SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
NATURAL HEALTH TRENDS CORP.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by Registration Statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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NATURAL HEALTH TRENDS CORP.
250 PARK AVENUE
NEW YORK, NEW YORK 10177
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 12, 1999
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of Natural Health Trends Corp., a Florida corporation (the "Company")
will be held at 250 Park Avenue, New York, New York 10177 on February 12, 1999,
at 10:00 a.m. local time, for the following purposes, all as described more
fully in the Proxy Statement attached hereto:
1.To approve the issuance of such number of shares of Common Stock to
be issued upon: (i) conversion of $2,800,000 aggregate stated value of
the Company's Series F Preferred Stock, (ii) conversion of $350,000
aggregate stated value of the Company's Series G Preferred Stock, and
(iii) exercise of five-year warrants ("Acquisition Warrants") to
purchase 200,000 shares of Common Stock, all to be issued in
connection with the acquisition (the "Asset Acquisition") of
substantially all of the assets (the "Kaire Assets"), of Kaire
International, Inc. ("Kaire"), by NHTC Acquisition Corp., a newly
formed Delaware corporation and a wholly-owned subsidiary of the
Company ("NHTC"), pursuant to an Asset Purchase Agreement dated as of
November 24, 1998 by and among the Company, NHTC, and Kaire (the
"Acquisition Agreement");
2.To ratify and approve the conversion of $1,650,000 aggregate stated
value of the Company's Series E Preferred Stock sold in the Company's
August 1998 private placement (the "Series E Private Placement") into
shares of Common Stock;
3.To approve (i) the future offering and sale by the Company of up to
$4,000,000 aggregate stated value of the Company's Series H Preferred
Stock (the "Series H Preferred Stock"), and (ii) the full conversion,
subsequent to any sale of the Series H Preferred Stock, of the Series
H Preferred Stock into shares of Common Stock; and
4.To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS OF THE COMPANY VOTE "FOR" PROPOSALS 1-3.
The Board of Directors has fixed the close of business on Friday, January
22, as the record date for determining the stockholders of the Company entitled
to notice of, and to vote at the meeting or any adjournment thereof.
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS
INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING. YOU ARE
EARNESTLY REQUESTED TO DATE, SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY IN
THE ENVELOPE ENCLOSED FOR THAT PURPOSE (TO WHICH NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES) WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN
PERSON. THE PROXY IS REVOCABLE BY YOU AT ANY TIME PRIOR TO ITS EXERCISE AND WILL
NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IN THE EVENT YOU ATTEND THE MEETING OR
ANY ADJOURNMENT THEREOF. THE PROMPT RETURN OF THE PROXY WILL BE OF ASSISTANCE IN
PREPARING FOR THE MEETING AND YOUR COOPERATION IN THIS RESPECT WILL BE
APPRECIATED.
By Order of the Board of Directors
/s/Joseph P. Grace
------------------------------------------
Joseph P. Grace, President
Dated: January 25, 1999
<PAGE>
NATURAL HEALTH TRENDS CORP.
250 PARK AVENUE
NEW YORK, NEW YORK 10177
-----------------
PROXY STATEMENT
-----------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 12, 1999
This Proxy Statement and the accompanying form of proxy is furnished to
stockholders of Natural Health Trends Corp., a Florida corporation (the
"Company"), in connection with the solicitation of proxies, in the accompanying
form, by the Company's Board of Directors to be voted at the Special Meeting of
Stockholders (the "Meeting") of the Company to be held on February 12, 1999 at
10:00 a.m. (local time) at 250 Park Avenue, New York, New York 10177 and at any
and all adjournments thereof.
Accompanying this Proxy Statement is a Notice of Special Meeting of
Stockholders, a form of proxy, a copy of the Company's Current Report on Form
8-K dated as of December 28, 1998, the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1997 containing audited financial statements and
related data, and a copy of the Company's quarterly reports on Form 10-QSB for
the quarters ended March 31, 1998, June 30, 1998 and September 30, 1998, which
contain certain unaudited financial statements at such dates and for such
periods then ended.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Meeting, the stockholders of the Company will be asked:
1. To approve the issuance of such number of shares of Common Stock to
be issued upon: (i) conversion of $2,800,000 aggregate stated value of
the Company's Series F Preferred Stock, (ii) conversion of $350,000
aggregate stated value of the Company's Series G Preferred Stock, and
(iii) exercise of five-year warrants ("Acquisition Warrants") to
purchase 200,000 shares of Common Stock, all to be issued in
connection with the acquisition (the "Asset Acquisition") of
substantially all of the assets (the "Kaire Assets"), of Kaire
International, Inc. ("Kaire"), by NHTC Acquisition Corp., a newly
formed Delaware corporation and a wholly-owned subsidiary of the
Company ("NHTC"), pursuant to an Asset Purchase Agreement dated as of
November 24, 1998 by and among the Company, NHTC, and Kaire (the
"Acquisition Agreement");
2. To ratify and approve the conversion of $1,650,000 aggregate stated
value of the Company's Series E Preferred Stock (the "Series E
Preferred Stock"), sold in the Company's August 1998 private placement
(the "Series E Private Placement") into shares of Common Stock;
3. To approve (i) the future offering and sale by the Company of up to
$4,000,000 aggregate stated value of the Company's Series H Preferred
Stock (the "Series H Preferred Stock"), and (ii) the full conversion,
subsequent to any sale of the Series H Preferred Stock, of the Series
H Preferred Stock into shares of Common Stock; and
4. To transact such other business as may properly be brought before the
meeting and any and all adjournments thereof.
THE BOARD OF DIRECTORS OF THE COMPANY UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS OF THE COMPANY VOTE "FOR" PROPOSALS 1-3.
All proxies which are properly filled in, signed and returned to the
Company prior to or at the Meeting will be voted in accordance with the
instructions thereon. A proxy may be revoked by any stockholder giving the same
prior to the exercise thereof by: (a) a written notice delivered to the
Company's principal officers prior to the commencement of the Meeting; (b)
providing a signed proxy bearing a later date, or (c) appearing in person and
voting at the Meeting. The Company intends to vote executed but unmarked proxies
in favor of the Proposals 1-3 as set forth above (collectively, the
"Proposals"). Broker non-votes will be counted for purposes
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of determining a quorum but otherwise will be considered not represented with
regard to voting on any matter with respect to which there is a broker non-vote.
The Board of Directors of the Company has fixed the close of business on
January 22, 1998 as the record date (the "Record Date") for the determination of
stockholders who are entitled to notice of, and to vote at the meting or any
adjournment thereof. Only holders of shares of Common Stock as of the Record
Date are entitled to vote at the Meeting. On or about January 25, 1999 this
Proxy Statement and the accompanying form of proxy are first being mailed to
each stockholder of record of the Company at the close of business on the Record
Date.
The expenses of preparing, assembling, printing and mailing the form of
proxy and the material used in solicitation of proxies will be borne by the
Company. In addition to the solicitation of proxies by use of the mails, the
Company may utilize the services of some of its officers and regular employees
(who will receive no additional compensation therefor) to solicit proxies
personally, and by telephone. The Company has requested banks, brokerage firms
and other custodians, nominees and fiduciaries to forward copies of the proxy
material to their principals and to request authority for the execution of
proxies and will reimburse such persons for their services in doing so.
VOTE REQUIRED TO APPROVE THE PROPOSALS, PRINCIPAL STOCKHOLDERS AND
STOCKHOLDINGS OF MANAGEMENT
Although the Florida Business Corporation Act, as amended (the "FBCA"),
does not require that the stockholders of the Company approve the Asset
Acquisition, under the rules of the NASDAQ SmallCap Market system ("NASDAQ") and
in the absence of a waiver therefrom, the Company must obtain stockholder
approval to issue a number of shares of common stock, par value $.001 per share
(the "Common Stock") equal to or greater than the number equal to twenty (20%)
percent of its theretofore issued and outstanding Common Stock, in order for the
Common Stock to remain listed on NASDAQ. The Company believes that the aggregate
number of shares of Common Stock issuable upon the full conversion of the Series
F Preferred Stock, the Series G Preferred Stock, the Series H Preferred Stock
and the Acquisition Warrants, will in the aggregate be in excess of twenty (20%)
percent of its issued and outstanding Common Stock, and as a result the Company
is seeking shareholder approval to such issuances at the Meeting.
At the Record Date, the Company had 6,230,982 shares of Common Stock issued
and outstanding, the holders of which are each entitled to one vote per share.
The presence in person or by proxy of at least a majority of the issued and
outstanding Common Stock of the Company is necessary to constitute a quorum at
the meeting. Approval of (i) the issuance of shares of Common Stock upon (a)
conversion of $2,800,000 aggregate stated value of the Company's Series F
Preferred Stock, (b) conversion of $350,000 aggregate stated value of the
Company's Series G Preferred Stock, and (c) exercise of the Acquisition Warrants
to purchase 200,000 shares of Common Stock, all being issued in connection with
the acquisition of substantially all of the Kaire Assets pursuant to the
Acquisition Agreement, (ii) the issuance of shares of Common Stock upon
conversion of $1,650,000 aggregate stated value of the Company's Series E
Preferred Stock previously sold by the Company in the Series E Private
Placement, and (iii) the future offer and sale of up to $4,000,000 aggregate
stated value of the Company's Series H Preferred Stock and the issuance of
shares of Common Stock upon conversion of the Series H Preferred Stock which may
be sold in the future by the Company in private placements, requires the
affirmative vote of holders of a majority of the issued and outstanding Common
Stock.
The following table sets forth, as of the Record Date, the number of shares
of Common Stock owned beneficially to the knowledge of the Company by each
director and by all officers and directors of the Company as a group and all
persons, to the best of the Company's knowledge, that beneficially own five (5%)
percent or more of the issued and outstanding Common Stock. The percentages have
been calculated on the basis of treating as outstanding for purposes of
computing the percentage ownership of a particular individual, all shares of
Common Stock outstanding as of such date and all shares of Common Stock issuable
to such individual in the event of exercise of outstanding options owned by such
holder at such date which are exercisable within 60 days of such date. Shares of
Common Stock issuable upon conversion of outstanding Series C Preferred Stock
and Series E Preferred Stock (or conversion of the Series F Preferred Stock,
Series G Preferred Stock, or the Series H Preferred Stock, or the exercise of
the Acquisition Warrants, all being issued in connection with the
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Asset Acquisition), are not deemed outstanding for these purposes as the number
of shares of Common Stock issuable upon conversion of each such security
fluctuates based on changes in the market price for the Common Stock. Except as
indicated in the footnote to the table, each individual is the sole beneficial
owner with sole voting rights and investment power with respect to the shares
set forth opposite his name (except for shares issuable upon exercise of his
options, none of which have been exercised).
<TABLE>
<CAPTION>
NAME AND ADDRESS* NUMBER OF SHARES
OF BENEFICIAL OWNER1 BENEFICIALLY OWNED2 PERCENT OF CLASS
- ----------------------------------- --------------------- -----------------
<S> <C> <C>
Joseph P. Grace3 .................. 11,479 **
Martin C. Licht4 .................. 1,300 **
Sir Brian Wolfson5 ................ 850 **
Dirk D. Goldwasser6 ............... 1,125 **
Ralph Ellison7 .................... 15,000 **
All Executive Officers and 39,754 **
Directors (Five Persons) .........
</TABLE>
- ----------
* The address of each executive officer and director is c/o the Company, 250
Park Avenue, New York, New York 10177.
** Owns less than one (1%) percent.
1 Unless otherwise noted, all persons named in the table have sole voting and
dispositive power with respect to all shares of Common Stock beneficially
owned by them.
2 Does not include shares of Common Stock issuable upon the conversion of the
Company's issued and outstanding Series C Preferred Stock and Series E
Preferred Stock. Pursuant to the terms of the Series C Preferred Stock, the
holders thereof generally are not entitled to convert such instruments to the
extent that such conversion would increase the holders' beneficial ownership
of Common Stock to in excess of 4.9%, except in the event of a mandatory
conversion. On the date of a mandatory conversion of the Preferred Stock with
respect to the Series C Preferred Stock and the Series E Preferred Stock, a
change in control of the Company may occur, based upon the number of shares
of Common Stock issuable. As of the date of this Proxy Statement, 1,650
shares of Series E Preferred Stock are issued and outstanding.
3 Mr. Grace is the Acting President and a Director of the Company.
4 Mr. Licht is a Director of the Company.
5 Sir Brian is 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.
MARKET PRICE DATA
The Company's Common Stock is traded on the Nasdaq SmallCap Market System
("NASDAQ") under the symbol "NHTCC." On January 22, 1999 the most recent date
for which it was practicable to obtain market price information prior to the
printing of this Proxy Statement, the closing bid price of the Common Stock on
NASDAQ was $4.25 per share. There is no public market for the capital stock of
Kaire.
4
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SUMMARY PRO FORMA FINANCIAL INFORMATION
The following tables set forth certain unaudited pro forma condensed and
historical financial data for the Company and Kaire. The following data gives
effect to the Acquisition of the Kaire Assets accounted for as a purchase
business combination as if the Asset Acquisition had occurred as of September
30, 1998 with respect to the balance sheet data and as of January 1, 1997 with
respect to the statement of operations data for the fiscal year ended December
31, 1997 and nine months ended September 30, 1998. The following data should be
read in conjunction with the consolidated financial statements of the Company,
the consolidated financial statements of Kaire and the pro forma financial
information regarding the Acquisition and all notes relating thereto, all
appearing elsewhere in this Proxy Statement. This data should be read in
conjunction with the unaudited Pro Forma Condensed Financial Information of the
Company and Kaire included elsewhere in this Proxy Statement.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that could have occurred if the Asset Acquisition had been consummated
as of such dates, nor is it necessarily indicative of future operating results
or financial position.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------- -------------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS:
Total Revenues .................................... $ 36,815,238 $ 22,020,397
Total Expenses .................................... $ 47,504,840 $ 27,516,012
Loss before taxes ................................. $ (10,689,602) $ (5,495,615)
Loss from continuing operations ................... $ (10,689,602) $ (5,495,615)
Loss per share from continuing operations ......... $ (26.74) $ (4.29)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
-------------------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Total Assets ................. $14,704,765
Total Liabilities ............ $ 6,532,690
Stockholders' Equity ......... $ 8,172,075
</TABLE>
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SELECTED FINANCIAL DATA OF THE COMPANY
Certain of the selected consolidated financial data presented below for each of
the two fiscal years ended December 31, 1997 and 1996, has been derived from the
Company's consolidated financial statements which were audited for 1997 and 1996
by Feldman Sherb Ehrlich & Co., P.C., independent certified public accountants.
Certain of the selected consolidated financial data presented below for the nine
months ended September 30, 1998 and 1997, has been derived from the Company's
unaudited consolidated financial statements on the same basis as the audited
financial statements and include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of these periods.
This data should be read in conjunction with the Company's Consolidated
Financial Statements, related notes and other financial information included
elsewhere in this Proxy Statement.
NATURAL HEALTH TRENDS CORP.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED FISCAL YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................ $ 1,001,481 $ 535,202 $ 1,133,726 $ 0
Loss from continuing operations ................... (2,088,351) (2,398,298) (4,304,073) (1,148,546)
Loss from continuing operations per share ......... (2.30) (6.57) (11.60) (4.10)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, 1998 DECEMBER 31, 1997
-------------------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets ....................... $7,866,344 $13,804,921
Long term debt ..................... 0 2,434,358
Redeemable preferred stock ......... 0 0
Dividends per common share ......... 0 0
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL DATA OF KAIRE
Certain of the selected consolidated financial data presented below for
each of the last two fiscal years ended December 31, 1997 and 1996, has been
derived from Kaire's consolidated financial statements which were audited by BDO
Seidman, LLP, independent certified public accountants for 1997 and 1996.
Kaire's independent certified public accountants stated in their report on the
December 31, 1997 consolidated financial statements that due to losses from
operations and a working capital deficit, there is substantial doubt about the
Company's ability to continue as a going concern. This data should be read in
conjunction with Kaire's Financial Statements, related notes and other financial
information included elsewhere in this Proxy Statement. The information for the
nine month periods ended September 30, 1998 and 1997 are unaudited but give
effect to all adjustment (none of which were other than normal recurring
adjustments) necessary, in the opinion of management of Kaire, to fairly present
this information. The results of operations for the interim periods should not
be taken as indicative of results for a full fiscal year. The information below
is in thousands except for per share amounts and other data.
THE CONSOLIDATED FINANCIAL STATEMENTS AND INFORMATION AND NOTES THERETO OF
KAIRE REFERENCED ABOVE ARE INCLUDED ELSEWHERE IN THIS PROXY STATEMENT.
STOCKHOLDERS ARE URGED TO CAREFULLY REVIEW SUCH FINANCIAL STATEMENTS PRIOR TO
COMPLETING THEIR PROXY.
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net Sales .......................................... $ 51,499 $ 35,682
Cost of Goods Sold ................................. 13,321 8,388
Gross Profit ....................................... 38,178 27,294
Operating Expenses:
Associate Commissions ............................. 27,966 19,968
Selling, General & Administrative Expenses ......... 12,976 13,009
Loss from Operations ............................... (2,764) (5,683)
Other Expense, Net ................................. (27) (562)
Net Loss Before Income Tax
Benefit and Minority Interest ..................... (2,791) (6,245)
Benefit from Income Taxes .......................... 1,103 13
Minority Interest in Subsidiaries .................. (115) 134
-------- --------
Net Loss ........................................... $ (1,803) $ (6,098)
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
(UNAUDITED) (UNAUDITED)
--------------------------- --------------------------
<S> <C> <C>
Net Sales ............................................ $ 27,887 $ 21,019
Cost of Sales ........................................ 6,587 5,159
Gross Profit ......................................... 21,300 15,860
Operating Expenses:
Associate Commission ................................. 15,626 10,854
Selling, General and Administrative Expenses ......... 9,739 7,309
Loss from Operations ................................. (4,065) (2,303)
Other Expenses, Net .................................. (161) (1,030)
Net Loss Before Income Tax
Benefit and Minority Interest ....................... (4,226) (3,333)
Benefit from Income Taxes ............................ - -
Minority Interest in (Income)
Loss of Subsidiaries ................................ 44 141
-------- --------
Net Loss ............................................. $ (4,182) $ (3,192)
======== ========
</TABLE>
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CONSOLIDATED BALANCE SHEET DATA (IN 000S):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Working Deficiency ..................... $ (1,382) $ (6,492)
Total Assets ........................... 6,350 4,324
Long-Term Obligations .................. 114 15
Total Liabilities ...................... 6,026 9,149
Minority Interest in
Consolidated Subsidiaries ............. 200 200
Stockholders' Equity (Deficit) ......... 124 (5,025)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
-------------------------
ACTUAL
-------------------------
<S> <C>
Working Deficiency ..................................... $ (9,285)
Total Assets ........................................... 2,942
Long-Term Obligations .................................. -0-
Total Liabilities ...................................... 11,323
Minority Interest in Consolidated Subsidiaries ......... 49
Stockholders' Deficit .................................. (8,332)
</TABLE>
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ACTION TO BE TAKEN AT THE MEETING
(PROPOSAL 1)
APPROVAL OF THE ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE SERIES F
PREFERRED STOCK AND SERIES G PREFERRED STOCK AND UPON EXERCISE OF THE
ACQUISITION WARRANTS, ALL OF WHICH ARE BEING ISSUED IN CONNECTION WITH THE
ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF KAIRE INTERNATIONAL, INC. BY
NHTC ACQUISITION CORP., THE COMPANY'S WHOLLY-OWNED SUBSIDIARY.
Although the Florida Business Corporation Act, as amended, does not require
that the stockholders of the Company approve the Asset Acquisition, Rule
4310(c)(25)(H) of the NASDAQ Marketplace Rules (the "NASDAQ Rule") requires that
in order for the Company to continue its listing of its Common Stock on NASDAQ,
the Company must either receive the approval of its shareholders at a
shareholders' meeting, or receive a waiver of such requirement from NASDAQ, in
order to issue a number of shares of Common Stock equal to or greater than
twenty (20%) percent of the number of its theretofore issued and outstanding
shares of Common Stock. As more fully described below, the Company believes the
issuance of the shares of Common Stock upon full conversion of the Series F
Preferred Stock and the Series G Preferred Stock and the exercise of the
Acquisition Warrants, all to be issued by the Company in connection with the
Asset Acquisition, as well as the shares of Common Stock issuable upon full
conversion of the Series H Preferred Stock which the Company in the future may
seek to sell, will in the aggregate, in all likelihood, be in excess of 20% of
the currently issued and outstanding Common Stock. The Series F Preferred Stock,
the Series G Preferred Stock and the Acquisition Warrants shall sometimes
collectively be referred to as the "Acquisition Securities." Accordingly, the
Company will conduct a shareholders' meeting and is soliciting proxies through
this Proxy Statement in order to obtain at such shareholders' meeting the
required shareholder approval.
On September 2, 1998, the Company had a hearing before the NASDAQ Listing
Qualifications Panel (the "Panel"), regarding the continued listing of its
Common Stock on NASDAQ. Pursuant to a letter (the "NASDAQ Letter"), dated
October 27, 1998 from NASDAQ to the Company, NASDAQ informed the Company that
the Panel had determined that although the Company was in compliance with all
requirements for continued listing, the Panel "lacked confidence in the
Company's ability to sustain compliance with the net tangible asset requirements
"for continued listing on NASDAQ. As a result, the Panel informed the Company
that it was required on or before November 30, 1998 (which date NASDAQ extended
until December 7, 1998), to file a proxy statement with the Securities and
Exchange Commission (the "SEC") seeking shareholder approval for the issuance of
its securities in the Asset Acquisition and thereafter on or before February 1,
1999, the Company must complete the Asset Acquisition and demonstrate compliance
with all of the NASDAQ continued listing requirements. On December 7, 1998, the
Company filed a proxy statement with the SEC. Pursuant to a letter from NASDAQ
dated December 14, 1998, NASDAQ informed the Company that such filing evidenced
compliance with the Panel's initial listing requirement. The Company is
presently in discussions with NASDAQ to seek an extension of the NASDAQ deadline
for completion of the Asset Acquisition to a date after the date of the Meeting.
DESCRIPTION OF THE ACQUISITION SECURITIES
Pursuant to the Acquisition Agreement, in connection with the proposed
acquisition of substantially all of the Kaire Assets by NHTC, the Company has
agreed to issue (i) to Kaire, $2,800,000 aggregate stated value of Series F
Preferred Stock; (ii) to two creditors of Kaire (who are owed by Kaire in the
aggregate approximately $350,000 of secured indebtedness), $350,000 aggregate
stated value of Series G Preferred Stock; and (iii) to Kaire, the Acquisition
Warrants to purchase 200,000 shares of Common Stock.
THE SERIES F PREFERRED STOCK. The Series F Preferred Stock to be issued to
Kaire shall pay a dividend (provided the Company has either sufficient surplus
or net profits), at the rate of six (6%) percent of the stated value per annum,
payable upon conversion of the shares of Series F Preferred Stock, in cash or,
at the option of the Company, in shares of Common Stock. The shares of the
Series F Preferred Stock are non-voting prior to conversion, and, subject to
certain limitations, are convertible by the holder at any time into shares of
Common Stock of the Company, at a conversion price per share determined by
dividing the stated value by ninety-five (95%) percent of the average closing
bid price of the Common Stock for the three (3) trading days
10
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immediately preceding the date on which the Company receives notice of
conversion from a holder. The terms of the Series F Preferred Stock permit the
Company at any time, on five (5) days prior written notice, to redeem the
outstanding Series F Preferred Stock at a redemption price (the "Redemption
Price"), equal to the stated value and the accrued dividends thereon. The shares
of Common Stock issuable upon conversion of the Series F Preferred Stock are
subject to a lock-up preventing the sale, pledge, hypothecation or other
transfer of such shares, for a period of one (1) year from the closing date (the
"Closing Date") of the Asset Acquisition in the case of $1,000,000 aggregate
stated value of Series F Preferred Stock, and a lock-up of two (2) years from
the Closing Date with respect to the remaining $1,800,000 aggregate stated value
of Series F Preferred Stock. FOR A COMPLETE DESCRIPTION OF THE SERIES F
PREFERRED STOCK SEE THE ARTICLES OF AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION RELATING TO THE CERTIFICATE OF DESIGNATION FOR THE SERIES F
PREFERRED STOCK ANNEXED HERETO AS EXHIBIT 4.2.
THE SERIES G PREFERRED STOCK. The Series G Preferred Stock, to be issued to
two creditors of Kaire, shall pay a dividend (provided the Company has either
sufficient surplus or net profits), at the rate of six (6%) percent of the
stated value per annum, payable upon conversion of the shares of Series G
Preferred Stock, in cash or, at the option of the Company, in shares of Common
Stock. The shares of the Series G Preferred Stock are non-voting prior to
conversion, and, subject to certain limitations, are convertible by the holder
at any time into shares of Common Stock of the Company, at a conversion price
per share determined by dividing the stated value by ninety-five (95%) percent
of the average closing bid price of the Common Stock for the three (3) trading
days immediately preceding the date on which the Company receives notice of
conversion from a holder. The terms of the Series G Preferred Stock permit the
Company at any time, on five (5) days prior written notice, to redeem the
outstanding Series G Preferred Stock at a redemption price (the "Redemption
Price"), equal to the stated value and the accrued dividends thereon. The
Company has agreed to register for sale under the Securities Act of 1933, as
amended (the "Act"), all shares of Common Stock issuable upon conversion of the
Series G Preferred Stock on any registration statement (other than on Form S-4,
Form F-8 or any similar or successor form) filed by the Company or upon demand
of all of the holders of the Series G Preferred Stock commencing eight (8)
months following the Closing Date of the Acquisition (or if all of the holders
of the Series G Preferred Stock so elect and agree to pay any and all costs
associated therewith, to register the underlying shares upon demand, but no
earlier than 30 days following the Closing Date of the Acquisition). FOR A
COMPLETE DESCRIPTION OF THE SERIES G PREFERRED STOCK SEE THE ARTICLES OF
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION RELATING TO THE CERTIFICATE
OF DESIGNATION FOR THE SERIES G PREFERRED STOCK ANNEXED HERETO AS EXHIBIT 4.3.
THE ACQUISITION WARRANTS. The Acquisition Warrants to be issued to Kaire
are exercisable for a period of five (5) years from the Closing Date of the
Asset Acquisition into an aggregate of 200,000 shares of Common Stock at an
exercise price equal to 110% of the closing bid price of the Common Stock of the
Company on the day prior to the Closing Date. The exercise price may be payable
at the option of the holder thereof in cash and/or by a cashless exercise based
on the difference between the fair market value of the shares of Common Stock
for which the Acquisition Warrants are being exercised, and the exercise price,
by delivering to the Company for cancellation the Acquisition Warrants owned by
such holders. The shares of Common Stock issuable upon exercise of the
Acquisition Warrants shall contain certain "piggyback" registration rights and
anti-dilution protections. FOR A COMPLETE DESCRIPTION OF THE ACQUISITION
WARRANTS, SEE THE FORM OF ACQUISITION WARRANT ANNEXED HERETO AS EXHIBIT 4.5.
DESCRIPTION OF THE PROPOSED ASSET ACQUISITION
Pursuant to the Acquisition Agreement, NHTC, the Company's newly formed,
wholly-owned subsidiary, has agreed to acquire substantially all of the tangible
and intangible assets of Kaire including, but not limited to, the names "Kaire,"
"Kaire International, Inc." and all variations thereof and any other product
name and all other registered or unregistered trademarks, tradenames, service
markets, patents, logos, and copyrights of Kaire, all accounts receivable,
contractual rights and product formulations to any and all products of Kaire,
product inventory, "800" and other "toll-free" telephone numbers, product supply
contracts (including, but not limited to, its EnzogenolTM product), independent
associate lists, and shares of capital stock owned by Kaire in each of its
wholly-owned and/or partially owned subsidiaries including, but not limited to,
Kaire New Zealand Ltd., Kaire Australia Pty Ltd., Kaire Trinidad, Ltd. and Kaire
Europe Ltd. (but excluding Kaire Korea Ltd.).
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In exchange for the Kaire Assets, on the Closing Date the Company shall
issue (i) to Kaire, the $2,800,000 aggregate stated value of Series F Preferred
Stock; (ii) to two creditors of Kaire, the $350,000 aggregate stated value of
Series G Preferred Stock; and (iii) to Kaire, the Acquisition Warrants. In
addition, NHTC has agreed to make certain payments to Kaire each year for a
period of five (5) years (the "NHTC Net Income Payments") commencing with the
year ending December 31, 1999, to be determined as follows:
(i) 25% of the Net Income (as determined based upon the year end audited
financial statements of NHTC prepared in accordance with GAAP
consistently applied) of NHTC, if the Net Sales (as determined based
upon the year-end audited financial statements of NHTC prepared in
accordance with GAAP consistently applied) of NHTC in any such year
are between $1.00 and $10,000,000;
(ii) 33% of NHTC's Net Income if its Net Sales are between $10,000,000
and $15,000,000;
(iii) 40% of NHTC's Net Income if its Net Sales are between $15,000,000
and $40,000,000; and
(iv) 50% of NHTC's Net Income if its Net Sales are in excess of
$40,000,000.
The NHTC Net Income Payments shall be reduced on a dollar-for-dollar basis
to the extent of (A) all indebtedness of Kaire assumed by NHTC pursuant to the
Acquisition Agreement; (B) all other direct and/or indirect costs or expenses
assumed and/or otherwise incurred by NHTC and/or the Company of, or resulting
from, Kaire including, but not limited to, litigation costs, including, but not
limited to, reasonable attorneys' fees, payments of sales or other taxes,
expenses of officers of Kaire, and other payments or expenses resulting directly
and/or indirectly from the transactions contemplated by the Acquisition
Agreement; and (C) any reasonable inter-company obligations of the Company to
NHTC resulting from third party payments made by the Company on behalf of (or
allocable proportionately to) NHTC by the Company) that resulted from the
transactions contemplated by the Acquisition Agreement. In addition, all amounts
set-off against NHTC Net Income Payments are cumulative and, if not set-off in
the year they are paid (or incurred) because NHTC did not have a sufficient
amount of Net Income (or for any other reason), such set-off amounts shall
accrue and be used as a set-off in the earliest possible year or years.
Pursuant to the Acquisition Agreement, NHTC has agreed to assume certain
specified liabilities of Kaire including: (i) approximately $475,000 owed to MW
International Inc.; (ii) approximately $50,000 owed to Manhattan Drug Company;
(iii) approximately $120,000 in the aggregate owed to Robert Richards and Mark
Woodburn (both officers and directors of Kaire); (iv) up to approximately
$120,000 in unpaid payroll taxes of Kaire up to the Closing Date; and (v) up to
$180,000 owed to STAR Financial Bank.
The closing of the Asset Acquisition is also subject to a number of
conditions precedent including, but not limited to: (i) delivery of all required
consents and approvals of the parties to the transactions contemplated by the
Acquisition Agreement, (ii) the Kaire Assets being delivered to NHTC at the
closing of the Asset Acquisition free and clear of all liens, claims,
restrictions and other encumbrances, and (iii) the Company's Common Stock
remaining listed on NASDAQ.
Pursuant to the Acquisition Agreement, following the closing of the Asset
Acquisition, the Company shall appoint to its Board of Directors one (1) nominee
of Kaire. Kaire has informed the Company that it currently intends to appoint
Robert L. Richards as its appointee to the Board of Directors of NHTC. See
"Description of Kaire International, Inc.-Kaire Management." In addition, NHTC
has agreed to indemnify certain officers of Kaire against all amounts paid
following the Closing Date by such persons resulting from unpaid sales taxes
accrued by Kaire prior to the Closing Date.
THE FOREGOING DESCRIPTION OF THE ACQUISITION AGREEMENT IS A SUMMARY ONLY.
THE FORM OF ACQUISITION AGREEMENT IS ATTACHED TO THIS PROXY STATEMENT AS
EXHIBIT 2.1. READERS ARE STRONGLY RECOMMENDED TO READ THE ACQUISITION AGREEMENT
IN ITS ENTIRETY PRIOR TO MAKING A VOTING DECISION.
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<PAGE>
DESCRIPTION OF KAIRE INTERNATIONAL, INC.
BUSINESS
Kaire develops and distributes, through a network of independent
associates, products that are intended to appeal to health-conscious consumers.
Current Kaire products include health care supplements and personal care
products. Kaire offers a line of approximately 50 products which it divides into
nine categories, including Antioxidant Protection, (Bodily) Defense, Digestion,
Energy and Alertness, Stress, Vital Nutrients, Weight Management, Anti-Aging and
Personal Care.
Kaire develops products that it believes will have market appeal to its
associates and their customers, and assists its associates in establishing their
own businesses. Kaire associates can start a home based business without
significant start-up costs and other difficulties usually associated with new
ventures. Kaire provides product development, marketing aids, customer service,
and essential record-keeping functions to its associates without charge. Kaire
also provides other support programs to its associates including 24-hour
TouchTalk system (as explained below), international teleconferencing calls,
seminars and business training systems with audio and video tapes.
It is Kaire's strategy and expectation that associates actively recruit
interested people to become new associates. These recruits are placed beneath
the recruiting associate in the "network" and are referred to by Kaire as that
associate's "organization." Associates earn commissions on purchases by the
associates in their organization as well as retail profits on the sales they
make themselves. Kaire's marketing program is designed to provide incentives for
associates to build an organization of recruited associates to maximize their
earning potential. Approximately 60,000 of Kaire's associates have had product
purchases in excess of $50 during 1997 and are considered to be "active," as
opposed to approximately 108,000 and 156,000 in 1996 and 1995, respectively.
Kaire purchases most of its products directly from manufacturers and
markets them to its independent associates located in all fifty states, the
District of Columbia, Puerto Rico, Guam, and Canada. In 1995, Kaire expanded the
number of its associates located in other parts of the world, particularly
Australia and New Zealand. Kaire expanded its operations into South Korea,
Trinidad and Tobago and the United Kingdom during 1997. Kaire has since
discontinued its operations in South Korea in October 1998.
INDUSTRY OVERVIEW. According to The Direct Selling Association, network
marketing is one of the fastest growing segments for the distribution of
products. The Direct Selling Association reports that worldwide, over 17.5
million individuals are now involved in direct selling (of which network
marketing is a major segment) and that those involved in direct selling generate
$80 billion in annual sales around the world. Network marketing sales in the
United States are estimated to be approximately $22 billion annually.
Currently, Kaire has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and Tobago
and the United Kingdom. Management believes that significant market potential
exists for its products in international markets, and it is Kaire's intention to
explore expansion into Japan, Europe, Hong Kong, Taiwan, India and the
Philippines. Statistics from the World Federation of Direct Selling Associations
as reported in May 1998 indicate that the direct sales market in the foregoing
countries amounted to over $37 billion with 6.4 million individuals being
involved in some form of direct marketing. This compares to $28.6 billion in
sales and 7.2 million individuals involved in the markets currently serviced by
Kaire.
DISTRIBUTION AND MARKETING. Kaire's products are distributed through its
network marketing system of associates. Associates are independent contractors
who purchase products directly from Kaire for resale to retail consumers.
Associates may elect to work on a full-time or a part-time basis. Management
believes that its network marketing system is well suited to marketing its
nutritional supplements and other products because sales of such products are
strengthened by ongoing personal contact between retail consumers and
associates, many of whom use Kaire's products.
Associates' revenues are derived from several sources. First, associates
may receive revenues by purchasing Kaire's products at wholesale prices and
selling Kaire's products to customers at retail prices. Second,
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<PAGE>
associates earn the right to receive bonuses (commissions) based upon purchases
by members of their organization. There are basically three types of bonuses
that associates can earn on product purchases by members of their organizations.
The standard bonus is available to any individual who has attained "Broker"
status in Kaire. "Broker" status is attained by purchasing a minimum quantity
for a month. The percentages used to determine the bonus and the number of
levels in the organization the associate receives bonuses upon is based on the
individual's status in Kaire. The first status level is that of a "Broker" and
the highest being an "Executive." There are two intermediary levels between
"Broker" and "Executive." An associate achieves higher levels in the bonus
structure primarily through increased purchases by associates sponsored directly
by them (their first level) although the minimum monthly purchase as an
individual does increase between certain levels. The requirements for an
associate to reach an "Executive" level are generally monthly personal purchases
exceeding $300 and monthly volume of $900 on their first level. The program is
such that each month an associate must qualify at that level to be paid at that
level. The advantage to this is that the associate must remain active in
purchasing and sponsoring to retain their bonus, but if they miss a month, their
income is only reduced that one month. A second form of bonus is available to
those having multiple "Executives" in their first level. Based on the number of
"Executives" they have at this first level, associates will receive a percentage
of their standard bonus as an additional bonus. Finally, for those "Executives"
attaining the highest levels in Kaire, they are allowed to participate in a
percentage of the company-wide Gross Bonusable Sales to be divided among
qualifying "Executives." Management believes that the right of associates to
earn bonuses contributes significantly to Kaire's ability to retain its
productive associates.
Kaire management believes its associate compensation plan is superior to
that of other network marketing organizations because the program offers an
earning opportunity without the need to finance a large inventory of products
and requires only a modest amount of sales to meet the bonus requirements.
To become an associate, a person must simply sign an agreement to comply
with the policies and procedures of Kaire. No investment is necessary to become
an associate. Kaire considers approximately 60,000 of its associates to be
"active," that is, an individual associate who has ordered at least $50 of
Kaire's products during the preceding 12 month period.
Kaire has regularly sponsored opportunity meetings in various key cities
and participates in motivational and training events in its market areas
designed to inform prospective and existing associates about Kaire's product
line and selling techniques. Associates give presentations relating to their
experiences with Kaire's products and the methods by which they have developed
their own organization of associates. Specific selling techniques are explained,
and emphasis is placed on the need for consistency in using such techniques.
Participants are encouraged to ask questions regarding selling techniques and
product developments, to share information with other associates and to develop
confidence in selling and goal-setting techniques. Motivation is offered to
participants in the form of recognition, gifts, excursions and tours, which are
intended to foster an atmosphere of excitement throughout the associate
organization. Prospective associates are educated about the structure, dynamics
and benefits of Kaire's network marketing system.
Kaire continues to develop marketing strategies and programs to motivate
associates. These programs are designed to increase associates' monthly product
sales and the recruiting of new associates. An example of these programs is
Kaire's Kaire Select Program.
Under the Kaire Select Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
autodraft. The associate also gets preferred pricing, no minimum purchase
requirement (once they have a qualifying select order set up), exclusive access
to some product introductions, and discounts on Kaire sponsored events.
As part of Kaire's maintenance of constant communication with its associate
network, Kaire offers the following support programs to its associates:
TOUCHTALK AND FAXBACK. An automated telephone system that associates can
call 24 hours a day to place orders, receive reports on the sales activity of
their organization and listen to selected messages on special offers, marketing
program updates, product information, and similar information. Certain
information is also available via facsimile to the associate.
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24 HOUR TELECONFERENCE. A weekly teleconference on various subjects such as
technical product discussions, associate organization building and management
techniques. An associate can listen to any of the last four weekly
teleconferences.
INTERNET. Kaire maintains a web-site at http:\www.kaireint.com. There, the
user can read news letters, learn more about products, place an order or sign up
to be an associate. This web-site became fully functional in early 1997. In
addition, associates can send messages and orders to Kaire e-mail address of
kaireint.com. This allows associates to potentially be able to sponsor
associates and order products 24 hours a day.
PRODUCT LITERATURE. Kaire produces for its associates color catalogues and
brochures displaying and describing Kaire's products.
TOLL FREE ACCESS. A toll free number is available to place orders and
sponsor new associates. Kaire believes that it was one of the first companies in
the network marketing industry to permit associates to sponsor new associates
over the telephone.
BROADCAST FAX/BROADCAST E-MAIL. Kaire announcements and product specials
are automatically sent via facsimile and/or e-mail to associates who have
requested this service.
MARKETS. Kaire has operations in the United States, Canada, Australia and
New Zealand, Trinidad and Tobago and the United Kingdom. Kaire closed down its
operations of its South Korean subsidiary in October 1998 and on June 30, 1998,
Kaire recorded a $471,000 write down of its assets in its South Korean
subsidiary to what Kaire believed to be their "net realizable value." See Note
12 of the Consolidated Financial Statements for Net Sales, Income from
Operations and Identifiable Assets for the related geographical areas. Kaire
also has sustained substantial operating losses trying to penetrate the United
Kingdom market.
Upon deciding to enter a new market, Kaire hires local counsel to assist
ensuring that Kaire's network marketing system and products comply with all
applicable regulations and that Kaire's profits may be expatriated. In addition,
local counsel assists in establishing favorable relations in the new market area
by acting as liaison between Kaire and local regulatory authorities, public
officials and business people. Local counsel also is responsible for explaining
Kaire's products and product ingredients to appropriate regulators and, when
necessary, will arrange for local technicians to conduct any required ingredient
analysis tests of Kaire's products.
If regulatory approval is required in a foreign market, Kaire's local
counsel interfaces with local regulatory agencies to confirm that all of the
ingredients of Kaire's products are permissible within the new market. During
the regulatory compliance process, Kaire may alter the formulation, packaging or
labeling of its products to conform to applicable regulations as well as local
variations in customs and consumer habits, and Kaire may modify certain aspects
of its network marketing system as necessary to comply with applicable
regulations.
Following completion of the regulatory compliance phase, Kaire undertakes
the steps necessary to meet the operational requirements of the new market.
Kaire then initiates plans to satisfy inventory, distribution, personnel and
transportation requirements of the new market, and modifies its associate
training materials as may be necessary to be suitable for the new market. Kaire
has prepared manuals in Korean, French and Spanish.
PRODUCTS. Kaire's product line consists primarily of consumable products
that are targeted to growing consumer interest in natural health alternatives
for nutrition and personal care. In developing its product line, Kaire has
emphasized quality, purity, potency, and safety.
ANTIOXIDANT PROTECTION. This line is primarily nutritional supplements
based in antioxidants including Maritime Prime and EnzoKaire Complete. Most of
the products are based on exclusive formulations in several combinations
containing natural products including Pycnogenol, Enzogenol and Arctic Root.
Products containing Pycnogenol have not been approved for direct importation
into Australia. Kaire is currently seeking approval to import its products
containing Pycnogenol into Australia in conjunction with the Therapeutic Goods
Association of Australia. Maritime Plus is not available in Canada due to
Canadian regulations on the ascorbate that is contained in this product. Kaire
is also working with French authorities for approval to import the Maritime
Prime line into France.
Pycnogenol and Enzogenol have been recognized by sources not associated
with Kaire as a potent antioxidant. Pycnogenol, in Kaire's formulation, are
believed to be highly bioavailable and retained in the body for
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several days. Antioxidants have been shown to be effective in fighting the
effects of oxidation on the body. Oxidation is the same process that causes
metals to rust and apples to turn brown. Free radicals, which are molecules
damaged by oxidation, are being studied as the causes of various infirmities in
humans. A free radical is an unstable oxygen molecule seeking, at the molecular
level, to pair up with an electron. Free radicals can be created in the
atmosphere by the exposure of oxygen to sunlight and pollution. Free radicals
can also be created by natural metabolic processes. Antioxidants are molecules
which can combine with and, as a result, neutralize free radicals.
DEFENSE. The products in this category are primarily oriented towards
working with the body's natural defense systems to make them more efficient. It
consists of three of the more recent additions to the Kaire line, Colloidal
Silver Kaire, Immunol and Noni.
Colloidal Silver Kaire is a solution of silver particles
electro-magnetically suspended in deionized water and provides dietary support
for the immune system. It is used by individuals for a number of purposes
including eye drops, a topical solution, nose drops and a drink.
Immunol is a shark liver based capsule which Kaire believes aids the human
immune system. This product is imported exclusively by Kaire, which obtained the
worldwide marketing rights to this product in March 1996 from Marine Biologics,
Inc.
Noni is the most recent addition to the product line. Derived from a fruit
grown only in the Central and South Pacific, it contains high levels of
naturally occurring vitamins, minerals, trace elements, enzymes, and
phytochemicals. The processing method of flash freezing the fruit and then
processing it into capsules retains the high level of nutrients that may be lost
through the pasteurization of liquid presentations of this product.
DIGESTION. The main constituent of this group has long been the Aloe
products. Aloe has been studied for a number of years as everything from a
topical for skin irritations and sunburn to a supplement for improving the
general health of the body. Kaire has recently introduced Fruit-N-Aloe which is
a more palatable form of the Aloe juice as it is mixed with fruit juices to get
the Aloe benefits without the strong taste and AloElite, a more concentrated
form of the Aloe juice.
Two other products currently round out this line, a colon-cleansing product
for periodic use in cleaning the lower digestive system and Synerzyme, a
combination of naturally occurring enzymes and trace minerals to enhance the
efficacy of the enzymes, which may assist the body with the breakdown and
assimilation of various foods and fats.
ENERGY AND ALERTNESS. AquaKaire Daytime and Night-time are two recently
introduced Kaire products. They are concentrated, "clustered" water products
whose purpose is to increase the metabolic efficiency of the body. Inner Chi is
another recent addition, combining raw honey with Chinese herbs and botanicals
for a balanced, energy enhancing tonic.
STRESS. Products in this category serve two primary purposes. The first is
to provide adaptogens in an efficient medium and the second is to provide a
natural relaxant for rest and sleep. Arctic Root is an adaptogen, an herb which
works with the body to allow energy to be used by the body as needed as opposed
to stimulants and depressants which affect the body's energy as a whole, over a
certain period of time. Kavatu combines the extract from the Pacific KavaKava
plant with other nutrients to form a product allowing for a more complete rest
and sleep without the "hangover" effects of many artificial relaxants and sleep
aids. Kaire introduced St. John's Wart in the second quarter of 1998.
VITAL NUTRIENTS. This category provides for many of the basic vitamins and
nutrients which are missing in the typical adult or child's diet.
WEIGHT MANAGEMENT. One of the newest members of Kaire's product family is a
weight management program that includes a number of products designed to work as
a system to assist weight loss safely while giving the dieter a higher level of
energy while maintaining a healthy body. This system concept is based upon a
complete program including Kaire products, walking or other sensible exercise
available to virtually all individuals and sensible permanent eating habits.
Weight management products of Kaire include LipeX (a product
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designed to inhibit the absorption of fat by the body), fiber wafers to reduce
appetite, lubricate the system and inhibit fat absorption and nutritional bars
to provide both a healthy meal snack alternative and to provide nutrients which
interact with the LipeX to increase metabolism and fat burning in the system.
Kaire believes that the Weight Management Program is well designed to
promote long-term, sustained weight loss. However, Kaire's experience has been
that many dieters are highly motivated to lose significant pounds quickly and
the Yes! Weight Management Program does not work quickly enough for such
persons. As a result, Kaire is exploring several products which will allow it to
penetrate the rapid weight loss market.
ANTI-AGING. These products are intended to combat the effects of aging on
the human body.
DHEA. This is a hormonal product which replaces the same hormone in the
body. Research shows that as a person matures their body generates diminishing
amounts of DHEA. According to a number of research studies, DHEA is the hormone
which allows the body to know its energy level. Kaire has obtained from Dr.
Steve Chernisky, author of "The DHEA Breakthrough" the exclusive rights to his
signature line of products.
ARTHRIKAIRE AND OSTEO FORMULA. ArthriKaire and Osteo Formula are Kaire
products introduced in June 1997. Osteo Formula is a comprehensive bone
supplement that provides 18 nutrients including four different types of calcium
for maximum absorption and assimilation. ArthriKaire is designed to provide
dietary support for joints, tendons and ligaments. This proprietary formula
combines proteoglycans, vitamins and herbs that support the integrity of
connective tissue.
PERSONAL KAIRE. This includes JoBelle Gold (a skin softener containing gold
flakes), Dermakaire (Kaire's original moisturizing lotion with Pycnogenol), and
the JoBelle Skin Care System consisting of shampoo, conditioner and body lotion
as well as a "top of the line" six part face care system. Kaire is attempting to
develop an upscale image for this product line with an appeal to a younger
market than Kaire's current United States associate base.
The following table indicates how many of Kaire's products were available
as of September 30, 1998 in each of Kaire's current markets.
<TABLE>
<CAPTION>
PRODUCTS OFFERED
---------------------------------------------------------------------
TOTAL TRINIDAD
PRODUCT PRODUCTS NEW AND UNITED
CATEGORIES/LINES OFFERED U.S. CANADA ZEALAND AUSTRALIA TOBAGO KINGDOM
- -------------------------------- ---------- ------ -------- --------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Antioxidant Protection ......... 8 8 6 4 0 8 2
Defense ........................ 3 3 3 2 0 2 1
Digestion ...................... 5 5 5 5 2 3 2
Energy and Alertness ........... 3 3 3 1 1 2 2
Stress ......................... 3 3 2 2 0 1 1
Vital Nutrients ................ 4 4 2 2 0 3 2
Weight Management .............. 3 3 0 0 0 3 0
Anti-Aging ..................... 3 3 1 0 0 1 0
Personal Care .................. 18 18 14 12 12 12 0
-- -- -- -- -- -- -
50 50 36 28 15 35 10
== == == == == == ==
</TABLE>
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Presented below are the revenue amounts (in thousands) of each of Kaire's
product categories for the years ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
PRODUCT CATEGORY DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
- -------------------------------- ------------------- ------------------- ------------------
<S> <C> <C> <C>
Antioxidant Protection ......... $37,387 $33,947 $23,560
Defense ........................ 3,463 3,000 2,740
Digestion ...................... 3,141 2,534 1,779
Energy and Alertness ........... - 31 1,079
Stress ......................... 508 681 508
Vital Nutrients ................ 957 750 975
Weight Management .............. - 611 328
Anti-Aging ..................... - 43 608
Personal Care .................. 1,792 1,261 1,861
Other .......................... 10,593 8,641 2,244
------- ------- -------
$57,841 $51,499 $35,682
======= ======= =======
</TABLE>
NEW PRODUCT DEVELOPMENT. Additional products being considered in these
areas are additional antioxidants, anti-aging, weight management, and energy
products. In addition to the introduction of single products, Kaire is also
focusing on promoting groups of products to be taken in conjunction with each
other to address specific needs (such as weight loss, stress, daily wellness,
etc.) that an individual may have.
Kaire continually seeks to identify, develop and introduce innovative,
effective and safe products. In Fiscal 1996 and Fiscal 1997, Kaire introduced
over twenty new products or services. Management believes that its ability to
introduce new products increases its associates' visibility and competitiveness
in the marketplace.
New product ideas are derived from a number of sources, including trade
publications, scientific and health journals, Kaire's management and
consultants, and outside parties. Prior to introducing products into Kaire's
markets, Kaire's scientific consultants, legal counsel and other representatives
retained by Kaire investigate product formulation matters as they relate to
regulatory compliance and other issues. Kaire's products are formulated to suit
both the regulatory and marketing requirements of particular markets.
Kaire maintains its own product review and evaluation staff but relies upon
independent research, vendor research departments, research consultants and
others for product research, development and formulation services. When Kaire,
one of its consultants or another party identifies a new product concept or when
an existing product must be reformulated for introduction into a new or existing
market, the new product concept or reformulation is generally submitted to
Kaire's suppliers for technological development and implementation. Kaire owns
the proprietary rights to a majority of its product formulations.
Kaire expended no funds on new product research and development during
Fiscal 1996 and Fiscal 1997, respectively.
PRODUCT WARRANTIES AND RETURNS. Kaire's product warranties and policy
regarding returns of products are similar to those of other companies in its
industry. If a consumer of any of Kaire's products is not satisfied with the
product, she/he may return it to the associate from whom the purchase was made,
within 90 days of purchase. The associate is required to refund the purchase
price to the consumer. The associate may then return the unused portion of the
product to Kaire for an exchange of equal value. If an associate requests a
refund in lieu of an exchange, a check or credit card credit is issued. All
products are warranted against defect by the manufacturer of those products.
Most products returned to Kaire, however, are not found to be defective in
manufacture.
MANAGEMENT INFORMATION SYSTEM. Kaire maintains a computerized system for
processing associate orders and calculating associate commission and bonus
payments enabling it to promptly remit payments to associates. Kaire believes
that prompt remittance of commissions and bonuses is vital to maintaining a
motivated network of associates and that associate loyalty has been enhanced by
Kaire making commission and bonus payments as scheduled.
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Kaire's computer system provides each associate a detailed monthly
accounting of all sales and recruiting activity in his or her organization.
These convenient statements eliminate the need for substantial record keeping on
behalf of the associate. As a precaution, duplicate copies of Kaire's computer
records are transferred daily to an off-site location for safekeeping. Kaire is
utilizing both internal and external resources to identify, correct or
reprogram, and test the system for the Year 2000 compliance. It is anticipated
that all reprogramming efforts will be completed by December 31, 1998, allowing
adequate time for testing. Management has assessed Kaire's Year 2000 compliance
expense to be $250,000. Kaire has not yet established a contingency plan in the
event that it is unable to correct the "Year 2000" problem and as of the date of
the Proxy Statement has no plans to do so.
MANUFACTURING AND SUPPLIES. Kaire currently purchases all of its vitamins,
nutritional supplements and all other products and ingredients from parties that
manufacture such products to Kaire's specifications and standards. During Fiscal
1997, approximately one-half of the products purchased by Kaire were supplied by
MWI, a distribution company which purchases and imports Pycnogenol from Horphag
along with other raw materials. MWI is Kaire's source of Pycnogenol. Kaire
places significant emphasis on quality control. All nutritional supplements, raw
materials and finished products are subject to sample testing, weight testing
and purity testing by independent laboratories.
Kaire has no written agreements with any of its suppliers including MWI. In
the event of loss of any of its sources of supply, Kaire believes that suitable
replacement sources of similar products and product ingredients exist and are
available to Kaire. However, there can be no assurance that Kaire would be able
to obtain replacement suppliers on a timely basis, and on commercially
reasonable terms.
TRADEMARKS AND SERVICE MARKS. Most products are packaged under Kaire's
"private label." Kaire has registered trademarks with the United States Patent
and Trademark Office for its name, logo and various products names. It has
applied for trademark registration in several countries outside of those it is
currently operating in for its name, logo and various product names.
COMPETITION. Kaire competes with many companies which market and sell
products similar to its own products. It also competes intensely with other
network marketing companies in the recruitment of associates.
There are many network marketing companies with which Kaire competes for
associates. Some of the largest of these are Nutrition for Life International,
Inc., Nature's Sunshine, Inc., Herbalife International, Inc., Amway and Rexall
Sundown, Inc. Each of these companies is substantially larger than Kaire and has
significantly greater financial and personnel resources than Kaire. Kaire
competes for associates by means of its marketing program that includes its
commission structure, training and support services, and other benefits.
Not all competitors market all types of products marketed by Kaire, and
some competitors market products and services in addition to those marketed by
Kaire. For example, some competitors are known for and are identified with sales
of herbal formulations, some are known for and are identified with sales of
household cleaning and personal care products, and others are known for and are
identified with sales of nutritional and dietary supplements. Kaire's principal
methods of competition for the sale of products are its responsiveness to
changes in consumer preferences and its commitment to quality, purity, and
safety.
GOVERNMENT REGULATION. Although Kaire confines its activities to marketing
and distribution, the manufacturing, processing, formulation, packaging,
labeling and advertising of Kaire's products are subject to regulation by
federal agencies, including the Food and Drug Administration ("FDA"), the
Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
United States Department of Agriculture, the United States Postal Service and
the United States Environmental Protection Agency. These activities are also
subject to regulation by various agencies of the jurisdictions, states and
localities in which Kaire's products are sold.
In November 1991, the FDA issued proposed regulations designed to, among
other things, amend its food labeling regulations. The proposed regulations met
with substantial opposition. In October 1994, the "Dietary Supplement Health and
Education Act of 1994" (the "Dietary Supplement Law") was enacted. Section 11 of
the Dietary Supplement Law provided that the advance notice of proposed rule
making by the FDA concerning dietary supplements was null and void. FDA
regulations that became effective on June 1, 1994 require standard
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<PAGE>
format nutrition labeling on dietary supplements. However, because the new
Dietary Supplement Law also addresses labeling of dietary supplements, the FDA
indicated that it would not enforce its labeling regulations until January 1,
1998. To the date of this Proxy Statement, no new regulations which affect
Kaire's labeling practices have been promulgated. In the interim, new
regulations are expected to be proposed by the FDA. Because the FDA has not yet
reconciled its existing regulations with the new Dietary Supplement Law, Kaire
cannot determine to what extent any changed or amended regulations will affect
its business.
The Dietary Supplement Law did not affect the July 1, 1994 effectiveness of
the FDA's health claims regulations. Those regulations prohibit any express or
implied health claims for dietary supplements unless such claims are approved in
advance by the FDA through the promulgation of specific authorizing regulations.
Such approvals are rarely provided by the FDA. Therefore, no claim may be made
on a dietary supplement label or in printed sales literature, "that expressly or
by implication characterizes the relationship of any substance to a disease or
health-related condition." Kaire cannot determine what effect currently proposed
FDA regulations, when and if promulgated, will have on its business in the
future. Such regulations could, among other things, require expanded or
different labeling, recalling or discontinuing of certain products, additional
record keeping and expanded documentation of the properties and certain products
and scientific substantiation. In addition, Kaire cannot predict whether new
legislation regulating its activities will be enacted, which new legislation
could have a material adverse effect on Kaire.
Kaire has an ongoing compliance program with assistance from FDA counsel
regarding the nature and scope of food and drug legal matters affecting Kaire's
business and products. Kaire is unaware of any legal actions pending or
threatened by the FDA or any other governmental authority against Kaire.
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products.
Based on research conducted in opening its existing markets (including
assistance from local counsel), the nature and scope of inquiries from
government regulatory authorities and Kaire's history of operations in such
markets to date, Kaire believes that its method of distribution is in compliance
in all material respects with the laws and regulations relating to direct
selling activities of the countries in which Kaire currently operates. Even
though management believes that laws governing direct selling are generally
becoming more permissive, many countries currently have laws in place that would
prohibit Kaire from conducting business in such markets. There can be no
assurance that Kaire will be allowed to continue to conduct business in each of
its existing markets that it currently services or any new market it may enter
in the future.
Kaire is subject to or affected by extensive governmental regulations not
specifically addressed to network marketing. Such regulations govern, among
other things, (i) product formulation, labeling, packaging and importation, (ii)
product claims and advertising, whether made by Kaire, or its associates, (iii)
fair trade and distributor practices, and (iv) taxes, transfer pricing and
similar regulations that affect foreign taxable income and customers duties.
Based on Kaire's experience and research (including assistance from local
counsel) and the nature and scope of inquiries from government regulatory
authorities, Kaire believes that it is in material compliance with all
regulations applicable to it. Despite this belief, Kaire could be found not to
be in material compliance with existing regulations as a result of, among other
things, the considerable interpretative and enforcement discretion given to
regulators or misconduct by associates. There can be no assurances that Kaire
will not be subject to inquiries and regulatory investigations or disputes and
the effects of any adverse publicity resulting therefrom. Any assertion or
determination that Kaire or any of its associates are not in compliance with
existing laws or regulations could have a material adverse effect on Kaire's
business and results of operations. In addition, in any country or jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or have a
material adverse effect on Kaire's business and results of operations. Kaire
cannot determine the effect, if any, that future governmental regulations or
administrative orders may have on Kaire's business and results of operations.
Moreover, governmental regulations in
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countries where Kaire may commence or expand its operations may prevent, delay
or limit market entry of certain products or require the reformulation of such
products. Regulatory action, whether or not it results in a final determination
adverse to Kaire, has the potential to create negative publicity, with
detrimental effects on the motivation and recruitment of associates and
consequently, on Kaire's sales and earnings.
PROPERTIES. Kaire leases an aggregate of approximately 45,000 square feet
of office and warehouse space in three buildings in Longmont, Colorado. The
lease terms expire over a span of one month to six months, and the current
monthly rate is approximately $15,000 per month. The Australian and New Zealand
subsidiaries also lease their office and warehouse facilities of approximately
8,000 square feet for a period of approximately five years. Kaire has entered
into leases at June 1, 1997 through its South Korean (which previously ceased
operations) and Trinidad and Tobago subsidiaries. The former is a three year
lease on the second floor in one of the office/commercial buildings in downtown
Seoul, South Korea. The Trinidad and Tobago office is approximately 1,100 square
feet in downtown Port-of-Spain, Trinidad, which lease is for one year with two
one-year renewals. In January 1998, Kaire entered into, through its United
Kingdom subsidiary, a lease of approximately 4,800 square feet for 11 years in
Solihull, England, with an option to review the leases after five years, and
terminate with notice. Management of Kaire believes that such properties are
suitable and adequate for current operating needs.
EMPLOYEES. At September 30, 1998, Kaire had employed approximately 59 full
time persons of whom three were executive, 13 were engaged in finance and
administrative activities, 11 in order entry, one in travel services, six in
Management Information Services ("MIS"), three in purchasing, two in compliance,
three in data support services, one in international development, two in human
resources, one in associate services, five in customer relations, one in
marketing and seven in shipping. None of Kaire's employees is represented by a
collective bargaining unit. Kaire believes that its relationship with its
employees is good.
LEGAL PROCEEDINGS. To the knowledge of the management of Kaire, there is
no material litigation pending or threatened against Kaire nor are there any
such proceedings to which Kaire is a party.
However, Kaire is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. Kaire was initially contacted in January 1997 and was advised, in
writing, that it is not a "target" of the Department's investigation, but that
it is a "subject" (meaning that its conduct is deemed to be within the scope of
the investigation) thereof. Kaire has completed all obligations and requests
pertaining to this matter.
Kaire has also received a voluntary request for information from the FTC
regarding a separate investigation into dietary supplement interactions with
certain disorders. Kaire voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. Kaire is currently responding with clarifications to
previous inquiries.
KAIRE MANAGEMENT
The directors and executive officers of Kaire are as follows:
<TABLE>
<CAPTION>
NAME AGE COMPANY POSITIONS
- --------------------- ----- --------------------------------------------------------------
<S> <C> <C>
Robert L. Richards 53 Chief Executive Officer and Director
Michael Lightfoot 45 President
Loren E. Bagley 56 Chairman of the Board
J.T. Whitworth 62 Chief Operating Officer, Chief Financial Officer and Director
William F. Woodburn 56 Treasurer and Director
L. Charles Laursen 44 Vice President of Finance
Mark D. Woodburn 28 Secretary and Director
</TABLE>
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Set forth below is a brief background of the Executive Officers and
Directors of Kaire, based upon information supplied by them.
ROBERT L. RICHARDS, co-founder of Kaire, has been Senior Executive Vice
President (since November 1994), Chief Executive Officer (since August 1996) and
a Director of Kaire since its inception in October 1992. Mr. Richards also
served as Kaire's Executive Vice President and Chief Financial Officer from 1992
to 1994. From 1989 until joining Kaire, Mr. Richards was the vice president of
Continental Tax Corporation, a property tax consulting firm. From 1982 to 1989,
Mr. Richards was the president of RARADAN Oil Company, a company engaged in the
development of oil and gas joint ventures. Mr. Richards was a Captain in the
United States Air Force and an instructor-pilot from 1970 to 1975. He is an
athlete, having been National Champion and All American in 1966 in the 3,000
meter steeplechase. He was also on the United States Olympic Training Team
(steeplechase) in 1968 and 1972. Mr. Richards graduated from Brigham Young
University with a Bachelor of Science degree in Geology.
MICHAEL LIGHTFOOT has been President of Kaire International, Inc. since
August 1997. Mr. Lightfoot has been involved with Kaire since 1993, when he
joined Kaire as an associate and formed Kaire International (Canada) Ltd. in
September 1993. Prior to 1993, Mr. Lightfoot was regional general manager for
Forever Living Products, Inc. of British Columbia, Canada. Mr. Lightfoot has
over 20 years experience in network marketing.
LOREN E. BAGLEY has been Chairman of Kaire's Board of Directors since its
inception. Mr. Bagley is also president and chief executive officer of Trans
Energy, Inc. ("TEI"), a company whose securities are listed on NASDAQ, having
been TEI's executive vice president from August 1991 until assuming his current
responsibilities at TEI in September 1993. From 1979 to the present, Mr. Bagley
has also been self employed in the oil and gas industry as president, chief
executive officer or vice president of various corporations which he has either
started or purchased, including Ritchie County Gathering Systems, Inc. Prior to
becoming involved in the oil and gas industry, Mr. Bagley was employed by the
United States Government with the Agriculture Department. Mr. Bagley attended
Ohio University and Salem College and received a Bachelor of Arts degree.
J.T. WHITWORTH joined Kaire in 1994 as Vice President of Operations. In
1995 he was promoted to Executive Vice President of Operations and Chief
Financial Officer. He was promoted to Chief Operating Officer and Chief
Financial Officer in 1997. He was elected a Director of Kaire in 1996. From 1983
until joining Kaire, Mr. Whitworth was manager of worldwide commerce, import,
export, and corporate distribution of AGCO Corporation ("AGCO"), a major farm
equipment manufacturer. During his tenure with AGCO, which was from 1961 until
1994, he held several managerial positions.
WILLIAM F. WOODBURN has been Treasurer and a Director of Kaire since its
inception. Mr. Woodburn is also vice president in charge of TEI's operations
and has been a director of TEI since August 1991. Mr. Woodburn has been
actively engaged in the oil and gas business in various capacities for the past
fourteen years. Prior to his involvement in the oil and gas industry, Mr.
Woodburn was employed by the United States Army Corps of Engineers for twenty
four years and was resident engineer on several construction projects. Mr.
Woodburn graduated from West Virginia University with a Bachelor of Science
degree in Civil Engineering.
L. CHARLES LAURSEN, a Certified Public Accountant, joined Kaire in July
1994 as its Controller. Mr. Laursen was promoted to the position of Vice
President of Finance in May 1996. From 1990 until joining Kaire, Mr. Laursen was
the controller of Solid Systems Engineering, a heavy equipment distributor. From
1985 until 1990, Mr. Laursen was the controller of Pratt Partnership, an
industrial park complex encompassing construction, maintenance, property
management, and hotel operations. Mr. Laursen graduated from Colorado State
University with a Bachelor of Science degree in Accounting.
MARK D. WOODBURN has been Secretary and a Director of Kaire since its
inception. He also serves as assistant secretary of TEI, a position which he
has held for the past four years. Mark D. Woodburn is the son of William F.
Woodburn.
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KAIRE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
CONSOLIDATED FINANCIAL STATEMENTS OF KAIRE AND NOTES THERETO, INCLUDED ELSEWHERE
IN THIS PROXY STATEMENT. THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE
PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS OF BOTH KAIRE AND THE COMPANY.
THE CAUTIONARY STATEMENTS MADE IN THIS PROXY STATEMENT SHOULD BE READ AS BEING
APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR HERE.
OVERVIEW. Kaire develops, purchases and distributes primarily natural
source products intended for nutritional or personal care purposes. Kaire's
products are distributed through a network of over 430,000 associates, of which
approximately 15% are "active" (as defined herein) in several countries in four
continents, North America, Australia, Asia and Europe. Kaire offers
approximately 50 products in nine categories, including Antioxidant Protection,
(Bodily) Defense, Digestion, Energy and Alertness, Stress, Vital Nutrients,
Weight Management, Anti-Aging and Personal Care.
Kaire commenced operations in October 1992 with the introduction of
MARITIME PRIME. MARITIME PRIME features the ingredient Pycnogenol, a derivative
of Southern France's Maritinus Pinus tree. Pycnogenol was combined with a blend
of other natural ingredients developed by Horphag Research Ltd. ("Horphag"), a
European corporation not otherwise affiliated with Kaire which is Pycnogenol's
manufacturer.
During Fiscal 1992 and Fiscal 1993, Kaire's focus was on obtaining the
information on Pycnogenol and the properties associated with it from Horphag and
disseminating that information in the United States and, in Fiscal 1993, in
Canada. At inception, Kaire elected to market its product by "network" as the
most effective way to disseminate product information. During these two fiscal
years, Kaire also sold several complimentary products as well as an aloe vera
line of products. During 1993, Kaire developed a "uni-level" compensation plan
designed to be simple and financially attractive to associates (product
distributors). By the end of Fiscal 1993, sales revenues had increased to a rate
of approximately $400,000 per month.
In Fiscal 1994, Kaire experienced substantial growth in sales revenues. By
September of 1994, net sales increased to a rate of approximately $5,000,000 per
month and new associates were being sponsored at a rate exceeding approximately
10,000 per month. New products introduced during 1994 were nutritional - and/or
Pycnogenol-based. During the summer of 1994 sales volume briefly exceeded
Kaire's product delivery capacity but by the fall of 1994, this was rectified
and Kaire was delivering product on a timely basis. A price increase was
instituted in October 1994 to offset the weakening of the United States dollar
with respect to the French franc and a price increase from the manufacturer of
Pycnogenol via the importer.
In Fiscal 1995, Kaire commenced operations in New Zealand and Australia
through its subsidiaries domiciled there. Although the subsidiaries had a brief
period of rapid growth in sales revenues, Kaire believes that sales leveled off
as the apparent success of these subsidiaries became known in the network
marketing industry and competitors began offering competitive products and/or
comparable commission programs. Kaire believes that most significant competition
was from competitors selling grape seed and grape skin products which have some
of the same properties as Pycnogenol, but are less expensive to produce and
could be sold for substantially less than Kaire's Pycnogenol based products. In
addition, a grape supplier asserted that its product was a generic version of
Pycnogenol and could be marketed as such. Actions ranging from letters to
lawsuits by Kaire and Pycnogenol's importer and manufacturer and accompanying
cease-and-desist orders were required to end these assertions.
Based upon management's network marketing industry experience and a
leveling off of sales in the latter part of 1995, Kaire anticipated that it
would reach maturity as a network marketing concern and could face the
possibility of diminishing sales unless Kaire acted. In an effort to thwart the
possibility of diminishing sales, in March 1996, Kaire revised its associate
commission program to include, among other things, providing the sponsor of an
associate with a substantially higher commission on the first purchase made by
the sponsored
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associate (in the past, the sponsor had received no such additional compensation
on a first sale). Kaire's goals in altering its associate commission program was
to encourage associates to not only sponsor new associates but have the sponsors
assist the new associates in making sales and forming their own sales
organization comprised of additional levels of associates and, ultimately,
attract a more entrepreneurial younger associate than it had attracted in the
past. The nature of Kaire's products was believed by Kaire to be a draw to
middle aged associates whose apparent focus was to assist friends, relatives,
etc. by introducing them to Kaire's products and not necessarily having an
additional focus of earnings. Additionally, at or about the same time, Kaire
introduced a weight loss program, a line of cosmetics, Kaire World Magazine, and
new and improved training materials.
Kaire believes that the changes in its associate commission program were
not well received by its existing associates and attracted a number of new
associates whose primary focus was apparently directed at garnering the larger
commissions on initial product sales to associates whom they had sponsored, as
opposed to developing a self-sustaining sales organization. Kaire believes that
as a consequence, sales revenues declined while product returns increased. Also,
newly introduced products, such as Immunol, Synerzyme and the Yes! Weight
Management Program, did not have the revenue impact anticipated. In the fall of
1996, Kaire essentially returned to the prior commission program, with some
increase in commissions being added to the original structure, while greater
emphasis was placed on seeking professional network marketers versed and
established in the network industry. Kaire believes that its new and improved
training materials have been useful to Kaire and well received by its
associates.
In 1996, Kaire also decided to open new markets and expand into additional
countries. By January 1997, it began to establish operations in South Korea and
Trinidad and Tobago. In June 1997, Kaire opened an office in Port-of-Spain,
Trinidad and Tobago. Also in June 1997, Kaire received approval from the South
Korean government to begin recruitment and engage associates in that country. In
July 1997, Kaire completed South Korea's product approval and quarantine
procedures and the sales of selected products commenced. Initially, only a
high-end line of skin care products (JoBelle Gold Line) was available in South
Korea. Maritime Prime was approved late in August 1997, and additional Kaire
supplements were approved in November 1997. Kaire sustained substantial losses
in trying to penetrate the South Korean market. Kaire ceased operations of its
South Korean subsidiary in 1998 and at June 30, 1998, Kaire recorded a $471,000
write-down of its assets in its South Korean subsidiary to what Kaire believed
to be their net realizable value. Kaire incorporated Kaire Europe, Ltd. in the
United Kingdom in July 1997 and commenced sales in November 1997. Approval
efforts are being undertaken for various product lines in Canada, Trinidad and
Tobago, New Zealand, Australia, the United Kingdom and France. There can be no
assurance, however, that any of such approvals will be forthcoming in a timely
fashion, or at all, or will not be contingent on various conditions or
restrictions which may be imposed by the appropriate governmental authorities.
Also, in 1997, Kaire decided to modify its commission program with the objective
of increasing the flow of funds to Kaire and stabilize its financial position.
The modification consisted of the elimination of a 5% bonus, a restructuring of
supplemental bonuses for top executives, the institution of a program to pay the
car expenses of certain associates in North America, New Zealand and Australia
and a change in qualification and the number of sponsored levels paid under the
international sponsoring program. It is anticipated that this change will lower
the total bonus payout by approximately four (4%) percent.
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RESULTS OF OPERATIONS. The following table sets forth for the periods
indicated, selected consolidated statement of operations data of Kaire expressed
as a percentage of net sales.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEARS ENDED DECEMBER 31, (UNAUDITED)
-------------------------------------- ---------------------------
1995 1996 1997 1997 1998
---------- ---------- ------------ ------------ ------------
Net Sales ................................... 100.0% 100.0% 100.0% 100.0% 100.0%
<S> <C> <C> <C> <C> <C>
Cost of Goods Sold .......................... 25.0% 25.9% 23.5% 23.6% 24.5%
Gross Profit ................................ 75.0% 74.1% 76.5% 76.4% 75.5%
Operating Expenses ..........................
Associate Commissions ....................... 53.3% 54.3% 56.0% 56.0% 51.7%
Selling, General and Administrative ......... 17.9% 25.2% 36.5% 35.0% 34.8%
Income (Loss) from Operations ............... 3.8% (5.4)% (16.0)% (14.6)% (11.0)%
Other Income (Expense) Net .................. (0.1)% (0.0)% ( 1.6)% ( 0.6)% ( 4.9)%
Net Income (Loss) Before Taxes and Minority
Interest ................................... 3.7% (5.4)% (17.6)% (15.2)% (15.9)%
Income Tax (Provision) Benefit .............. (1.5)% 2.1% 0.0% 0.0% 0.0%
Minority Interest in Subsidiaries ........... (0.1)% (0.2)% 0.4% 0.2% 0.7%
Net Income (Loss) ........................... 2.1% (3.5)% (17.2)% (15.0)% (15.2)%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998 ("NINE MONTHS 1998") COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 ("NINE MONTHS 1997")
NET SALES. Net sales for Nine Months 1998 were approximately $21,019,000 as
compared to Nine Months 1997 sales of approximately $27,887,000, a decline of
$6,868,000 or 24.6%. Domestically, the Company has been experiencing declining
sales since March 1996. This decline in sales has slowed in Nine Months 1998 as
compared to Nine Months 1997. Domestic sales in Nine Months 1997 included
significant sales to the South Korean community in the United States. Some
comparable sales had been reflected in South Korean sales in Nine Months 1998,
but the South Korean sales have not achieved their projections and in October
1998 the Company ceased operations in South Korea due to a significant decline
in all Far Eastern economies and the decline of the relative value of the South
Korean Won against the U.S. Dollar.
COST OF GOODS SOLD. Cost of goods sold for Nine Months 1998 was $5,159,000
or 24.5% of net sales. Cost of goods sold for Nine Months 1997 was $6,587,000 or
23.6% of net sales. The total cost of goods sold declined by approximately
$1,428,000 or 21.7% from Nine Months 1997 to Nine Months 1998. The primary
factor affecting this category was the decline in sales resulting in lower total
dollars. Affecting the reduction in cost of goods sold was a change in freight
carrier which lowered the cost of shipping products to customers while not
affecting shipping revenue and the introduction of several new products in the
latter part of 1997 which maintained a lower cost percentage.
GROSS PROFIT. Gross profit decreased from approximately $21,300,000 or
76.4% of net sales in Nine Months 1997 to approximately $15,860,000 or 75.5% of
net sales in Nine Months 1998. The decline was approximately $5,440,000 or
25.5%. The reason for the gross decline was the reduction in sales discussed
above.
COMMISSION. Associate commissions decreased from approximately $15,626,000
or 56.0% of sales in Nine Months 1997 to approximately $10,854,000 or 51.7% of
sales in Nine Months 1998, a decline of $4,772,000 or 30.5%. The primary reason
for the decline was the decrease in sales that the commissions are based upon.
There were several reasons for the reduction in the percentage of commissions
paid to associates. The first was a "purging" of the associate genealogy which
occurred in December 1996. Under the standard compensation plan, an associate
can go deep into his/her organization to fill up to six levels of compensation.
His/her position, however, is determined by sales on his/her first level without
this "rollup and compression." The purge moved active associates onto the first
line of associates that they were previously rolling up to. This qualified the
new "first line sponsor" for higher, deeper paying positions in Kaire,
increasing their commission without having to do any new sponsoring or selling.
This effect gradually disappears due to the maturation of
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<PAGE>
the commission structure and has been substantially diluted by Nine Months 1998,
but the Nine Months 1997 bonus may have been negatively affected by one to three
percent. Second was a reduction in the bonus payout at a level available to top
associates and a reduction in the "Eagles Nest" bonus percentage from 1% to 0.5%
for all countries except South Korea. Finally, South Korean operations and sales
became a factor in Nine Months 1998. There is a statutory limitation of 35% of
sales for commissions in that country. As South Korean sales increased as a
percentage of total sales, this effectively reduced the average commission
payment percentage. Kaire since ceased operations in South Korea in October
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs decreased from approximately $9,739,000 or 35.0% of net
sales in Nine Months 1997 to approximately $7,310,000 or 34.8% of net sales in
Nine Months 1998, a decrease of $2,429,000 or 24.9%. Part of the expense in Nine
Months 1997 was a program Kaire believed would increase the number of
professional network marketers joining Kaire as opposed to grass roots and first
time individuals who had made up much of its initial growth. It was hoped that
the professionals would bring stability and leadership to the associate base.
The total cost of this program was approximately $1,188,000 and was incurred
from August 1996 through August 1997. Significant expenses were therefore
incurred in Nine Months 1997. No expenses were incurred for this program in Nine
Months 1998. In addition to the discontinuance of the program, Kaire has
embarked on a number of cost saving measures both domestically and abroad. The
management of the marketing department during 1998 decreased expenses through a
reduction in personnel salaries and reduced operating costs. Kaire also
instituted cost-cutting measures in its domestic operations (of which the
marketing department is a part), reducing operating expenses for selling,
general and administrative expenses from approximately $1,000,000 during
September 1997 to under $500,000 per month during September 1998. Kaire
accomplished this by reducing staff, cutting out inefficient programs and
limiting optional spending. Increasing sales, general and administrative
expenses for Nine Months 1998 was the inclusion of operations in South Korea
(which subsequently ceased operations), Trinidad and Tobago and the United
Kingdom. Such operations in South Korea and Trinidad and Tobago began late in
the second quarter of 1997, but did not have a significant impact on Nine Months
1997 operating expenses. Also contributing to the operating expenses in Nine
Months 1998 was the reduction in net realizable value of South Korean assets due
to the continued losses in South Korea and the decline of the South Korean
economy. This reduction totaled approximately $471,000.
LOSS FROM OPERATIONS. Operating losses decreased from approximately
$4,065,000 or 14.6% of net sales in Nine Months 1997 to approximately $2,303,000
or 11.0% of net sales in Nine Months 1998. This represented a 43.3% decrease in
loss or approximately $1,762,000 between the periods. This decrease was a result
of improved margins in the cost of sales and commissions areas combined with a
reduction in selling, general and administrative expenses.
OTHER EXPENSES. Other expenses increased from approximately $161,000 or
0.6% of sales in Nine Months 1997 to approximately $1,030,000 or 4.9% of sales
in Nine Months 1998, a change of approximately $869,000 or 639.8%. This increase
is almost exclusively attributable to the interest on the increased borrowings
in 1998 needed to fund operations, and the writeoff of deferred offering costs.
These borrowings were necessitated by the inability to achieve profitability
while incurring costs associated with the above development programs.
INCOME TAXES. Income tax benefits were not reflected in either period. The
anticipated benefits of utilizing net operating losses against future profits
was not recognized in Nine Months 1998 or Nine Months 1997 under the provisions
of Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 109 (Accounting for Income Taxes), by utilizing its loss
carryforwards as a component of income tax expenses. As of September 30, 1998,
Kaire has a significant amount of net operating loss available to carryforward
and offset against future earnings. A valuation allowance equal to the net
deferred tax asset has been recorded, as Kaire management has not been able to
determine that it is more likely than not that the deferred tax assets will be
realized.
MINORITY INTEREST. The offset for minority interest increased from
approximately $44,000 or 0.2% of sales in Nine Months 1997 to approximately
$141,000 or 0.7% of sales in Nine Months 1998, a change of approximately $97,000
or 320.5%, reflecting losses incurred in the South Korean and Australian
subsidiaries offset by
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income from the New Zealand subsidiary. Losses in South Korea and income from
New Zealand both increased in Nine Months 1998 offsetting each other despite the
fact the minority interest percentage in South Korea is much lower than in New
Zealand.
NET LOSS. Net loss was approximately $3,192,000 in Nine Months 1998 or
15.2% of net sales as compared to approximately $4,182,000 or 15.0% of net sales
in Six Months 1997, a decline of approximately $990,000 or 23.7%. The reduced
loss is a result of significant cost cutting measures in selling, general and
administrative expenses combined with lower cost percentages in the cost of
goods sold and commissions to associates.
YEAR ENDED DECEMBER 31, 1997 ("FISCAL 1997") COMPARED TO YEAR ENDED
DECEMBER 31, 1996 ("FISCAL 1996")
NET SALES. Fiscal 1997 and Fiscal 1996 were periods of declining sales for
Kaire. Revenues for Fiscal 1997 were approximately $35,682,000 which was a
decline of approximately $15,817,000 or approximately 30.7% from Fiscal 1996 of
$51,499,000. Fiscal 1996 was the year in which Kaire hit its high water mark to
date for domestic sales and then saw a consistent decline from that point. Kaire
had observed its sales growth slowing in the latter part of Fiscal 1995 and
responded to this leveling with a new marketing and compensation program
beginning in March 1996 in an effort to stimulate sales. While sales did
experience a temporary increase under the new program, sales soon started to
decline at approximately 4% per month. Kaire believes that the new associates
attracted by the new program were focused on the large initial bonus offered by
the new program. In addition, Kaire believes that many existing associates did
not accept the program and left Kaire. As a result, by October 1996, Kaire had
substantially abandoned this new program and returned to a commission program
more comparable to the program used in prior years. Despite the return to the
old program, sales continued to decline through both the end of 1996 and
throughout Fiscal 1997. During Fiscal 1997, the rate of decline had slowed
substantially and there were several months with sales growth from the prior
month, but generally, the trend was downward. To combat this, Kaire took several
steps to turn the situation around including a focused effort to attract
professional network marketers through several recruiting programs and entering
international markets in South Korea, Trinidad and Tobago and the Caribbean and
the United Kingdom and Europe. The programs to recruit the professional
marketers included a bonus program called the Eagles Nest which was a bonus pool
consisting of 1% of world-wide sales to be split among the top qualifying
associates; a support program wherein established network marketers were
subsidized while they were building their organization within Kaire; and an
aggressive recruitment, training and support program run by associates who had
been solicited by Kaire specifically for that purpose. Kaire has since
discontinued its South Korean operations.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1997 was $8,388,000 or
approximately 23.5% of net sales. Cost of goods sold for Fiscal 1996 was
approximately $13,321,000 or 25.9% of net sales. The total cost of goods sold
declined by approximately $4,933,000 or 37.0% from Fiscal 1996 to Fiscal 1997.
The primary factory affecting this category was the decline in sales resulting
in lower total dollars. Affecting the percentage was a slight price increase
that was put in place as a part of the March 1996 compensation program change
and a change in the product sales mix due predominantly to the introduction of
new, higher margin products. In Fiscal 1997, 29.5% of total product sales were
of non-Pycnogenol related products (all but those considered Antioxidant
Protection in the table on page 18) as compared to 22.4% in Fiscal 1996. The
average cost of goods sold for products in the "Antioxidant Protection" category
is approximately 23% as opposed to approximately 13-19% in the other categories.
Therefore, as the percentage of products other than Antioxidant Protection
products increases as a percentage of total sales, the overall cost of goods
sold percentage will continue to decline. Returns for Fiscal 1997 averaged
approximately $72,000 per month of 2.36% of gross sales. Returns for Fiscal 1996
averaged approximately $64,000 per month or 1.47% of gross sales.
GROSS PROFIT. Gross profit decreased from approximately $38,178,000 in
Fiscal 1996 to approximately $27,294,000 in Fiscal 1997. The decline was
approximately $10,884,000 or 28.5%. The reason for the gross profit decline was
the reduction in sales discussed above. The reason the percentage decline was
less than the sales decline were the factors mentioned above in the Cost of
Goods Sold section that results in a greater gross profit on each dollar of
sales.
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COMMISSIONS. Associate commissions decreased from approximately $27,966,000
or 54.3% in Fiscal 1996 of sales to approximately $19,968,000 or 56.0% in Fiscal
1997 of sales, a decline of approximately $7,998,000 or 28.6%. The primary
reason for the decline was the decrease in sales that the commissions are based
on. The commissions as a percentage of sales increased because of the
compensation program that was put in place in March 1996 and eliminated in
September 1996 paid an overall lower percentage of the net sales. The Quick
Start bonus which paid on only one level, 45% to the sponsor on the first
qualifying order, was one of the primary reasons that the program paid less to
the associates in 1996. Fiscal 1997 showed a larger percentage payout also
because of two compensation decisions made late in 1996. The first paid an
additional 5% bonus on the seventh level (originally taken from the first level,
but later not removed when the first level bonus was restored). The second was a
"purging" of the associate genealogy. Under the standard compensation plan, an
associate can go deep into his or her organization to fill up to seven levels of
compensation. This position, however, is determined by sale son his or her first
level without this "rollup and compression." The purge moved active associates
onto the first line of associates they were previously rolling up to. This
qualified the new "sponsor" for higher, deeper paying positions in Kaire,
increasing their commission without having to do any new sponsoring or selling.
This effect will gradually wear away, but as the change was made in December
1996, the Fiscal 1997 bonus may have been negatively affected by 1-3% for the
year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs increased from approximately $12,976,000 in Fiscal 1996 to
approximately $13,009,000 in Fiscal 1997, an increase of $33,000 or 0.3%. This
increase is not consistent with the decline in sales and is one of the
predominant reasons for the net loss for the year. The first reason for the
overall increase was an increase in selling costs as a result of the institution
of a program which Kaire believed would increase the number of professional
network marketers joining Kaire as opposed to grass roots and first time
individuals who had made up much of Kaire's initial growth. It was hoped that
the professionals would bring stability and leadership to the associate base.
The total cost of this program was approximately $1,188,000 and was incurred
from August 1996 through August 1997. The majority of the expenses were
therefore incurred in Fiscal 1997. In addition, development costs of
approximately $1,040,000 to commence operations in Trinidad and Tobago, South
Korea and the United Kingdom were incurred in Fiscal 1997. In addition to the
development expenses, as with most new ventures, these subsidiaries showed
losses in Fiscal 1997 as they were building their sales forces to the levels
needed to achieve profitability. Offsetting these expense increases were changes
in the management of the marketing department during Fiscal 1997 which decreased
expenses through both reduced personnel salaries and reduced operating costs.
In addition, Kaire instituted cost-cutting measures in its domestic
operations (of which the marketing department is a part), reducing operating
expenses for selling, general and administrative expenses from approximately
$1,200,000 per month during July through September 1996 to approximately
$750,000 by December 1997. Kaire accomplished this by reducing staff, cutting
out inefficient programs and limiting optional spending. This would represent a
savings of $450,000 per month or approximately $5,400,000 on an annualized
basis.
LOSS FROM OPERATIONS. Operating losses increased from approximately
$2,764,000 in Fiscal 1996 to approximately $5,683,000 in Fiscal 1997. This
represented a 105.6% increase in the loss or approximately $2,919,000 between
the two years. This increase was a result of the decline in sales accompanied by
the increases in selling, general and administrative expenses associated with
new foreign subsidiaries and a professional recruitment program.
OTHER EXPENSES. Other expenses increased from approximately $27,000 or .05%
of sales in Fiscal 1996 to approximately $562,000 or 1.6% of sales in Fiscal
1997, a change of approximately $535,000. This increase is almost exclusively
attributable to the interest, of approximately $600,000, on the increased
borrowings in Fiscal 1997 needed to fund operations. This borrowing was
necessitated by the inability to achieve profitability while incurring costs
associated with the above development programs.
INCOME TAXES. Income tax benefits declined from approximately $1,103,000 in
Fiscal 1996 to approximately $13,000 in Fiscal 1997 as the ability to carry net
operating losses back to prior years to claim refunds was substantially used up
in Fiscal 1996. The anticipated benefits of utilizing net operating losses
against future profits was not recognized in Fiscal 1997 under the provisions of
Financial Accounting Standards Board Statement of Financial Accounting Standards
No. 109 (Accounting for Income Taxes), utilizing its loss carryforwards
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as a component of income tax expense. As of December 31, 1997, Kaire had
approximately $4,700,000 in Federal net operating losses available to
carryforward and offset against future earnings. As a result of the IMT
Agreement and Plan of Reorganization and subsequent changes in ownership,
certain limitations will be placed on the unrestricted loss carryforwards. A
valuation allowance equal to the net deferred tax asset has been recorded, as
Kaire management had not been able to determine that it is more likely than not
that the deferred tax assets will be realized.
MINORITY INTEREST. The income offset for minority interest was a reduction
in Kaire's income (increase in the loss) in Fiscal 1996 of approximately
$115,000 reflecting income earned in the Australia and New Zealand subsidiaries.
A reduction in Kaire's loss for Fiscal 1997 in the amount of approximately
$134,000 is a reflection of the decreased revenue and/or losses recognized by
the New Zealand, Australian and South Korean subsidiaries as well as the
reduction in value of the assets of the foreign entities in comparison to the
United States dollar which is presented in these statements. These factors serve
to reduce the interest attributable to the minority shareholders of the foreign
subsidiaries.
NET LOSS. Net loss was approximately $6,098,000 in Fiscal 1997 or 17.1% of
net sales as compared to approximately $1,803,000 or 3.5% of net sales in Fiscal
1996. The increased losses are primarily a result of declining sales, an
unsuccessful change in the commission program and the cost of opening several
new markets.
YEAR ENDED DECEMBER 31, 1996 ("FISCAL 1996") COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995 ("FISCAL 1995")
NET SALES. Fiscal 1995 and Fiscal 1996 represent the peak of Kaire's
performance to date with respect to net sales. Revenues for Fiscal 1996 were
approximately $51,499,000 which was a decline of approximately $6,342,000 or
approximately 11.0% from Fiscal 1995 revenues of approximately $57,841,000.
Fiscal 1995 was a year of growth in domestic sales for Kaire at a slower rate
than in Fiscal 1994. In addition, Australian and New Zealand operations were
acquired in November 1995 adding to the sales total for Fiscal 1995. Kaire
recognized that sales were leveling off near the end of Fiscal 1995. In response
to this leveling off, Kaire adopted a new marketing and compensation program in
March 1996 in an effort to stimulate sales. While sales did respond with a
temporary increase, they soon started to fall on a monthly basis. Kaire believes
that the new associates attracted by the new program were focused on the larger
initial bonus offered by the new program and not focused on the development of a
sales organization and many then existing associates did not accept the new
program and left Kaire. As a result, by October 1996, Kaire abandoned this new
program and returned to a program more comparable to the program used in prior
years. The decline in net sales in Fiscal 1996 was not as pronounced because net
sales from Australia and New Zealand were included for a full twelve months in
Fiscal 1996 as opposed to the two post-acquisition months in Fiscal 1995.
COST OF GOODS SOLD. Cost of goods sold for Fiscal 1996 was approximately
$13,321,000 which represented 25.9% of net sales. Cost of goods sold for Fiscal
1995 was approximately $14,476,000 or 25.0% of net sales. This represented a
decrease of approximately $1,155,000 or 8.7% from Fiscal 1995 to Fiscal 1996.
The decline in total cost of goods sold was caused by the decreased sales
revenue for Fiscal 1996. Kaire believes that the increase in the cost of goods
sold percentage was related to an increase in sales returns. Also, there was a
minor price increase in Fiscal 1996, but no other adjustments in the cost or
sales price of the products sold. The returns stemmed from the new program which
encouraged larger initial purchases as well as broadcast claims made by an
unrelated third party about the effectiveness of Pycnogenol on certain medical
conditions. While these events did generate additional sales, Kaire believes a
higher percentage of those purchasing under the new program returned the product
for refunds under Kaire's satisfaction guaranteed policy than had made returns
in the past. In addition, Kaire released a new, more concentrated version of its
Maritime Prime (Super Prime) late in 1996.
This product was initially not well accepted by the associates as they
indicated that the anticipated results from its use were not achieved. While a
reformulation of the Super Prime product apparently corrected the perceived
problem, Kaire also replaced this product at its cost when so requested.
Sales returns averaged approximately $27,000 per month or 0.6% of gross
sales in January 1996 through April 1996. This percentage had remained
consistent with Fiscal 1994 and Fiscal 1995. For the last eight months
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of 1996, the returns increased to approximately $82,000 per month or 1.9% of
sales. Kaire's return policy is satisfaction guaranteed with time restrictions
(90 days from the date of sale) on most purchases. Partially used or empty
bottles may be returned if the customer was not fully satisfied. Depending on
whether the purchaser was an end user or an associate will affect if the refund
was given as an inventory trade or a cash refund. As the net sales are reduced
by non-salable returns, the cost of goods remains the same, therefore the cost
of goods percentage of net sales will increase. Kaire has been reviewing its
refund policies.
Kaire's policy has been to account for refunds in the period that the
refund request is received. The policy allows 90 days from the date of purchase
to accept refunds but many are received in the month of sale. Because of the
foregoing, Kaire has elected not to establish a reserve for anticipated refunds
as the effect on the statement of operations and the balance sheet would not be
material and there is no long term liability due to the 90 day return policy.
GROSS PROFIT. Gross profit decreased from approximately $43,365,000 in
Fiscal 1995 to approximately $38,178,000 in Fiscal 1996, approximately 12.0%.
The primary reason for the decline in gross profit was the decline in net sales
described above. In addition, gross profit as a percentage of net sales declined
from approximately 75.0% in Fiscal 1995 to 74.1% in Fiscal 1996 due primarily to
the increase in returns.
COMMISSIONS. Associate commissions decreased from approximately $30,831,000
in Fiscal 1995 to approximately $27,966,000 in Fiscal 1996, a decline of
approximately $2,865,000 or 9.3%. As a percentage of net sales, commissions
increased from 53.3% in Fiscal 1995 to 54.3% in Fiscal 1996. Commissions were
constant in Fiscal 1995 as the program was not changed from prior years. In
March 1996 the new program was implemented. The new program was not successful
as it attracted associates interested in short term gain and not long term
stability, the smaller associates (who represent a large portion of Kaire's
associate base) were adversely effected the most in proportion to their income
and sales leaders did not support the new program. As of September 1996, the
original program was substantially restored. Kaire also enhanced the original
program in an effort to stop further declines in sales raising the effective
commission rate by 10% of sales. Kaire purged inactive associates which Kaire
believes made a significant number of associates qualify for higher positions in
the commission structure and increased their bonus percentages without a
corresponding increase in sponsoring and sales. This change increased its
effective bonus rate by an additional 3%. The net effect of these changes in the
latter part of Fiscal 1996 was to increase commissions measured as a percentage
of net sales for Fiscal 1996 by approximately 1.9% from Fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were approximately $12,976,000 or 25.2% of net sales in
Fiscal 1996 as compared to approximately $10,370,000 or 17.9% of net sales in
Fiscal 1995, an increase of approximately $2,606,000 or 25.1%. The largest
factor in this increase was the acquisition of the interests in the New Zealand
and Australia subsidiaries in November 1995. During Fiscal 1995, Kaire incurred
approximately $250,000 in selling, general and administrative expenses through
those entities. During Fiscal 1996, the first full year of ownership of said
entities, approximately $1,800,000 of their selling, general and administrative
expenses were included within Kaire's overall selling, general and
administrative expenses. Also, an increased marketing effort was undertaken in
Fiscal 1996 to promote the new (commission) program and introduce an internet
marketing opportunity for associates. An additional approximate $478,000, in
comparison to approximately $410,000 in Fiscal 1995, was spent on these
marketing efforts in Fiscal 1996. Finally, personnel costs increased
approximately $746,000 from approximately $3,621,000 in Fiscal 1995 to
approximately $4,267,000 in Fiscal 1996. This was due to the addition of several
managerial positions, the installation of Kaire's 401(k) plan with matching
contributions and an increase in medical insurance costs in Fiscal 1996.
INCOME (LOSS) FROM OPERATIONS. Loss from operations in Fiscal 1996 was
approximately $2,764,000, a decrease of approximately $4,928,000 from Fiscal
1995's income from operations of approximately $2,164,000. The primary reasons
for this decline was the drop in net sales and corresponding decline in gross
profit. Most of Kaire's selling, general and administrative expenses are fixed
and do not fluctuate with changes in net sales. These expenses did not
correspondingly decline when net sales declined resulting in a loss instead of a
profit.
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OTHER INCOME (EXPENSES). There was no significant variance in other
expenses from Fiscal 1996 to Fiscal 1995. In neither year did other income or
other expense have a material effect on the overall profitability of Kaire.
INCOME TAXES. Kaire's income tax provision for Fiscal 1995 was $862,000
based on income earned during that year. In Fiscal 1996, Kaire recorded an
income tax benefit of approximately $1,103,000 from utilizing net operating
losses against prior income taxes paid. No benefit, from utilizing net operating
losses against future profits, was reflected in Fiscal 1996 operations. This
treatment was consistent with the provisions of the Financial Standards Board
Statement of Financial Accounting Standards No. 109 (Accounting for Income
Taxes) ("FASB 109"), utilizing its loss carryforwards as a component of income
tax expense, since Kaire's management has not been able to determine that it is
more likely than not that the deferred tax assets will be realized.
MINORITY INTEREST. The provision for Minority Interest was approximately
$86,000 in Fiscal 1995 and $115,000 in Fiscal 1996. This slight increase for
Fiscal 1996 was indicative of the increase in profitability of the foreign
subsidiaries in Fiscal 1996.
NET INCOME (LOSS). Kaire's net loss was approximately $1,803,000 for Fiscal
1996 compared to net income of approximately $1,186,000 for Fiscal 1995. This
change from profitability to a loss was primarily due to the decrease in net
sales and gross profit without a corresponding decrease in selling, general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
Kaire's capital requirements in connection with its operations, foreign
development and marketing activities have been and will continue to be
significant. As of September 30, 1998 and December 31, 1997, Kaire had working
capital deficits of approximately $9,285,000 and $6,492,000, respectively.
Kaire's independent certified public accountants stated in their report on the
December 31, 1997 consolidated financial statements that due to losses from
operations and a working capital deficit, there is substantial doubt about
Kaire's ability to continue as a going concern. Despite the fact that Kaire has
not made its payroll and sales tax deposits on a timely basis, Kaire has
continued to pay its associates timely and has negotiated out of any default
situations with its creditors and debtholders. Kaire believes it is addressing
the going concern issue in virtually every aspect of its operation. Kaire has
cut its operating expenses and is continuing to search for, and introduce, new
products, such as EnzoKaire Complete, which it believes will provide, but as to
which there can be no assurance of, improved profit margins and anticipated high
profile and user appeal. Kaire has also suspended expansion efforts into
additional foreign markets until the existing markets penetrated in 1997 achieve
a positive cash flow from operations. Kaire is dependent upon the proceeds from
additional capital raising activities or mergers to continue its foreign
development activities and domestic operations and fund its marketing plans, as
well as other working capital requirements.
Through 1995, Kaire has generated significant cash flow from operations due
to revenue growth and minimal capital requirements. Additionally, Kaire does not
extend credit to associates, but requires payment prior to shipping products and
accordingly does not maintain high receivable balances. A typical sales
transaction consists of the placement of an order by an associate. At the time
the order is placed, the associate must provide a valid credit card, be
pre-approved for using autodraft (direct withdrawal from their bank account), a
check or cash. No payment terms are offered to purchasers. The order is shipped
after the payment is processed. The only receivables created are therefore those
sales accepted at month end for which the funds are not received until the
following month, those accounts where a "hard" form of payment (check or
cashier's check) was submitted by mail and the actual order was calculated to be
a different amount than the funds sent or a failure to pay due to an
insufficient funds check or autodraft or credit card dispute. As a result, the
receivable is small in relation to sales and turns over rapidly. Non-collectable
accounts are written off to Selling, General and Administrative expenses on a
regular basis. Kaire's principal need for funds has been for distributor
incentives, working capital (principally inventory purchases), and the expansion
into new markets. Prior to 1997, Kaire had generally relied entirely on cash
flow from operations to meet its business objectives without incurring long term
debt to unrelated third parties.
In Nine Months 1998, the cash applied to operating activities was
approximately $1,032,000. This was primarily because of the net loss of
approximately $3,192,000 which was off-set by decreases in inventories of
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approximately $567,000 and increases in accrued liabilities and accounts payable
of approximately $547,000. The decrease in inventories as well as the increase
in accrued liabilities and accounts payable were attributed to better cash flow
and asset management by Kaire. Investing activities provided approximately
$30,000. Cash was primarily used for the funding of a restricted cash account in
the amount of approximately $125,000 related to a change in credit card
processors and approximately $46,000 for the purchase of additional property and
equipment. This was offset by a decline in deposits of approximately $200,000.
Cash was generated from financing activities in the amount of approximately
$880,000. Net proceeds from additional borrowing totaled approximately
$1,153,000 after payment of $440,000 on notes payable and capital lease
obligations. The decline in the value of foreign currencies in relation to the
dollar accounted for an additional approximately $122,000 increase in cash. The
net effect was no effect in total cash for Nine Months 1998.
In Fiscal 1997, the cash applied to operating activities was approximately
$3,433,000. Operating cash was provided by increases in accounts payable of
approximately $1,245,000 and collections of income tax refunds of approximately
$1,025,000. Cash of approximately $107,000 was used for investing, primarily in
the purchases of property and equipment of approximately $275,000 and increasing
deposits by approximately $289,000. Both of these investments relate primarily
to the investment required to open Kaire's South Korean subsidiary. Financing
activities generated approximately $3,341,000. Net borrowings from related and
non-related parties generated approximately $3,795,000. The sale of Kaire common
stock generated an additional approximately $171,000. Some of these proceeds
were used to pay for deferred offering costs and debt issue costs of
approximately $331,000. The effect of foreign exchange rate changes on cash was
a reduction in cash in the amount of approximately $79,000. For Fiscal 1997,
cash decreased by approximately $279,000.
In Fiscal 1996, cash used in operating activities was approximately
$1,622,000. Additional operating cash expenditures were approximately $725,000
for refundable income taxes and a reduced in accrued liabilities of
approximately $322,000. These were offset by collections on accounts receivable
of approximately $597,000 and increases in accounts payable of approximately
$157,000. Cash used in investing totaled approximately $891,000. The invested
cash was used for property and equipment of approximately $243,000, the purchase
of stock in an unrelated company of $250,000, advances to distributors of
approximately $225,000 and investments in intangibles such as trademarks of
approximately $172,000. Financing activities generated approximately $1,448,000.
Most of this was generated by the issuance of checks in excess of deposits of
approximately $1,376,000. Additional borrowings generated $525,000 less payments
on notes and other long term debt of approximately $453,000. Foreign currency
fluctuations generated additional cash of approximately $34,000. For Fiscal
1996, the net decrease in cash was approximately $1,031,000.
In Fiscal 1995, cash generated by operating activities was approximately
$1,060,000. Operating cash in the amount of approximately $300,000 was applied
to an increase in refundable income taxes while approximately $169,000 was
applied to increases in receivables. Investing activities used approximately
$217,000 of which approximately $194,000 was used for the purchase of property
and equipment. Financing activities used approximately $264,000 for payments of
principal on capital lease obligations. For Fiscal 1995, approximately $578,000
of cash and cash equivalents were generated.
"Checks written in excess of deposits" represents checks either written and
held or issued in anticipation of deposits from sales. Kaire has avoided an
insufficient check charge in all but an extremely limited number of situations
based on the amount of checks written on a monthly basis. It is Kaire's intent
to discontinue this method of financing as a tool in generating cash once
sufficient cash balances have been attained through either operations or
financing activities to warrant this discontinuance of this practice.
The downturn in the South Korean economy has not had a significant impact
on Kaire's overall liquidity due in part to the fact that revenues from South
Korea represented less than three (3%) percent of its consolidated revenues
during 1997. However, Kaire sustained substantial losses in trying to penetrate
the South Korean market, and at September 30, 1998 it recorded a $471,000
write-down of its assets in its South Korean subsidiary to what was believed to
be their net realizable value. Kaire has since ceased operations of its South
Korean subsidiary in October 1998.
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Because of the significant losses incurred by Kaire over the past two
fiscal years, it has become substantially dependent on loans from its officers
and directors and private placements of its securities to fund its operations.
These financings are described below.
On or about January 1, 1997, Kaire sold $300,000 in Agreement Notes to
three private investors. As partial consideration for their purchase of the
Agreement Notes, Kaire issued warrants to the three investors to purchase an
aggregate of approximately 22,050 shares of Kaire's Common Stock at an exercise
price of approximately $.02 per share of Common Stock. The Agreement Notes and
related interest were paid in full in July 1997. The foregoing warrants were
exercised in July 1998.
During January 1997, Kaire borrowed $200,000 for working capital purposes
from a corporation, not otherwise affiliated with Kaire, pursuant to demand
promissory notes, bearing interest at the rate of 10% per month, and guaranteed
by certain officers and directors of Kaire. An August 25, 1997 agreement
modified the repayment provisions of principal and interest, and required that
Kaire repay all interest and principal by December 31, 1997 and reduced the
interest rate from 10% per month to 2% per month payable monthly, retroactive to
March 5, 1997. Furthermore, in the event that Kaire was unable to repay the
principal and accrued interest on such notes in full by December 31, 1997, Kaire
would then be required to make twelve monthly payments, beginning January 1,
1998, in the amount of $18,911 each. In connection with this transaction, the
lending corporation was issued options to purchase 50,000 shares of Kaire's
Common Stock at $6.60 per share. As of September 30, 1998, such options had not
been exercised. On January 15,1998, Kaire entered into an agreement with the
lender to make monthly payments of interest only and to amend the term of the
promissory note to a demand note. In connection with the reverse stock split on
October 1, 1998, the lender was issued additional warrants to purchase 12,500
shares of Kaire's Common Stock at $6.60 per share.
On or about March 20, 1997, Kaire completed a private placement of an
aggregate of 500,000 shares of its Common Stock and 500,000 warrants for gross
proceeds of $250,000 from five private investors (the "March 1997 Private
Placement"). Following the payment of commissions and non-accountable expenses,
an initial payment towards its non-accountable expenses for a proposed Public
Offering and counsel fees and expenses for that private placement, Kaire
received net proceeds of approximately $171,500. In connection with the reverse
stock split on October 1, 1998, the lender was issued additional warrants to
purchase 250,000 shares of Kaire's Common Stock at $6.60 per share.
In May 1997, Kaire Korea, Ltd., pursuant to a demand promissory note
bearing interest at the rate of 9.5% per year and guaranteed by Kaire, borrowed
$500,000 from Horphag, Kaire's Pycnogenol manufacturer. An option expiring in
May 2000 to acquire 15% of the capital stock of Kaire Korea Ltd. at the par
value of Kaire Korea Ltd.'s capital stock was granted to Horphag as partial
consideration for the note. The note provides for additional options to be
issued in the event of late payments and/or the failure to pay the entire
principal balance plus accrued interest within six months of the origination
date of the note. As of September 30, 1998, a principal balance of $475,000
remained outstanding. The options to acquire capital stock of Kaire Korea Ltd.
had been exercised on November 15, 1997 by Horphag. In an agreement executed on
June 2, 1998 but effective as of January 1, 1998, Horphag agreed to waive any
options it may have had in Kaire Korea Ltd. due to late payments or the failure
to repay the promissory note in consideration for Kaire pledging its 85%
interest in Kaire Korea Ltd. As security on the promissory note to Horphag,
Kaire and Horphag also agreed to amend the repayment terms on the promissory
note to a demand note. The note was due on September 15, 1998. The Company is
currently in default on its note payable. Kaire intends to repay the note and
accrued interest from future cash flows provided by operations.
Between June 3, 1997 and December 8, 1997, Kaire completed a private
placement of an aggregate of 172,500 shares of its Common Stock and $1,725,000
in principal amount of its promissory notes (10% Notes") to nine investors (the
"Summer 1997 Private Placement"). Following the payment of commission and
non-accountable expenses, additional payments towards its non-accountable
expenses for a proposed but as-yet-unconsummated public offering and counsel
fees and expenses, Kaire received approximately $1,400,000 in net proceeds. The
10% Notes bear interest at a rate of ten percent per year and mature and are
payable in full (principal plus accrued but unpaid interest) upon the earlier of
(a) eighteen months after issuance, (b) the completion date of an equity
financing of Kaire pursuant to which it receives gross proceeds of not less than
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$3,000,000, or (c) Kaire's receipt of at least $1,000,000 in proceeds from the
"Key Man" life insurance policies on any of its executive officers and
directors. The 10% Notes are secured by the accounts and accounts receivable of
Kaire (as defined in the 10% Notes) but are subordinated to Kaire's banking
obligations.
During August 1997, Kaire borrowed $200,000 from two lenders, not otherwise
affiliated with it, pursuant to unsecured promissory notes bearing interest at
the rate of 12% per year and due in September and October 1997. These notes were
paid in full in December 1997. In connection with this borrowing, the lenders
were each issued options to purchase 7,500 shares of Kaire's Common Stock at
$.02 per share. As of October 1998, the options had been exercised by the
lenders.
During August and September 1997, Kaire borrowed approximately $492,000
from a lender, not otherwise affiliated with Kaire, pursuant to two promissory
notes bearing interest at a rate of .33% per day and guaranteed by certain
officers and directors of Kaire. Both notes were repaid by Kaire in December
1997.
During 1997, J.T. Whitworth, the Chief Operating Officer, Chief Financial
Officer and a Director of Kaire, and Robert L. Richards, Chief Executive Officer
and a Director of Kaire, advanced $140,071 and $118,226, respectively, for
working capital requirements. On November 28, 1997, Kaire issued demand
promissory notes bearing interest at the rate of ten (10%) percent per year in
the amount of $258,337 to the two officers for funds provided by those
individuals to that date.
During 1997, Kaire borrowed $663,000 from William F. Woodburn and Loren E.
Bagley, two directors of Kaire pursuant to demand promissory notes bearing
interest at the rate of ten (10%) percent per year and secured by Kaire's shares
of Aloe Commodities International, Inc. In September 1997, Kaire sold its shares
of Aloe Commodities International, Inc., at cost, and made a partial payment on
the notes. The remaining outstanding balance of approximately $241,000 was
renegotiated to two unsecured demand promissory notes bearing interest at the
rate of ten (10%) percent per year.
During November 1997, Kaire borrowed $700,000 from Integrated Medical
Technologies, Inc. ("IMT"). On December 9, 1997, Kaire and certain of its
stockholders entered into an Agreement and Plan of Reorganization (the
"Agreement") with IMT whereby IMT agreed to provide an additional $300,000
equity investment in Kaire and convert the $700,000 previously borrowed by Kaire
to equity in Kaire and for IMT to provide $2,000,000 additional equity
investments to Kaire by February 15, 1998. The additional equity investment of
$2,000,000 was not made by IMT. The Agreement restricted the payment of
dividends and the purchase of treasury shares, among other things. Also, IMT
acquired approximately 81% of the Common Stock of Kaire from certain holders of
common stock for approximately 45% of the common shares of IMT, as defined in
the Agreement. During late March 1998, it became apparent that IMT was unable to
provide the additional capital that was provided for under the Agreement. IMT
reached an agreement with Global Market LLC ("Global") to sell 1,250,078 shares,
54% of Kaire's stock to Global in return for Global immediately loaning
$1,000,000 to Kaire. These funds were needed by Kaire as Kaire had issued checks
in anticipation of a receipt of funds by IMT. Such loans was evidenced by a
$1,000,000 promissory note payable to Global. The note bears interest at the
rate of ten (10%) percent per annum, is uncollateralized and is payable upon
demand.
During April 1998, Kaire borrowed $100,000 from William F. Woodburn, a
Director of Kaire for a demand promissory note. The note bears interest at the
rate of ten (10%) percent per annum, is collateralized by the assets of Kaire
and is due on demand. As of September 30, 1998, $19,000 of this note had been
repaid.
During January 1998, Kaire borrowed $150,000 from a corporation for a
promissory note payable at an interest rate of two (2%) percent per month or
twenty-four (24%) percent annual interest. Interest and principal are due on
demand. The note is collateralized and is personally guaranteed by certain
officers and directors of Kaire.
During January 1998, Kaire borrowed $103,000 for working capital from
William F. Woodburn and Loren E. Bagley, two Directors of Kaire, pursuant to
demand promissory notes bearing interest at the rate of ten (10%) percent per
year.
At the present time, Kaire has no plans or commitments for capital
expenditures.
"YEAR 2000" PROBLEM. Kaire management is aware of the issues associated
with the programming code in existing computer systems as the millennium (year
2000) approaches. The "Year 2000" problem is pervasive and
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complex as virtually every computer operation will be affected in some way by
the rollover of the two digit year value to 00. The issue is whether computer
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. Kaire is utilizing both internal and
external resources to identify, correct or reprogram, and test the computer
system for the Year 2000 compliances. It is anticipated that all reprogramming
efforts will be completed by December 31, 1998, allowing adequate time for
testing. Kaire management has assessed its Year 2000 compliance expense to be
$250,000. Kaire has not yet established a contingency plan in the event that it
is unable to correct the "Year 2000" problem and as of the date of this Proxy
Statement has no plans to do so.
RECENT ACCOUNTING PRONOUNCEMENTS. During 1998, Kaire management implemented
Financial Accounting Standards No. 128, entitled "Earnings Per Share" ("SFAS
128"), recently issued by the Financial Accounting Standards Board ("FASB").
SFAS 128 provides a different method of calculating earnings per share than is
currently used in accordance with Accounting Board Opinion ("ABP") No. 15,
entitled "Earnings Per Share." SFAS 128 provides for the calculation of "Basic"
and "Diluted" earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted earnings per share.
SFAS 128 became effective for financial statements issued for periods ending
after December 15, 1997. All prior period earnings per share data has been
restated to reflect the requirements of SFAS No. 128. The adoption of SFAS No.
128 did not effect the earnings per share calculations at September 30, 1998 and
1997 and December 31, 1997, 1996 and 1995. See Note 8 for computation of
earnings per share.
In June 1997, FASB issued Statement of Financial Accounting Standard No.
130, entitled "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standard No. 131, entitled "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 130 establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. SFAS 131 supersedes Statement of
Financial Accounting Standard No. 14, entitled "Financial Reporting for Segments
of a Business Enterprise." SFAS 131 establishes standards of the way the public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Kaire management adopted SFAS 130 and Kaire's
financial statements for all prior periods have been restated in accordance
therewith.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Kaire management believes the adoption of this statement will
have no material impact on Kaire's financial statements.
The FASB has recently issued Statement of Financial Accounting Standard
No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 established standards for recognizing all derivative
instruments including those for hedging activities as either assets or
liabilities in the
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statement of financial position and measuring those instruments at fair value.
This Statement is effective for fiscal years beginning after June 30, 1999.
Kaire has not yet determined the effect of SFAS No. 133 on its financial
statements.
The FASB recently issued Statement of Financial Accounting Standards No.
134 "Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No.
134"). SFAS No. 134 establishes accounting and reporting standards for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise.
This statement is effective for the first fiscal quarter beginning after
December 15, 1998. The Company has not yet determined the effect of SFAS No. 134
on its financial statements. Management believes the adoption of this statement
will have no material impact of the Company's financial statement.
CHANGE IN ACCOUNTANTS
On or about August 1, 1996, Kaire changed the independent certified public
accounting firm engaged to prepare Kaire's annual audited financial statements
from Jones, Jensen and Company to BDO Seidman, LLP. The report on Kaire's
financial statements as prepared by Jones, Jensen and Company did not contain
any adverse opinion, disclaimers of opinion, modifications or qualifications or
scope limitations. The decision was based on the recommendation of counsel to a
proposed underwriting. Kaire's board of directors approved the change.
There were no disputes with the dismissed firm over accounting, auditing,
financial statement disclosures or internal control issues. No discussions were
held with the newly engaged auditor with respect to specific accounting
treatments or transactions, changes in the audit opinion, scope or any
limitations on the opinion, or any other accounting, internal control or other
reporting related issues.
KAIRE RISK FACTORS
RECENT SUBSTANTIAL LOSSES. From its inception in late 1992 through the end
of its Fiscal 1995, Kaire had experienced a rapid expansion in its net sales,
growing from net sales of approximately $2,719,000 during its first full fiscal
year, Fiscal 1993, to net sales of approximately $36,895,000 and $57,841,000,
for Fiscal 1994 and Fiscal 1995, respectively. During these three fiscal years
Kaire's net income experienced corresponding increases, with Kaire sustaining a
net loss of approximately $207,000 during Fiscal 1993 and net income of
approximately $1,091,000 and $1,186,000 during Fiscal 1994 and Fiscal 1995,
respectively. Fiscal 1996 and Fiscal 1997 were periods of declining revenues and
net losses. During Fiscal 1996 and Fiscal 1997, Kaire sustained net losses of
approximately $1,803,000 and $6,098,000, respectively, upon net sales of
approximately $51,499,000 and $35,682,000, respectively. During Nine Months
1998, Kaire sustained a net loss of approximately $3,192,000 on net sales of
approximately $21,019,000 (which net losses amount to approximately 15.2% of net
sales). This is in comparison to Nine Months 1997 during which Kaire sustained a
net loss of approximately $4,182,000 upon net sales of approximately $27,887,000
(which net losses amount to approximately 15% of net sales). See "Risk
Factors-Going Concern Modification in Independent Certified Public Accountants'
Report." Management believes that the foregoing net sales decreases and losses
resulted from Kaire maturing as a network marketing enterprise, having reached a
leveling off of its net sales during the latter part of 1995, and Kaire's own
initial efforts to overcome this maturation. In an effort to overcome this
maturation, Kaire formulated several approaches. Those approaches were to
attract a younger and more entrepreneurial minded associate than it had
attracted in the past; attract persons who had been successful network marketers
with other companies; continue to expand its line of products, including efforts
to develop products directed at a younger market; and further expand
geographically outside of the United States. Attracting new, younger and
entrepreneurial minded associates was, by its nature, the first approach
undertaken. In an effort to accomplish this, among other things, Kaire changed
its commission program that had been in place since 1994. The change in
commission structure was not well received by Kaire's associates and, in
addition, Kaire's new commission structure attracted associates who misused the
new commission program which increased commissions on first time sales without
providing for commission recovery by Kaire on product returns and refunds.
Exacerbating Kaire's losses
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were to lesser degrees: the time and cost of personnel devoted to promoting the
new commission program, competition in recently penetrated markets of Australia
and New Zealand of "copycat" products, the introduction of new products that
were not as well received by the market as had been expected, a new product not
as consistent as the product it replaced and a corporate infrastructure (new
personnel and facilities) with related fixed costs that had grown
correspondingly with the growth in sales in prior fiscal years. Kaire, in the
latter part of Fiscal 1996, reverted to essentially its former commission
program. There can be no assurance that following the Asset Acquisition future
unforeseen developments, such as the failure to successfully penetrate new
geographically targeted markets that Kaire had targeted, generate revenue growth
as market competition increases, create or secure new products that will be
accepted in the market place, contain its general and administrative overhead
costs and other unforeseen circumstances will not have a material adverse effect
on NHTC's operations in its current or expanded market areas. Moreover, no
assurance can be given that following the Asset Acquisition the future
operations of NHTC will be profitable.
GOING CONCERN MODIFICATION IN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS'
REPORT. The report dated May 1, 1998, except for the first paragraph of Note 8
which is dated October 1, 1998, from BDO Seidman, LLP, the independent certified
public accountants for Kaire, expressed "substantial doubt" about Kaire's
ability to continue as a going concern due to recurring losses and negative
working capital. See Kaire's Consolidated Financial Statements.
LOSSES SUSTAINED IN ATTEMPTING TO PENETRATE NEW MARKETS; RISKS INVOLVED IN
ENTERING NEW MARKETS. Kaire has sustained substantial losses in trying to
penetrate the South Korean market. During the period ended September 30, 1998,
Kaire recorded a $471,000 write-down of its assets in its South Korean
subsidiary to what Kaire believed to be their net realizable value. Following
the Asset Acquisition, NHTC intends to complete Kaire's expansion efforts into
the United Kingdom. Completing the establishment of its operations in the United
Kingdom will require the recruitment and training of new personnel, paying
salaries of the United Kingdom personnel and their related benefits, continuing
compliance with the laws and regulations of that country, delivering products
into that country which are subject to quarantine periods, purchasing equipment,
continuing leasehold payments and payments of other costs and expenses until the
United Kingdom operations generate sufficient revenues to cover the foregoing
and other costs and expenses related to Kaire's United Kingdom operations. Until
such time as the United Kingdom operations generate sufficient revenue to cover
the foregoing costs and expenses, of which no assurance can be given, the United
Kingdom operations will continue to sustain losses. In addition to the
foregoing, future events, including problems, delays, expenses and complications
frequently encountered by companies seeking to penetrate new markets, foreign
currency exchange fluctuations, as well as changes in governmental policies,
economic or other conditions may occur that could cause NHTC, following the
Asset Acquisition, to be unsuccessful in such expansion efforts. See "Business."
NEED FOR ADDITIONAL FUTURE FINANCING; POSSIBLE ADDITIONAL DILUTION.
Following the Asset Acquisition, NHTC may seek equity or debt financing in order
to complete its expansion efforts into any additional geographic areas that NHTC
may target in the future or for additional working capital if it continues to
sustain losses or its United Kingdom or other expansion areas continues to
suffer losses. There can be no assurance that the Company will be able to obtain
additional financing on terms acceptable to NHTC or at all. In the event
additional financing for NHTC is unavailable, NHTC may be materially adversely
affected.
GOVERNMENT REGULATION OF PRODUCTS AND MARKETING. Kaire's business (and
NHTC's following the Asset Acquisition) is subject to or affected by extensive
governmental regulations not specifically addressed to network marketing. Such
regulations govern, among other things, (i) product formulation, labeling,
packaging and importation, (ii) product claims and advertising, (iii) fair trade
and distributor practices, and (iv) taxes, transfer pricing and similar
regulations that affect foreign taxable income and customs duties. Based on
Kaire's experience and research, the nature and scope of inquiries from
government regulatory authorities, and the advice it receives from various
counsel, Kaire believes that it is in material compliance with all regulations
applicable to Kaire. However, there can be no assurances that NHTC following the
Asset Acquisition will not be subject to inquiries and regulatory investigations
or disputes and the effects of any adverse publicity resulting therefrom. Any
assertion or determination that NHTC is not in compliance with existing laws or
regulations could potentially have a material adverse effect on NHTC's business
and results of operations. In addition, in any country or jurisdiction, the
adoption of new laws or regulations or changes in the interpretation of existing
laws or
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regulations could generate negative publicity and/or have a material adverse
effect on NHTC following the Asset Acquisition. NHTC cannot determine the
effect, if any, that future governmental regulations or administrative orders
may have on NHTC following the Asset Acquisition. Moreover, governmental
regulations in countries where NHTC plans to commence or expand operations
following the Asset Acquisition may prevent, delay or limit market entry of
certain products or require the reformulation of such products. Regulatory
action, whether or not it results in a final determination adverse to NHTC has
the potential to create negative publicity, with detrimental effects on the
motivation and recruitment of associates and, consequently, on NHTC's possible
future sales and earnings.
GOVERNMENT REGULATION OF DIRECT SELLING ACTIVITIES. Direct selling
activities are regulated by various governmental agencies. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes.
Such schemes, often referred to as "pyramid" or "chain sales" schemes, often
promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products. See
"Business - Government Regulation."
As is the case with most network marketing companies, Kaire has from time
to time received inquiries from various government regulatory authorities
regarding the nature of its business and other issues such as compliance with
local business opportunity and securities laws. To date none of these inquiries
has resulted in a finding materially adverse to Kaire. There can be no assurance
that NHTC, following the Asset Acquisition, will not face inquiries in the
future which, either as a result of findings adverse to either of them or as a
result of adverse publicity resulting from the initiation of such inquiries,
could have a material adverse effect on the NHTC's business and results of
operations following the Asset Acquisition. See "Business Government
Regulation."
TAXATION RISKS AND TRANSFERS PRICING. Kaire was and NHTC, following the
Asset Acquisition, will be subject to federal and state taxation in the United
States. In addition, each of Kaire's subsidiaries (certain of which will become
subsidiaries of NHTC following the Asset Acquisition) are subject to taxation in
the country in which it operates, currently ranging from a statutory tax rate of
up to 35% in Trinidad and Tobago. After the Asset Acquisition, NHTC will in all
likelihood be eligible for foreign tax credits in the United States for the
amount of foreign taxes actually paid in a given period. In the event that
NHTC's operations following the Asset Acquisition in high tax jurisdictions such
as Trinidad and Tobago grow disproportionately to the rest of its operations,
NHTC may be unable to fully utilize its foreign tax credits in the United
States, which could, accordingly, result in NHTC paying a higher overall
effective tax rate on its worldwide operations.
Because Kaire's subsidiaries (and following the Asset Acquisition, NHTC's
subsidiaries) operate outside of the United States, Kaire is, and NHTC will,
following the Asset Acquisition, be subject to the jurisdiction of the relevant
foreign tax authorities. In addition to closely monitoring the subsidiaries
locally based income, these tax authorities regulate and restrict various
corporate transactions, including intercompany transfers. No assurance can be
given that Kaire's structures will not be challenged by foreign tax authorities
or that such challenges will not have a material adverse effect on NHTC's
business or results of operations following the Asset Acquisition.
INCREASED EMPHASIS ON OPERATIONS OUTSIDE OF THE UNITED STATES. Less than
18% of Kaire's net sales during Fiscal 1997 were derived from operations outside
of the United States. Following the Asset Acquisition, NHTC's future operations
may be materially and adversely affected by economic, political and social
conditions in the countries in which it will then operate. A change in policies
by any government in such markets and proposed markets, could adversely affect
NHTC's future operations through, among other things, changes in laws, rules or
regulations, or the interpretation thereof, confiscatory taxation, restrictions
on currency conversion, currency repatriation or imports, or the expropriation
of private enterprises. This could be especially true in the event of a change
in leadership, social or political disruption or upheaval, or unforeseen
circumstances affecting economic, political or social conditions or policies.
There can be no assurance that such activities, or other similar activities in
such markets, will not result in passage of legislation or the enactment of
policies which could materially adversely affect the Company's operations in the
market areas where Kaire currently operates. In addition, NHTC's ability to
expand Kaire's current operations into new markets will directly depend on its
ability to secure the requisite government approvals and comply with the local
government regulations. See "Losses Sustained in Attempting to Penetrate New
Markets; Risks Involved in Entering New Markets."
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CURRENCY RISKS. Kaire's foreign-derived sales and selling, general and
administrative expenses are converted to U.S. dollars for reporting purposes.
Consequently, Kaire's reported earnings are significantly impacted by changes in
currency exchange rates, generally increasing with a weakening dollar and
decreasing with a strengthening dollar. Given the uncertainty of the extent of
exchange rate fluctuations, Kaire (and NHTC) cannot estimate the effect of these
fluctuations on its future business, product pricing, results of operations or
financial condition. However, because Kaire's revenue is, and NHTC's following
the Asset Acquisition will be, realized in local currencies and the majority of
its cost of sales is denominated in U.S. dollars, Kaire's gross profits (and
NHTC's following the Asset Acquisition) are positively affected by a weakening
in the U.S. dollar and will be negatively affected by a strengthening in the
U.S. dollar. There can be no assurance that any of the foregoing currency risks
will not have a material adverse effect upon NHTC following the Asset
Acquisition, or its results from operations or financial condition thereafter.
Fluctuations in currency exchange rates, particularly those caused by an
increase in the value of the United States dollar, could have a material adverse
effect on NHTC's financial position, results of operations and cash flows.
RELIANCE UPON INDEPENDENT DISTRIBUTOR NETWORK AND HIGH TURNOVER RATE OF
DISTRIBUTORS. Kaire distributes its products exclusively through independent
associates. Associate agreements with Kaire are voluntarily terminable by the
associates at any time. Kaire's revenue is directly dependent upon the efforts
of these independent associates, and any growth in future sales volume will
require an increase in the productivity of these associates and/or growth in the
total number of associates. As is typical in the direct selling industry, there
is turnover in associates from year to year, which requires the sponsoring and
training of new associates by existing associates to maintain or increase the
overall associate force and motivate new and existing associates. Kaire
experiences seasonal decreases in associate sponsoring and product sales in some
of the countries in which Kaire operates because of local holidays and customary
vacation periods. The size of the associate force can also be particularly
impacted by general economic and business conditions and a number of intangible
factors such as adverse publicity regarding Kaire, or the public's perception of
Kaire's products, product ingredients, Kaire associates or direct selling
businesses in general. Historically, Kaire has experienced periodic fluctuations
in the level of associate sponsorship (as measured by associate applications).
However, because of the number of factors that impact the sponsoring of
associates, and the fact that Kaire has little control over the level of
sponsorship of new associates, Kaire cannot predict the timing or degree of
those fluctuations. There can be no assurance that the number or productivity of
Kaire's associates will be sustained at current levels or increased in the
future. Moreover, there can be no assurances any of Kaire's associates will
agree to become associates of NHTC following the Asset Acquisition. In addition,
the number of associates as a percent of the population in a given country or
market could theoretically reach levels that become difficult to exceed due to
the finite number of persons inclined to pursue a direct selling opportunity.
POTENTIAL EFFECTS OF ADVERSE PUBLICITY. The size of the distribution force
and the results of Kaire's operations can be particularly impacted by adverse
publicity regarding Kaire, or its competitors, including the legality of network
marketing, the quality of NHTC's products and product ingredients or those of
its competitors, regulatory investigations of Kaire or Kaire's competitors and
their products, associate actions and the public's perception of Kaire's
associates and direct selling businesses generally. Following the Asset
Acquisition, there can be no assurance that such adverse publicity will not have
a material adverse effect on NHTC's ability to attract and retain customers or
associates, or on NHTC's results from operations or financial condition
generally.
DEPENDENCE ON KEY PERSONNEL. Kaire's (and NHTC's, following the Asset
Acquisition) future success depends on the continued availability of certain key
management personnel, including Robert L. Richards, Michael Lightfoot, and J.T.
Whitworth. The business of Kaire (and NHTC, following the Asset Acquisition)
could be adversely affected by the loss of services of any of the foregoing
individuals. Kaire does not (and NHTC, following the Asset Acquisition, will
not) have employment contracts with any of the foregoing individuals. See
"Management-Executive Compensation." Kaire's (and NHTC's, following the Asset
Acquisition) growth and ability to return to profitability may depend on its
ability to attract and retain other management personnel, of which no assurance
can be given. Kaire only maintains Key Man Life Insurance on Robert L. Richards.
LACK OF WRITTEN CONTRACTS WITH SUPPLIERS OR MANUFACTURERS. With the
exception of one manufacturing and distribution agreement with ENZO
Nutraceuticals, Inc., Kaire does not have any written contracts with any of
39
<PAGE>
its suppliers or manufacturers or commitments from any of its suppliers or
manufacturers to continue to sell products to Kaire (or NHTC following the Asset
Acquisition). Due to the absence of any written contract with almost all of its
suppliers, there is a risk that, following the Asset Acquisition, Kaire's
suppliers or manufacturers will not sell their products to NHTC. Although NHTC
believes that it could establish alternate sources for most of its products,
there can be no assurance that any such alternative sources will be available or
willing to transact business with NHTC.
COMPETITION. Kaire (and, following the Asset Acquisition, NHTC will)
competes with many companies marketing products similar to those currently sold
and marketed by Kaire. Kaire also competes intensely with other network
marketing companies in the recruitment of associates, of which there are many
such companies. Some of the largest of these are Nutrition for Life
International, Inc., Nature's Sunshine, Inc., Herbalife International, Inc.,
Amway and Rexall Sundown, Inc. Each of these companies is substantially larger
than Kaire (or NHTC following the Asset Acquisition) and has significantly
greater financial and personnel resources than either Kaire or NHTC.
DEPENDENCE UPON SUPPLIERS. Kaire has one source of Pycnogenol, MW
International ("MWI"), and approximately two-thirds of Kaire's revenues have
been derived from Pycnogenol. During Fiscal 1995, Fiscal 1996, Fiscal 1997 and
Nine Months 1998, Kaire purchased approximately 40%, 57%, 48% and 50% of its
products, respectively, from MWI. During the same foregoing fiscal periods,
Kaire purchased approximately 40%, 22%, 6% and 7% of its products from Manhattan
Drug, Inc. Kaire has no written agreements with its suppliers and although Kaire
believes that suitable replacement and comparable product sources are available,
there can be no assurance that Kaire would be able to obtain replacement
suppliers on a timely basis, on commercially reasonable terms or at all, in the
event this supplier discontinues its association with Kaire, goes out of
business or for some other reason its products become unavailable to Kaire. See
"Business - Manufacturing and Supplies."
PRODUCT LIABILITY EXPOSURE. Although Kaire does not (and NHTC following the
Asset Acquisition will not) engage in the manufacture of any of the products it
markets and distributes, Kaire is (and NHTC following the Asset Acquisition will
be) subject to product liability claims for the products which it distributes.
Kaire is not aware of any such claims to date. Although Kaire (and NHTC shall
after the Asset Acquisition) maintains product liability insurance which it
believes to be adequate for its needs, there can be no assurance that Kaire (or
NHTC following the Asset Acquisition) will not be subject to claims in the
future or that its insurance coverage will be adequate.
FORWARD-LOOKING STATEMENTS. This Proxy Statement contains forward-looking
statements. Additional written or oral forward-looking statements may be made by
the Company or Kaire from time to time in filings with the Commission or
otherwise. Such forward-looking statements are within the meaning of that term
in Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934 ("Exchange Act"). Such statements may include, but not be limited
to, projections of revenues, income, or loss, capital expenditures, plans for
future operations, financing needs or plans, and plans relating to products or
services of Kaire, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results could differ materially from those set forth in,
contemplated by, or underlying the forward-looking statements. Statements in
this Proxy Statement, including those contained in the sections entitled "Kaire
Risk Factors," "Kaire Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Kaire International, Inc.
- - Business" and in the notes to the Financial Statements of either Kaire or the
Company or the pro forma statements giving effect to the Asset Acquisition as if
consummated as of September 30, 1998, describe factors, among others, that could
contribute to or cause such differences.
"YEAR 2000" PROBLEM. The Company, Kaire and NHTC are aware of the issues
associated with the programming code in existing computer systems being acquired
from Kaire by NHTC as the millennium (Year 2000) approaches. The "Year 2000"
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the latter two digit year value to 00.
The issue is whether computer
40
<PAGE>
systems will properly recognize date sensitive information when the year changes
to 2000. Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. Kaire's management has assessed the
"Year 2000" compliance expense to be approximately $250,000. Kaire has not yet
established a contingency plan in the event that it is unable to correct the
"Year 2000" problem and as of the date of initial filing of this Proxy with the
SEC has no plans to do so. There can be no assurance that such problem can be
resolved by NHTC in a timely or cost effective fashion, or at all, or that any
difficulty or inability in resolving such problem will not have a material
adverse effect upon NHTC following the Asset Acquisition.
REASONS WHY THE BOARD OF DIRECTORS RECOMMENDS APPROVAL OF PROPOSAL ONE
The Board of Directors of the Company believes that there is a strategic
fit and synergy in the current product offerings of Kaire and NHTC, and that
following the Asset Acquisition, NHTC will be able to achieve efficiencies of
scale including efficiencies in sales and marketing, product distribution,
product research and development, and management and personnel. The Board of
Directors of the Company believes that the Kaire Assets which will be acquired
pursuant to the Asset Acquisition will provide NHTC with greater opportunities
to develop and enhance markets for the Company's and Kaire's products, license
the products and certain technology related to their production and development,
and engage in other strategic combinations and transactions involving their
products and technologies. The Board of Directors of the Company believes that
the combined variety of the product offerings following the Asset Acquisition
will permit quicker and more effective responses to market competition,
scientific and technological advances and discoveries and recent research
findings, and other rapid innovations, and will be more appealing to existing
and potential customers. The Board also believes that the Asset Acquisition may
result in a larger customer base and greater profile (including greater brand
name recognition) in the market, thus presenting greater marketing opportunities
for products.
AS A RESULT, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE ISSUANCE OF THE SHARES OF COMMON STOCK UNDERLYING THE
ACQUISITION SECURITIES.
(PROPOSAL 2)
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK UPON THE CONVERSION OF
THE $1,650,000 AGGREGATE STATED VALUE OF THE COMPANY'S SERIES E PREFERRED
STOCK.
In August 1998, the Company sold $1,650,000 aggregate stated value of its
Series E Preferred Stock to investors in the Series E Private Placement. As
discussed elsewhere in this Proxy Statement, the Nasdaq Rule prevents the
Company from issuing a number of shares of Common Stock equal to or greater than
twenty (20%) percent of the number of the Company's outstanding shares of Common
Stock, unless such issuance is either approved by the Company's shareholders or
NASDAQ waives such requirement. The terms of the Series E Preferred Stock
provided that the holders of the Series E Preferred Stock may not convert the
Series E Preferred Stock into more than twenty (20%) percent of the issued and
outstanding Common Stock outstanding on the date of close of the Series E
Private Placement unless this Proposal is approved or a waiver is obtained. Each
share of Series E Preferred Stock is redeemable by the Company at 133% of its
stated value plus all accrued interest and is convertible into shares of Common
Stock at a conversion price equal to the lower of (i) the closing bid price of
the Common Stock on the date of issuance, or (ii) seventy-five (75%) percent of
the average closing bid price of the Common Stock for the five (5) trading days
immediately preceding the date of the notice of conversion. Each share of Series
E Preferred Stock shall automatically be converted into Common Stock on the date
which is 24 months from the date of issuance. FOR A COMPLETE DESCRIPTION OF THE
SERIES E PREFERRED STOCK, SEE ARTICLES OF AMENDMENT TO COMPANY'S ARTICLES OF
INCORPORATION CONTAINING THE CERTIFICATE OF DESIGNATION FOR THE SERIES E
PREFERRED STOCK ANNEXED HERETO AS EXHIBIT 4.1.
The Board of Directors believes that it is in the Company's best interests
to convert the shares of Series E Preferred Stock in accordance with its terms
rather than redeem such securities at 133% of their face value in accordance
with its terms.
41
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
ISSUANCE OF ADDITIONAL SHARES TO PERMIT THE CONVERSION IN FULL OF THE SERIES E
PREFERRED STOCK.
(PROPOSAL 3)
APPROVAL OF THE OFFER AND SALE OF UP TO THE $4,000,000 AGGREGATE STATED
VALUE OF SERIES H PREFERRED STOCK OF THE COMPANY AND THE ISSUANCE OF SHARES OF
COMMON STOCK UPON THE FULL CONVERSION OF THE SERIES H PREFERRED STOCK.
Management of the Company believes that following the Asset Acquisition, it
may raise additional funds to, among other items, provide working capital for
the Company and NHTC. Accordingly, the Board of Directors of the Company has
approved the offer and sale in a private placement pursuant to Regulation D of
the Securities Act by the Company of up to the $4,000,000 aggregate stated value
of the Company's Series H Preferred Stock. Although shareholder approval for the
offer and sale of Series H Preferred Stock is not required under the Florida
Business Corporation Act, because the shares of Common Stock issuable upon
conversion of any Series H Preferred Stock sold by the Company in the future,
together with the shares of Common Stock issuable upon conversion of the Series
F Preferred Stock, the Series G Preferred Stock and the Acquisition Warrants may
in the aggregate be in excess of twenty (20%) percent of the issued and
outstanding Common Stock, the Company is seeking approval of such issuance to
comply with the continued listing requirements of NASDAQ. The Company has no
current prospective buyers for any of its Series H Preferred Stock and no
assurances can be given when, if ever, the Company will sell any of such Series
H Preferred Stock.
The Series H Preferred Stock shall have a stated value of $1,000 per share,
shall pay a dividend (provided the Company has either sufficient surplus or net
profits), at the rate of eight (8%) percent of the stated value per annum,
payable in cash or in shares of Common Stock (valued at the conversion price set
forth below) at the option of the Company upon conversion of the shares of
Series H Preferred Stock. The shares of the Series H Preferred Stock are
non-voting prior to conversion, and are convertible into shares of Common Stock,
at a conversion price per share equal to the lower of (i) $3.259375
(representing the average closing bid price of the Common Stock for the ten (10)
business days prior to the date the Company initially filed this Proxy Statement
with the SEC), or (ii) the quotient determined by dividing the stated value of
each share of Series H Preferred Stock being converted by seventy-five (75%)
percent of the average closing bid price of the Common Stock for the three (3)
trading days immediately preceding the date on which the Company receives notice
of conversion from a holder. The terms of the Series H Preferred Stock permit
the Company at any time, on five (5) days prior written notice, to redeem the
outstanding Series H Preferred Stock at a redemption price (the "Redemption
Price"), equal to 133% of the stated value plus the accrued dividends thereon.
The shares of Common Stock issuable upon conversion of the Series H
Preferred have certain piggyback registration rights as well as demand
registration rights commencing forty-five (45) days following the initial sale
of any shares of Series H Preferred Stock. FOR A COMPLETE DESCRIPTION OF THE
SERIES H PREFERRED STOCK SEE THE ARTICLES OF AMENDMENT OF THE COMPANY'S ARTICLES
OF INCORPORATION PERTAINING TO THE CERTIFICATE OF DESIGNATION FOR THE SERIES H
PREFERRED STOCK ANNEXED HERETO AS EXHIBIT 4.4.
The Board of Directors of the Company believes that by obtaining
shareholder approval to the future sale of the Series H Preferred Stock and the
issuance of the shares of Common Stock issuable upon conversion thereof in
advance it may make the Series H Preferred Stock a more attractive investment to
potential investors. The Board believes that because of the NASDAQ Rule,
investors may be required, following their purchase of the Series H Preferred
Stock, to postpone converting their Series H Preferred Stock until following
shareholder approval at a shareholders' meeting. However, if shareholder
approval to the issuance of the shares of Common Stock issuable upon exercise of
the Series H Preferred Stock is obtained in advance, potential investors could
avoid the conversion waiting period, which the Board believes may make the
Series H Preferred Stock a more attractive investment to potential investors,
and, thus allow the Company to raise funds, if needed, in a shorter period of
time.
AS A RESULT, THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE FUTURE SALE AND ISSUANCE OF THE SERIES H PREFERRED STOCK AND THE
SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF.
42
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-------
<S> <C>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS:
Description page .............................................................. F-2
Pro forma Balance Sheet at September 30, 1998 ................................. F-3
Pro forma Statement of Operations for the nine months ended September 30, 1998 F-5
Pro forma Statement of Operations for the year ended December 31, 1997 ........ F-6
Notes to Pro forma financial statements ....................................... F-7
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996:
Independent Auditors' Report .................................................. F-8
Consolidated Balance Sheet .................................................... F-9
Consolidated Statements of Operations ......................................... F-10
Consolidated Statement of Stockholders' Equity ................................ F-11
Consolidated Statement of Cash Flows .......................................... F-12
Notes to Consolidated Financial Statements .................................... F-14
UNAUDITED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1997:
Consolidated Balance Sheet dated September 30, 1998 ........................... F-27
Consolidated Statements of Operations ......................................... F-28
Consolidated Statement of Cash Flows .......................................... F-29
Notes to Consolidated Financial Statements .................................... F-30
</TABLE>
F-1
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed financial statements have
been prepared to show the effects of the November 24, 1998 acquisition of Kaire
International, Inc. ("Kaire") by Natural Health Trends Corp. (the "Company") for
preferred stock with a face amount of $2,800,000 issued to the sellers, and
additional preferred stock with a face amount of $350,000 issued for settlement
with certain creditors and five year warrants, issued to the sellers, to
purchase 200,000 shares of the Company's common stock at 110% of the closing bid
price of the common stock on the day before the closing upon which the Company
has computed an aggregate value of $682,000 utilizing the Black Scholes Option
Pricing Model. The acquisition is accounted for as a purchase business
combination.
The following unaudited pro Forma consolidated balance sheet is adjusted to
present the pro forma financial position of the Company at September 30, 1998 as
if the acquisition of Kaire had occurred on such date. Included are adjustments
to record the purchase consideration paid, the assets acquired, liabilities
assumed and the resulting goodwill.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1997 and the nine month period ended September 30, 1998
reflect the combined results of the Company and Kaire as if the acquisition had
occurred on January 1, 1997. Adjustments include amortization of goodwill and
dividends on the preferred stock issued in the acquisition. The accompanying
unaudited pro Forma statements of operations exclude the operations of the
Company's discontinued schools line of business, which was disposed of in August
1998, for both periods presented.
The accompanying unaudited pro forma balance sheet does not necessarily
reflect the actual financial position of the Company that would have resulted
had the acquisition of Kaire been consummated on September 30, 1998. The
unaudited pro forma consolidated statements of operations do not necessarily
represent actual results that would have been achieved had the companies been
together as of January 1, 1997, nor are they indicative of future operations.
These unaudited pro forma consolidated financial statements should be read in
conjunction with the Company's historical financial statements and notes
thereto.
F-2
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
NATURAL HEALTH KAIRE
TRENDS, CORP. INTERNATIONAL, INC.
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
---------------- --------------------
<S> <C> <C>
CURRENT ASSETS:
Cash ..................................................................... $ 1,021,626 $ 460,701
Restricted cash .......................................................... - 125,000
Accounts receivable, net ................................................. 19,031 249,397
Inventory ................................................................ 436,915 1,067,283
Prepaid expenses and other current assets ................................ 514,413 135,374
------------- ------------
TOTAL CURRENT ASSETS ................................................... 1,991,985 2,037,755
Property and Equipment ................................................... 46,265 673,735
Patents and Customer Lists ............................................... 4,733,363 -
Goodwill ................................................................. 844,780 -
Deposits and other Assets ................................................ 249,951 230,436
Net Assets Held for Disposition .......................................... - -
------------- ------------
$ 7,866,344 $ 2,941,926
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES: .....................................................
Cash overdraft .......................................................... $ - $ 1,049,566
Accounts payable and accrued expenses ................................... 989,589 5,368,155
Revolving credit line ................................................... - -
Accrued expenses for discountinued operations ........................... 789,833 -
Deferred revenue ........................................................ - -
Accrued expenses for discontinued operations ............................ 314,593 -
Accrued consulting contract ............................................. 360,131 -
Notes payable ........................................................... - 2,230,521
Notes payable - related parties ......................................... - 2,114,747
Current portion of long-term debt, net of discount ...................... 587,184 48,897
Other current liabilities ............................................... 104,939 510,987
------------- ------------
TOTAL CURRENT LIABILITIES .............................................. 3,146,269 11,322,873
Long Term Debt ........................................................... - -
Minority Interest ........................................................ - (49,194)
Common Stock Subject to Put .............................................. 380,000 -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 1,500,000 shares authorized, 4,330
shares issued and outstanding (actual) and 7,480 (pro forma) ............ 3,789,525 -
Common stock, $.0001 par value, 50,000,000 shares authorized,
4,041,598 shares issued and outstanding (actual) and (pro forma) ........ 4,042 22,312
Additional paid-in capital .............................................. 14,530,911 1,365,537
Cumulative translation adjustment ....................................... - (534,067)
Retained earnings (deficit) ............................................. (13,604,403) (9,185,535)
Common stock subject to put ............................................. (380,000) -
------------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ................................... 4,340,075 (8,331,753)
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,866,344 $ 2,941,926
============= ============
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
----------------
DR (CR) TOTAL
---------------- ----------------
<S> <C> <C>
CURRENT ASSETS:
Cash ..................................................................... $ (7,233) $ 1,475,094
Restricted cash .......................................................... - 125,000
Accounts receivable, net ................................................. - 268,428
Inventory ................................................................ (207,319) 1,296,879
Prepaid expenses and other current assets ................................ (95,254) 554,533
------------- -------------
TOTAL CURRENT ASSETS .................................................... (309,806) 3,719,934
Property and equipment ................................................... (75,146) 644,854
Patents and customer lists ............................................... - 4,733,363
Goodwill ................................................................. 4,303,426 5,148,206
Deposits and other assets ................................................ (21,979) 458,408
Net assets held for disposition .......................................... - -
------------- -------------
$ 3,896,495 $ 14,704,765
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Cash overdraft ........................................................... $ - $ 1,049,566
Accounts payable and accrued expenses ................................... 3,655,197 2,702,547
Revolving credit line ...................................................
Accrued expenses for discountinued operations ........................... - 789,833
Deferred revenue ........................................................
Accrued expenses for discontinued operations ............................ - 314,593
Accrued consulting contract ............................................. - 360,131
Notes payable ........................................................... 2,035,521 195,000
Notes payable-related parties ........................................... 2,114,747 -
Current portion of long-term debt, net of discount ...................... - 636,081
Other current liabilities ............................................... 510,987 104,939
------------- -------------
TOTAL CURRENT LIABILITIES ............................................... 8,316,452 6,152,690
------------- -------------
Long term debt ........................................................... - -
Minority interest ........................................................ (49,194) -
Common stock subject to put .............................................. - 380,000
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 par value, 1,500,000 shares authorized, 4,747
shares issued and outstanding (actual) and 7,897 (pro forma) .......... (3,150,000) 6,939,525
Common stock, $ .0001 par value, 50,000,000 shares authorized,
1,367,995 shares issued and outstanding (actual) and (pro forma) ...... 22,312 4,042
Additional paid-in capital .............................................. 683,537 15,212,911
Cumulative translation adjustment ....................................... (534,067) -
Retained earnings (deficit) ............................................. (9,185,535) (13,604,403)
Common stock subject to put ............................................. - (380,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) ................................... (12,163,753) 8,172,075
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT). $ (3,896,495) $ 4,704,765
============= =============
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-4
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NATURAL HEALTH KAIRE
TRENDS, CORP. INTERNATIONAL, INC.
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
---------------- --------------------
<S> <C> <C>
Revenues .............................................. $ 1,001,481 $ 21,018,916
Cost of goods sold .................................... 283,206 5,158,842
------------ ------------
Gross profit .......................................... 718,275 15,860,074
Distribution commissions .............................. - 10,853,535
Selling, general and administrative expensess ......... 2,470,312 7,309,552
------------ ------------
Operating loss ........................................ (1,752,037) (2,303,013)
Interest income (expense) ............................. (336,314) (684,808)
Minority (income) expense ............................. - 140,661
Other income (expense) ................................ - (345,104)
Provision for taxes ................................... - -
------------ ------------
Loss from continuing operations ....................... (2,088,351) (3,192,264)
Preferred stock dividendss ............................ (2,028,196) -
------------ ------------
Loss to common shareholders ........................... $ (4,116,547) $ (3,192,264)
============ ============
Net loss per share-basic .............................. $ (2.30)
============
Weighted average shares ............................... 1,786,500
============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DR (CR) TOTAL
---------------- ----------------
<S> <C> <C>
Revenues ............................................. $ - $ 22,020,397
Cost of goods sold ................................... - 5,442,048
---------- ------------
Gross profit ......................................... - 16,578,349
Distributor commissions .............................. - 10,853,535
Selling, general and administrative expenses ......... 215,000(1) 9,994,864
------------ ------------
Operating loss ....................................... (215,000) (4,270,050)
Interest income (expense) ............................ - (1,021,122)
Minority (income) expense ............................ - 140,661
Other income (expense) ............................... - (345,104)
Provision for taxes .................................. - -
------------ ------------
Loss from continuing operations ...................... (215,000) (5,495,615)
Preferred stock dividends ............................ 142,000(2) (2,170,196)
------------ ------------
Loss to common shareholders .......................... $ (357,000) $ (7,665,811)
============ ============
Net loss per share-basic ............................. - $ (4.29)
============ ============
Weighted average shares .............................. - 1,786,500
============ ============
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-5
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NATURAL HEALTH KAIRE
TRENDS, CORP. INTERNATIONAL, INC.
YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31,
1997 1997
---------------- --------------------
<S> <C> <C>
Revenues ............................................. $ 1,133,726 $ 35,681,512
Cost of goods sold ................................... 375,034 8,387,963
------------ ------------
Gross profit ......................................... 758,692 27,293,549
Distributor commissions .............................. - 19,968,230
Selling, general and administrative expenses ......... 4,194,044 13,008,859
------------ ------------
Operating loss ....................................... (3,435,352) (5,683,540)
Interest income (expense) ............................ (868,721) (671,819)
Minority (income) expense ............................ - 133,590
Other income (expense) ............................... - 110,267
Benefit from taxes ................................... - 12,973
------------ ------------
Loss from continuing operations ...................... (4,304,073) (6,098,529)
Preferred stock dividends ............................ (733,333) -
------------ ------------
Loss to common shareholders .......................... $ (5,037,406) $ (6,098,529)
============ ============
Net loss per share-basic ............................. $ (11.60)
============
Weighted average shares .............................. 434,265
============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
DR (CR) TOTAL
---------------- ----------------
<S> <C> <C>
Revenues ............................................. $ - $ 36,815,238
Cost of goods sold ................................... - 8,762,997
---------- -------------
Gross profit ......................................... - 28,052,241
Distributor commissions .............................. - 19,968,230
Selling, general and administrative expenses ......... 287,000(1) 17,489,903
------------ -------------
Operating loss ....................................... (287,000) (9,405,892)
Interest income (expense) ............................ - (1,540,540)
Minority (income) expense ............................ - 133,590
Other income (expense) ............................... - 110,267
Benefit from taxes ................................... - 12,973
------------ -------------
Loss from continuing operations ...................... (287,000) (10,689,602)
Preferred stock dividends ............................ 189,000(2) (922,333)
------------ -------------
Loss to common shareholders .......................... $ (476,000) $ (11,611,935)
============ =============
Net loss per share-basic ............................. - $ (26.74)
============ =============
Weighted average shares .............................. - 434,265
============ =============
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS.
F-6
<PAGE>
NATURAL HEALTH TRENDS CORP./KAIRE INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A. The following unaudited pro-forma adjustments are included in the
accompanying unaudited pro forma consolidated balance sheet at September 30,
1998:
(1) To record the acquisition of certain assets and the assumption of certain
liabilities of Kaire for $2,800,000 face amount of the Company's Series F
convertible preferred stock, with the acquisition accounted for as a
purchase business combination. Additionally, the Company issued $350,000
face amount of Series G preferred stock for settlement of certain Kaire
liabilities. The preferred stock pays dividends at the rate of 6% per
annum, and is convertible into common stock at 95% of the common stock's
market value. In addition to the Series F Preferred Stock, the sellers
received five year warrants to purchase 200,000 shares of common stock at
an exercise price of 110% of the closing bid price of the common stock on
the date before the closing. The Company has computed an aggregate
$682,000 value on the warrants under the Black Scholes Option Pricing
Model. No value is attributed to the 5% discount off market upon the
conversion of the preferred stock into common, since substantially all
the common stock obtainable upon such conversion is subject to a two year
lock-up and the 5% level of discount is considered reasonable in light of
this restriction. Recorded goodwill totals $4,303,426, but is based on a
preliminary purchase allocation which is subject to adjustment. The
computation is as follows:
<TABLE>
<S> <C> <C>
ASSETS ACQUIRED:
Cash ................................................. $ 578,468
Accounts receivable .................................. 249,397
Inventory ............................................ 859,964
Prepaid expenses and other assets .................... 248,577
Property and equipment ............................... 598,589
---------
$2,534,995
LIABILITIES ASSUMED:
Cash overdraft ....................................... 1,049,566
Accounts payable and accrued expenses ................ 1,712,958
Note payable and capital obligations ................. 243,897
---------
3,006,421
----------
Net book value ....................................... (471,426)
Purchase price (including value of Warrants) ......... 3,832,000
----------
Goodwill ............................................. $4,303,426
==========
</TABLE>
.
B. The following pro-forma adjustments are included in the accompanying
unaudited pro forma consolidated statements of operations for the year ended
December 31, 1997 and the nine months period ended September 30, 1998:
(1) To amortize goodwill over 15 years.
(2) To record preferred stock dividends.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
Pompano Beach, Florida
We have audited the accompanying consolidated balance sheet of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
the financial position of Natural Health Trends Corp. and Subsidiaries as of
December 31, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses in
each of the last two fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 1998. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb Ehrlich & Co., P.C.
----------------------------------------
Feldman Sherb Ehrlich & Co., P.C.
(Formerly Feldman Radin & Co., P.C.)
Certified Public Accountants
New York, New York
March 10, 1998 and
April 14, 1998 as to
Notes 2 (O), 6 (E) and 16 and July 1, 1998 as to Note 7 (B)
F-8
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash ...................................................... $ 104,784
Restricted cash ........................................... 250,000
Accounts receivable ....................................... 1,979,948
Inventories ............................................... 1,026,999
Prepaid expenses and other current assets ................. 184,576
-------------
TOTAL CURRENT ASSETS .................................... 3,546,307
Property and equipment .................................... 3,518,117
Deposits and other assets ................................. 6,740,497
-------------
$ 13,804,921
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................... $ 3,026,436
Accrued expenses .......................................... 1,199,887
Revolving credit line ..................................... 217,422
Accrued expenses for discontinued operations .............. 338,446
Current portion of long term debt ......................... 2,020,349
Deferred revenue .......................................... 1,089,647
Current portion of accrued consulting contract ............ 246,607
Other current liabilities ................................. 325,115
-------------
TOTAL CURRENT LIABILITIES ............................... 8,463,909
-------------
Long-term debt ............................................ 2,254,591
Debentrues payable ........................................ 179,767
Accrued consulting contract ............................... 113,524
Accrued expenses discontinued operations .................. 17,616
COMMON STOCK SUBJECT TO PUT ............................... 380,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,500,000 shares
authorized; 2,200 shares issued and outstanding ......... 1,900,702
Common stock, $.001 par value;
5,000,000 shares authorized; 758,136 shares
issued and outstanding at December 31, 1997 .............. 758
Additional paid-in capital ................................ 11,941,381
Retained earnings (accumulated deficit) ................... (11,053,577)
Common stock subject to put ............................... (380,000)
Prepaid stock compensation ................................ (13,750)
-------------
TOTAL STOCKHOLDERS' EQUITY .............................. 2,395,514
-------------
$ 13,804,921
=============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-9
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues ........................................................... $ 1,133,726 $ 0
Cost of sales ...................................................... 375,034 0
------------ ------------
Gross profit ....................................................... 758,692 0
Selling, general and administrative expenses ....................... 4,194,044 1,092,247
Non-cash imputed compensation expense .............................. - 22,000
Litigation settlement .............................................. - -
------------ ------------
Operating income (loss) ............................................ (3,435,352) (1,114,247)
OTHER INCOME (EXPENSE):
Interest (net) .................................................... (868,721) (32,209)
Other ............................................................. - -
Miscellaneous revenue ............................................. - (2,090)
Income (loss) from continuing operations before income tax ......... (4,304,073) (1,148,546)
Provision for income tax ........................................... - -
------------ ------------
Income (loss) from continued operations ............................ (4,304,073) (1,148,546)
------------ ------------
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations ........................ (2,919,208) 176,558
Gain (loss) on disposal ........................................... (501,839) 82,450
------------ ------------
Income (loss) from discontinued operations ......................... (3,421,047) 259,008
Net income (loss) .................................................. $ (7,725,120) $ (889,538)
============ ============
Basic income (loss) per common share: $ (11.60) $ (4.10)
Continued operations ..............................................
Discontinued operations ........................................... ( 7.88) 0.93
------------ ------------
Net income (loss) per common share ................................. $ (19.48) $ (3.17)
============ ============
Weighted average common shares used ................................ 434,265 280,350
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-10
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
--------- -------- -------- ------------
<S> <C> <C> <C> <C>
BALANCE-DECEMBER 31, 1995 ...................... 267,728 $268 - $ -
Shares issued for acquisitions ............. 9,500 9 - -
Shares issued for consulting agreement 2,500 2 - -
Amortization of prepaid consulting ......... - - - -
Shares issued to employees ................. 400 1 - -
Convertible debentures treated as
converted .................................. 28,522 29 - -
Common stock subject to put ................ - - - -
Net loss ................................... - - - -
------- ---- - ----------
BALANCE-DECEMBER 31, 1996 ...................... 308,650 309 - -
Sale of convertible Series A preferred
stock ...................................... - - 2,200 1,900,702
Preferred stock dividends imputed .......... - - - -
Conversion of debentures ................... 303,986 303 - -
Stock issued for acquisition ............... 145,000 145 - -
Other issuances ............................ 500 1 - -
Issuance of stock options .................. - - - -
Amortization of deferred stock
compensation ............................... - - - -
Discount on debentures ..................... - - - -
Net loss ................................... - - - -
------- ---- ----- ----------
BALANCE-DECEMBER 31, 1997 ...................... 758,136 $758 2,200 $1,900,702
======= ==== ===== ==========
</TABLE>
<TABLE>
<CAPTION>
COMMON
ADDITIONAL RETAINED STOCK DEFERRED
PAIDE-IN EARNINGS SUBJECT STOCK
CAPITAL (DEFICIT) TO PUT COMPENSATION TOTAL
-------------- ---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE-DECEMBER 31, 1995 ...................... $ 3,877,730 $ (1,705,584) $ - $ - $ 2,172,414
Shares issued for acquisitions ............. 1,367,991 - - - 1,368,000
Shares issued for consulting agreement 164,998 - - (165,000) -
Amortization of prepaid consulting ......... - - - 68,750 68,750
Shares issued to employees ................. 21,999 - - - 22,000
Convertible debentures treated as
converted .................................. 809,971 - - - 810,000
Common stock subject to put ................ - - (380,000) - (380,000)
Net loss ................................... - (889,539) - - (889,539)
----------- ------------- ----------- ---------- ------------
BALANCE-DECEMBER 31, 1996 ...................... 6,242,689 (2,595,123) (380,000) (96,250) 3,171,625
Sale of convertible Series A preferred
stock ...................................... - - - - 1,900,702
Preferred stock dividends imputed .......... 733,333 (733,333) - - -
Conversion of debentures ................... 1,207,172 - - - 1,207,475
Stock issued for acquisition ............... 2,899,855 - - - 2,900,000
Other issuances ............................ 24,999 - - - 25,000
Issuance of stock options .................. 400,000 - - - 400,000
Amortization of deferred stock
compensation ............................... - - - 82,500 82,500
Discount on debentures ..................... 433,333 - - - 433,333
Net loss ................................... - (7,725,120) - - (7,725,120)
----------- ------------- ----------- ---------- ------------
BALANCE-DECEMBER 31, 1997 ...................... $11,941,381 $ (11,053,577) $ (380,000) $ (13,750) $ 2,395,514
=========== ============= =========== ========== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-11
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (7,725,120) $ (889,539)
------------ ----------
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization ............................................... 567,670 244,571
Non-cash imputed compensation expense ....................................... 425,000 22,000
Loss on disposal of fixed assets, net ....................................... 105,001 -
Interest settled by issuance of stock ....................................... 116,065 -
Write-off of goodwill ....................................................... 1,325,605 -
Amortization of note payable discount ....................................... 433,333 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .................................. (533,815) (707,544)
(Increase) decrease in inventories .......................................... (271,235) (130,295)
(Increase) decrease in prepaid expenses ..................................... (24,566) 31,393
(Increase) decrease in due from affiliate ................................... - (1,200)
(Increase) decrease in deposits and other assets ............................ (112,238) (34,518)
Increase (decrease) in accounts payable ..................................... 1,613,581 97,959
Increase (decrease) in accrued expenses ..................................... 737,197 286,463
Increase (decrease) in deferred revenue ..................................... 325,767 278,636
Increase (decrease) in other current liabilities ............................ (55,989) -
Increase (decrease) in accrued expenses for disc. operations ................ 356,062 -
Increase (decrease) in accrued consulting contract .......................... 360,131 -
------------ ----------
TOTAL ADJUSTMENTS .......................................................... 5,367,569 87,465
------------ ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES .......................... (2,357,551) (802,074)
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................ (611,863) (438,650)
Net cash provided by (used for) acquistions ................................. 20,241 (11,388)
Loan to Global Health Alternatives, Inc. .................................... (1,964,000) -
------------ ----------
NET CASH USED IN INVESTING ACTIVITIES ........................................ (2,555,622) (450,038)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in due from officer ..................................... 136,495 (1,887)
(Increase) decrease in due to related parties ............................... 23,724 -
(Increase) decrease in restricted cash ...................................... 8,932 (258,932)
Proceeds from preferred stock ............................................... 2,200,000 -
Proceeds from sale of debentures ............................................ 1,626,826 810,000
Payment of debentures ....................................................... (355,650) -
Offering costs of preferred stock ........................................... (299,299) -
Proceeds from notes payable and long-term debt .............................. 3,273,551 349,851
Payments of notes payable and long-term debt ................................ (2,113,945) (44,215)
------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................... 4,500,634 854,817
------------ ----------
NET INCREASE (DECREASE) IN CASH .............................................. (412,539) (397,295)
CASH, BEGINNING OF YEAR ...................................................... 517,323 914,618
------------ ----------
CASH, END OF YEAR ............................................................ $ 104,784 $ 517,323
============ ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-12
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................... $450,470 $236,671
======== ========
Income taxes ................................... $ - $ -
======== ========
DISCLOSURE OF NONCASH FINANCING
AND INVESTING ACTIVITIES:
During fiscal year 1997, debentures
and accrued interest totaling $1,207,474
were converted to Common Stock.
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-13
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida Institute of Massage
Therapy, Inc.) (the "Company") was incorporated under the laws of the State of
Florida in December 1988.
The Company's primary business is the operation of schools which develop, market
and offer curricula in therapeutic massage training and skin care therapy. The
Company presently has a total of three schools, located in the Miami, Pompano
Beach and Orlando, Florida areas. Natural Health Shoppe, Inc. is a wholly owned
subsidiary which owns and operates on-site book stores servicing the school's
students, practicing therapists and the public.
In July 1997, the Company acquired Global Health Alternatives, Inc., ("Global")
a company incorporated in Delaware and headquartered in Portland, Maine, which
is in the business of marketing and distribution of over-the-counter
homeopathic pharmaceutical health products. Global operates its business
through its wholly owned subsidiaries: GHA (UK), Ltd., Ellon, Inc. ("Ellon"),
Maine Naturals, Inc. ("MNI") and Natural Health Laboratories, Inc.
In 1996, the Company opened two natural health care centers which provided
multi-disciplinary complementary health care in the areas of alternative and
nutritional medicine. These facilities were closed during 1997 and accordingly
are being accounted for as discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Natural Health Trends Corp. and its subsidiaries. All material inter-company
transactions have been eliminated in consolidation.
B. ACCOUNTS RECEIVABLE
Accounts receivable are stated net of allowance for doubtful accounts of
$92,912.
C. INVENTORIES
Inventories consisting primarily of books and supplies for the schools, and
natural remedies for Global, are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
D. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost.
Depreciation is computed using the straight-line method and accelerated methods
over the useful lives of the various assets, which is generally five to seven
years for equipment, and furniture and fixtures, and thirty-nine years for the
building.
E. CASH EQUIVALENTS
Cash equivalents consist of money market accounts and commercial paper with an
initial term of fewer than three months.
For purposes of the statement of cash flows, the Company considers highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.
F. DEFERRED REVENUE
Deferred revenue represents tuition revenues which will be recognized into
income as earned. Tuition revenue is recognized as earned over the enrollment
period.
F-14
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
G. EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (FAS No. 128"),
which became effective for both interim and annual financial statements for
periods ending after December 15, 1997. FAS No. 128 requires a presentation of
"Basic" and (where applicable) "Diluted" earnings per share. Generally, Basic
earnings per share are computed on only the weighted average number of common
shares actually outstanding during the period, and the Diluted computation
considers potential shares issuable upon exercise or conversion of other
outstanding instruments where dilution would result. Furthermore, FAS No. 128
requires the restatement of prior period reported earnings per share to conform
to the new standard. The per share presentations in the accompanying financial
statements reflect the provisions of FAS No. 128. Loss per share is reduced by
$733,333 of preferred stock dividends for 1997.
H. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
I. CONCENTRATION OF CREDIT RISK
The Company has most of its cash maintained in an asset trust account with a
financial institution where account balances are not federally-insured. The
Company has not experienced any losses in the account. The Company believes it
is not exposed to any significant credit risk on cash and cash equivalents.
J. INCOME TAXES
Pursuant to SFAS 109, the Company accounts for income taxes under the liability
method. Under the liability method, a deferred tax asset or liability is
determined based upon the tax effect of the differences between the financial
statement and tax basis of assets and liabilities as measured by the enacted
rates which will be in effect when these differences reverse.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, receivables, and
accrued expenses approximate fair value based on the short-term maturity of
these instruments.
L. STOCK BASED COMPENSATION
The Company accounts for stock transactions in accordance with APB Opinion No.
25, "Accounting For Stock Issued To Employees." In accordance with Statement of
Financial Accounting Standards No. 123, "Accounting For Stock-Based
Compensation," the Company has adopted the pro forma disclosure requirements of
Statement No. 123 in fiscal 1997.
M. IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets, certain identifiable assets and goodwill
related to those assets for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts may not be
recovered. At December 31, 1997, the Company believes that there has been no
impairment of its long-lived assets.
N. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," established standards for the
reporting and display of comprehensive income and its components. SFAS No. 131,
"Disclosures about Segments of an Enterprise and
F-15
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
Related Information," establishes standards for reporting information about
operating segments in annual and interim financial statements. The Company will
adopt these standards in the first quarter of 1998. They will not have any
significant effect on the Company's financial position or results of operations.
O. BASIS OF PRESENTATION
At December 31, 1997, the Company has a working capital deficiency of
approximately $4,918,000 and has recorded a net loss of approximately $7,725,000
for the year then ended. The Company's continued existence is dependent on its
ability to obtain additional debt or equity financing and to generate profits
from operations. Management has instituted certain plans in regard to these
matters as more fully described in Note 16.
P. ROYALTY EXPENSE
Royalties that are incurred on a per unit sold basis are included in Cost of
Sales. Additional royalty amounts incurred to meet contractual minimum levels
are classified as Selling, General and Administrative Expenses.
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
LIFE RANGE AMOUNT
------------ -------------
<S> <C> <C>
Equipment, furniture and fixtures .......... 5 to 7 $ 393,507
Building and improvements .................. 3 to 5 2,693,449
Land ....................................... - 893,809
----------
3,980,764
Less: Accumulated depreciation ............. (462,647)
==========
$3,518,117
==========
</TABLE>
4. OTHER ASSETS
Other assets consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Deposits and other assets ................................................. $ 162,732
Goodwill, net of accumulated amortization of $50,181 ...................... 1,223,276
Deferred finance costs, net of accumulated amortization of $72,832 ........ 185,985
Patents and customer list, net of accumulated amortization of $216,909..... 5,063,091
Other intangible assets net of accumulated amortization of $194,800 ....... 105,413
----------
$6,740,497
==========
</TABLE>
The goodwill, the patents, and the customer list arise in connection with the
acquisitions of businesses made by the Company in 1997, 1996 and 1995. The
deferred finance costs relate to convertible debentures made in 1997. The
goodwill, the patents, the customer list, and the deferred finance costs are
being amortized over their estimated useful lives which are 5 years for the
customer list, 20 years for goodwill and 11 and 17 years for patents.
F-16
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
Note payable for purchase of school, bearing interest at 8.75%, principal and interest
payments due quarterly commencing February 1996 through November 1999 ..................... $ 67,896
Mortgage Note payable to a bank, bearing interest at 8.24%. Monthly payments consisting of
principal and interest are approximately $29,352 and are payable through November 2007, at
which time the balance of principal is due in a balloon payment in November 2007 ......... 2,247,725
$100,000 promissory note, bearing interest at 18%. Interest starts accruing on August 26,
1997, with monthly interest payments of $1,500 due on the 15th day of each month. Principal
amount due in full on August 26, 1998 ..................................................... 100,000
Line of Credit - Merrill Lynch, for a maximum availability of $300,000, annually renewable
in November with interest at prime +1%, collateralized by money market accounts held with
Merrill Lynch............................................................................... 217,422
$375,000 face amount note payable, noninterest bearing, due October 1, 2000 (less
unamortized discount based on imputed interest rate of 12% per annum - $41,385). Initial
payment of $93,750 on October 15, 1996, then monthly payments of $7,813 beginning on
November 1, 1997 and ending October 1, 2000 ................................................. 239,865
$75,000 face amount note payable, noninterest bearing, due September 15, 1998 (less
unamortized discount based on imputed interest rate of 12% per annum - $1,349). Monthly
payments of $4,166 from October 1996 through September 1997, and $2,084 from October 1997
through September 1998 ..................................................................... 47,819
$69,000 face amount note payable, noninterest bearing, due October 15, 1997 (less
unamortized discount based on imputed interest rate of 12% per annum - $0). Initial payment
of $19,500 on October 15, 1996, then monthly payments of $4,500 from December 1996 through
October 1997. ............................................................................... 27,000
Various bridge notes totaling $685,000, bearing interest at 12.5%. In the event of default,
14.5% interest rate will be applied from the date of default on the unpaid principal and
interest balances. Principal and interest payments due in full on September 15, 1997. 685,000
Bridge notes issued in October and November 1997, bearing interest at 14% per annum, due in
February 1998, $700,000 of which are secured by the schools and the Pompano building, and
$150,000 of which are secured by Global common stock ....................................... 850,000
------------
Other ..................................................................................... 9,635
------------
4,492,362
Less: Current portion .................................................................... (2,237,771)
------------
$ 2,254,591
============
</TABLE>
The two noninterest bearing notes and the various bridge notes above were not
paid on the maturity date and accordingly all unpaid balances are included in
current portion of long-term debt.
F-17
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
Long-term debt maturities for the next five years are as follows:
<TABLE>
<S> <C>
1998 ........... $2,237,771
1999 ........... 66,411
2000 ........... 33,647
2001 ........... 36,527
2002 ........... 39,653
</TABLE>
6. STOCKHOLDERS' EQUITY
A. COMMON STOCK
The Company was authorized to issue 40,000,000 shares of common stock, $.001
par value per share.
B. PREFERRED STOCK
The Company is authorized to issue a maximum of 1,500,000 shares of $.001 par
preferred stock, in one or more series and containing such rights, privileges
and limitations, including voting rights, dividend rates, conversion privileges,
redemption rights and terms, redemption prices and liquidation preferences, as
the Company's board of directors may, from time to time, determine.
In June 1997, the Company sold 2,200 shares of its convertible Series A
preferred stock for $1,000 a share realizing net proceeds of $1,900,702. The
preferred stock pays dividends at the rate of 8% per annum payable in cash or
shares of the Company's common stock valued at 75% of the closing bid price. The
preferred stock has a liquidation preference of $1,000 per share. The preferred
stock is convertible commencing 60 days after issuance, provided that a
registration statement covering the resale of the shares of common stock is
effective, at the rate of 75% of the average closing bid price of the common
stock over the five days preceding the notice of redemption. The Company has the
right to redeem the preferred stock for 240 days after the date of issuance at
the rate of 125% of the stated value. If a registration statement is not deemed
effective within 60 days of the date of issuance, then the Company is obligated
to pay a penalty at the rate of 2.5% per month.
C. CONVERTIBLE DEBENTURES
In April 1997, the Company issued $1,300,000 of 6% convertible debentures (the
"Debentures"). Principal on the Debentures is due in March 2000. The principal
and accrued interest on the Debentures are convertible into shares of common
stock of the Company. The Debentures are convertible into shares of common stock
at a conversion price equal to the lesser of $1.4375 or 75% of the average
closing bid price of the Common Stock for the five trading days immediately
preceding the notice of conversion. In June 1997, the Company repaid $300,000 of
the Debentures. As of December 1997, $820,233 of such debentures were converted
into shares of common stock.
In conjunction with the issuance of the Debentures, the Company issued warrants
to purchase an aggregate of 5,000 shares of Common Stock. The warrants are
exercisable until April 3, 2002.
Warrants to purchase 2,500 shares of Common Stock are exercisable at $2.4375 per
share, and the balance are exercisable at $3.25 per share.
D. ISSUANCE OF OPTIONS
During the quarter ended September 30, 1997, the Company's president and
secretary were issued an aggregate of 20,000, 10 year options, exercisable at
$.001 per share. The Company has recorded a non-cash expense of $400,000
representing the difference between the exercise price and the fair value of the
common stock.
F-18
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
E. 1 FOR 40 REVERSE STOCK SPLIT
On April 6, 1998, the Company effected a 1 for 40 reverse split of its Common
Stock, amending its certificate of incorporation to provide for the authority to
issue 5,000,000 shares of $.001 par value Common Stock. All per share data in
these financial statements is retroactively restated to reflect this reverse
split.
7. DISCONTINUED OPERATIONS
A. During the third quarter of 1997, the Company reached a decision to
discontinue the medical clinic line of business. Net assets of the medical
clinics were approximately $1,509,405 consisting primarily of furniture and
equipment, accounts receivable and goodwill. Liabilities were approximately
$213,987. The Company has accrued an estimated loss on disposal of approximately
$716,193 representing primarily accrued employment contract and lease
terminations. Accordingly, the results of the clinic operations are shown
separately as "discontinued operations." The Company's 1996 financial
information has been reclassified to conform with the 1997 presentation.
Revenues of the discontinued medical clinic line of business were $1,754,066 for
1997 and $2,374,469 for 1996.
B. During the quarter ended June 30, 1998, the Company discontinued its schools
line of business. The accompanying financial statements have been restated to
present this line of business as discontinued operations. Revenues of the
discontinued schools line of business were $5,858,790 and $4,844,372 for the
fiscal years ended December 31, 1997 and 1996 respectively.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for both the expected impact of differences between the financial
statement and tax basis of assets and liabilities, and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. SFAS No.
109 additionally requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. At December 31, 1997, the
Company had net deferred tax assets of approximately $4,119,000. The Company has
established a valuation allowance for the full amount of such deferred tax
assets. The following table gives the Company's deferred tax assets and
(liabilities) at December 31, 1997:
<TABLE>
<S> <C>
Net operating loss deduction ......... $ 3,760,000
Deferred revenue ..................... 436,000
Section 481 adjustment ............... (124,000)
Other ................................ 5,000
Valuation allowance .................. (4,077,000)
------------
$ -
============
</TABLE>
The provision for income taxes (benefits) differs from the amount computed by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
---------------- --------------
<S> <C> <C>
Income tax (benefit) computed at statutory rate ......... $ (2,704,000) $ (670,000)
Effect of temporary differences ......................... 152,000 146,000
Effect of permanent differences ......................... 13,000 19,000
Tax benefit not recognized .............................. 2,539,000 505,000
------------ ----------
Provision for income taxes (benefit) .................... $ - $ -
------------ ----------
</TABLE>
The net operating loss carryforward at December 31, 1997 was approximately
$9,401,000 and expires in the years 2011 to 2012.
F-19
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
A. The Company leases its school facilities under non-cancelable operating
leases. The lease terms are five years and expire from October 1998 through
December 2002. The Company leases its Portland Maine office under a lease
expiring in 1999. Rent expense for the years ended December 31, 1997 and 1996
was $1,306,597 and $647,907, respectively. Minimum rental commitments over the
next five years are as follows:
<TABLE>
<S> <C>
1998 ........... $538,899
1999 ........... 364,378
2000 ........... 378,272
2001 ........... 293,317
2002 ........... 302,112
</TABLE>
B. During the quarter ended March 31, 1997, the Company renegotiated with a
former stockholder of Sam Lily, Inc. with whom it was obligated under an
employment agreement to cancel the employment agreement and replaced it with a
consulting agreement. The consulting agreement requires the individual to
provide services to the Company for one day per week through December 1998 at
the rated of $5,862 per week. The Company has determined that the future
services, if any, that it will require will be of little or no value and is
accounting for this obligation as a cost of severing the employment contract.
Accordingly, the present value (applying a discount rate of 10%) of all future
payments is accrued in full at September 1997. The expense associated with this
accrual is recorded as part of the loss from discontinued operations.
C. LITIGATION
On August 4, 1997 Samantha Haimes brought an action in the Fifteenth Judicial
Circuit of Palm Beach County, Florida, against the Company and Health Wellness
Nationwide Corp., the Company's wholly-owned subsidiary. The Company has
asserted counterclaims against Samantha Haimes and Leonard Haimes. The complaint
arises out of the defendant's alleged breach of contract in connection with the
Company's medical clinic located in Pompano Beach, Florida. The Company is
vigorously defending the action. The plaintiff is seeking damages in the amount
of approximately $535,000. No accrual for the litigation has been made in the
financial statements as it is the Company's belief that it will prevail in the
litigation.
On September 10, 1997 Rejuvenation Unlimited, Inc. and Sam Lilly, Inc. brought
an action in the Fifteenth Judicial Circuit of Palm Beach County, Florida,
arising out of the Company's alleged breach of contract in connection with the
acquisition of the Company's medical clinic in Pompano Beach, Florida from the
plaintiff. The plaintiff is seeking damages in excess of $15,000. The Company is
vigorously defending the action and believes that the loss, if any, will be
immaterial.
10. PURCHASE OF BUILDING AND REFINANCE
The Company purchased a building located in Pompano Beach, Florida (the "Pompano
Property") to which it relocated its Lauderhill, Florida school and corporate
offices. The purchase price for the property was $2,350,000, of which $1,875,000
was financed through a first and second mortgage. The Pompano Property was
encumbered by mortgages securing repayment of loans made to acquire an adjacent
parcel which is owned by Justin Real Estate Corp. ("Justin Corp."). All of the
common stock of Justin Corp. is owned by principal shareholders of the Company.
In October 1997, the Company refinanced the mortgage and entered into a new
mortgage with another financial institution in the amount of $2,250,000. Monthly
payments, including principal and interest are $17,725 through October 2007,
with the balance of any unpaid principal due in November 2007. The interest rate
is 8.24% per annum.
Simultaneously with this transaction, the Company paid off the underlying
mortgage on the adjacent parcel owned by Justin Corp. in the amount of $435,000.
The Company has recorded this amount as an increase in the basis of the land.
F-20
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
11. REVENUES
The schools obtain a large proportion of their revenues from Federal and State
student financial aid programs. For the year ended December 31, 1997, the
schools derived approximately 66% of tuition collections from students with
financial aid and approximately 34% from students without financial aid. The
schools' ability to obtain such funding is dependent on a number of factors,
including meeting various educational accreditation and licensing standards and
also certain financial standards such as maintaining at least a 15% ratio of
non-financial aid students. The Company believes it has complied with all other
factors necessary to obtain funding.
The duties of disbursing Federal aid funds is handled by an independent service
company through separate federal trust accounts. All requests and payments for
Federal funds are done by the outside service company. Federal aid funds are
wired into a separate U.S. Federal Pell Trust Account and the money can only be
transferred to the Company's operating accounts with check registers issued by
the outside service company. The Company believes that it is in compliance with
Federal requirements with respect to the administration of Federal aid programs.
12. COMMON STOCK SUBJECT TO PUT
In connection with the January 1996 acquisition of the net assets of Sam Lilly,
Inc. the 9,500 shares issued in connection with the acquisition are subject to
the seller's ability to require the Company to repurchase such shares for a
three year period for $380,000, in the event that the aggregate market value of
the shares falls below $380,000. Such shares are excluded from permanent equity
on the accompanying balance sheet. As of March 1998, this matter is subject to
litigation.
13. STOCK OPTION PLAN
Under the Company's 1994 Stock Option Plan, up to 16,667 shares of common stock
are reserved for issuance. The exercise price of the options will be determined
by the Stock Option Committee selected by the board of directors, but the
exercise price will not be less than 85% of the fair market value on the date of
grant. Towards the end of 1995, 50 options were issued to each of two directors
at an exercise price equal to the market price at the time. During 1996 the
Company issued 250 options to a director at a price equal to the fair market
value on the date of grant. In August 1997, the Company adopted a stock option
plan covering officers, directors, employees and consultants. In August the
Company issued 43,750 ten year options under the 1997 Plan, exercisable at fair
market value (which was $22.40 per share) to certain of its officers who were
former principals of Global. Options to purchase 21,875 shares will be
exercisable in August 1998, and the remaining 21,875 will be exercisable in
August 1999.
In fiscal 1997, the Company adopted the disclosure provisions SFAS No. 123,
"Accounting for Stock-Based Compensation". For disclosure purposes, the fair
value of options is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
stock options granted during the years ended December 31, 1997 and December 31,
1996: annual dividends of $0; expected volatility of 50%; risk free interest
rate of 7% and expected life of 10 years. The weighted average fair value of
stock options granted during the years ended December 31, 1997 and December 31,
1996 was $21.60 and $142.00, respectively. If the Company had recognized
compensation cost of stock options in accordance with SFAS No. 123, the
Company's proforma net income (loss) and net income (loss) per share would have
been $(8,608,120) and $(19.82) per share for the fiscal year ended December 31,
1997 and $(983,538) and $(3.40) per share for the fiscal year ended December 31,
1997. Pro forma income (loss) from continuing operations would have been
$(6,083,679) and $(14.01) per share in 1997 and $(850,346) and $(3.03) per share
in 1996.
F-21
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
14. ACQUISITIONS
On July 23, 1997, the Company closed on the acquisition of the capital stock of
Global Health Alternatives, Inc. ("Global"). The purchase price for the
acquisition of Global was settled with the issuance of 145,000 shares of the
Company's common stock. The Company has agreed to issue to former Global
shareholders additional shares of common stock as follows: i) up to 20,000
shares if Global's pre-tax operating earnings equal or exceed $1,200,000 for the
period from July 1, 1997 through June 30, 1998, and ii) shares equal in market
value to the lesser of $45 million or eight times Global pre-tax operating
earnings for the period from July 1, 1999 through June 30, 2000 minus the fair
market value on the date of issuance of the 145,000 share initial consideration
or the 20,000 contingent shares, if they are earned. The following table
summarizes the acquisition.
<TABLE>
<S> <C>
Purchase price .......................... $ 2,900,000
Liabilities assumed ..................... 4,530,741
Fair value of assets acquired ........... (6,511,954)
------------
Goodwill ................................ $ 918,787
============
</TABLE>
The assets acquired included two patents, one (the "Troy Patent") is valued at
$4,819,000, and is being amortized over its remaining life of 11 years, the
other (the "Xu Patent") is valued at $404,000 and is being amortized over its
remaining life of 17 years. Additionally, the Company acquired a customer list
valued at $57,000, which is being amortized over 5 years.
The following schedule combines the unaudited pro-forma results of operations
the Company and Global, as if the acquisition occurred on January 1, 1996 and
includes such adjustments which are directly attributable to the acquisition,
including the amortization of goodwill. It should not be considered indicative
of the results that would have been achieved had the acquisition not occurred or
the results that would have been obtained had the acquisitions actually occurred
on January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Revenues .......................................... $ 7,856,071 $ 5,129,857
============= ============
Loss from continuing operations ................... $ (7,709,728) $ (2,933,434)
============= ============
Net loss .......................................... $ (10,234,169) $ (3,036,626)
============= ============
Loss per share from continuing operations ......... $ (15.21) $ (6.90)
============= ============
Net loss per share ................................ $ (20.20) $ (7.14)
============= ============
Shares used in computation ........................ 506,765 425,350
============= ============
</TABLE>
F-22
<PAGE>
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 (CONTINUED)
15. SEGMENT INFORMATION
Summary information for the Company's two significant industry segments is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
NATURAL AND
HEALTH
SCHOOLS PRODUCTS TOTAL
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues .............................. $ 5,858,790 $ 1,133,726 $ 6,992,516
============ ============ =============
Operating income (loss) ............... $ (2,188,027) $ (3,012,652) $ (5,200,679)
============ ============ =============
Identifiable assets ................... $ 8,712,964 $ 5,091,957 $ 13,804,921
============ ============ =============
Other information:
Depreciation and amortization ......... $ 177,881 $ 196,669
============ ============
Capital expenditures .................. $ 431,570 $ 37,588
============ ============
</TABLE>
16. SUBSEQUENT EVENTS
A. SALE OF PREFERRED STOCK
In April 1998, the Company sold an aggregate of $4,000,000 of 10% convertible
preferred stock, realizing proceeds after expenses of approximately $3.5
million, $2.5 million of which were utilized to redeem previously issued
preferred stock. The preferred stock provides for a conversion to common at 75%
of the market price.
B. RENEGOTIATION OF PATENT AGREEMENT
In April 1998, the Company renegotiated the terms of its acquisition of the Troy
Patent, due to the agreement being in breach because of unpaid minimum
royalties. Under the new agreement, royalties are payable at the rate of 3% of
the first $2,000,000 of related product sales; 2% of the next $2,000,000 in
sales and 1% of sales in excess of $4,000,000. In connection with the new
agreement, the Company was required to assume $585,000 of debt owed to third
parties by the Troy Sellers.
C. PROPOSED SALE OF SCHOOLS
In February 1998, the Company entered into discussions with its Chief Executive
Officer, who is also a principal stockholder and director, and his wife, who is
the Company's secretary and a principal stockholder and director, for the sale
of the schools division. The contemplated sales price is $1,800,000.
D. PROPOSED SALE OF BUILDING
In March 1998, the Company entered in discussions for the sale of the building,
in which its Pompano School is located.
F-23
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................................. $ 1,021,626
Accounts Receivable ................................................................... 19,031
Inventories ........................................................................... 436,915
Prepaid Expenses ...................................................................... 514,413
-------------
TOTAL CURRENT ASSETS ................................................................. 1,991,985
=============
Property, Plant and Equipment .......................................................... 46,265
Patents and Customer Lists ............................................................. 4,733,363
Goodwill ............................................................................... 844,780
Deposits and Other Assets .............................................................. 249,951
-------------
$ 7,866,344
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable ...................................................................... $ 989,589
Accrued Expenses ...................................................................... 789,833
Accrued Expenses for Discontinued Operations .......................................... 314,593
Current Portion of Long-Term Debt ..................................................... 587,184
Accrued Consulting Contract ........................................................... 360,131
Other Current Liabilities ............................................................. 104,939
-------------
TOTAL CURRENT LIABILITIES ............................................................ 3,146,269
=============
Common Stock Subject to Put ............................................................ 380,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value; 1,500,000 shares authorized; 4,330 shares issued and 3,789,525
outstanding at September 30, 1998 .....................................................
Common Stock, $.001 par value; 50,000,000 shares authorized; 4,041,598 shares issued and 4,042
outstanding at September 30, 1998 .....................................................
Additional Paid-in Capital ............................................................. 14,530,911
Retained Earnings (Accumulated Deficit) ................................................ (13,604,403)
Common Stock Subject to Put ............................................................ (380,000)
-------------
TOTAL STOCKHOLDERS' EQUITY ........................................................... 4,340,075
-------------
$ 7,866,344
=============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-24
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Revenues .......................................... $ 1,001,481 $ 535,202
Cost of sales ..................................... 283,206 125,073
------------ ------------
Gross profit ...................................... 718,275 410,129
Selling general & administrative expenses ......... 2,470,312 2,092,885
------------ ------------
Operating income (loss) ........................... (1,752,037) (1,682,756)
Other income (expenses):
Interest (net) ................................... (336,314) (715,542)
------------ ------------
Loss from continued operations (2,088,351) (2,398,298)
before income taxes ..............................
Provision for income taxes ........................ 0 0
Loss from continued operations .................... (2,088,351) (2,398,298)
------------ ------------
Discontinued operations:
Loss from eiscontinued operations ................ (33,289) (2,655,412)
Gain (loss) on disposal .......................... 595,379 (613,406)
------------ ------------
Gain (loss) from discontinued operations .......... 562,090 (3,268,818)
------------ ------------
Loss before extraordinary gain .................... (1,526,261) (5,667,116)
Extraordinary gain-forgiveness of debt ............ 869,516 0
------------ ------------
Net income (losss) ................................ $ (656,745) $ (5,667,116)
------------ ------------
INCOME (LOSS) PER COMMON SHARE:
Continued operations ............................. $ (2.30) $ (6.57)
Discontinued operations .......................... 0.31 ( 8.95)
Extraordinary gain ............................... 0.49 0.00
------------ ------------
Net income (loss) ................................ $ (1.50) $ (15.52)
------------ ------------
Weighted average common shares used ............... 1,786,500 365,116
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-25
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss .............................................................. $ (656,745) $ (5,667,116)
Adjustments to reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and amortization ....................................... 513,401 334,660
Non-cash imputed compensation expense ............................... 0 425,000
Loss on disposal of fixed assets, net ............................... 0 87,191
Interest settled by issuance of stock ............................... 112,971 90,650
Write-off of Goodwill ............................................... 322,219 1,325,605
Amortization of note payable discount ............................... 0 433,333
Proceeds from sale of Discontinued Operations ....................... (1,783,333) 0
CHANGES IN ASSETS AND LIABILITIES:
(Increase) Decrease in Accounts Receivable ......................... 1,960,917 (732,460)
(Increase) Decrease in Inventories ................................. 590,084 (175,712)
(Increase) in Prepaid Expenses ..................................... (329,837) (213,155)
Decrease in Property and Equipment ................................. 1,197,603 0
(Increase) Decrease in Deposits & Other Assets ..................... 202,621 (213,083)
Increase (Decrease) in Accounts Payable ............................ (2,036,847) 861,312
Increase (Decrease) in Accrued Expenses ............................ (410,054) 559,379
Increase (Decrease) in Deferred Revenue ............................ (1,089,647) 596,660
Increase (Decrease) in Other Current Liabilities ................... (220,176) 31,081
Increase (Decrease) in Accrued Expenses for Discontinued Operations (41,469) 613,105
Increase in Accrued Consulting Contract ............................ 0 360,131
---------- ------------
TOTAL ADJUSTMENTS .................................................. (1,011,547) 4,383,697
---------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ................... (1,668,292) (1,283,419)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (51,997) (184,026)
Net cash provided by acquisitions .................................... 0 20,240
Proceeds from disposition of Discontinued Operations ................. 4,132,106 0
Pre-acquisition loan to Global Health Alternatives, Inc. ............. 0 (1,964,000)
---------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ................... 4,080,109 (2,127,786)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer ......................................... 0 (4,904)
Decrease in Restricted Cash .......................................... 250,000 8,932
Proceeds from preferred stock ........................................ 5,283,000 2,200,000
Proceeds from sale of debentures ..................................... 0 1,626,826
Payments of debentures ............................................... 0 (355,650)
Loan origination costs-preferred stock ............................... 0 (299,299)
Proceeds from note payable and long-term debt ........................ 196,517 119,873
Payments of notes payable and long-term debt ......................... (3,506,695) (286,458)
Redemption of common stock ........................................... (96,197) 0
Redemptions of preferred stock ....................................... (3,621,600) 0
---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............................. (1,494,975) 3,009,320
---------- ------------
NET INCREASE (DECREASE) IN CASH ....................................... 916,842 (401,885)
CASH, BEGINNING OF PERIOD ............................................. 104,784 517,323
---------- ------------
CASH, END OF PERIOD ................................................... $1,021,626 $ 115,438
========== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-26
<PAGE>
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but reflect all adjustments
which, in the opinion of management, are necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented. All such adjustments are of a normal and recurring nature. The
results of operations for any interim period are not necessarily indicative of
the results attainable for a full fiscal year.
EARNINGS (LOSS) PER SHARE
Basic per share information is computed based on the weighted average number of
shares outstanding during the period. The earnings per share reflects a charge
of $2,028,196 which represent imputed preferred stock dividends. Prior year per
share information has been restated to reflect the one for 40 reverse split
which was effected in April 1998.
GAIN ON FORGIVENESS OF DEBT
During the three months ended September 30, 1998, the Company's subsidiary
Global Health Alternatives, Inc. (GHA) failed to make payments to three large
creditors pursuant to settlement agreements entered into earlier in the year.
Accordingly, the Company reduced its realized gain on the work-out of various
debt and payables of GHA by approximately $639,000 to about $870,000
year-to-date.
PREFERRED STOCK
In February 1998, the Company sold 300 shares of its convertible Series B
preferred stock for $1,000 a share realizing proceeds of $261,500. As of
September 30, 1998, all 300 shares of the Series B preferred stock had been
converted into a total of 541,330 shares of common stock.
In April 1998, the Company sold 4,000 shares of its convertible Series C
preferred stock for $1,000 a share realizing proceeds of $3,507,000. The
preferred stock pays dividends at the rate of 10% per annum payable in cash or
shares of the Company's common stock valued at 75% of the closing bid price. The
preferred stock has a liquidation preference of $1,000 per share. The preferred
stock is convertible commencing 41 days after issuance at the rate of 75% of the
average closing bid price of the common stock over the five days preceding the
notice of conversion. From the proceeds raised, the Company paid $2,500,000 to
retire $1,568,407 face value of Series A preferred stock outstanding. As of
September 30, 1998, 1,320 shares of the Series C preferred stock had been
converted into a total of 1,418,912 shares of common stock.
In July 1998, the Company sold 75 shares of its convertible Series D preferred
stock for $1,000 a share realizing proceeds of $75,000. The preferred stock was
redeemed at 120 percent of the stated value, plus 8% per annum dividend, in
August 1998 upon the sale of the Company's vocational schools (see Note 6).
In August 1998, the Company sold 1,650 shares of its convertible Series E
preferred stock for $1,000 a share realizing proceeds of $1,439,000. The
preferred stock pays dividends at the rate of 10% per annum payable in cash or
shares of the Company's common stock valued at 75% of the closing bid price. The
preferred stock has a liquidation preference of $1,000 per share. The preferred
stock is convertible commencing 60 days after issuance at the rate of 75% of the
average closing bid price of the common stock over the five days preceding the
notice of conversion.
CONVERSION OF NOTES PAYABLE
In August 1998, $595,000 of short-term notes payable, plus $104,113 of accrued
interest thereon, were converted into 1,195,472 shares of the Company's common
stock.
DISCONTINUED OPERATIONS
In August 1998, the Company sold its three vocational schools and certain
related businesses. Revenues for the vocational school operations were
$2,316,028 for the six months ended June 30, 1998 and $ 2,459,429 for the
comparable period in 1997.
F-27
<PAGE>
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED) (CONTINUED)
Following is a calculation of the gain on the disposition
of the Company's vocational school operations:
<TABLE>
<S> <C> <C>
Proceeds from sale of schools:
Cash ........................................ $1,778,333
Market value of redeemed NHTC Stock ......... 96,197
----------
$ 1,874,530
Less book value of school assets transferred:
Cash ........................................ $ (50,710)
Restricted Cash ............................. 256,577
Accounts Receivable ......................... 1,697,777
Inventories ................................. 398,953
Prepaid Expenses ............................ 110,757
Property Plant & Equipment .................. 161,335
Deposits & Other Assets ..................... 112,491
----------
(2,687,180)
Add liabilities assumed by purchaser:
Accounts Payable ............................ $ 578,076
Accrued Expenses ............................ 374,852
Revolving Credit Line ....................... 227,953
Deferred Revenue ............................ 1,115,983
Other Current Liabilities ................... 110,359
Long-Term Debt .............................. 152,026
----------
2,559,249
Less Goodwill written off .................... (322,220)
------------
Gain from sale of schools .................... $ 1,424,379
============
</TABLE>
In November 1998, the Company sold an office building located in Pompano Beach,
Florida that previously accommodated the Company's corporate headquarters and
one of its vocational schools. Following is a calculation of the estimated loss
on the disposition of the building:
<TABLE>
<S> <C>
Proceeds from sale of buildings .................... $ 2,900,000
Less estimated closing costs ....................... (314,000)
Less net book value of assets transferred .......... (3,261,000)
Less write off of deferred financing costs ......... (154,000)
-----------
Estimated Loss from sale of building ............... ($ 829,000)
===========
</TABLE>
The Company has realized the estimated loss on building sale during the current
quarter under Discontinued Operations. Also, the assets and liabilities related
to the building, including the long-term mortgage debt obligation, have been
reclassified as Net Assets Held for Disposal of $248,951 and are included in
Other Assets as of September 30, 1998.
F-28
<PAGE>
KAIRE INTERNATIONAL INC.
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ......... F-33
FINANCIAL STATEMENTS .......................................
CONSOLIDATED BALANCE SHEETS ................................ F-34 - F-35
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME .................................. F-36 - F-37
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT) ............................ F-38 - F-39
CONSOLIDATED STATEMENTS OF CASH FLOWS ...................... F-40 - F-41
SUMMARY OF ACCOUNTING POLICIES ............................. F-42 - F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................. F-48 - F-71
</TABLE>
F-29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Kaire International, Inc.
Longmont, Colorado
We audited the accompanying consolidated balance sheets of Kaire
International, Inc. and subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations and comprehensive
income, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1997, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kaire
International, Inc. and subsidiaries at December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and has a
working capital deficit of $6,492,288 at December 31, 1997. These conditions
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
May 1, 1998, except for the first paragraph
of Note 8 which is dated October 1, 1998
Denver, Colorado.
F-30
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
SEPTEMBER 30,
1998 1997 1996
-------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Notes 1, 5 and 6)
CURRENT:
Cash and cash equivalents ................................ $ 460,701 $ 460,663 $ 739,267
Restricted cash .......................................... 125,000 - -
Accounts receivable, less allowance of $0, $168,805
and $30,000 for possible losses (Notes 5 and 6) ......... 249,397 301,135 148,406
Inventories (Note 5) ..................................... 1,067,283 1,612,960 2,194,315
Refundable income taxes (Notes 7 and 9) .................. - - 1,025,000
Note receivable-related party (Note 2) ................... - - 94,670
Advances-other ........................................... - - 226,855
Prepaid expenses and other ............................... 135,374 267,123 101,225
------------ ------------ ----------
Total current assets ...................................... 2,037,755 2,641,881 4,529,738
------------ ------------ ----------
PROPERTY AND EQUIPMENT (Note 4):
Computer equipment ....................................... 927,168 914,451 895,577
Computer software ........................................ 579,955 579,955 596,178
Office equipment ......................................... 418,292 424,714 421,915
Furniture and fixtures ................................... 264,308 322,171 153,678
Leasehold improvements and other ......................... 119,284 174,985 90,762
------------ ------------ ----------
2,309,007 2,416,276 2,158,110
Accumulated depreciation and amortization ................ (1,635,272) (1,344,463) (901,212)
------------ ------------ ----------
Net property and equipment ............................... 673,735 1,071,813 1,256,898
------------ ------------ ----------
OTHER ASSETS:
Investment (Note 3) ...................................... - - 250,000
Deposits and other ....................................... 213,656 405,638 313,483
Debt issuance costs, net of accumulated amortization
of $331,450, $143,886 and $0 (Note 6) ................... 16,780 204,344 -
------------ ------------ ----------
Total other assets ....................................... 230,436 609,982 563,483
------------ ------------ ----------
$ 2,941,926 $ 4,323,676 $6,350,119
============ ============ ==========
</TABLE>
SEE ACCOMPANYING REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-31
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
SEPTEMBER 30,
1998 1997 1996
-------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Notes payable (Note 6) ............................................ $ 2,035,521 $ 1,787,166 $ 200,000
Note payable to bank (Note 5) ..................................... 195,000 240,000 250,000
Notes payable-related parties (Notes 2 and 3) ..................... 2,114,747 984,667 75,000
Current portion of capital lease obligations (Note 4) ............. 48,897 116,079 258,392
Checks written in excess of deposits .............................. 1,049,566 1,322,910 1,376,065
Accounts payable .................................................. 3,261,030 2,495,829 1,341,637
Accounts payable, related party ................................... 137,459 26,255 -
Accrued commissions payable (Note 3) .............................. 1,091,612 1,369,305 1,991,476
Accrued payroll taxes payable and other (Note 7) .................. 349,677 281,841 137,079
Sales taxes payable (Note 7) ...................................... 528,377 268,299 -
Other accrued liabilities ......................................... 510,987 241,818 282,062
------------ ------------ ----------
Total current liabilities .......................................... 11,322,873 9,134,169 5,911,711
Capital lease obligation, less current maturities (Note 4) ......... - 14,713 114,010
Total liabilities .................................................. 11,322,873 9,148,882 6,025,721
------------ ------------ ----------
Minority interest in concolidated subsidiaries ..................... (49,194) 199,636 199,907
COMMITMENTS AND CONTINGENCIES
(NOTES 4, 6, 10 AND 15)
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 8):
Preferred stock: $.01 par value; 5,000,000 shares authorized;
-0- shares issued and outstanding ................................ - -
Common stock: $.01 par value; 25,000,000 shares
authorized; 2,231,226, 2,209,176 and 1,470,000 shares
issued and outstanding ................................... ...... 22,312 22,092 14,700
Additional paid-in capital ........................................ 1,365,537 1,365,317 (6,604)
Cumulative translation adjustment ................................. (534,067) (418,980) 11,137
Retained earnings (deficit) ....................................... (9,185,535) (5,993,271) 105,258
------------ ------------ ----------
Total stockholders' equity (deficit) .............................. (8,331,753) (5,024,842) 124,491
------------ ------------ ----------
$ 2,941,926 $ 4,323,676 $6,350,119
============ ============ ==========
</TABLE>
SEE ACCOMPANYING REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-32
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------------- --------------------------------------------------
1998 1997 1997 1996 1995
--------------- ---------------- ---------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES (Note 12) ....................... $ 21,018,916 $ 27,887,227 $ 35,681,512 $ 51,498,562 $57,841,350
COST OF SALES
(Notes 3 and 11) ......................... 5,158,842 6,586,767 8,387,963 13,321,062 14,476,630
------------ ------------ ------------ ------------ -----------
GROSS PROFIT .............................. 15,860,074 21,300,460 27,293,549 38,177,500 43,364,720
------------ ------------ ------------ ------------ -----------
OPERATING EXPENSES:
Distributor commissions .................. 10,853,535 15,626,441 19,968,230 27,965,416 30,830,521
Selling general and administrative
expenses ................................ 7,309,552 9,738,877 13,008,859 12,975,915 10,370,482
------------ ------------ ------------ ------------ -----------
Total operating expenses .................. 18,163,087 25,365,318 32,977,089 40,941,331 41,201,003
------------ ------------ ------------ ------------ -----------
Income (loss) from operations ............. (2,303,013) (4,064,858) (5,683,540) (2,763,831) 2,163,717
------------ ------------ ------------ ------------ -----------
OTHER INCOME (EXPENSES):
Other income ............................. 40,328 193,953 195,899 40,432 14,556
Interest income .......................... 22,997 29,268 54,573 79,029 75,618
Interest expense ......................... (707,805) (332,275) (726,392) (126,663) (85,936)
Write off of deferred offering costs ..... (365,525)
Gain (loss) on foreign exchange .......... 37,394 (8,389) (29,202) (17,335) (435)
Other expense ............................ (57,301) (43,548) (56,430) (2,775) (33,905)
------------ ------------ ------------ ------------ -----------
Total other income (expenses) ............ (1,029,912) (160,991) (561,552) (27,312) (30,102)
------------ ------------ ------------ ------------ -----------
Income (loss) before income taxes
and minority interest ................... (3,332,925) (4,225,849) (6,245,092) (2,791,143) 2,133,615
Benefit from (provision for) income
taxes (Note 9) .......................... - - 12,973 1,103,000 (862,000)
Minority interest in (income) loss of
subsidiaries ............................ 140,661 44,321 133,590 (114,643) (85,264)
------------ ------------ ------------ ------------ -----------
NET INCOME (LOSS) ......................... (3,192,264 (4,181,528) (6,098,529) (1,802,786) 1,186,351)
Other comprehensive income (loss):
Foreign currency translation
adjustment .............................. (115,087) 29,243 (430,117) 11,137 -
------------ ------------ ------------ ------------ -----------
COMPREHENSIVE INCOME
(LOSS) ................................... $ (3,307,351) $ (4,152,285) $ (6,528,646) $ (1,791,649) $1,186,351]
============ ============ ============ ============ ===========
</TABLE>
SEE ACCOMPANYING REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-33
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------------- ---------------------------------------------
1998 1997 1997 1996 1995
------------- ------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) PER SHARE
(Note 8)
Basic and diluted ............... $ (1.44) $ (2.11) $ (3.01) $ (1.23) $ .81
---------- ---------- ---------- ---------- ----------
Basic and diluted weighted average
number of common shares
outstanding (Note 8) ............ 2,215,476 1,980,198 2,023,283 1,470,000 1,470,000
---------- ---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-34
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
------------------------------- PAID-IN COMPREHENSIVE
SHARES (NOTE 8) AMOUNT CAPITAL INCOME/(LOSS)
----------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1995 .......................... 1,400,000 $ 14,000 $ (13,000) $ -
Contribution to capital by subsidiaries ........... - - 1,396 -
Issuance of common stock for services ............. 70,000 700 5,000 -
Comprehensive income:
Net income ....................................... - - - -
--------- -------- --------- -------
Balance, December 31, 1995 ........................ 1,470,000 14,700 (6,604) -
Comprehensive income/(loss):
Net loss ......................................... - - - -
Foreign currency translation adjustments ......... - - - 11,137
--------- -------- --------- -------
Balance, December 31, 1996 ........................ 1,470,000 $ 14,700 $ (6,604) $11,137
--------- -------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS COMPREHENSIVE STOCKHOLDERS'
(DEFICIT) INCOME/(LOSS) EQUITY (DEFICIT)
--------------- ----------------------------- -----------------
<S> <C> <C> <C>
Balance, January 1, 1995 .......................... $ 721,693 $721,693] $ 722,693
===============
Contribution to capital by subsidiaries ........... - - 1,396
Issuance of common stock for services ............. - - 5,700
Comprehensive income:
Net income ....................................... 1,186,351 [1,186,351] 1,186,351
------------ --------------- ------------
Balance, December 31, 1995 ........................ 1,908,044 $1,186,351] 1,916,140
===============
Comprehensive income/(loss):
Net loss ......................................... (1,802,786) [(1,802,786)] (1,802,786)
Foreign currency translation adjustments ......... - [11,137] 11,137
------------ ------------------ ------------
Balance, December 31, 1996 ........................ $ 105,258 $(1,791,649)] $ 124,491
==================
</TABLE>
F-35
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
------------------------------ PAID-IN COMPREHENSIVE
SHARES (NOTE 8) AMOUNT CAPITAL INCOME/(LOSS)
----------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Issuance of common stock for services ............ 316,676 $ 3,167 $ 61,769 $ -
Issuance of common stock for cash net of
offering costs of $78,543 (Note 8) .............. 250,000 2,500 168,957 -
Issuance of common stock in connection
with debt net of offering costs of $29,580
(Note 6) ........................................ 172,500 1,725 141,195 -
Conversion of debt to additional paid-in
capital (Note 8) ................................ - - 1,000,000 -
Comprehensive income/(loss):
Net loss ........................................ - - - -
Foreign currency translation adjustment ......... - - - (430,117)
------- ------- ---------- ----------
Balance, December 31, 1997 ....................... 2,209,176 22,092 1,365,317 (418,980)
Issuance of Common Stock in Connection
with exercise of Stock Warrants (unaudited) 22,050 220 220
Comprehensive income/(loss):
Net loss (unaudited) ............................ - - - -
Foreign currency translation adjustment
(unaudited) .................................... - - - (115,087)
--------- ------- ---------- ----------
Balance, September 30, 1998 (unaudited) .......... 2,231,226 $22,312 $1,365,537 $ (534,067)
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS COMPREHENSIVE STOCKHOLDERS'
(DEFICIT) INCOME/(LOSS) EQUITY (DEFICIT)
--------------- -------------------- -----------------
<S> <C> <C> <C>
Issuance of common stock for services .............. $ - $- $ 64,936
Issuance of common stock for cash net of
offering costs of $78,543 (Note 8) ................ - - 171,457
Issuance of common stock in connection with
debt net of offering costs of $29,580 (Note 6) ..... - - 142,920
Conversion of debt to additional paid-in capital
(Note 8) ........................................... - - 1,000,000
Comprehensive income/(loss):
Net loss .......................................... (6,098,529) [(6,098,529)] (6,098,529)
Foreign currency translation adjustment ........... - [(430,117)] (430,117)
------------ ---------------- ------------
Balance, December 31, 1997 ......................... (5,993,271) $(6,528,646)] (5,024,842)
Comprehensive income/(loss):
Issuance of Common Stock in Connection
with exercise of Stock Warrants (unaudited) ....... - - 440
Net loss (unaudited) .............................. (3,192,264) [(3,192,264)] (3,192,264)
Foreign currency translation adjustment
(unaudited) ...................................... - [(115,087)] (115,087)
------------ ---------------- ------------
Balance, September 30, 1998 (unaudited) ............ $ (9,185,535) $(3,307,351)] $ (8,331,753)
================
</TABLE>
SEE ACCOMPANYING REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-36
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVANLENTS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------------------- ----------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- ---------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............. $ (3,192,264) $ (4,181,528) $ (6,098,529) $ (1,802,786) $ 1,186,351
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization ................ 645,928 387,644 876,836 440,873 340,254
Minority interest ............ (140,661) (44,321) (133,590) 114,643 85,264
Loss on disposal of fixed
assets ...................... - - 17,217 - 34,240
Common stock issued for
services .................... - 17,500 17,500 - 5,700
Deferred income taxes ........ - - - (84,000) 26,366
Provision for doubtful
accounts .................... 197,843 35,900 259,369 41,210 118,855
Writedown on inventory ....... 66,135 - - - -
Changes in operating assets and
liabilities:
Accounts receivable .......... (152,666) (261,975) (435,517) 317,451 (86,178)
Related party receivable ..... - - - 238,638 (202,141)
Inventories .................. 567,116 66,874 293,087 123,341 (90,349)
Prepaid expenses and other 290,187 (427,260) (315,748) (55,909) 102,781
Refundable income taxes ...... - 774,105 1,025,000 (725,000) (300,000)
Accounts payable ............. 178,370 1,788,624 1,218,959 157,490 (79,217)
Accounts payable, related
party ....................... 138,804 (339,243) 26,254 - -
Accrued liabilities and
other ....................... 369,195 - (184,223) (322,349) (96,959)
Income taxes payable ......... - - - (65,755) 14,761
------------ ------------ ------------ ------------ -----------
Net cash provided by (used in)
operating activities .......... (1,032,013) (2,183,680) (3,433,385) (1,622,153) 1,059,728
Investing activities:
Restricted cash ............... (125,000) - - - -
Deposits and other ............ 200,402 (342,193) (289,238) - -
Purchases of intangibles ...... - (63,417) (20,106) (172,488) (21,223)
Purchases of property and
equipment .................... (45,654) (364,302) (274,679) (243,415) (193,662)
Advances-other ................. - 145,136 226,855 (224,804) (2,051)
Investment .................... - 250,000 250,000 (250,000) -
------------ ------------ ------------ ------------ -----------
Net cash used in investing
activities .................... 29,748 (374,776) (107,168) (890,707) (216,936)
------------ ------------ ------------ ------------ -----------
</TABLE>
F-37
<PAGE>
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVANLENTS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------------- -------------------------------------------------
1998 1997 1997 1996 1995
------------- ------------- --------------- --------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Financing activities:
Checks written in excess of
deposits ...................... (273,344) (109,292) (53,155) 1,376,065 -
Proceeds from note payable
to bank ....................... - - - 250,000 -
Payments on note payable to
bank .......................... (45,000) (10,000) (10,000) - -
Proceeds from notes payable 150,000 2,468,668 4,217,463 200,000 -
Payments on notes payable ...... - (325,000) (1,017,463) - -
Proceeds from notes
payable-related party ......... 1,443,000 967,046 1,165,531 75,000 -
Payments on notes payable-
related party ................. (312,920) (547,451) (561,192) (228,738) -
Payments on capital lease
obligations ................... (81,895) (197,547) (241,610) (223,902) (265,734)
Issuance of common stock ....... 441 171,457 171,457 - 1,396
Offering costs paid ............ - (94,405) (29,580) - -
Payments for debt issue costs - - (300,794) - -
--------- --------- ---------- --------- --------
Net cash provided by (used
in) financing activities ...... 880,282 2,323,476 3,340,657 1,448,425 (264,338)
--------- --------- ---------- --------- --------
Effect of foreign exchange
rates changes on cash ......... 122,021 29,243 (78,708) 33,570 -
--------- --------- ---------- --------- --------
Net increase (decrease) in
cash and cash equivalents ..... 38 (205,737) (278,604) (1,030,865) 578,454
Cash and cash equivalents,
beginning of period ........... 460,663 739,267 739,267 1,770,132 1,191,678
--------- --------- ---------- ---------- ---------
Cash and cash equivalents,
end of period ................. $ 460,701 $ 533,530 $ 460,663 $ 739,267 $1,770,132
---------- ---------- ------------ ------------ ----------
</TABLE>
SEE ACCOMPANYING REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS, SUMMARY OF
ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-38
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
ORGANIZATION AND BUSINESS
Kaire International, Inc. ("the Company"), was incorporated in Nevada in
October 1992. The Company is engaged in the distribution of health and personal
care products through network marketers throughout the United States, Canada,
New Zealand, Australia, South Korea, Trinidad and Tobago, and the United
Kingdom.
As of March 18, 1997, the Company was merged into a newly formed Delaware
corporation of the same name with the Nevada corporation ceasing to exist. The
transaction was accounted for on a basis similar to a pooling of interest with
no change in the historical financial statements of the Company. The newly
formed corporation had no operations prior to the merger.
The Company expanded its markets in 1995 by entering New Zealand and Australia
with its health and personal care products. Kaire New Zealand Ltd. ("Kaire New
Zealand") and Kaire Australia Pty. Ltd. ("Kaire Australia") were incorporated
in August 1995 and began operations on November 1, 1995. The Company acquired a
51% interest in these two subsidiaries on the date of incorporation.
During 1997, the Company expanded its markets into South Korea, Trinidad and
Tobago, and the United Kingdom. Kaire Korea, Ltd. ("Kaire Korea") was
incorporated on March 19, 1997 in South Korea as a wholly owned subsidiary of
the Company through November 15, 1997. On November 15, 1997, the Company sold
15% of Kaire Korea, in consideration of $143,375 of interest expense due on a
note payable. Operations and sales began during July 1997 (see Note 6). During
October 1998, the Company began trying to sell its South Korean subsidiary, and
at September 30, 1998, the Company has reflected its assets in its South Korea
subsidiary at their net realizable value. The Company recorded a $471,000
writedown of its assets in its South Korean subsidiary. Kaire Europe Limited
("Kaire Europe") was incorporated as a wholly owned subsidiary of the Company on
July 24, 1997 in the United Kingdom, commencing sales during November 1997.
Kaire Trinidad Limited ("Kaire Trinidad"), a wholly owned subsidiary of the
Company, was incorporated on May 21, 1997 in the Republic of Trinidad and Tobago
and began operations during June 1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, its majority owned subsidiaries Kaire New Zealand, Kaire Australia and
Kaire Korea, and its wholly owned subsidiaries Kaire Europe, and Kaire Trinidad.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements for the nine months ended September 30, 1998 and 1997 are presented
on a basis consistent with the audited consolidated financial statements and
reflect all adjustments, consisting only of normal recurring accruals, necessary
for fair presentation of the results of such periods. The results of operations
for the interim period ended September 30, 1998 are not necessarily indicative
of the results to be expected for the year ending December 31, 1998.
CONCENTRATION OF RISK
The Company maintains its cash accounts in several bank accounts. Accounts in
the United States are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000. The Company's cash balance in some of its bank accounts
generally exceeds the insured limits.
The Company sells its products through network marketers throughout the United
States, Canada, New Zealand, Australia, South Korea, Trinidad and Tobago, and
the United Kingdom. Credit is extended for returned checks and or until credit
card purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial statements and
are based on management's expectations. The Company's accounts receivable are
subject to potential concentrations of credit risk. The Company does not believe
that it is subject to any unusual or significant risks, in the normal course of
business.
F-39
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
CASH AND CHECKS WRITTEN IN EXCESS OF DEPOSITS
The cash balance on the accompanying balance sheet represents cash from the
Company's subsidiaries which are not overdrawn. The checks in excess of deposits
represents bank overdrafts on the parent company's financial statements. The
cash held in the Company's subsidiary accounts is not available to cover the
parent company's bank overdrafts.
INVENTORIES
Inventories consist mainly of health and personal care products and are stated
at lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization are
computed, using primarily the straight-line method, over the estimated useful
lives of the assets which range from three to seven years. Maintenance and
repair costs are expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected undiscounted future cash flow from the
use of the assets and its eventual disposition is less than the carrying amount
of the assets, an impairment loss is recognized and measured using the asset's
fair value.
RESTRICTIVE CASH
The Company has a restricted cash account with a credit card processing company.
The primary purpose of this account is to provide a reserve for potential
uncollectible amounts and chargebacks by the Company's credit card customers.
DEFERRED OFFERING COSTS
Deferred offering costs include professional fees directly related to the
Company's proposed public offering. If the offering is successful, costs
incurred will be offset against the proceeds of the offering. Since the offering
was unsuccessful, such costs have been expensed.
DEBT ISSUE COSTS
Debt issue costs are being amortized using the straight-line method over the
term of the notes payable.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales are
recorded when products are shipped.
Under the Kaire Direct program the Company provides a 100% refund (less shipping
and handling), to all end users, for any unopened product that is returned
within 30 days from the date of purchase in resalable condition. The Company
provides a 100% product exchange for any product that does not meet customer
satisfaction if returned within 30 days under the "Kaire Direct" program. An
Associate is allowed 90 days from order date for exchange or refund only if
product bottles (empty, partial or full) are returned. Statement of Financial
Accounting Standards No. 48 "Revenue Recognition When Right of Return Exists"
requires the Company to accrue losses that may be expected from sales returns.
For the nine months ended September 30, 1998 and 1997, the Company recorded
sales returns of $324,470 and $691,650, and for the years ended December 31,
1997, 1996 and 1995, the Company recorded sales returns of
F-40
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
$869,305, $861,213 and $87,156. The Company monitors its historical sales
returns and will accrue a liability for sales returns when and if sales returns
become significant.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires the
use of the "liability method". Accordingly, deferred tax liabilities and assets
are determined based on the temporary differences between the financial
statement and tax basis of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Fair values of accounts receivables, accounts payable, and accrued liabilities
are assumed to approximate carrying values for these financial instruments
since they are short term in nature and their carrying amounts approximate
fair value or they are receivable or payable on demand.
NOTE RECEIVABLE AND NOTES PAYABLE TO RELATED PARTIES
Due to its related party nature and terms of the receivable and payables to
related parties, the Company cannot estimate the fair market value of such
financial instrument.
NOTES PAYABLE
Substantially all of these notes bear interest at fixed rates of interest based
upon the terms of the Agreements. The fair value of these notes are not
materially different than their reported carrying amounts at September 30,
1998 and December 31, 1997 and 1996.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
INVESTMENT IN COMMON STOCK
The Company acquired 1,400,000 shares of common stock of Aloe Commodities
International, Inc. ("Aloe") representing a 14% interest in Aloe for $250,000 in
1996. During 1997, the Company sold its investment in Aloe for $250,000 and used
the proceeds as partial payment on certain notes payable (see Note 3).
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of subsidiaries, are translated at the rate of exchange
in effect on the balance sheet date; income and expenses of subsidiaries are
translated at the average rates of exchange prevailing during the year. The
related translation adjustments are reflected as a cumulative translation
adjustment in consolidated stockholders' equity.Foreign currency gains and
losses resulting from transactions are included in results of operations in the
period in which the transactions occurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
F-41
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items included in the 1996 and 1995 financial statements have been
reclassified to conform to the current year presentation. Such reclassifications
have no impact on the Company's financial position or results of operations.
NET INCOME (LOSS) PER COMMON SHARE
During 1998, the Company implemented Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 provides for the
calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully diluted earnings per share. All prior period earnings per share data has
been restated to reflect the requirements of SFAS No. 128. The adoption of SFAS
No. 128 did not effect the EPS calculations at September 30, 1998 and 1997, and
December 31, 1997, 1996 and 1995. See Note 8 for computation of earnings per
share.
STOCK OPTIONS
The Company applies Accounting Pronouncements Bulletin Opinion 25, "Accounting
for Stock Issued to Employee", ("APB 25") and related interpretations in
accounting for all stock option plans. Under APB Opinion 25, no compensation
cost has been recognized for stock options granted as the option price equals or
exceeds the market price of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), requires the Company to provide pro forma
information regarding net income (loss) as if compensation cost for the
Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black Scholes option-pricing model.
COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting Standards
No.130, "Reporting Comprehensive Income" ("SFAS No. 130"). The implementation of
SFAS No. 130 required comparative information for earlier years to be presented.
The Company has elected to report comprehensive income on the consolidated
statements of operations and the consolidated statements of stockholders' equity
(deficit). Comprehensive income is comprised of net income (loss) and all
changes to the consolidated statements of stockholders' equity (deficit), except
those due to investments by stockholders, changes in paid in capital and
distributions to stockholders.
F-42
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 supersedes Statement of
Financial Accounting Standard No. 14 "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards of the way the public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of a company about which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing performance.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by the implementation of this standard.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS No. 132") which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established standards for
recognizing all derivative instruments including those for hedging activities as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. This Statement is effective for
fiscal years beginning after June 30, 1999. The Company has not yet determined
the effect of SFAS No. 133 on its financial statements. Management believes the
adoption of this statement will have no material impact on the Company's
financial statements.
The FASB recently issued Statement of Financial Accounting Standards No. 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" ("SFAS No. 134").
SFAS No. 134 establishes accounting and reporting standards for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise.
This statement is effective for the first fiscal quarter beginning after
December 15, 1998. The Company has not yet determined the effect of SFAS No. 134
on its financial statements. Management believes the adoption of this statement
will have no material impact of the Company's financial statements.
1. GOING CONCERN
The Company incurred significant losses during the years ended December 31, 1997
and 1996 and, at December 31, 1997, has a negative working capital of
$6,492,288. Additionally, the Company has not made its payroll tax and sales tax
deposits on a timely basis. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The Company has continued to pay its associates on a timely basis and has
negotiated out of any default situations with its creditors and debtholders.
There are a number of factors which contributed to the losses for 1997 and 1996
including several marketing promotions which did not generate the anticipated
results, a decline in sales from the normal business cycle of a mature business
in the network marketing industry, the creation of a number of marketing
F-43
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
videos, changes in the bonus plan effecting the total payout, the start up of
operations in Korea, Europe and Trinidad and Tobago, and the implementation of
an aggressive recruitment plan. In response to those challenges, the Company has
taken significant steps including the discontinuance of the unsuccessful
marketing promotions, the elimination of videos from the marketing plan, a full
restructuring of the marketing department with significant emphasis on budgeting
and performance, changes to the compensation structure for the associates to
predominantly return to the former compensation structure, a curtailment of any
future expansion plans into foreign countries until adequate capital is
available, an overall reduction in the Company's operating expenses and the
implementation of significant controls over expenses to maintain a very
conservative operational approach.
In addition, the Company is continuing to search for, and introduce, new
products that management believes will provide improved profit margins and
anticipated high profile and user appeal. Management believes that many of the
products introduced over the past two years are excellent products but were
either not fully promoted or lacked the spotlight appeal demanded by many of the
consumers in the network marketing industry. Management's long term goal is to
improve on identifying products which have greater market appeal and then
properly introduce and promote them. The Company has also introduced new
marketing tools to promote sales to end users without the need for the associate
who introduced the product to them to stay with the Company. The Company is also
exploring several avenues of improving its gross profit margin.
During 1997, the Company actively pursued a rapid international growth strategy.
The Company obtained a "door to door" selling license in Korea through a newly
formed subsidiary, Kaire Korea, leased office space in Seoul, received approval
for a portion of their product line and started selling products in Korea in the
second half of the year. The Company has sustained losses in trying to penetrate
the South Korean market. The Company is actively trying to sell its South Korean
subsidiary, and at September 30, 1998, the Company has reflected its assets in
its South Korean subsidiary at their net realizable value. The Company recorded
a $471,000 writedown of its assets in its South Korean subsidiary. This amount
is reflected in selling, general and administrative expenses for the nine months
ended September 30, 1998. In May 1997, the Company formed Kaire Trinidad, leased
office space in Port of Spain and began sales operations in Trinidad and Tobago.
During the second half of 1997, the Company formed Kaire Europe in the United
Kingdom, leased office space north of London and began operations.
These locations were strategically chosen. The Asian market, including Japan, is
the largest in network marketing. Korea was targeted for the entry into that
market as it could be done at a lower cost than Japan. The Company had contacts
with a potentially large associate base of Koreans and Korean-Americans, and it
was believed that the Company would be better accepted by the Koreans for using
it as the starting point into the Asian market as opposed to the more
traditional bases of Hong Kong, Singapore, Taiwan and Japan. The Company has
decided to exit the Korean market due to the recent Asian financial crisis
allowing more time and capital to be allocated to other existing markets.
Trinidad was selected for the low cost of operations as the Trinidad economy has
a larger "middle class" than most of the Caribbean islands, and as an entry into
both the Caribbean and South American markets with which it maintains strong
trading ties. The United Kingdom was selected for the entry point into the
strong European direct sales market. The United Kingdom presented an English
speaking country, a member of the European Union and regulatory and tax
situations similar to several of the countries the Company was already doing
business in.
As with many new entities, the costs of operations in the first months of
operations are high while the sales force and corresponding sales are building.
Therefore, all these entities showed a loss during 1997. Management anticipates
that as these companies become more established and mature, they will be able to
both cut down on their operating expense as a percentage of sales and increase
sales to contribute to the profitability of the Company in future years.
In summary, Management believes that the Company is addressing the going concern
issue in virtually every aspect of its operations. It has cut its domestic
operating expenses. As a part of this reduction, marketing expenses have been
reduced sharply with no perceived impact on the effectiveness of the Company's
marketing strategy. The Company is continuing to pursue outside financing
options including consolidating its various debt instruments with
F-44
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
one lending institution. Management believes that its plan will enable the
Company to remain viable for at least 12 months from the date of the
consolidated financial statements. There are no assurances that any of these
financing events will occur, or that the Company's plan to achieve profitability
and a positive cash flow will be successful. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
2. NOTE RECEIVABLE-RELATED PARTY
On October 18, 1994, the Company accepted a 10% promissory note receivable from
a related party in the amount of $115,549. The note was uncollateralized and due
on demand. During 1997, the Company offset the promissory note and accrued
interest against certain loans made to the Company by the related party (See
Note 3).
3. RELATED PARTY TRANSACTIONS
During 1997 and 1996, three officers of the Company advanced funds to the
Company for working capital requirements. The Company recorded these advances as
current liabilities. On November 28, 1997, the Company issued 10% promissory
notes payable to the officers. The notes are uncollateralized and due on demand.
As of September 30, 1998 and December 31, 1997 and 1996, the Company owed
$258,337, $262,037 and $75,000 to the officers.
During January 1997, the Company borrowed $205,000 from two individual
directors. The Company and the two individual directors agreed to offset the
$115,549 note receivable balance as stated in Note 2 with the advance of
$205,000. The Company then entered into a demand note payable for the balance
with the two directors for $89,451 paying 10% interest per annum. In July 1997,
the Company borrowed an additional $458,000 from the same two directors for
notes payable at 10%, due and payable upon demand. The Company pledged as
collateral on the July 1997 notes payable its investment in the shares of Aloe
Commodities International, Inc. The Company sold its investment in the shares of
Aloe Commodities International, Inc. to an unrelated third party, valued at
$250,000, which was the Company's cost of those shares. No public market existed
for those shares. The proceeds were used to pay down the note. The Company
repaid an additional $71,500 to the directors and issued 10% promissory notes
for the remaining balances. The remaining principal balance plus accrued but
unpaid interest was refinanced under separate note agreements. The notes are
uncollateralized and due upon demand. As of September 30, 1998 and December 31,
1997, the Company owed $242,410 and $247,630, respectively, under these notes to
the directors. In addition, during 1997, the two directors advanced an
additional $113,000 to the Company which was repaid by the Company during 1997.
In December 1997, the directors and officers entered into an agreement with the
Company to which they agreed that the Company not make repayments on the notes
issued to them until after the end of the first calendar quarter in which the
Company has achieved positive cash flow. The agreement requires payments only
after calendar quarters during which the Company has received positive cash flow
and that the Company is only required to pay the officers and directors on a pro
rata basis as to their indebtedness in an aggregate amount equal to 50% of the
positive net cash flow for each such quarter.
Kaire Korea, pursuant to a demand promissory note guaranteed by the Company and
personally guaranteed by certain officers of the Company, borrowed $500,000 from
a corporation during May 1997 pursuant to the terms of a note payable at an
annual interest rate of 9.5%. The note was due in principal installments of:
$25,000 due August 31, 1997, $125,000 due September 30, 1997, $175,000 due
October 31, 1997 and $175,000 due November 30, 1997. An option to acquire 15% of
the capital stock of Kaire Korea Ltd. at the par value of Kaire Korea's capital
stock expiring May 2000 was granted to the lender. During 1997, Kaire Korea
defaulted under the note agreement. On November 15, 1997, the Corporation
exercised its option to acquire 15% of Kaire Korea from the Company in
consideration of $143,375 in interest expense due by Kaire Korea under the note
agreement. The Company renegotiated the terms of the original note agreement on
January 1, 1998. The January 1, 1998 Agreement modifies the repayment provisions
of principal and interest, stipulating that the Company make monthly interest
only
F-45
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
payments until the note is paid in full. The note was due on September 15, 1998.
The Company is currently in default on its note payable. The Company has
classified this liability as a current liability. The Company also pledged its
stock in Kaire Korea as collateral on this note. As of September 30, 1998 and
December 31, 1997, Kaire Korea owes $475,000 to its minority stockholder.
During November 1997, Interactive Medical Technologies, Ltd. ("IMT") loaned the
Company $700,000. Pursuant to an Agreement and Plan of Reorganization, IMT
agreed to convert its $700,000 of debt to equity in the Company (see Note 8).
On January 5, 1998, the Company borrowed $103,000 from two directors of the
Company for notes payable. The notes payable bear interest at 10%, are
uncollateralized and due on demand. On April 29, 1998, the Company borrowed
$100,000 from a director of the Company for a note payable. The note payable
bears interest at 10%. The note is collaterized by all the assets of the Company
and is due on demand. As of September 30, 1998, the Company owed $139,000, under
these notes to the directors.
During March and April 1998, Global Marketing, LLC, a stockholder of the
Company, advanced a total of $1,000,000 to the Company for working capital
requirements. On April 16, 1998, the Company entered into a $1,000,000 note
payable with the stockholder. The note bears interest at 10% per annum, is
uncollateralized and is payable upon demand.
As of September 30, 1998 and December 31, 1997, the Company owes $137,459 and
$26,255 in accounts payable to officers and directors.
4. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations which are collateralized by
equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $51 to $11,349.
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of September 30,
1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- -------------
(UNAUDITED)
<S> <C> <C>
1998 ............................................ $39,646 $131,879
1999 ............................................ 15,347 15,347
------- --------
Total future minimum lease payments ............. 54,993 147,226
Less amounts representing interest .............. 6,096 16,434
------- --------
Present value of minimum lease payments ......... 48,897 130,792
Less current maturities ......................... 48,897 116,079
------- --------
Total long-term obligations ..................... $ - $ 14,713
======= ========
</TABLE>
At September 30, 1998, December 31, 1997 and 1996, property and equipment
includes equipment under capital lease obligations with a total cost of $757,689
and accumulated amortization of $525,590, $413,900 and $263,588.
5. NOTE PAYABLE TO BANK
The Company had a $250,000 line of credit agreement with a bank. The credit line
bore interest at 10% per annum and was collateralized by inventories, accounts
receivable, certain other assets, and the personal guarantees of
F-46
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
certain officers and directors of the Company. On December 26, 1997, the line of
credit was converted to a term loan. The term loan bears interest at 10.5% per
annum and is collateralized by inventories, accounts receivable, certain other
assets, and the personal guarantees of certain officers and directors of the
Company. The term loan is payable in monthly principal payments of $5,000 plus
accrued interest and is due January 1999. As of September 30, 1998, December 31,
1997 and 1996, the balance was $195,000, $240,000 and $250,000. As of September
30, 1998 and December 31, 1997, the term loan is classified as a current
liability.
6. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- --------------------------
1998 1997 1996
--------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to individuals(1) .......... $ - $ - $200,000
Note payable to a corporation(2) ......... 200,000 200,000 -
Notes payable to individuals(3) .......... 1,685,521 1,587,166 -
Note payable to a corporation(4) ......... 150,000 - -
---------- ---------- --------
Total notes payable ...................... $2,035,521 $1,787,166 $200,000
========== ========== ========
</TABLE>
- ----------
(1) At December 31, 1996, the Company had two $100,000 notes with two
individuals. The notes bore interest at 14% and matured on June 30, 1997.
The notes were collateralized by all accounts and notes receivable and
certain other assets. In connection with this borrowing, the lenders were
each issued warrants to purchase 7,350 shares of the Company's common stock
at $.02 per share. The warrants expire on December 30, 1999. As of December
31, 1997, the notes were paid in full, and the warrants had not been
exercised. The warrants were exercised in July 1998.
(2) During January 1997, the Company borrowed $200,000 from a corporation for a
note payable at an interest rate of 10% per month, with interest payments
due monthly. The note is guaranteed by certain officers and directors and is
due upon demand. The Company renegotiated the terms of the original
agreement on August 25, 1997, as the Company had not met the interest
payment requirements of the agreement. The August 25, 1997 agreement
modifies the repayment provisions of principal and interest, stipulating
that the Company repay all interest and principal due under the original
agreement by December 31, 1997. Also, the interest rate was reduced from 10%
per month to 2% per month payable monthly, retroactive to March 5, 1997. On
January 15, 1998, the note was amended and changed to a demand note as the
Company was unable to repay the note by December 31, 1997 as stated in the
August 25, 1997 amendment. The Company is required to make monthly interest
only payments of $4,000 per month. In connection with the original terms of
this borrowing, the lender was issued warrants to purchase 12,500 shares of
the Company's common stock at $6.60 per share. The warrants expire six years
after the effective date of the initial public offering. As of September 30,
1998, the warrants had not been exercised. On October 1, 1998, the lender
was issued additional warrants to purchase 12,500 shares of the Company's
common stock at $6.60 per share as a result of the reverse stock split (see
Note 8).
(3) During 1997, the Company borrowed $1,725,000 pursuant to a private placement
offering consisting of the issuance of promissory notes and common stock of
the Company. In connection with this private placement offering, the Company
incurred $348,230 in debt issue costs. The debt issue costs are being
amortized using the straight line method over the term of the promissory
notes. The promissory notes are due the earlier of eighteen months from the
date of issue, the completion date of an equity financing of the Company
pursuant to which it receives gross proceeds of not less than $3,000,000, or
the Company's receipt of at least $1,000,000 in proceeds from the "Key Man"
life insurance policies on any of its executive officers and/or directors.
The promissory notes bear interest at 10% per annum. In connection with the
private placement offering, debt holders were issued 172,500 shares of the
Company's common stock. Original issue discount of $172,500 was recorded as
part of the private offering financing and is being charged to interest over
the life of the promissory notes under the effective interest method. The
shares issued were valued based upon their estimated fair market value at
date of issuance. As of September 30, 1998 and December 31, 1997, the notes
payable are disclosed net of unamortized original issue discount of $39,479
and $137,834.
(4) During January 1998, the Company borrowed $150,000 from a corporation for a
note payable at an interest rate of 2% per month or 24% annual interest.
Interest and principal are due on demand. The note is uncollateralized and
is personally guaranteed by certain officers and directors of the Company.
All warrants issued in connection with the above financing transactions have
been valued using the Black Scholes Model and are considered to be nominal in
value.
F-47
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
7. PAYROLL TAX AND SALES TAX LIABILITIES
During 1998 and 1997, the Company has not made its payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. The Company has filed all required payroll tax returns (see Note
15). The Company has been negotiating with the IRS to work out a payment plan.
As of September 30, 1998 and December 31, 1997, the Company owes approximately
$225,141 and $51,096 of delinquent payroll tax liabilities including interest
and penalties.
During September 1998, the Company reached an agreement with the IRS to pay
certain current and prior payroll tax liabilities. The Company has also agreed
to pay all future payroll taxes on a current basis. Any failure to meet the
terms of the agreement with the IRS, could result in a federal tax lien being
filed. The Company has not made all required payroll tax deposits in accordance
with the agreement.
During 1998 and 1997, the Company did not make its sales tax deposits with the
various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of September 30, 1998 and December 31, 1997, the
Company owed approximately $528,400 and $268,300 in current and delinquent sales
taxes. The Company's failure to pay its delinquent sales taxes could result in
tax liens being filed by various taxing authorities.
8. STOCKHOLDERS' EQUITY
STOCK SPLIT AND AUTHORIZATION OF SHARES
On October 1, 1998 the Board of Directors authorized a 1 for 2 reverse stock
split for shareholders of record on October 1, 1998. All references to common
share and per share amounts in the accompanying financial statements have been
restated to reflect the effect of this reverse stock split. As a result of the 1
for 2 reverse stock split, certain warrant holders received an additional
712,500 warrants to purchase common stock of the Company at $6.60 per share. The
warrants expire six years after the effective date of the initial public
offering. These warrants granted on October 1, 1998 were considered nominal
value.
On February 1, 1997, the Board of Directors authorized a stock split, effected
in the form of a dividend of 2,800 shares of common stock for each common share
held by shareholders of record on February 1, 1997. All references to common
share and per share amounts in the accompanying financial statements have been
restated to reflect the effect of this stock dividend.
During March 1997, the Board of Directors adopted certain resolutions which were
approved by the Company's stockholders to increase the number of authorized
shares of common stock from 1,000,000 to 25,000,000 shares. The stockholders
also approved the authorization of the issuance of a new class of 5,000,000
shares of preferred stock. The preferred stock of the Company can be issued in
series. With respect to each series issued, the Board of Directors of the
Company will determine, among other things, the number of shares in the series,
voting rights and terms, dividend rates and terms, liquidation preferences and
redemption and conversion privileges. No preferred stock has been issued as of
September 30, 1998.
ISSUANCE OF COMMON STOCK
On March 20, 1997, the Company sold 250,000 shares of common stock pursuant to a
private placement offering for $171,457, net of $78,543 in offering costs, and
warrants to purchase an additional 250,000 shares of common stock at a purchase
price of $6.60 per share. On October 1, 1998, the investors were issued
additional warrants to purchase 250,000 shares of the Company's common stock at
a purchase price of $6.60 per share as a result of the reverse stock split. The
warrants are exercisable for a period of four years commencing two years from
the date the Securities and Exchange Commission declares the Company's
registration statement effective. The effective date is the first date the
Company may offer the sale of its common stock in an initial public offering.
The Company may redeem the warrants commencing one year from the effective date
at a redemption price $.05 per warrant if: (1) the closing bid price of the
common stock for twenty (20) consecutive trading days exceeds $10.00, (2) the
redemption occurs during the first two years following the effective date and
the Company receives the prior written
F-48
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
consent of the underwriter for such redemption, and (3) the warrants are
exercisable. The warrants issued in connection with this transaction are
considered nominal in value.
During 1997, the Company borrowed $700,000 from IMT. On December 9, 1997, the
Company entered into an Agreement and Plan of Reorganization (the "Agreement")
with IMT whereby IMT agreed to convert its $700,000 of debt previously borrowed
by the Company to equity in the Company, and invest an additional $300,000 in
equity in the Company at closing. The Agreement for reorganization of the
Company contemplated an exchange between the shareholders of Kaire
International, Inc. for IMT shares whereby IMT issued, in total, shares equal to
forty-five percent (45%) of its common stock outstanding (as defined in the
agreement) immediately prior to the closing date of the Agreement in exchange
for not less than 80% of the issued and outstanding common stock of the Company.
During March 1998, IMT exchanged 57% of the common stock of the Company to
Global Marketing, LLC. IMT's controlling interest in the Company was deemed
temporary and as such did not result in any adjustment to the Company's
consolidated financial statements as of date of the Agreement.
STOCK OPTIONS AND WARRANTS
During 1997, the Company adopted a stock option plan. No options have been
granted under this Plan as of September 30, 1998. The Company has reserved
500,000 shares of its common stock for future grants under this Plan.
SFAS No. 123 requires the Company to provide pro forma information regarding net
loss and net loss per share as if compensation costs for the Company's stock
option plans and other stock awards had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. No stock awards were issued
to employees during the periods ended 1998, 1997, 1996 and 1995. For stock
awards issued to non-employees, the Company estimates the fair value of each
stock award at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1996, respectively. The options and warrants granted during 1997 and 1996 to
non-employees were considered nominal in value. No stock awards were issued to
non-employees during the periods ended 1998 and 1995.
F-49
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
--------------- --------
<S> <C> <C>
Dividend yield .................... 0% 0%
Expected volatility ............... 0% 0%
Risk-free interest rates .......... 5.85% to 6.6% 6%
Expected lives in years ........... 3 to 6 years 3 years
</TABLE>
A summary of the status of the Company's stock option and warrant plan as of
September 30, 1998 and December 31, 1997 and 1996 is presented below.
<TABLE>
<CAPTION>
OPTIONS WARRANTS
--------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Outstanding,
January 1, 1996 ........................ - $ - - $ -
Granted ................................ - - 14,700 0.02
- ------- ------ ------
Outstanding,
December 31, 1996 ...................... - - 14,700 0.02
Granted ................................ 65,000 $ 0.02 719,850 6.53
------ ------- ------- ------
Outstanding,
December 31, 1997 ...................... 65,000 $ 0.02 734,550 6.40
Granted ................................ - - - -
Exercised .............................. - - (22,050) 0.02
------ ------- ------- ------
Outstanding,
September 30, 1998 (unaudited) ......... 65,000 $ 0.02 712,500 $ 6.60
------ ------- ------- ------
Exercisable,
December 31, 1996 ...................... - $ - 14,700 $ 0.02
------ ------- ------- ------
Exercisable,
December 31, 1997 ...................... 65,000 $ 0.02 22,050 $ 0.02
------ ------- ------- ------
Exercisable,
September 30, 1998 (unaudited) ......... 65,000 $ 0.02 - $ -
------ ------- ------- ------
</TABLE>
F-50
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS WARRANT
----------- ---------
<S> <C> <C>
Weighted average fair value of options and warrants granted $ None $ 0.48
during 1996 ..............................................
Weighted average fair value of options and warrants granted $ 0.49 $ None
during 1997 ..............................................
</TABLE>
The following table summarizes information about exercisable stock options and
warrants at September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------------- ---------------------------
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
SEPTEMBER 30, 1998 PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------- -------------- ------------- ------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPTIONS $ 0.02 65,000 3.48 $ 0.02 65,000 $ 0.02
----------- ------ ---- ------- ------ -------
WARRANTS 6.60 712,500 6.00 6.60 - -
----------- ------- ---- ------- ------ -------
DECEMBER 31, 1997
- --------------------
OPTIONS $ 0.02 65,000 4.23 $ 0.02 65,000 $ 0.02
----------- ------- ---- ------- ------ -------
WARRANTS $ 0.02 22,050 2.00 $ 0.02 22,050 $ 0.02
6.60 712,500 6.00 6.60 - -
----------- ------- ---- ------- ------ -------
$ 0.02-6.60 734,550 5.88 $ 6.50 22,050 $ 0.02
----------- ------- ---- ------- ------ -------
</TABLE>
F-51
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------------- -------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss) ..................... $ (3,192,264) $ (4,181,528) $ (6,098,529) $ (1,802,786) $ 1,186,351
Denominator:
Denominator for basic and diluted
earnings per share-weighted
average shares outstanding ........... 2,215,476 1,980,198 2,023,283 1,470,000 1,470,000
------------ ------------ ------------ ------------ -----------
Basic and diluted net income (loss) per
share ................................ $ (1.44) $ (2.11) $ (3.01) $ (1.23) $ .81
------------ ------------ ------------ ------------ -----------
</TABLE>
For the periods ended September 30, 1998 and 1997 and for the years ended
December 31, 1997 and 1996, total stock options and stock warrants of 777,500,
674,550, 799,550, and 14,700 were not included in the computation of diluted
earnings per share because their effect was anti-dilutive. For the year ended
December 31, 1995, the Company did not have any stock options and stock warrants
outstanding.
9. INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------------- --------------------------------------------------
1998 1997 1997 1996 1995
--------------- --------------- --------------- -------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current (expense) benefit:
Federal .............................. $ - $ - $ 12,973 $ 1,017,000 $ (763,000)
Foreign .............................. - - - - -
State ................................ - - - 2,000 (130,000)
------------ ------------ ------------ ----------- -----------
- - 12,973 1,019,000 (893,000)
------------ ------------ ------------ ----------- -----------
Deferred benefit:
Federal .............................. 702,000 1,150,000 1,440,000 68,000 29,000
Foreign .............................. 239,000 - 205,000 - -
State ................................ 85,000 111,000 62,000 100,000 2,000
------------ ------------ ------------ ----------- -----------
1,026,000 1,261,000 1,707,000 168,000 31,000
------------ ------------ ------------ ----------- -----------
1,026,000 1,261,000 1,719,973 1,187,000 (862,000)
Change in valuation allowance ......... (1,026,000) (1,261,000) (1,707,000) (84,000) -
------------ ------------ ------------ ----------- -----------
Income tax (expense) benefit .......... $ - $ - $ 12,973 $ 1,103,000 $ (862,000)
------------ ------------ ------------ ----------- -----------
</TABLE>
F-52
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
At December 31, 1997, the Company had available
net operating loss carryforwards as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRE
-------------- -------------
<S> <C> <C>
Federal net operating loss carryforwards .......... $ 3,700,000 2017
State net operating loss carryforwards ............ 4,700,000 2010 to 2017
Foreign net operating loss carryforwards .......... 924,000 2003 to 2005
Foreign net operating loss carryforwards .......... 155,000 Indefinite
</TABLE>
The utilization of certain of the loss carryforwards are limited under Section
382 of the Internal Revenue Code of approximately $233,000 per year. The types
of temporary differences between the tax basis of assets and liabilities that
give rise to a significant portion of the net deferred tax liability and their
approximate tax effects are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- -----------------------------
1998 1997 1996
--------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Operating loss carryforwards ................. $ 2,337,000 $ 1,436,000 $ 148,000
Foreign operating loss carryforwards ......... 444,000 205,000 -
Property and equipment ....................... (72,000) (90,000) (125,000)
Inventories .................................. 95,000 216,000 47,000
Accounts receivable allowance ................ - 11,000 14,000
Contribution carryforwards ................... 13,000 13,000 -
----------- ----------- ----------
Net deferred tax assets ...................... 2,817,000 1,791,000 84,000
Less valuation allowance ..................... 2,817,000 1,791,000 84,000
----------- ----------- ----------
Net deferred taxes ........................... $ - $ - $ -
----------- ----------- ----------
</TABLE>
A valuation allowance equal to the net deferred tax assets has been recorded, as
management of the Company has not been able to determine that is more likely
than not that the net deferred tax assets will be realized.
A reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------------- ----------------------------------------------
1998 1997 1997 1996 1995
--------------- ---------------- ---------------- ---------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal income tax (benefit) computed
at the federal statutory rate ................ $ (702,000) $ (1,437,000) $ (1,452,973) $ (1,085,000) $ 734,000
State income tax (benefit), net of
federal benefit .............................. (85,000) (139,000) (62,000) (102,000) 64,000
Foreign tax (benefit) at statutory rates ..... (239,000) (167,000) (205,000) - -
Increase in valuation allowance .............. 1,026,000 1,261,000 1,707,000 84,000 -
Other ........................................ - 482,000 - - 64,000
----------- ------------ ------------ ------------ ---------
Income tax expense (benefit) ................. $ - $ - $ (12,973) $ (1,103,000) $ 862,000
----------- ------------ ------------ ------------ ---------
</TABLE>
Refundable income taxes in 1996 relate to the carryback of net operating losses.
F-53
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under operating leases for office space, office
equipment and vehicles. Three leases are on a month to month basis and sixteen
require future minimum lease payments as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------
<S> <C>
1998 ................. $ 424,000
1999 ................. 187,000
2000 ................. 72,000
2001 ................. 70,000
2002 ................. 69,000
Thereafter ........... 342,000
-----------
Total ................ $ 1,164,000
-----------
</TABLE>
Lease expense for all operating leases was $657,500, $301,600, $605,000,
$290,600 and $175,800 for the nine months ended September 30, 1998 and 1997 and
the years ended December 31, 1997, 1996, and 1995.
COMMITMENT WITH SUPPLIER
During August 1998, the Company entered into an agreement with a supplier where
the supplier will be the exclusive manufacturer of the product for the Company.
For a period of five years, the Company must purchase no less than $22,500 per
month for the first three months, no less than $45,000 per month for months four
through six, and no less than $73,750 per month thereafter.
SELF-INSURANCE
The Company is partially self insured for employee medical liabilities which
covers risk up to $10,000 per incident, per individual covered under the plan.
The Company has purchased excess medical liability coverage for individual
claims in excess of $10,000 and aggregate claims in excess of approximately
$312,000 annually with a national medical insurance carrier. Premiums and claim
expenses associated with the medical self insurance program are included in the
accompanying statements of operations. On July 1, 1998, the Company discontinued
its self insured plan.
CONSULTING AGREEMENT
On February 4, 1997, the Company entered into a consulting agreement with Magic
Consulting Group, Inc. ("Consultant"). Consultant is to receive the following
compensation for services: (i) an option to purchase 50,000 shares of common
stock of the Company for $.02 per share; (ii) 50,000 warrants to purchase an
aggregate of 50,000 shares of common stock of the Company at $6.60 per share
and; (iii) $2,500 per month for a period of 60 months. As of September 30, 1998,
no warrants were exercised. On October 1, 1998, Consultant was issued additional
warrants to purchase 50,000 shares of the Company's common stock at $6.60 per
share as a result of the reverse stock split (see Note 8). During October 1998,
Consultant exercised its option to purchase 50,000 shares of common stock of the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends on the continued availability of certain
key management personnel. The Company does not have employment contracts with
any of its employees. The business of the Company could be adversely affected by
the loss of services of any of its key employees.
F-54
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
401(K) PROFIT SHARING PLAN
On January 1, 1996 the Company established a 401(k) profit sharing retirement
plan. The plan requires one year of service and attainment of age 21 to become
eligible. Employer contributions vest over a five year period. The Company's
contributions to the plan for the nine months ended September 30, 1998 and 1997
were approximately $0 and $41,300 and for the years ended December 31, 1997 and
1996 were approximately $53,000 and $67,000.
LEGAL PROCEEDINGS
The Company is the subject of an investigation by the United States Department
of Justice, Office of Consumer Litigation, into the actions by certain
specifically named individuals active in the dietary supplement industry. The
Company was initially contacted in January, 1997 and was advised, in writing,
that it is not a "target" of the Department's investigation, but that it is a
"subject" (meaning that its conduct is deemed to be within the scope of the
investigation) thereof. The Company has completed all obligations and requests
pertaining to this matter.
The Company has also received a voluntary request for information from the FTC
regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
11. MAJOR SUPPLIERS
During the nine months ended September 30, 1998 and 1997 and the years ended
December 31, 1997, 1996, and 1995, the Company purchased amounts of its products
from a limited number of vendors, including significant amounts from MW
International of 50%, 67%, 48%, 57% and 40% and from Manhattan Drug of 7%, 8%,
6%, 22% and 40%. The Company currently buys all of its Pycnogenol, an important
component of its products, from one supplier. Although there are a limited
number of manufacturers of this component, management believes that other
suppliers could provide similar components on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
F-55
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
12. FOREIGN SALES
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1998 UNITED AUSTRALIA
(UNAUDITED) STATES NEW ZEALAND
- ----------------------------- ---------------- ---------------
<S> <C> <C>
Sales to unaffiliated
customers .................. $ 15,152,125 $ 3,350,142
Transfers between
geographic areas ........... 1,484,364 -
------------ -----------
Net sales ................... $ 16,636,489 $ 3,350,142
============ ===========
Income (loss) from
operations ................. $ (1,116,162) $ (282,185)
============ ===========
Identifiable assets at
September 30, 1998 ......... $ 1,773,653 $ 561,364
============ ===========
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1998 OTHER
(UNAUDITED) KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------- ----------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Sales to unaffiliated
customers .................. $ 1,740,159 $ 776,490 $ - $ 21,018,916
Transfers between
geographic areas ........... - - (1,484,364) -
------------- ----------- ------------ -------------
Net sales ................... $ 1,740,159 $ 776,490 $ (1,484,364) $ 21,018,916
============= =========== ============ =============
Income (loss) from
operations ................. $ (1,204,519) $ (115,197) $ 415,050 $ (2,303,013)
============= =========== ============ =============
Identifiable assets at
September 30, 1998 ......... $ 406,932 $ 199,977 $ - $ 2,941,926
============= =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 1998 UNITED AUSTRALIA OTHER
(UNAUDITED) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------- ---------------- --------------- --------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers .................. $ 23,317,499 $ 4,131,780 $ 437,948 $ - $ - $ 27,887,227
Transfers between
geographic areas ........... 1,236,792 - - - (1,236,792) -
------------ ----------- ----------- ------- ------------ -------------
Net sales ................... $ 24,554,291 $ 4,131,780 $ 437,948 $ - (1,236,792) $ 27,887,227
============ =========== =========== ======= ============ =============
Income (loss) from
operations ................. $ (3,380,654) $ (476,144) $ (430,656) $ - $ 222,596 $ (4,064,858)
============ =========== =========== ======= ============ =============
Identifiable assets at
September 30, 1997 ......... $ 3,756,605 $ 962,068 $ 1,252,964 $ - $ - $ 5,971,637
============ =========== =========== ======= ============ =============
</TABLE>
F-56
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997 UNITED AUSTRALIA OTHER
(UNAUDITED) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------- ---------------- --------------- --------------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers ................. $ 29,278,545 $ 5,302,119 $ 808,117 $ 292,731 $ - $ 35,681,512
Transfers between
geographic areas .......... 2,211,101 - - - (2,211,101) -
------------ ----------- ----------- ----------- ------------ -------------
Net sales .................. $ 31,489,646 $ 5,302,119 $ 808,117 $ 292,731 $ (2,211,101) $ 35,681,512
============ =========== =========== =========== ============ =============
Income (loss) from
operations ................ $ (4,639,664) $ (693,875) $ (786,714) $ (155,037) $ 591,750 $ (5,683,540)
============ =========== =========== =========== ============ =============
Identifiable assets at
December 31, 1997 ......... $ 2,526,853 $ 702,695 $ 859,954 $ 288,282 $ (54,108) $ 4,323,676
============ =========== =========== =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1996 UNITED AUSTRALIA OTHER
(UNAUDITED) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------- ---------------- --------------- ---------- -------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers .................. $ 44,122,950 $ 7,375,612 $ - $ - $ - $ 51,498,562
Transfers between
geographic areas ........... 1,784,815 - - - (1,784,815) -
------------ ----------- ------- ------- ------------ -------------
Net sales ................... $ 45,907,765 $ 7,375,612 $ - $ - $ (1,784,815) $ 51,498,562
============ =========== ======= ======= ============ =============
Income (loss) from
operations ................. $ (3,034,684) $ (299,886) $ - $ - $ 570,739 $ (2,763,831)
============ =========== ======= ======= ============ =============
Identifiable assets at
December 31, 1996 .. ....... $ 5,153,240 $ 1,196,879 $ - $ - $ - $ 6,350,119
============ =========== ======= ======= ============ =============
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1995 UNITED AUSTRALIA OTHER
(UNAUDITED) STATES NEW ZEALAND KOREA SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------- -------------- --------------- ---------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers .................... $56,718,455 $ 1,122,895 $ - $ - $ - $ 57,841,350
Transfers between
geographic areas ............. 171,742 - - - (171,742) -
----------- ----------- ------- ------- ----------- ------------
Net sales ..................... $56,890,197 $ 1,122,895 $ - $ - $ (171,742) $ 57,841,350
=========== =========== ======= ======= =========== ============
Income (loss) from
operations ................... $ 2,168,623 $ (4,564) $ - $ - $ (342) $ 2,163,717
=========== =========== ======= ======= =========== ============
Identifiable assets
at December 31, 1995 ......... $ 5,752,254 $ 1,034,890 $ - $ - $ - $ 6,787,144
=========== =========== ======= ======= =========== ============
</TABLE>
F-57
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
13. SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31,
----------------------------- ------------------------------------------
1998 1997
(UNAUDITED) (UNAUDITED) 1997 1996 1995
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash paid during the period for:
Interest ...................... $ 84,680 $141,147 $ 278,139 $ 120,839 $ 104,502
Income taxes ................... $ - $ - $ - $ - $ 853,582
Non-cash investing and
financing transactions:
Note payable
converted to capital .......... $ - $ - $1,000,000 $ - $ -
Note receivable-
related party
offset to notes
payable-related
parties ....................... $ - $ 94,670 $ 94,670 $ - $ -
Issuance of common
stock in connection
with long-term debt ........... $ - $172,500 $ 172,500 $ - $ -
Increase in minority
interest from sale
of 15% interest in
subsidiary .................... $ - $ - $ 143,375 $ - $ -
Equipment
acquired under
capital lease
obligations ................... $ - $ - $ - $ 79,374 $ 174,931
Equipment
purchased
from related
party under
notes payable ................. $ - $ - $ - $ - $ 66,865
Inventory
purchased
from related
party under
notes payable ................. $ - $ - $ - $ - $ 153,764
Common stock
issued for
debt issue costs .............. $ - $ 47,436 $ 47,436 $ - $ -
Common stock
issued for
services ...................... $ - $ 64,936 $ 17,500 $ - $ 57,002
========= ======== ========== ========= =========
</TABLE>
F-58
<PAGE>
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
INFORMATION AS TO THE PERIODS ENDED SEPTEMBER 30, 1998 AND 1997 IS UNAUDITED
(CONTINUED)
14. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
Period ended
September 30, 1998
(unaudited) ............... $ 168,805 $ 197,843 $ 366,648 $ -
Year ended
December 31, 1997 $ 30,000 $ 259,369 $ 120,564 $ 168,805
Year ended
December 31, 1996 ......... $ 56,000 $ 41,210 $ 67,210 $ 30,000
Year ended
December 31, 1995 ......... $ 56,000 $ 118,855 $ 118,855 $ 56,000
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
ASSET PURCHASE AGREEMENT WITH NATURAL HEALTH TRENDS CORPORATION
On November 24, 1998, the Company entered into an Asset Purchase Agreement with
Natural Health Trends Corp. (NHTC), a publicly traded company, where NHTC, in
exchange for the Company's assets and assumption of certain liabilities, will
issue to Kaire 2,800,000 of its Series F Preferred stock; $350,000 of its Series
G Preferred stock and warrants to purchase 200,000 shares of Common stock.
Furthermore, based upon NHTC's net income and sales levels, NHTC has agreed to
pay certain amounts to the Company each year for a period of five years,
commencing with the year ended December 31, 1999. This transaction must be
approved by the stockholders of NHTC and, if approved, is anticipated to close
in January, 1999.
NOTE PAYABLE
During December 1998, the Company borrowed $250,000 from NHTC under a note
payable agreement at an interest rate of 10% per annum. The note is guaranteed
by certain officers of the Company and is due on demand. The note is
collateralized by all right, title and interest in connection with the supplier
agreement discussed at Note 10.
CONTINGENT TAX LIABILITY
On November 17, 1998, the Company received a notice of proposed assessment
from the State of California Franchise Tax Board ("Franchise Tax Board") for
state income tax. The Franchise Tax Board proposed that the Company was liable
for approximately $450,000 related to tax year 1996. For calendar year 1996, the
Company believes that it does not have an income tax liability for this
contingency as the Company suffered a substantial loss during 1996 and therefore
has not recorded a liability. The Company is currently protesting the proposed
assessment.
F-59
<PAGE>
INDEX TO EXHIBITS
2.1 Acquisition Agreement
4.1 Articles of Amendment of the Company's Articles of Incorporation pertaining
to the Certificate of Designation for the Series E Preferred Stock.
4.2 Articles of Amendment of the Company's Articles of Incorporation pertaining
to the Certificate of Designation for the Series F Preferred Stock
4.3 Articles of Amendment of the Company's Articles of Incorporation pertaining
to the Certificate of Designation for the Series 6 Preferred Stock
4.4 Articles of Amendment of the Company's Articles of Incorporation pertaining
to the Certificate of Designation for the Series H Preferred Stock
4.5 Form of Acquisition Warrant
<PAGE>
ASSET PURCHASE AGREEMENT
------------------------
AGREEMENT made as of the 24th day of November 1998 by and between
NATURAL HEALTH TRENDS CORP., a Florida corporation (the "NHTC"), NHTC
ACQUISITION, CORP., a Delaware corporation and a wholly-owned subsidiary of NHTC
(the "Buyer") and KAIRE INTERNATIONAL, INC., a Delaware corporation (the
"Seller").
W I T N E S S E T H :
- - - - - - - - - - -
WHEREAS, Seller is in the business (the "Business") of developing and
distributing through a network of independent associates a variety of natural
health products including nutritional supplements and personal care products;
and
WHEREAS, Buyer desires to purchase from Seller and Seller desires to
sell to Buyer, all of the assets, property, business and goodwill of Seller,
subject to the transfer to and assumption by Buyer of certain of Seller's
liabilities relating to the ownership and operation of the Business, all on and
subject to the terms and conditions hereinafter set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby unconditionally acknowledged, the parties hereto do hereby agree as
follows:
1. PURCHASE OF ASSETS. Subject to the terms and conditions of this
Agreement:
1.1 Seller agrees to sell, transfer and assign to Buyer at the
Closing (hereinafter defined), free and clear of all liens, claims and
encumbrances whatsoever, except as otherwise specifically set forth on Exhibit A
to this Agreement, and Buyer agrees to purchase from Seller thereon:
(a) All of the assets of Seller set forth on Exhibit B
hereto, including, without limitation, all cash on hand and in banks, accounts
receivable, notes receivable, tax refunds and/or credits, insurance policies and
proceeds receivable, contractual rights and product formulations to any and all
products of the Company, machinery, equipment, furniture, fixtures, leasehold
security deposits and improvements, vehicles, licenses, product inventory,
computers, computer systems, on-site and off-site computer records and computer
software, including, but not limited to, all codes, improvements and
modifications to any such software, customer lists, associate lists, telephone
lists and telephone numbers including the Seller's "800" and other "toll-free"
telephone numbers, product supply contracts, including, but not limited to, all
rights to Enzogenol pursuant to the Manufacturing and Distributing Agreement
dated as of August 14, 1998 by and between Seller and Enzo Nutraceutricals, Ltd.
(the "Enzogenol Contract"), independent associate lists, all shares of capital
stock owned by the Company 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.
<PAGE>
(collectively, the "Subsidiaries"), but excluding Kaire Korea Ltd., and all
other personal property owned or leased by Seller; and
(b) All real property which Seller owns or to which it has
title and all real property or leasehold estates in real property of which
Seller is a lessor or lessee, all of which is also set forth on Exhibit C
hereto; and
(c) All other tangible and intangible assets of Seller
(except any pension or profit sharing plan), including, but not limited to, all
of Seller's rights to the name "Kaire International, Inc.," and "Kaire" and any
and all derivatives thereof and any other product name and all other registered
or unregistered trademarks, tradenames, service marks, patents, logos, and
copyrights of Seller, as well as all of Seller's financial and other books and
records, including, but not limited to, its regulatory and compliance records,
sales information, product information and sales material relating to the
operation of the Business, all of which also are included on Exhibit B, tax
returns as well as any other documents Buyer will need in order to be able to
file a Current Report on Form 8-K following the purchase of the Assets and all
future SEC filings including, but not limited to, all required audited and
unaudited financial statements of the Business (the items referred to in
subparagraphs (a) through (c) hereof hereinafter collectively, the "Assets");
and
(d) Seller will deliver to Buyer at the Closing a bill of
sale to the Assets in the form annexed hereto as Exhibit D (the "Bill of Sale")
and an agreement of assignment and assumption in the form annexed hereto as
Exhibit E (the "Assumption Agreement") or such other appropriate document of
assignment and/or conveyance as may be approved by counsel to the Buyer.
1.2 Seller will assign to Buyer and Buyer will assume at the Closing
only those liabilities of Seller set forth on Exhibit F hereto (hereinafter, the
"Liabilities"). On the Closing Date (hereinafter defined), Buyer will execute
the Assumption Agreement, assuming only the Liabilities. Buyer will not be
liable for any obligations or liabilities of Seller of any kind or nature which
either arose or are based upon any act or omission of Seller prior to the
Closing Date which are not set forth on Exhibit F.
2. PURCHASE PRICE.
2.1 The purchase price (the "Purchase "Price") for the Assets
shall be paid at Closing as follows:
PURCHASE PRICE.
(i) NHTC will issue to the Seller (a) an aggregate of $2,800,000
stated value of shares of its 6% Series E Preferred Stock (the "Series
E Preferred"), par value $.01 per share, $1,000 stated value per share,
of which each outstanding
-2-
<PAGE>
share of Series E Preferred shall pay dividends at the annual rate of 6%
of the stated value payable in cash or shares of Common Stock at the
option of the Company, be redeemable at its stated value at any time by
NHTC and shall be convertible into such number of shares of common
stock, par value $.001 per share (the "Common Stock") of NHTC, as
determined by dividing the stated value of each share of Series E
Preferred being converted by 95% of the average closing bid price of the
Common Stock for the three (3) trading days prior to the date of
conversion of any share of Series E Preferred Stock (the Series E
Preferred also shall contain such other terms, rights, limitations and
preferences as set forth on Exhibit G hereto, to be prepared and filed
with the Secretary of State of the State of Delaware no later than the
Closing Date), and (ii) five (5) year warrants (the "Acquisition
Warrants"), to purchase 200,000 shares of Common Stock at an exercise
price of 110% of the closing bid price of the Common Stock on the date
prior to the Closing Date (which exercise price can be paid, at the
option of the holder, in cash or on a cashless basis by delivering
shares of Common Stock). The form of Acquisition Warrant shall be
annexed hereto as Exhibit H no later than the Closing Date. The shares
of Common Stock issuable upon conversion of the Series E Preferred Stock
and exercise of the Acquisition Warrants shall be subject to certain two
(2) year "lock-ups" with the Company, which shall prevent the sale of
the underlying Common Stock for a period of two (2) years from the
Closing Date;
(ii) Buyer shall pay to Seller each year for a period of five (5)
years ("Buyer Net Income Payments") commencing with the year ending
December 31, 1999, 25% of the Net Income of Buyer (as determined based
upon the year end audited financial statements of Buyer prepared in
accordance with GAAP consistently applied), if the Net Sales of Buyer
(as determined based upon the year-end audited financial statements of
Buyer prepared in accordance with GAAP consistently applied), in any
such year is between $1.00 and $10,000,000; 33% of Buyer's Net Income
if its Net Sales are between $10,000,000 and $15,000,000; 40% of
Buyer's Net Income if its Net Sales are between $15,000,000 and
$40,000,000; and 50% of Buyer's Net Income if its Net Sales are in
excess of $40,000,000; provided, however, notwithstanding anything to
the contrary provided herein or elsewhere, any Buyer Net Income
Payments to be made pursuant to this Section 1.1(a)(ii) shall be
reduced on a dollar-for-dollar basis to the extent of (A) all
indebtedness of the Seller to (1) MW International, Inc., and (B)
Manhattan Drug Company assumed by Buyer pursuant to the Assumption
Agreement; (C) all other direct and/or indirect liabilities, costs or
expenses assumed and/or otherwise incurred by the Buyer and/or NHTC of,
or resulting from, the Seller, 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 the Seller,
and other payments or expenses resulting directly and/or indirectly
from the transactions contemplated by this Agreement;
-3-
<PAGE>
and (D) any reasonable inter-company obligations of the Buyer to NHTC
resulting from third party payments made by NHTC on behalf of (or
allocable proportionately to the Buyer by NHTC) that resulted from the
transactions contemplated by this Agreement; provided, further, that
all amounts set-off against Buyer Net Income Payments are cumulative
and shall if not set-off in the year they are paid (or incurred)
because the Buyer did not have a sufficient amount of Net Income to
set off such payments against (or for any other reason), shall accrue
and be used as a set-off in the earliest possible year or years
thereafter; and
(iii) On the Closing Date NHTC will issue shares of its 6% Series
F Preferred Stock (the "Series F Preferred), par value $.01 per share,
stated value $1,000 per share in exchange for the cancellation of
certain indebtedness of the Buyer as follows: (i) approximately
$150,000 of secured indebtedness owed by Seller to Marden
Rehabilitation Associates, Inc. "Marden"), and (ii) approximately
$200,000 of secured indebtedness owed to Magco, Inc. "Magco"). NHTC
will issue to each such entity such number of shares of the Series E
Preferred Stock as shall equal the quotient determined by dividing such
person's aggregate indebtedness to the Seller being cancelled as set
forth above, or as otherwise agreed to by the parties hereto, by the
stated value of the Series F Preferred. The Series F Preferred shall
have the same general terms as the Series E Preferred including, but
not limited to, conversion formula, redemption rights and dividends,
except the underlying shares of Common Stock shall not be subject to
any lock-up agreement and shall have piggy-back registration rights
(provided that if all of the holders of such underlying shares elect to
have such shares registered earlier, and such holders agree to pay all
costs and expenses associated with registering such shares including,
but not limited to, fees and expenses of the NHTC's counsel and filing
fees, then such holders shall have the right commencing thirty (30)
days following the Closing Date to demand registration of such
underlying shares by the Company on a registration statement on Form
S-3). The terms, preferences, rights and limitations of the Series F
Preferred shall be more fully set forth in the Series F Preferred Stock
Certificate of Designation annexed hereto as Exhibit I (to be attached
hereto and filed with the Secretary of State of the State of Delaware
no later than the Closing Date). Such shares of Series F Preferred
stock shall be issued pursuant to debt conversion agreements with each
of Marden and Magco the form of which is annexed hereto as Exhibit J
(the "Debt Conversion Agreements").
2.2 With respect to the receipt of any shares of Preferred E
Stock, Series F Preferred Stock, the Acquisition Warrants and the Common Stock
issuable upon conversion or exercise thereof, as the case may be, Seller hereby
represents and warrants (and each subsequent assignor prior to receiving any
such shares will represent and warrant in writing to NHTC) as follows:
-4-
<PAGE>
(a) Such stock is being acquired for such Seller's own
account, with no present intention of transferring such securities or
any participation or interest therein (other than the transfer,
pursuant to a valid exemption from registration under the Securities
Act of 1933, as amended), as set forth in Section 2.1(ii) and without
a view to the distribution of any portion thereof, except in
accordance with the Act;
(b) Seller has been given the opportunity to ask questions
of, and receive answers from, NHTC concerning NHTC and the NHTC Stock
and to obtain such additional information, to the extent NHTC
possesses such information or can acquire it without unreasonable
effort or expense, necessary to verify the accuracy of same as the
Purchasers reasonably desire in order to evaluate NHTC and the NHTC
Stock, and the Seller has had the opportunity to discuss any questions
regarding NHTC or the NHTC Stock with its counsel or other advisor;
and
(c) Seller acknowledges and understands that all shares of
the Series E Preferred Stock, Series F Preferred the Acquisition
Warrants and all shares of Common Stock issuable upon conversion or
exercise thereof shall contain a restrictive legend substantially as
follows:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF AGREES FOR
THE BENEFIT OF NATURAL HEALTH TRENDS CORP. (THE "COMPANY") THAT THIS
SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (1) TO
THE COMPANY (UPON CONVERSION, EXCHANGE OR REDEMPTION THEREOF OR
OTHERWISE), (2) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN
ACCORDANCE WITH RULE 144 (IF AVAILABLE) UNDER THE SECURITIES ACT, OR
(3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES."
2.3 The Purchase Price shall be allocated for foreign, federal,
state and local tax purposes by each party among the Assets sold, transferred
and assigned hereunder as determined by the Buyer and presented to the Seller,
in accordance with Section 1060 of the Internal Revenue Code, not later than
ninety (90) days from the Closing Date but in any event not later than fifteen
(15) days prior to the date any party is obligated to file its original tax
return indicating such allocation, not including any extensions of time with
respect thereto. For all pertinent tax purposes each party hereto shall report
the purchase and sale provided for, and with the characterization given these
transactions in this Agreement, to taxing authorities on a basis consistent with
such allocation, and each party agrees not to take a position inconsistent
-5-
<PAGE>
with such allocation. The Buyer and Seller each shall timely file after the
Closing Form 8594 with the Internal Revenue Service detailing this allocation.
In the event that the Buyer determines, in its sole discretion, that any
adjustments to such allocation are necessary, the Seller shall make such
modifications as are necessary in Seller's Form 8594 or any tax report or return
filed or to be filed by the Seller in order to conform to the Buyer's allocation
as adjusted.
3. Termination of Agreement.
3.1 Buyer shall be entitled to terminate this Agreement prior to
or on the Closing Date or as a result of any uncured breach or default of any of
Seller's representations, warranties, covenants or obligations under this
Agreement, or the failure of any condition to Buyer's obligations provided for
in Paragraph 8 of this Agreement.
3.2 Seller shall be entitled to terminate this Agreement on the
Closing Date, as a result of any uncured breach or default of any of Buyer's
representations, warranties, covenants or obligations under this Agreement or
the failure of Paragraph 9 of this Agreement.
3.3 In the event that Buyer or Seller shall claim a breach or
default of any representation, warranty, covenant or obligation of the other of
them under this Agreement, Buyer or Seller shall be required to provide notice
thereof to the breaching party. The breaching party shall have ten (10) days
from such notice to cure any such breach or default. If required hereunder, the
Closing Date shall be extended for a period of up to the remainder of such ten
(10) day cure period, in the event the cure period has not expired on the
Closing Date.
3.4 The termination of this Agreement by Buyer or Seller under
this Paragraph 3 in accordance with the provisions of Paragraphs 3.1 or 3.2
hereof, shall be Buyer's or Seller's, as the case may be, sole and exclusive
remedy against the other for any such breach or default of this Agreement and
thereafter, Buyer and/or Seller shall have no further rights or obligations
under this Agreement, unless any such termination is solely the result of a
willful refusal to consummate this Agreement.
3.5 Notwithstanding any provision in this Agreement to the
contrary, in the event of Buyer's or Seller's willful refusal to consummate this
Agreement, Buyer and Seller hereby agree and acknowledge that any such willful
default may cause irreparable harm and damage to Buyer or Seller, as the case
may be, and may not be remediable by an action at law for damages and the Buyer
or Seller, as the case may be, shall, therefore, be entitled to seek all
equitable remedies therefor, including, without limitation, declaratory
judgment, temporary or permanent injunction, or specific performance of the
provisions of this Agreement, without the necessity of posting a bond therefor,
showing any actual damages, or that monetary damages would not provide an
adequate remedy at law. Such equitable remedies shall not be exclusive remedies
for any such willful default and Buyer and Seller may also avail themselves of
any other remedies available to them.
-6-
<PAGE>
4. Representations and Warranties of Seller. In order to induce Buyer
to enter into and consummate this Agreement, Seller represents and warrants to
Buyer as follows:
4.1 Seller (and each of the subsidiaries (the "Subsidiaries"), in
their respective place of incorporation) is a corporation, duly organized,
validly existing, and in good standing under the laws of the State of Delaware
and has all requisite power and authority to own or lease its properties and
carry on its business as now conducted. Seller (and each of the Subsidiaries) is
duly qualified to transact business and is in good standing in each jurisdiction
in which the failure to so qualify would have a material adverse effect on the
operations of the Business or the Assets.
4.2 Except for the delivery of the requisite consents of Seller's
shareholders and Board of Directors at the Closing as hereinafter provided, all
action on the part of the Subsidiaries, Seller and its Board of Directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, has been properly taken and obtained in compliance with the
terms of the Subsidiaries and the Seller's Certificate of Incorporation and
By-Laws, as amended and applicable law, and this Agreement constitutes a valid
and legally binding obligation of Seller, enforceable in accordance with its
terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium, or other laws affecting generally the enforcement of
creditors' rights and by general principles of equity.
4.3 Other than as set forth on Exhibit K hereto, no consent,
approval, order, authorization, registration, qualification, license, permit,
designation or declaration of, or other filing with or notification to, any
foreign and/or domestic federal, state or local governmental or adhered or
agency (the "Approvals") is required in connection with the authorization,
execution, delivery and performance of this Agreement or the consummation of the
transactions contemplated hereby. All Approvals are now, or as of the closing
Date will be, in full force and effect and are not now, or will not be on the
Closing Date, in default or subject to any notice of default, modification or
limitation, or threat thereof and will be delivered by Seller to Buyer at the
Closing.
4.4 Except as set forth on Exhibit L annexed hereto, there is no
action, suit, proceeding, or investigation pending, or to the knowledge of
Seller, threatened against the Business, any Subsidiary, the Seller and/or their
respective officers, directors and/or shareholders (the "Kaire Affiliates") by
any third party relating to the Business, the Subsidiaries and/or the Assets or
any action, suit, proceeding, or investigation pending, or the knowledge of
Seller, threatened against any Subsidiary, Seller and/or the Kaire Affiliates in
any way relating to the validity of this Agreement or the right of Seller to
enter into or consummate this Agreement and the transactions contemplated
hereby, or that might result, individually or in the aggregate, in any material
adverse change in the Assets of Seller or any of the agreements constituting
part of the Assets, or the condition, affairs, prospects or operations of
Seller, any Subsidiary, or the Business, financially or otherwise, nor is Seller
aware that there is any basis
-7-
<PAGE>
for any of the foregoing. Seller is not a party or subject to the provisions of
any order, writ, injunction, judgment, or decree of any court or governmental
body, agency or authority. There is no action, suit, proceeding, or
investigation by Seller currently pending or which Seller intends to initiate.
4.5 Seller (nor any Subsidiary with respect to any of the
following of any Subsidiary) is not in violation or default of any provision of
its Certificate of Incorporation, By-Laws (each as amended), or of any
instrument, finance, credit and/or loan agreement, debenture, not, judgment,
order, writ, decree, or agreement to which it is a party or by which it is bound
or, to its knowledge, of any provision of federal, state, or local law, rule or
regulation applicable to any Subsidiary, Seller, the Business or the Seller's
Assets. The authorization, execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not result in
any violation or be in conflict with or constitute, with or without the passage
of time or giving of notice, either a default under any such provision,
instrument, finance, credit and/or loan agreement, debenture, note, judgment,
order, writ, decree, agreement, law, rule or regulation, or an event which will
result in the creation of any lien, claim, charge or encumbrance upon the
Business or any of the Assets.
4.6 The Assets listed on Exhibit B attached hereto represent all
of Seller's Assets (except for any pension or profit sharing plan). Seller owns
the Assets and has, sole and marketable right, title and interest to all of the
Assets and will convey the same to Buyer on the Closing Date, free and clear of
all liens, claims, and encumbrances whatsoever (except as set forth on Exhibit A
hereto) and in full compliance with all applicable "Bulk Sales" and similar
laws.
4.7 Seller will deliver an updated Exhibit F to Buyer on the
Closing Date. There will be no material increase in the individual or aggregate
amounts of the Liabilities set forth on such updated Exhibit F from those
Liabilities set forth on Exhibit F attached hereto as of the date hereof.
Exhibit M annexed hereto is a list of all debts, liabilities and obligations of
Seller (the "Non-Assumed Liabilities") which are not being assumed by Buyer or
converted on or prior to the Closing Date (which Exhibit M will provide the
specifics of all such Non-Assumed Liability).
4.8 All machinery and equipment transferred to Buyer at the
Closing as part of the Assets will be in good operating order and condition,
free of all material defects, will have been properly maintained in accordance
with all service and maintenance agreements relating thereto and will be fit for
operation in the ordinary course of business.
4.9 (a) Seller's financial books and records, including, but not
limited to, the Audited Financial Statements (as defined below), relating to its
ownership and operation of the Business are accurate and complete and truthfully
set forth all revenues, expenses, assets, liabilities and other matters
pertaining to the financial condition and operation of the Business.
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(b) The Seller has delivered to the Buyer by the delivery of
Amendment No. 2 to the Registration Statement on Form S-1 (File No.
333-46085) of Kaire International, Inc. dated October 23, 1998
("Amendment No. 2"), balance sheets of the Seller as at December 31,
1997, 1996 and 1995, respectively, and the related statements of
income for the fiscal years then ended, together with the reports of
BDO Seidman & Co. (hereinafter referred to as the "Accountant") with
respect thereto (hereinafter referred to as the "Audited Financial
Statements"). The Audited Financial Statements are true and correct in
all material respects and comply with Regulation S-X of the Securities
Act of 1933, as amended and have been prepared in conformity with
generally accepted accounting principles consistently applied
throughout the periods to which such financial statements relate,
except as otherwise indicated therein or in the reports of the
Accountant with respect thereto. The Audited Financial Statements
fully and fairly present in conformity with such principles as so
applied, the financial position and results of operations of the
Seller, and the changes in its cash flows, at the dates shown and for
the periods therein specified. The balance sheets constituting a part
of the Audited Financial Statements fully and fairly present all
liabilities of Seller of the types normally reflected in balance
sheets as at the dates thereof. All adjustments necessary consistently
to present fully and fairly the financial position and results of
operations of Seller, and the changes in its cash flows, for such
periods have been included in the Audited Financial Statements.
(c) The Seller has also delivered to the Buyer the balance
sheets of the Corporation as and at September 30, 1998 and 1997, and
the related statements of income for the nine (9) months then ended
(hereinafter referred to as the "Interim Financial Statements," and,
together with the Audited Financial Statements, - the "Historical
Financial Statements"). The Interim Financial Statements have been
prepared in conformity with generally accepted accounting principles
consistently applied throughout the periods to which such financial
statements relate. The Interim Financial Statements fully and fairly
present, in conformity with such principles as so utilized, the
financial position and results of operations of the Seller, and the
changes in its cash flows, at the dates shown and for the periods
therein specified. The balance sheets constituting a part of the
Interim Financial statements fully and fairly present all liabilities
of the Seller of the types normally reflected in balance sheets as a
basis comparable to past practice, all adjustments necessary to
presently fully and fairly the financial position and results of
operations of the Seller, and the changes in its cash flows, for such
periods have been included in the Interim Financial Statements.
4.10 Except to the extent set forth in or provided for in the
Historical Financial Statements, this Agreement, or the schedules hereto, Seller
has no liabilities, whether accrued, absolute, contingent, or otherwise, whether
due or to become due and whether the amount thereof is readily ascertainable or
not, and no unrealized or anticipated losses from any unfavorable commitments or
sales of products which, individually or in the aggregate, might have a material
adverse effect on the Business or the Assets.
4.11 Subsequent to September 30, 1998, neither the Seller nor any
subsidiary has, and prior to Closing will not:
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(a) directly and/or indirectly incurred any liability or
obligation or otherwise become liable through a guarantee, assumption
or otherwise under agreements or otherwise, except current liabilities
entered into or incurred in the ordinary course of business consistent
with past practice; issued any notes or other corporate debt
securities or paid or discharged any outstanding indebtedness, except
in the ordinary course of business consistent with past practice; or
waived any of its rights;
(b) directly and/or indirectly mortgaged, pledged or
subjected to any lien or other encumbrance of any kind the Assets;
entered into any lease of real property or buildings; or, except in
the ordinary course of business consistent with past practice, entered
into any lease of machinery or equipment or sold or transferred any
tangible or intangible asset or property;
(c) effected any increase in salary, wages, or other
compensation of any kind, whether current or deferred, to any officer,
employee, consultant, or agent of the Seller, other than routine
increases in the ordinary course of business consistent with past
practice or as was required from time to time by governmental
legislation affecting wages (provided, however, that in no event was
any such increase in compensation made with respect to any of the
officers, employees, consultants or agents of the Seller earning in
excess of $30,000 per annum); made any bonus, pension, profit sharing,
or like payment to any officer, employee, consultant or agency of the
Seller rendering services to Seller;
(d) entered into any salary, wage, severance, or other
compensation agreement with a term of one year or longer with any
officer, employee, consultant or agent of the Seller rendering
services to the Seller or made any contribution to any trust or plan
for the benefit of any such person, except as required by the terms of
plans or arrangements existing prior to such date; and neither the
Seller nor any Subsidiary is a party to any such agreement;
(e) entered into any transaction with respect to the Business
or the Assets other than in the ordinary course of business consistent
with past practice, except in connection with the execution and
performance of this Agreement and the transactions contemplated
hereby; or withdrawn any free cash from any bank account or used any
cash for items other than consistent with past business practices as
reflected in the Seller's books and records;
(f) suffered any damage, destruction, or loss to any of the
Assets (whether or not covered by insurance); or
(g) suffered any change in the Business or Assets which,
individually or in the aggregate, might have a material adverse effect
on the Business and/or the Assets; and, since September 30, 1998,
there has been no occurrence, circumstance or combination thereof
which might be expected to result in any such material adverse effect.
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4.12 The Seller has filed or caused to be filed all federal,
state, municipal and other tax returns, reports and declarations required to be
filed by it on or before the date hereof so as to prevent any valid lien, charge
or encumbrance of any nature on the Assets or impairment of the Business. The
Internal Revenue Service has not examined the federal tax returns of the Seller
for any period subsequent to December 31, ______. Only periods subsequent to
December 31, ______ remain open for assessment of additional federal taxes. All
assessments and charges (including penalties and interest, if any) related to
periods ended on or before December 31, ______ have been paid by the Seller,
including any necessary adjustments with state and local tax authorities, and no
deficiency of payment of any taxes for any period has been asserted by any
taxing authority which remains unsettled at the date hereof. Adequate provision
has been made in the Historical Financial Statements for the payment of all then
accrued and unpaid federal and other taxes, whether or not yet due and payable
and whether or not disputed by the Seller. The Seller has not agreed to the
extension of the statute of limitations with respect to any tax return.
4.13 The Seller does not own any real property utilized in the
Business. Set forth on Exhibit N hereto is a brief description of every lease or
agreement (including, in each case, the annual rental payable and the expiration
date, the cost and depreciation reserve of any leasehold improvements and a
brief description of the property covered) under which the Seller is lessee of,
or holds or operates, any real estate owned by any third party and used in
connection with the Business, and the amounts owed under such leases. Each of
such leases and agreements is in full force and effect and constitutes a legal,
valid and binding obligation of the respective parties thereto. The Seller is
not in default under any such lease or agreement, nor, to the best of the
knowledge of the Seller, is any other party to any such lease or agreement in
default thereunder; and no event has occurred, or is alleged to have occurred,
which constitutes, or with lapse of time or giving or notice or both would
constitute, a default by any other party to any such lease or agreement or a
basis for a class of force majeure or other claim of excusable delay or
non-performance thereunder. There is no condition, whether occurring naturally
or from any cause whatsoever, which would prevent any of the real properties
leased by the Seller and used in connection with the business from having
sufficient subjacent or lateral support in any material respect to support
adequately any structure, nor is any part of the real properties leased by the
Seller in a flood plain area, or affected by any adverse environmental
conditions, including, but not limited to, chemicals or hazardous or
non-hazardous waste which are violative of any environmental laws.
4.14 The Seller does not maintain or sponsor and is not required
to make contributions to any pension, profit-sharing, bonus, incentive, welfare,
or other employee benefit plan covering any employee utilized in the Business.
All pension, profit-sharing, bonus, incentive, welfare, or other employee
benefit plans within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended (hereinafter referred to as "ERISA"), in
which the employees of the Seller utilized in the Business participate (such
plans and related trusts, insurance, and annuity contracts, funding media, and
related agreements and arrangements, other than any "multiemployer plan" (within
the meaning of Section 3(37) of
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ERISA) being hereinafter referred to as the "Benefit Plans," and such
multiemployer plans being hereinafter referred to as the "Multiemployer Plans")
comply in all material respects with all requirements of the Department of Labor
and the Internal Revenue Service promulgated under ERISA and with all other
applicable law. The Seller has not taken or failed to take any action with
respect to either the Benefit Plans or the Multiemployer Plans which might
create any liability on the part of the Seller or the Buyer. Each "fiduciary"
(within the meaning of Section 3(21)(A) of ERISA) as to each Benefit Plan and as
to each Multiemployer Plan has complied in all material respects with the
requirements of ERISA and all other applicable law in respect to each such Plan.
The Seller has furnished to the Buyer copies of all Benefit Plans and of all
documents relating thereto requested by the Buyer, including, without
limitation, financial statements with respect to such Benefit Plans for all
periods in the last three years during which the Seller was a participant in or
was required to make contributions to such Benefit Plans. Such financial
statements are true and correct in all material respects, and none of the
actuarial assumptions underlying such statements have changed since the
respective dates thereof. In addition, as of the date hereof:
(i) No Benefit Plan which is a "defined benefit plan" (within
the meaning of Section 3(35) of ERISA) (hereinafter referred to as the
"Defined Benefit Plans") or Multiemployer Plan has incurred an
"accumulated funding deficiency" (within the meaning of Section 412(a)
of the Internal Revenue Code of 1986, as amended [hereinafter referred
to as the "Code"]), whether or not waived;
(ii) No "reportable event" (within the meaning of Section
4043 of ERISA) has occurred with respect to any Defined Benefit Plan
or any Multiemployer Plan; there have been no terminations of any
Defined Benefit Plan or any Multiemployer Plan or any related trust;
no such termination of any of the foregoing reasonably can be expected
to occur, whether as a consequence of the execution and delivery of
this Agreement, the consummation of the transactions contemplated
herein or therein, or otherwise;
(iii) The Seller has not withdrawn (partially or totally
within the meaning of ERISA) from any Benefit Plan or any
Multiemployer Plan; and neither the execution and delivery of this
Agreement or the consummation of the transactions contemplated herein
or therein will result in the withdrawal (partial or total within the
meaning of ERISA) from any Benefit Plan or Multiemployer Plan, or in
any withdrawal or other liability of any nature to the Seller or the
Buyer under any Benefit Plan or any Multiemployer Plan;
(iv) No "prohibited transaction" (within the meaning of
Section 406 of ERISA or Section 4975(c) of the Code) has occurred with
respect to any Benefit Plan or Multiemployer Plan;
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(v) There is no excess of the aggregate present value of
accrued benefits over the aggregate value of the assets of the Defined
Benefit Plans, and no withdrawal liability of the Seller with respect
to the Multiemployer Plans;
(vi) There are no contributions which are, or hereafter will
be required to have been made to trusts in connection with "defined
contribution plans" (within the meaning of Section 3(34) of ERISA)
with respect to services rendered by employees of the Seller utilized
in the Business prior to the date hereof; and
(vii) Other than claims in the ordinary course for benefits
with respect to the Benefit Plans or the Multiemployer Plans, there
are no actions, suits, or claims pending with respect to any Benefit
Plan or any Multiemployer Plan or any circumstances which might give
rise to any such action, suit, or claims.
4.15 Set forth in Exhibit O attached hereto is a list and
description of all of the Seller's patents, logos, registered and common law
trademarks and tradenames, copyrights, licenses and other similar rights and
applications for each of the foregoing, in each case in any manner utilized in
connection with the Business. The Seller owns all right, title and interest in
and to all such proprietary rights, free and clear of all liens and other
encumbrances of any kind. Such proprietary rights are all of the proprietary
rights of the Seller. No adverse claims have been made, and no dispute has
arisen with respect to any of the said proprietary rights; and the operations of
the Seller and the use by it of its proprietary rights do not involve
infringement or claimed infringement of any patent, trademark, servicemark,
tradename, copyright, license or similar right. To the best of the knowledge of
the Seller, the Seller has not suffered or allowed any of its trade secrets,
know-how or other intellectual or intangible property rights to enter into the
public domain. No other persons or businesses have received from the Seller the
right to use, nor are there any persons or businesses using, any trademark,
service mark, tradename set forth in Schedule O, or any variant thereof, singly
or in combination with any other term, and no persons or businesses otherwise
using any such tradename, or any variant thereof, singly or in combination with
any other term, have ever attempted to restrain the Seller from using such name
or any variant thereof, singly or in combination with any other term.
4.16 The Seller has had no material problem in obtaining, in a
timely manner and at market prices, any and all materials, supplies, equipment,
and service used in connection with the Business including from Horphas Research
Ltd., MW International, Inc. and Manhattan Drug Company, and the Seller has no
reason to believe that the Business may have problems with respect to the
availability of such materials, supplies, equipment, and services.
4.17 Neither the sale by the Seller to Buyer of the Assets nor the
transfer by the Seller to Buyer of the Liabilities as contemplated in this
Agreement, singly, constitutes a "bulk sale" (as that term is defined by the
Uniform Commercial Code) and the completion of the transactions contemplated in
this Agreement, singly or in combination, shall not subject the
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Buyer to any claims relating to or liabilities resulting from the operations or
obligations of the Seller other than those included within the Liabilities.
4.18 The Seller has provided to the Buyer a complete and correct
copy of Amendment No. 2 dated October 23, 1998 (the "Amendment No. 2"), to its
Registration Statement (File No. 333-46085). The Amendment No. 2 is correct and
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements herein or therein not misleading.
4.19 There are no labor problems or unrest existing or, to the
best of Seller's knowledge, threatened against Seller which could adversely
effect the operation of the Business and/or use of the Assets after the Closing
and Seller is not a party to any collectively bargaining agreement.
4.20 Set forth on Exhibit P is a schedule of all insurance
currently in force with respect to the operation of Seller's Business. To
Seller's best knowledge, the insurance set forth on Exhibit M is adequate for
risks normally insured against by companies similarly situated to Seller and
provides coverage for all claims made by any third party against Seller (and its
stockholders, officers, directors, agents, and employees) and Buyer for any
product liability or other risks rendered by or on behalf of Seller prior to the
Closing Date, without any limitation or restriction except as set forth on
Exhibit P. All of such insurance is in full force and effect.
4.21 The use by Seller and each of its Subsidiaries of the
properties and premises used by each of them and any structures situated on any
real property leased by Seller and/or the Subsidiaries is not in violation of
any zoning, environmental, health, safety, fire or other codes or regulations of
any federal, state or local government authority, and Seller and/or the
Subsidiaries has legal and valid occupancy permits, if required, and all other
required licenses, permits or governmental approvals for each of the foregoing
properties and premises. No improvement, fixture or equipment in the properties
or premises owned, leased, used or occupied by Seller and/or the Subsidiaries,
nor the leasehold or occupation with respect thereto, is in violation of any
zoning or building laws. Neither the Seller nor any of the Subsidiaries has
received any notice of violation of any building, fire, health, safety,
environmental or zoning codes or any law, ordinance or regulation of any kind
relating to or affecting Seller's and/or the Subsidiaries properties and
premises, and all such properties and premises are zoned for the purposes for
which such properties and premises are currently being used. Furthermore,
neither the Seller nor any of the Subsidiaries has received formal or informal
notices or notifications of any outstanding requirements or recommendations by
the insurance companies which have issued the insurance policies covering the
property and premises leased by Seller and/or the Subsidiaries or by any board
of fire underwriters or other body exercising similar functions, including,
without limitation, any notice requiring or recommending any repairs or work to
be done on or to any such property or premises.
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4.22 The Seller (and/or its Subsidiaries, as the case may be), has
all domestic and international franchises, licenses, permits and other
governmental and non-governmental approvals necessary to enable it to carry on
the Business as currently conducted (including, without limitation, those
franchises, licenses, permits, and other approvals required by the United States
Food and Drug Administration, the United States Federal Trade Commission, the
Consumer Product Safety Commission, the United States Department of Agriculture,
the United States Postal Service and the United States Environmental Protection
Agency including the "Dietary Supplement Health and Education Act of 1984" and
the "Door-to-Door sale Act" of South Korea and the employees and agents of the
Seller assigned to or otherwise involved in the Business also have all such
franchises, licenses, permits and other governmental and non-governmental
approvals required of them in carrying out their duties on behalf of the Seller.
All such franchises, licenses, permits and other governmental and
non-governmental approvals are in full force and effect, there has been no
default or breach thereunder, and there is no pending or, to the best of the
knowledge of the Seller, threatened proceeding under which any may be revoked,
terminated or suspended. Without limiting the generality of the foregoing, the
Seller is not party to any management contract, collateral agreement or similar
arrangement requiring the approval of any of such organization or any submission
to any of such organization or any background investigation by any of such
organization. The execution and delivery of this Agreement, and the consummation
of the transactions contemplated hereby, will not adversely effect or otherwise
impair the ability of the Buyer as the sole owner of the Assets fully to enjoy
the benefits of any of such franchises, licenses, permits or other governmental
approvals. Set forth on Exhibit Q annexed hereto is a list of the Seller's
ownership interest in each of its Subsidiaries. The Seller has not violated, and
is not alleged to have violated, any law, rule, regulation, judgment,
stipulation, injunction, decree, determination, award or other order of any
government, or governmental agency or instrumentality, domestic or foreign, or
of any Indian Tribe or instrumentality thereof, binding upon the Seller.
(a) Without limiting the generality of the foregoing, neither
the consummation of the transactions contemplated by this Agreement
nor any real property utilized by the Seller in the Business nor any
condition thereon violates any Environmental Law (as hereinafter
defined) and no provision of any such Environmental Laws in any way
affects the consummation of the transactions contemplated by this
Agreement. Neither the Seller, nor any owner of any property utilized
by the Seller in connection with the Business; (i) has filed any
notice under any federal, state or local law, or regulation,
indicating past or present treatment, storage or disposal of a
hazardous or toxic waste or reporting a spill or release of a
hazardous or toxic waste, substance or constituent, or other substance
into the environment, or (ii) has any liability, contingent or
otherwise, under any such law or regulation in connection with any
release of any hazardous or toxic waste, substance or constituent, or
other substance on any such property. No hazardous materials and no
hazardous substances have been generated, treated, stored or disposed
of or placed in violation of any applicable law or regulation on any
such property or, from any such property, on or into any waste
disposal site owned or operated by a third party. All underground
tanks on such properties have been properly registered with or
reported to the appropriate governmental agency or agencies, and none
of such tanks leak.
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(b) For purposes hereof, "Environmental Laws" shall mean any
and all federal, state or local laws, statutes, ordinances, rules,
regulations, order or determinations of any federal, state or local
governmental authority pertaining to the environment, including,
without limitation, the federal Clean Air Act, as amended,
Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, Water Pollution Control Act, as amended,
Superfund Amendments and Reauthorization Act of 1986, as amended,
Hazardous Materials Transportation Act, as amended, National
Environmental Policy Act and all other environmental, conservation or
protection laws.
4.23 Listed and described on Exhibit R attached hereto are all
contracts other than real property leases (the "Contracts"), of the Company. All
of such Contracts are in full force and effect and the Seller has obtained
consents from the parties thereto (other than the Seller), to the assignment of
the particular contracts also listed on Schedule B hereto that Buyer desires to
acquire.
4.24 All of the foregoing representations and warranties of Seller
shall be true and correct as of the Closing Date and Seller will certify same to
Buyer as being true and correct at the Closing as hereinafter provided. All of
the foregoing representations and warranties of Seller will survive the Closing
of the transactions provided for hereunder and shall not be merged therein for a
period of twenty-four (24) months following the Closing Date.
5. Representations and Warranties of Buyer. In order to induce Seller
to enter into and consummate this Agreement, Buyer represents and warrants to
Seller as follows:
5.1 Buyer is a corporation, duly organization, validly existing,
and in good standing under the laws of the State of Delaware and has all
requisite power and authority to own or lease its properties and carry on its
business as now conducted.
5.2 All action on the part of Buyer necessary for the
authorization, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, has been (or prior to the
Closing will be) taken and obtained and at Closing this Agreement constitutes a
valid and legally binding obligation of Buyer, enforceable in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium, or other laws affecting generally the enforcement of
creditors' rights and by general principles of equity.
5.3 The authorization, execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
result in any violation or be in conflict with or constitute, with or without
the passage of time and giving of notice, a default under any provision of
Buyer's Certificate of Incorporation or its By-Laws or any instrument, judgment,
order, writ, decree or agreement to which it is a party or by which its assets
or properties are bound.
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5.4 There is no action, suit, proceeding, or investigation
pending, or to the knowledge of Buyer, currently threatened against Buyer, in
any way relating to the validity of this Agreement or the right of Buyer to
enter into or to consummate this Agreement and the transactions contemplated
hereby.
5.5 All of the foregoing representations and warranties of Buyer
shall be true and correct as of the Closing Date and Buyer will certify same to
Seller as being true and correct at the Closing as hereinafter provided. All of
the foregoing representations and warranties of Buyer will survive the Closing
for a period of twenty-four (24) months of the transactions provided for
hereunder and shall not be merged therein.
6. The Closing. The closing of the sale transaction which is the
subject of this Agreement (the "Closing") shall take place at 10:00 a.m. at the
offices of Gusrae, Kaplan & Bruno, 120 Wall Street, New York, New York 10005
upon the earlier to occur of (i) all of the conditions of the Buyer and Seller
as set forth in Sections 9 and 10, respectively, of this Agreement being
fulfilled or waived, or (ii) March 30, 1998 (the "Closing Date"), or on such
earlier or later date on which Buyer and Seller may mutually agree.
7. Conduct of Seller's Business Prior to Closing. During the period
from the date hereof to the Closing Date, Seller will operate the Business only
in the regular and ordinary course of its business, will preserve its present
relationships with its key employees, customers, suppliers, banks, government
officials and other third parties doing business with Seller and during such
period, it will not, without the consent of Buyer, engage in any conduct or
enter into any transaction which is not in the regular and ordinary course of
its business of operating the Business, including, without limitation, the
following:
(a) Create or incur any mortgage, security interest, lien,
charge, claim or encumbrance of any kind on the Assets, revenues, or
cash flow from the operation of the Business.
(b) Make or become a party to any employment, license,
management agreement (or renew, extend, amend, or modify any of such
agreements) or any other agreement or commitment in any way affecting
the operation of the Business (or renew, extend, amend or modify any
such other agreement or commitment), except in the regular and
ordinary course of Seller's business as to such other agreements or
commitments.
(c) Other than pursuant to employee salaries, consistent with
past payments as reflected on the Seller's books and records for the
prior 12 months, pay or distribute any cash of Seller to any employee,
stockholder, officer, director, principal or affiliate of any such
person or any person or entity owned or controlled, directly or
indirectly, by Seller, or any such person, partner or principal, for
any purpose.
(d) Waive or release any right of substantial value.
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8. Conditions to Obligations of Buyer. The obligations of Buyer to
consummate the transactions provided for under this Agreement are subject to and
conditioned upon the fulfillment, on and as of the Closing Date, of each of the
following conditions. If any of such conditions are not satisfied on and as of
the Closing Date (or earlier, with respect to the condition set forth in
subparagraph (a) hereof), Buyer may terminate this Agreement upon notice to
Seller:
(a) The representations, warranties, covenants and agreements
of Seller in this Agreement shall be true, accurate and complete both
on the date of this Agreement and on the Closing Date and Seller shall
have performed and complied with all agreements, covenants and
conditions required by this Agreement to be performed or complied with
by it prior to or on the Closing Date, and Buyer shall have been
furnished with a certificate of the officers of Seller, dated as of
the Closing Date, certifying to the fulfillment of the foregoing
conditions.
(b) There shall not be any material adverse change in the
financial condition, business or future prospects of Seller (or any of
its Subsidiaries) and there shall be no federal, state or local law,
rule or regulation proposed or enacted (whether domestically or
abroad), or other event or condition of any character, which Buyer
determines may adversely effect the operations of the Business after
the Closing.
(c) Seller shall have received and will deliver to Buyer on
the Closing Date, copies of the requisite consents of its Directors
and shareholders to the transaction contemplated by this Agreement (in
accordance with the Delaware General Corporation Law and any other
applicable law), and Seller shall have distributed in a timely manner
and in required form as required by the Delaware General Corporate Law
all notices to the shareholders of the Seller regarding the
transactions contemplated hereby.
(d) From and after the date hereof and until the Closing
Date, Seller shall have operated the Business diligently and in good
faith and only in the historical regular and ordinary course.
(e) Seller will own all right, title and interest in and to
the Assets on the Closing Date and will sell, transfer and assign the
same to Buyer on the Closing Date, free and clear of all liens,
claims, equities or encumbrances whatsoever, except as set forth on
Exhibit A hereto.
(f) The indemnification agreements (the "Indemnification
Agreements"), the form of which will be annexed hereto on later than
the Closing Date as Exhibit S regarding the Buyer indemnifying certain
officers of the Seller relating to sales tax of Seller have been
agreed to the satisfaction of the Buyer.
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(g) All of the inventory, machinery and equipment comprising
a part of the Assets and/or leased by Seller, will be in good
operating order and condition on the Closing Date, free of all
material defects.
(h) Buyer shall have received, on or prior to the Closing
Date, all Approvals or an opinion of Seller's counsel satisfactory to
Buyer that no such Approvals are so required (including but not
limited to the Enzogenol Agreement).
(i) There will be no pending or threatened action or
proceeding against the Seller or the Business in any way affecting or
challenging the transactions contemplated hereby, except as set forth
on Exhibit L.
(j) Seller will have delivered to Buyer on the Closing Date
all of the documents and other information required by Paragraph 11
hereof.
(k) NHTC, Buyer and its agents shall have completed their due
diligence of the Business and the Assets to their full satisfaction.
(l) NASDAQ shall not have objected directly and/or indirectly
to the closing of the Acquisition and the completion of the
transactions as contemplated in this Agreement (nor shall there be a
delisting possibility).
(m) All requirements of any applicable Bulk Sales laws have
been complied with (or waived by Buyer), to the satisfaction of the
Buyer and its counsel.
(n) NHTC shall, if necessary or required by NASDAQ to avoid
delisting, have obtained shareholder approval at a shareholders'
meeting and distributed proxies and a proxy statement in accordance
with Section 14 of the Securities Exchange Act of 1934, as amended,
and complied with all state and federal rules, regulations and laws.
(o) The required parties shall have entered into the Debt
Conversion Agreements annexed hereto as Exhibit J.
(p) All Exhibits to this Agreement shall have been delivered
and shall be satisfactory to the Buyer.
9. CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligations of Seller
to consummate the transactions provided for under this Agreement are subject to
and conditioned upon the fulfillment, on and as of the Closing Date, of each of
the following conditions. If any of such conditions are not satisfied on and as
of the Closing Date, Seller may terminate this Agreement upon notice to Buyer:
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(a) The representations, warranties, covenants and agreements
of Buyer in this Agreement shall be true, accurate and complete both
on the date of this Agreement and on the Closing Date and Buyer shall
have performed and complied with all agreements, covenants and
conditions required by this Agreement to be performed or complied with
by it prior to or on the Closing Date, and Seller shall have been
furnished with a certificate of the President of Buyer, dated as of
the Closing Date, certifying to the fulfillment of the foregoing
conditions.
(b) Buyer shall have paid the Purchase Price to Seller.
(c) The Indemnification Agreements shall have been entered
into.
(d) The Certificate of Designation for the Series E Preferred
and the Certificate of Designation for the Series F Preferred
(collectively, the Certificate of Designations), shall no later than
the Closing Date have been filed with the Secretary of State of the
State of Delaware.
(e) Buyer will have delivered to Seller on the Closing Date
all of the documents and other information required by Paragraph 10
hereof.
10. Documents to be Delivered by Buyer at Closing. Buyer (or NHTC, if
applicable) will deliver the following documents to Seller at the Closing:
(a) The Certificate signed by the President of Buyer required
by Paragraph 10(a) hereof.
(b) The Assumption Agreement relating to certain liabilities
being assigned and assumed by Buyer, shall have been duly executed by
Buyer.
(c) Stock Certificates representing the Series E Preferred
stock and the Series F Preferred stock NHTC Stock (as provided in
section 2 of this Agreement).
(d) The executed Debt Conversion Agreement.
(e) The Indemnification Agreements.
(f) The Certificate of Designations.
(g) The executed Acquisition Warrant.
(h) Such other documents consistent with the provisions of
this Agreement as counsel for Seller may reasonably request.
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11. Documents to be Delivered by Seller at Closing. Seller will
deliver the following documents to Buyer at the Closing:
(a) An Officers' Certificate signed by the President of the
Seller in form and substance satisfactory to the Buyer.
(b) Copies of the requisite consents of Seller's shareholders
and directors.
(c) The Bill of Sale, duly executed by Seller.
(d) The originals of all of the agreements constituting part
of the Assets and duly executed assignments to Buyer thereof by
delivery of duly executed Assumption Agreements.
(e) General releases of all claims against the Seller, NHTC,
the Buyer and the Assets duly executed by (i) all holders of the
promissory notes (the "Notes") sold to investors in private placements
conducted by May Davis & Co. totaling approximately $1,908,000 in the
aggregate as of September 30, 1998 (as well as documents evidencing
such person's cancellation of their Notes) and proof of filing of
U.C.C.-3s releasing such person's security interests in the Assets;
and (ii) from Marden and Magco.
(f) The original executed consent to the assignment of any
contract, duly executed or, in lieu thereof, a new agreement or a
continuation or modification of any existing agreements between Buyer
and any third party (including, but not limited to, the Enzogenol
Agreement).
(g) The original executed consent of Seller's landlords to
the assignment of the leases (set forth on Exhibit M), together with
an estoppel certificate from such landlords.
(h) A certificate or other written confirmation from Seller's
insurance carrier(s) or their authorized agents that all of the
insurance set forth on Exhibit P has been transferred to Buyer and is
in full force and effect as of the Closing Date.
(i) Updated judgment and lien searches on the Assets as of
the most recent practical date prior to the Closing Date, which must
show no liens, encumbrances, judgments or other clouds of title on the
Assets.
(j) Seller shall deliver to Buyer at the Closing, all books,
records and other documents relating to the Assets and operation of
the Business.
(k) Updated Exhibit F as of the Closing Date.
(l) A Secretary's Certificate and Incumbency Certificate.
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(m) Such other documents consistent with the provisions of
this Agreement as counsel for Buyer may reasonably request.
12. No Shop. In order to induce NHTC and the Buyer to expend the
out-of-pocket costs necessary to conduct its due diligence investigation of
Seller and the Assets and prepare the appropriate documentation for the
transactions contemplated hereby, Seller and each of its principals shall, and
shall cause Seller and its employees, representatives and agents to, immediately
cease discussions or negotiations with any other persons or entities with
respect to any sale, acquisition, merger, joint venture or financing proposals
involving the Assets or capital stock of Seller, and likewise, neither such
principals, Seller nor any of Seller's employees, representatives and agents
shall, during the 120 day period immediately following the date of this
Agreement shall solicit, or entertain unsolicited interests concerning any such
sales, joint ventures, acquisition or financing proposal or similar transaction
involving Kaire or its stockholders.
13. Public Statements. Neither NHTC, Buyer nor Seller shall release
any information concerning this Agreement or the transactions contemplated
hereby which is intended for or may result in the public dissemination thereof,
without first furnishing copies of all documents or scripts of proposed oral
statements to the other party for comment and for the other party's written
consent prior to the release thereof. Buyer and Seller agree not to disclose any
such information to any person except on a "need to know" basis to persons who
are advised of the confidential nature of the information and the potential
penalties for use or disclosure of non-public information. Nothing contained in
this Paragraph 14 shall prohibit either Buyer or Seller from releasing any
information to any governmental authority if required to do so by law.
14. Brokers. Other than as set forth on Exhibit T annexed hereto, the
parties hereto each agree and represent and warrant to the other that no broker
or finder was in any way instrumental or had any part in bring about this
transaction. Each of the parties hereto hereby agrees to defend, indemnify and
hold the other harmless from and against any loss, liability, claim, cost or
expense (including reasonable counsel fees) resulting from any claim that may be
made against the other by any broker, finder or other person or entity claiming
a commission, fee, or other compensation by reason of this transaction based
upon such indemnifying party's acts or omissions. All investment banking,
brokerage and similar fees, if any, set forth on Exhibit T, shall be the sole
responsibility of the party owing such fees.
15. Insurance; Risk of Loss. Seller shall maintain in effect, at its
cost, without modification, all insurance policies currently in effect covering
the Assets and the business from the date hereof through the Closing. Seller
hereby assumes all risk of loss, injury or destruction of the Assets from the
date hereof through the Closing Date. In the event of any loss, injury or
destruction of the Assets prior to the Closing that Buyer determines
substantially impairs the value of the Assets or the Business, or if the
operations of the Business are terminated or interrupted prior to the Closing
other than in the regular and ordinary course of business, Buyer shall have the
right to terminate this Agreement on or before the Closing.
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<PAGE>
16. Miscellaneous.
19.1 This Agreement, including the exhibits hereto, constitutes
the sole and entire agreement between the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements, representations,
warranties, statements, promises, information, arrangements and understandings,
whether oral or written, express or implied between the parties hereto with
respect to the subject matter hereof and may not be changed or modified except
by an instrument in writing signed by the party to be bound thereby.
19.2 All notices, consents, requests, demands and other
communications required or permitted to be given under this Agreement shall be
in writing and delivered personally, receipt acknowledged, or mailed by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the parties hereto as follows (or to such other address as either
of the parties hereto shall specify by notice given in accordance with this
provision) or sent by facsimile transmission (with a copy mailed by first class
mail to the address set forth below (or to such other facsimile number as either
of the parties hereto shall specify by notice given in accordance with this
provision):
If to Buyer:
Natural Health Trends Corp.
250 Park Avenue (10th Floor)
New York, New York 10022
Attention: Joseph P. Grace, President
Facsimile: (203) 222-8479
If to Seller:
Kaire International, Inc.
380 Lashley Street
Longmont, Colorado 80501
Attention: Robert L. Richards, Chief Executive Officer
Facsimile: (303) 682-4236
All such notices, consents, requests, demands and other communications
shall be deemed given when personally delivered as aforesaid, or, if mailed as
aforesaid, on the third business day after the mailing thereof or on the day
actually received, if earlier, except for a notice sent by facsimile
transmission, or a notice of a change of address which shall be effective only
upon receipt.
19.3 Neither party hereto may assign this Agreement or their
respective rights, benefits or obligations hereunder without the written consent
of the other party hereto. This
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Agreement shall be binding upon and inure to the benefit of the parties hereto,
and their successors and permitted assigns. Nothing contained herein is intended
to confer upon any person or entity, other than the parties hereto, or their
respective successors or permitted assigns, any rights, benefits, obligations,
remedies or liabilities under or by reason of this Agreement.
19.4 No waiver of any provision of this Agreement or of any breach
thereof shall be effective unless in writing and signed by the party to be bound
thereby. The waiver by either party hereto of a breach of any provision of this
Agreement or of any representation, warranty, or covenant in this Agreement by
the other party hereto, shall not be construed as a waiver of any subsequent
breach or of any other provision, representation, warranty, or covenant of such
other party, unless the instrument of waiver expressly so provides.
19.5 This Agreement shall be governed by and construed in
accordance with the laws of the State of New York with respect to contracts made
and to be fully performed therein, without regard to the conflicts of laws
principles thereof, except as to applicable federal and state securities laws or
as may otherwise be expressly provided for in any exhibit to this Agreement. The
parties hereto hereby agree that any suit or proceeding arising under this
Agreement or the consummation of the transactions contemplated hereby, shall be
brought solely in a federal or state court located in the City, County and State
of New York, except for any suit or proceeding seeking an equitable remedy
hereunder which may be brought in any court of competent jurisdiction. By its
execution hereof, Seller hereby covenants and irrevocably submitted to the in
personam jurisdiction of the federal and state courts located in the City,
County and State of New York and agrees that any process in any such action may
be served upon it personally, or by certified mail or registered mail upon
Seller or such agent, return receipt requested, with the same full force and
effect as if personally served upon Seller in New York City. The parties hereto
each waive any claim that any such jurisdiction is not a convenient forum for
any such suit or proceeding and any defense or lack of in personam jurisdiction
with respect thereto. In the event of any such action or proceeding, the party
prevailing therein shall be entitled to payment from the other party hereto of
its reasonable counsel fees and disbursements in an amount judicially
determined.
19.6 The parties hereto hereby agree that, at any time and from
time to time after the date hereof and through and after the Closing Date, upon
the reasonable request of either party hereto, they shall do, execute,
acknowledge and deliver, or cause to be done, executed, acknowledged and
delivered, such further acts, deeds, assignments, transfers, conveyances, and
assurances as may be reasonably required to more effectively consummate this
Agreement and the transactions contemplated thereby or to confirm or otherwise
effectuate the provisions of this Agreement.
19.7 Except as expressly provided for by the provisions of this
Agreement or applicable law, each of the parties hereto shall bear all of its
respective costs and expenses incurred in connection with the negotiation,
preparation, execution, consummation, performance
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and/or enforcement of this Agreement, including, without limitation, the fees
and disbursements of their respective counsel, financial advisors and
accountants, it being understood and agreed that all of such costs and expenses
of the Seller shall be paid out of the Purchase Price and not out of the Assets
of the Seller.
19.8 This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which when together, shall
constitute one and the same instrument.
19.9 The Paragraph headings used in this Agreement have been used
for convenience of reference only and are not to be considered in construing or
interpreting this Agreement.
19.10 If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision(s) shall be excluded from
this Agreement and the balance of this Agreement shall remain in full force and
effect.
17. Due Diligence and Requested Information.
(a) The Seller shall afford the Buyer and its officers,
employees, accountants, counsel, investment bankers (and their
counsel) and other authorized representatives reasonable access,
during ordinary business hours, to its properties, books and records,
and shall cause its representatives to furnish to the Buyer such
additional financial and operating data and other information as to
the Business and the Assets as the Buyer may from time to time
reasonably request. The Seller shall hold itself and its employees
available to consult with the Buyer with respect to the Business in
such manner as the Buyer shall from time to time reasonably request in
order for the Buyer fully to investigate the Assets and the Business;
it being understood and agreed that the reasonable expenses of travel
by any such employees required by the Buyer shall be borne by the
Buyer.
(b) In addition to its due diligence obligations set forth
above, Seller will provide to Buyer upon Buyer's request, all
information on a daily basis requested informally to the extent
available regarding sales, available cash, returns and chargebacks,
inventory and similar information.
18. Notification of Certain Matters. Between the date hereof and the
Closing Date, the Seller shall give prompt notice in writing to the Buyer of:
(i) the occurrence, or failure to occur, of any event known to the Seller, which
occurrence or failure would be likely to cause any representation or warranty of
the Seller, contained in this Agreement to be untrue or inaccurate in any
material respect from the date hereof to the Closing, (ii) any notice or other
communication received by the Seller, from any person alleging that the consent
of such person is or may be required in connection with the transactions
contemplated by this Agreement, (iii) any notice or other communication received
by the Seller, from any governmental or
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regulatory agency or authority in connection with the transactions contemplated
by this Agreement, (iv) any actions, suits, claims, investigations or
proceedings known to the Seller, commenced or, to the best of its knowledge,
threatened against the Seller, or relating to or involving the Seller affecting
the Seller or which relate to the Assets and/or consummation of the transactions
contemplated by this Agreement, and (v) any material failure known to the Seller
or any officer, director, employee or agent thereto to comply with or satisfy
any covenants, condition or agreement to be complied with or satisfied by it
hereunder.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals as of the day and year first above written.
ATTEST: NATURAL HEALTH TRENDS CORP.
_____________________________ By:_______________________________
Secretary Joseph P. Grace, President
ATTEST: NHTC ACQUISITION CORP.
_____________________________ By:_______________________________
Secretary Joseph P. Grace, President
ATTEST: KAIRE INTERNATIONAL, INC.
_____________________________ By:_______________________________
Mark D. Woodburn, Secretary Robert L. Richards,
Chief Executive Officer
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<PAGE>
EXHIBITS TABLE
--------------
EXHIBIT TITLE SECTION
- ------- ----- -------
A Permitted Liens 1.1
B Assets 1.1(a)
C Real Property 1.1(b)
D Form of Bill of Sale 1.1(d)
E Form of Assumption Agreement 1.1(d)
F Seller's Liabilities 1.2
G Form of Certificate of Designation
(to be attached as the Closing Date) 2.1(i)
H Form of Acquisition Warrant
(to be attached at the Closing Date) 2.1(i)
I Form of Certificate of Designation
for the Series F Preferred Stock
(to be attached at the Closing Date) 2.1(iii)
J Form of Debt Conversion Agreement
(to be attached at the Closing Date) 2.1(iii)
K Consents, Approvals, Orders, etc. 4.3
L Actions, Suits, Proceedings and Investigations 4.4
M Non-Assumed Liabilities 4.8
N Leases 4.13
O Intellectual Property 4.15
P Insurance 4.20
Q Domestic and International Subsidiaries,
Licenses, Permits and Other Approvals 4.22
R Contracts 4.23
S Form of Indemnification Agreement 8(f)
T Investment Banking, Brokers, Etc. Fees 14
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
NATURAL HEALTH TRENDS CORP.
Pursuant to the provisions of section 607.1006, Florida Statutes,
Natural Health Trends Corp. (the "Corporation") adopts the following articles of
amendment to its articles of incorporation:
I. ARTICLE IV is hereby amended by adding the following as Part G.
PART G
Series E Preferred Stock
One Thousand Seven Hundred Twenty (1,720) of the 1,500,000 authorized
shares of Preferred Stock of the Corporation shall be designated Series E
Preferred Stock (the "Series E Preferred Stock") and shall possess the rights
and privileges set forth below:
A. PAR VALUE STATED VALUE, PURCHASE PRICE AND CERTIFICATES.
1. Each share of Series E Preferred Stock shall have a par value of $.001, and a
stated value (face amount) of One Thousand Dollars ($1,000) (the "Stated
Value").
2. The Series E Preferred Stock shall be offered at a purchase price of One
Thousand Dollars ($1,000) per share.
3. Certificates representing the shares of Series E Preferred Stock purchased
shall be issued by the Corporation to the purchasers immediately upon acceptance
of the subscriptions to purchase such shares.
B. DIVIDENDS.
Holders of the shares of Series E Preferred Stock shall be entitled to receive
out of the assets of the Corporation legally available therefor cash dividends
at the rate of 10% of the Stated Value per annum, payable upon the conversion of
the shares of Common Stock. Such dividend shall be payable in shares of Common
Stock of the Corporation, at the option of the Corporation. If such dividends
are paid in shares of Common Stock, then the number of shares of Common Stock to
be issued on account of the accrued dividends shall be equal to the amount of
the dividend divided by the lower of (i) the Closing Bid Price, as hereinafter
defined, on the date of issuance (the "Fixed Conversion Price") or (ii) 75% of
the Closing Bid Price, for the five (5) trading days preceding the Notice Date,
as hereinafter defined.
nhtc\series-e\art-amd.01
<PAGE>
C. LIQUIDATION PREFERENCE.
1. In the event of any liquidation, dissolution or winding-up of the
Corporation, either voluntary or involuntary (a "Liquidation"), the Holders
of shares of the Series E Preferred Stock then issued and outstanding shall
be entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any payment shall be made to the Holders of shares of the Common
Stock or upon any other series of Preferred Stock of the Corporation junior
to the Series E Preferred Stock, an amount per share equal to the sum of (i)
the Stated Value and (ii) an amount equal to ten percent (10%) of the Stated
Value multiplied by the fraction N/365, where N equals the number of days
elapsed since full payment for the shares of Series E Preferred Stock. If,
upon any Liquidation of the Corporation, the assets of the Corporation
available for distribution to its shareholders shall be insufficient to pay
the Holders of shares of the Series E Preferred Stock and the Holders of any
other series of Preferred Stock with a liquidation preference equal to the
liquidation preference of the Series E Preferred Stock the full amounts to
which they shall respectively be entitled, the Holders of shares of the
Series E Preferred Stock and the Holders of any other series of Preferred
Stock with a liquidation preference equal to the liquidation preference of
the Series E Preferred Stock shall receive all the assets of the Corporation
available for distribution and each such Holder of the Series E Preferred
Stock and the Holders of any other series of preferred stock with a
liquidation preference equal to the liquidation preference of the Series E
Preferred Stock shall share ratably in any distribution in accordance with
the amounts due such shareholders. After payment shall have been made to the
Holders of shares of the Series E Preferred Stock of the full amount to
which they shall be entitled, as aforesaid, the Holders of shares of the
Series E Preferred Stock shall be entitled to no further distributions
thereon and the Holders of shares of the Common Stock and of shares of any
other series of stock of the Corporation shall be entitled to share,
according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its shareholders.
2. A merger or consolidation of the Corporation with or into any other
corporation, or a sale, lease, exchange, or transfer of all or any part of
the assets of the Corporation which shall not in fact result in the
liquidation (in whole or in part) of the Corporation and the distribution of
its assets to its shareholders shall not be deemed to be a voluntary or
involuntary liquidation (in whole or in part), dissolution, or winding-up of
the Corporation.
D. Conversion of Series E Preferred Stock.
The Holders of Series E Preferred Stock shall have the following conversion
rights:
1. RIGHT TO CONVERT. Each share of Series E Preferred Stock shall be
convertible, on the Conversion Dates and at the Conversion Prices set forth
below, into fully paid and nonassessable shares of Common Stock (sometimes
referred to herein as "Conversion Shares").
2. Mechanics of Conversion. Commencing sixty (60) days after the issuance of
the shares of Series E Preferred Stock each Holder of Series E Preferred
Stock who desires to convert the same into shares of Common Stock shall
provide notice (the "Conversion Notice") via telecopy (or an original) to
the Corporation. The certificate or certificates representing the shares of
Series E Preferred Stock for
nhtc\series-e\art-amd.01
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<PAGE>
which conversion is elected, shall accompany the Conversion Notice. The date
upon which a Conversion Notice is received by the Corporation shall be a "Notice
Date."
The Corporation shall use all reasonable efforts to issue and deliver within
five (5) business days after the Notice Date, to such Holder of Series E
Preferred Stock at the address of the Holder on the stock books of the
Corporation, a certificate or certificates for the number of shares of
Common Stock to which the Holder shall be entitled as aforesaid.
3. LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of evidence of
the loss, destruction, theft or mutilation of any Series E Preferred Stock
certificates (the "Certificates") and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Series E Preferred
Stock Certificates of like tenor and date. However, the Corporation shall
not be obligated to re-issue such lost or stolen Series E Preferred Stock
Certificates if the Holder thereof contemporaneously requests the
Corporation to convert such Series E Preferred Stock into Common Stock, in
which event the Corporation shall be entitle to rely on an affidavit of
loss, destruction or theft of the Series E Preferred Stock Certificate or,
in the case of mutilation, tender of the mutilated certificate, and shall
issue the Conversion Shares.
4. CONVERSION PERIOD. The Series E Preferred Stock shall become convertible
into shares of Common Stock at any time commencing sixty (60) days after the
issuance of the shares of Series E Preferred Stock.
5. CONVERSION FORMULA/CONVERSION PRICE. Each share of Series E Preferred Stock
shall be convertible into the number of Conversion Shares based upon a
conversion price (the "Conversion Price") equal to the lower of (i) the
Closing Bid Price of the Common Stock on the date of issuance of the shares
of Series E Preferred Stock or (ii) 75% of the average Closing Bid Price of
the Common Stock for the five (5) trading days immediately preceding the
Notice Date. For purposes hereof, the term "Closing Bid Price" shall mean
the closing bid price on the NASDAQ SmaIlCap Stock Market ("NASDAQ") as
reported by Bloomberg, LP, or if no longer traded thereon, the closing bid
price on the principal national securities exchange on which the Common
Stock is so traded.
(a) In the event that the Corporation shall at any time after the date of
issuance of the Series E Preferred Stock: (i) declare a dividend on the
outstanding Common Stock payable in shares of its capital stock; (ii)
subdivide the outstanding Common Stock; (iii) combine the outstanding Common
Stock into a smaller number of shares; or (iv) issue any shares of its
capital stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Corporation is the continuing corporation), then, in each case, the Fixed
Conversion Price per share in effect at the time of the record date for the
determination of stockholders entitled to receive such dividend or
distribution or of the effective date of such subdivision, combination, or
reclassification shall be adjusted so that it shall equal the price
determined by multiplying such Fixed Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action, and the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to such
action. Such adjustment shall be made successively whenever any event listed
above shall occur and shall become effective
nhtc\series-e\art-amd.01
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<PAGE>
at the close of business on such record date or at the close of business on
the date immediately preceding such effective date, as applicable.
6. AUTOMATIC CONVERSION. Each share of Series E Preferred Stock outstanding
twenty four (24) months from the date of issuance automatically shall be
converted into Common Stock based upon the Conversion Price then in effect,
and such date shall be deemed to be the Notice Date with respect to such
conversion.
7. NO FRACTIONAL SHARES. If any conversion of the Series E Preferred Stock
would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded
and the number of shares of Common Stock issuable upon conversion, if the
aggregate, shall be the next higher number of shares.
8. LIMITATION ON THE ISSUANCE OF SHARES OF COMMON STOCK. In no event shall the
Corporation be required to issue more than 20% of the number of shares of
Common Stock outstanding on the date of issuance of the Series E Preferred
Stock upon the conversion of the shares of Series E Preferred Stock unless
the stockholders of the Corporation approve the issuance of additional
shares of Common Stock upon the conversion of the shares of Series E
Preferred Stock or The NASDAQ Stock Market, Inc. ("NASDAQ") waives the
requirements of Market Place Rule 4460(i)(1)(D). In the event that 20% of
the number of shares of Common Stock outstanding on the date of issuance of
the Series E Preferred Stock have been issued upon the conversion of the
Series E Preferred Stock, and (i) NASDAQ has not waived the requirements of
Market Place Rule 4460(i)(1)(D) or (ii) the stockholders have not approved
the issuance of additional shares of Common Stock, then any shares of Series
E Preferred Stock that remain unconverted shall, at the election of the
Holder, be redeemed by the Corporation at a redemption price equal to 133%
percent of the sum of (i) the face amount of the shares of Series E
Preferred Stock and (ii) an amount equal to any accrued and unpaid dividends
thereon, within five (5) business days of the Holder's election. The
Corporation agrees to take such corporate action as may be necessary to
obtain the approval of the stockholders to issue additional shares of Common
Stock upon the conversion of the shares of Series E Preferred Stock.
9. CONVERSION DEFAULTS.
(a) In the event that the Conversion Shares are not delivered per the written
instructions of the Holder, within five (5) business days after the Notice
Date, then in such event the Corporation shall pay to Holder one percent
(1%) of the Stated Value in cash or shares of Common Stock, based upon the
Conversion Price, at the option of the Purchaser, of the shares of Series E
Preferred Stock being converted per each day after the fifth business day
following the Notice Date that the certificates for the Conversion Shares
are not delivered.
(b) To the extent that the failure of the Corporation to issue the Conversion
Shares is due to the unavailability of authorized but unissued shares of
Common Stock, the provisions of this Section 9 shall not apply but instead
the provisions of Section 10 shall apply.
(c) The Corporation shall make any cash payments in immediately available funds
or issue such shares of Common Stock incurred under this Section 9 within
three (3) business days from the date of
nhtc\series-e\art-amd.01
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<PAGE>
issuance of the applicable shares of Common Stock. Nothing herein shall
limit a Holder's right to pursue actual damages or cancel the conversion for
the Corporation's failure to issue and deliver Common Stock to the Holder
within ten (10) business days after the Notice Date.
(d) If the original certificate(s) representing the Conversion Shares have not
been delivered to the Holder within ten (10) business days after the Notice
Date, the Conversion Notice shall become null and void at the option of the
Holder.
10. LACK OF AUTHORIZED SHARES. If, at any time a Holder submits a Notice of
Conversion and the Corporation does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion
of the shares of Series E Preferred Stock (a "Conversion Default"), the date
of such default being referred to herein as the "Conversion Default Date"),
the Corporation shall issue to the Holder all of the shares of Common Stock
which are available, and the Notice of Conversion as to any shares of Series
E Preferred Stock requested to be converted but not converted (the
"Unconverted Shares"), upon Holder's sole option. may be deemed null and
void. The Corporation shall provide notice of such Conversion Default
("Notice of Conversion Default") to all existing Holders of outstanding
shares of Series E Preferred Stock, by facsimile, within one (1) business
day of such default (with the original delivered by overnight or two day
courier), and the Holder shall give notice to the Corporation by facsimile
within five (5) business days of receipt of the original Notice of
Conversion Default (with the original delivered by overnight or two day
courier) of its election to either nullify or confirm the Notice of
Conversion.
The Corporation agrees to pay all Holders of outstanding shares of Series E
Preferred Stock payments for a Conversion Default ("Conversion Default
Payments") in the amount of (N/365) x (.24) x the initial Stated Value of
the outstanding and/or tendered but not converted shares of Series E
Preferred Stock held by each Holder where N = the number of days from the
Conversion Default Date to the date (the "Authorization Date") that the
Corporation authorizes a sufficient number of shares of Common Stock to
effect conversion of all remaining shares of Series E Preferred Stock by the
fifth day of the following calendar month. The Corporation shall send notice
("Authorization Notice") to each Holder of outstanding shares of Series E
Preferred Stock that additional shares of Common Stock have been authorized,
the Authorization Date and the amount of Holder's accrued Conversion Default
Payments. The accrued Conversion Default Payments shall be paid in cash or
shall be convertible into shares of Common Stock at the Conversion Price, at
the Holder's option, payable as follows: (i) in the event Holder elects to
take such payment in cash, cash payments shall be made to such Holder or
(ii) in the event that the Holder elects to take such payment in Common
Stock, the Holder may convert such payment amount into Common Stock at the
Conversion Price at anytime after the fifth day of the calendar month
following the month in which the Authorization Notice was received, until
the expiration of the twenty four month (24) conversion period.
Nothing herein shall limit the Holder's right to pursue actual damages for the
Corporation's failure to maintain a sufficient number of authorized shares
of Common Stock.
11. LIMITATION ON CONVERSION. Except in the case of the provisions contained in
Section 6, in no event shall the Holder be entitled to convert any shares of
Series E Preferred Stock in excess of that number of shares of Series E
Preferred Stock upon conversion of which the sum of(l) the number
nhtc\series-e\art-amd.01
-5-
<PAGE>
of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed
beneficially owned through the ownership of the unconverted portion of the
shares of Series E Preferred Stock), and (2) the number of shares of Common
Stock issuable upon the conversion of the shares of Series E Preferred Stock
with respect to which the determination of this provision is being made,
would result in beneficial ownership by the Holder and its affiliates of
more than 4.9% of the outstanding shares of Common Stock of the Corporation.
For purposes of this provision, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13 D-G thereunder, except as otherwise provided in
clause (1) above.
12. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares
of Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series E Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all then outstanding shares of Series E Preferred Stock; and if at any time
the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series E Preferred Stock, the Corporation will take such corporate action as
may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
E. VOTING. Except as otherwise provided below or by the Florida
Statutes, the Holders of the Series E Preferred Stock shall have no voting power
whatsoever, and no Holder of Series E Preferred Stock shall vote or otherwise
participate in any proceeding in which action shall be taken by the Corporation
or the shareholders thereof or be entitled to notification as to any meeting of
the Board of Directors or the shareholders.
F. PROTECTIVE PROVISIONS. So long as shares of Series E Preferred
Stock are outstanding, the Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by Jaw) of the Holders of at
least seventy-five percent (75%) of the then outstanding shares of Series E
Preferred Stock:
1. alter or change the rights, preferences or privileges of the Series E
Preferred Stock so as to affect adversely the Series E Preferred Stock;
2. do any act or thing not authorized or contemplated by this Article IV which
would result in taxation of the Holders of shares of the Series E Preferred
Stock under Section 305 of the Internal Revenue Code of 1986, as amended (or
any comparable provision of the Internal Revenue Code as hereafter from time
to time amended); or
3. enter into a merger in which the Corporation is not the surviving
corporation; provided, however, that the provisions of this subparagraph (3)
shall not be applicable to any such merger if the authorized capital stock
of the surviving corporation immediately after such merger shall include
only classes or series of stock for which no such consent or vote would have
been required pursuant to this section if such class or series had been
authorized by the Corporation immediately prior to such merger or which have
the same rights, preferences and limitations and authorized amount as a
class or series of stock of the Corporation authorized (with such consent or
vote of the Series E
nhtc\series-e\art-amd.01
-6-
<PAGE>
Preferred Stock) prior to such merger and continuing as an authorized class
or series at the time thereof.
G. STATUS OF CONVERTED STOCK. In the event any shares of Series E
Preferred Stock shall be converted as contemplated by this Article IV, the
shares so converted shall be canceled, shall return to the status of authorized
but unissued Preferred Stock of no designated class or series, and shall not be
issuable by the Corporation as Series E Preferred Stock.
H. Taxes. All shares of Common Stock issued upon conversion of
Series E Preferred Stock will be validly issued, fully paid and nonassessable.
The Corporation shall pay any and all documentary stamp or similar issue or
transfer taxes that may be payable in respect of any issue or delivery of shares
of Common Stock on conversion of Series E Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Series E Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such transfer has paid to the Corporation the
amount of any such tax or has established to the satisfaction of the Corporation
that such tax has been paid or that no such tax is payable. The Corporation
shall adjust the amount of dividends paid or accrued so as to indemnify the
Holders of Series E Preferred Stock against any withholding or similar tax in
respect of such dividends.
nhtc\series-e\art-amd.01
-7-
<PAGE>
II. These Articles of Amendment of Articles of Incorporation were adopted by the
Board of Directors without shareholder action and shareholder action was not
required on August __, 1998.
Signed on August ___, 1998
NATURAL HEALTH TRENDS CORP.
By: ______________________
Name: Sir Brian Wolfson
Title: Chairman
nhtc\series-e\art-amd.01
-8-
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
NATURAL HEALTH TRENDS CORP.
Pursuant to the provisions of section 607.1006, Florida Statutes,
Natural Health Trends Corp. (the "Corporation") adopts the following articles of
amendment to its articles of incorporation:
I. ARTICLE IV is hereby amended by adding the following as Part H
PART H
Series F Preferred Stock
Two Thousand Eight Hundred (2,800) of the 1,500,000 authorized shares
of Preferred Stock of the Corporation shall be designated Series F Preferred
Stock (the "Series F Preferred Stock") and shall possess the rights and
privileges set forth below:
A. PAR VALUE STATED VALUE, PURCHASE PRICE AND CERTIFICATES.
1. Each share of Series F Preferred Stock shall have a par
value of $.001, and a stated value (face amount) of One Thousand Dollars
($1,000) (the "Stated Value").
2. The Series F Preferred Stock shall be offered at a purchase
price of One Thousand ($1,000) Dollars per share.
3. Certificates representing the shares of Series F Preferred
Stock purchased shall be issued by the Corporation to the purchasers immediately
upon acceptance of the subscriptions to purchase such shares.
B. DIVIDENDS.
Holders of the shares of Series F Preferred Stock shall be entitled to
receive out of the assets of the Corporation legally available therefor cash
dividends at the rate of six (6%) percent of the Stated Value per annum, payable
upon the conversion of the shares of Common Stock. Such dividend shall be
payable in shares of Common Stock of the Corporation, at the option of the
Corporation. If such dividends are paid in shares of Common Stock, then the
number of shares of Common Stock to be issued on account of the accrued
dividends shall be equal to the
<PAGE>
amount of the dividend divided by 95% of the Closing Bid Price, for the three
(3) trading days preceding the Notice Date, as hereinafter defined.
C. LIQUIDATION PREFERENCE.
1. In the event of any liquidation, dissolution or winding-up
of the Corporation, either voluntary or involuntary (a "Liquidation"), the
Holders of shares of the Series F Preferred Stock then issued and outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any payment shall be made to the Holders of shares of the Common Stock or
upon any other series of Preferred Stock of the Corporation expressly junior to
the Series F Preferred Stock, an amount per share equal to the sum of (i) the
Stated Value and (ii) an amount equal to ten (10%) percent of the Stated Value
multiplied by the fraction N/365, where N equals the number of days elapsed
since full payment for the shares of Series F Preferred Stock. After payment
shall have been made to the Holders of shares of the Series F Preferred Stock of
the full amount to which they shall be entitled, as aforesaid, the Holders of
shares of the Series F Preferred Stock shall be entitled to no further
distributions thereon and the Holders of shares of the Common Stock and of
shares of any other series of stock of the Corporation shall be entitled to
share, according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its shareholders.
2. A merger or consolidation of the Corporation with or into
any other corporation, or a sale, lease, exchange, or transfer of all or any
part of the assets of the Corporation which shall not in fact result in the
liquidation (in whole or in part) of the Corporation and the distribution of its
assets to its shareholders shall not be deemed to be a voluntary or involuntary
liquidation (in whole or in part), dissolution, or winding-up of the
Corporation.
D. CONVERSION OF SERIES F PREFERRED STOCK.
The Holders of Series F Preferred Stock shall have the following
conversion rights:
1. RIGHT TO CONVERT. Each share of Series F Preferred Stock
shall be convertible, on the Conversion Dates and at the Conversion Prices set
forth below, into fully paid and nonassessable shares of Common Stock (sometimes
referred to herein as "Conversion Shares").
2. MECHANICS OF CONVERSION. Commencing sixty (60) days after
the issuance of the shares of Series F Preferred Stock each Holder of Series F
Preferred Stock who desires to convert the same into shares of Common Stock
shall provide notice (the "Conversion Notice") via telecopy (or an original) to
the Corporation. The certificate or certificates representing the shares of
Series F Preferred Stock for which conversion is elected, shall accompany the
Conversion Notice. The date upon which a Conversion Notice is received by the
Corporation shall be a "Notice Date."
-2-
<PAGE>
The Corporation shall use all reasonable efforts to issue and deliver
to such Holder of Series F Preferred Stock at the address of the Holder on the
stock books of the Corporation, a certificate or certificates for the number of
shares of Common Stock to which the Holder shall be entitled as aforesaid.
3. LOST OR STOLEN CERTIFICATES. Upon receipt by the
Corporation of evidence of the loss, destruction, theft or mutilation of any
Series F Preferred Stock certificates (the "Certificates") and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Series F Preferred
Stock Certificates of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost or stolen Series F Preferred Stock Certificates
if the Holder thereof contemporaneously requests the Corporation to convert such
Series F Preferred Stock into Common Stock, in which event the Corporation shall
be entitle to rely on an affidavit of loss, destruction or theft of the Series F
Preferred Stock Certificate or, in the case of mutilation, tender of the
mutilated certificate, and shall issue the Conversion Shares.
4. CONVERSION PERIOD. The Series F Preferred Stock shall
become convertible into shares of Common Stock at any time commencing sixty (60)
days after the issuance of the shares of Series F Preferred Stock.
5. CONVERSION FORMULA/CONVERSION PRICE. Each share of Series F
Preferred Stock shall be convertible into the number of Conversion Shares based
upon a conversion price (the "Conversion Price") equal to 95% of the average
Closing Bid Price of the Common Stock for the three (3) trading days immediately
preceding the Notice Date. For purposes hereof, the term "Closing Bid Price"
shall mean the closing bid price on the NASDAQ SmallCap Stock Market system
("NASDAQ") as reported by Bloomberg, LP, or if no longer traded thereon, the
closing bid price on the principal national securities exchange on which the
Common Stock is so traded.
6. NO FRACTIONAL SHARES. If any conversion of the Series F
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
if the aggregate, shall be the next higher number of shares.
7. LIMITATION ON THE ISSUANCE OF SHARES OF COMMON STOCK. In no
event shall the Corporation be required to issue more than in the aggregate
twenty (20%) percent of the number of shares of Common Stock outstanding (as
determined on the date of issuance of the Series F Preferred Stock) upon the
conversion of the shares of Series F Preferred Stock, the Series G Preferred
Stock and the Series H Preferred Stock and warrants to purchase 200,000 shares
of Common Stock issued to Kaire International, Inc. (collectively, the
"Acquisition Securities"), unless the stockholders of the Corporation approve
the issuance of additional shares of Common Stock upon the conversion and/or
exercise of the Acquisition Securities, or the NASDAQ Stock Market, Inc.
("NASDAQ") waives the requirements of Market Place Rule
-3-
<PAGE>
4460(i)(1)(D). The Corporation agrees to use its best efforts to take such
corporate action as may be necessary to obtain the approval of the stockholders
to issue additional shares of Common Stock upon the conversion of the shares of
Series F Preferred Stock.
8. REDEMPTION BY THE COMPANY. At any time after issuance, and
from time to time, the Series F Preferred Stock, in whole or in part, at the
election of the Corporation, may be redeemed by the Corporation at a redemption
price equal to the sum of (i) the Stated Value of the shares of Series F
Preferred Stock being redeemed, and (ii) an amount equal to any accrued and
unpaid dividends thereon, within five (5) business days of the Corporation's
election.
9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series F Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of Series F Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series F Preferred Stock, the Corporation will take such corporate action as may
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
E. VOTING. Except as otherwise provided below or by the Florida
Statutes, the Holders of the Series F Preferred Stock shall have no voting power
whatsoever, and no Holder of Series F Preferred Stock shall vote or otherwise
participate in any proceeding in which action shall be taken by the Corporation
or the shareholders thereof or be entitled to notification as to any meeting of
the Board of Directors or the shareholders.
F. STATUS OF CONVERTED STOCK. In the event any shares of Series F
Preferred Stock shall be converted as contemplated by this Article IV, the
shares so converted shall be canceled, shall return to the status of authorized
but unissued Preferred Stock of no designated class or series, and shall not be
issuable by the Corporation as Series F Preferred Stock.
G. TAXES. All shares of Common Stock issued upon conversion of Series F
Preferred Stock will be validly issued, fully paid and nonassessable. The
Corporation shall pay any and all documentary stamp or similar issue or transfer
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series F Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Series F Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such transfer has paid to the Corporation the
amount of any such tax or has established to the satisfaction of the Corporation
that such tax has been paid or that no such tax is payable. The Corporation
shall adjust the amount of dividends paid or accrued so as to indemnify the
Holders of Series F Preferred Stock against any withholding or similar tax in
respect of such dividends.
-4-
<PAGE>
II. These Articles of Amendment of Articles of Incorporation were adopted by the
Board of Directors without shareholder action and shareholder action was not
required on _____________________, 1999.
Signed on _____________, 1999
NATURAL HEALTH TRENDS CORP.
By:_________________________________
Joseph P. Grace, President
-5-
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
NATURAL HEALTH TRENDS CORP.
Pursuant to the provisions of section 607.1006, Florida Statutes,
Natural Health Trends Corp. (the "Corporation") adopts the following articles of
amendment to its articles of incorporation:
I. ARTICLE IV is hereby amended by adding the following as Part I
PART I
Series G Preferred Stock
Three Hundred and Fifty (350) of the 1,500,000 authorized shares of
Preferred Stock of the Corporation shall be designated Series G Preferred Stock
(the "Series G Preferred Stock") and shall possess the rights and privileges set
forth below:
A. PAR VALUE STATED VALUE, PURCHASE PRICE AND CERTIFICATES.
1. Each share of Series G Preferred Stock shall have a par
value of $.001, and a stated value (face amount) of One Thousand Dollars
($1,000) (the "Stated Value").
2. The Series G Preferred Stock shall be offered at a purchase
price of One Thousand ($1,000) Dollars per share.
3. Certificates representing the shares of Series G Preferred
Stock purchased shall be issued by the Corporation to the purchasers immediately
upon acceptance of the subscriptions to purchase such shares.
B. DIVIDENDS.
Holders of the shares of Series G Preferred Stock shall be entitled to
receive out of the assets of the Corporation legally available therefor cash
dividends at the rate of six (6%) percent of the Stated Value per annum, payable
upon the conversion of the shares of Common Stock. Such dividend shall be
payable in shares of Common Stock of the Corporation, at the option of the
Corporation. If such dividends are paid in shares of Common Stock, then the
number of shares of Common Stock to be issued on account of the accrued
dividends shall be equal to the
<PAGE>
amount of the dividend divided by 95% of the Closing Bid Price, for the three
(3) trading days preceding the Notice Date, as hereinafter defined.
C. LIQUIDATION PREFERENCE.
1. In the event of any liquidation, dissolution or winding-up
of the Corporation, either voluntary or involuntary (a "Liquidation"), the
Holders of shares of the Series G Preferred Stock then issued and outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any payment shall be made to the Holders of shares of the Common Stock or
upon any other series of Preferred Stock of the Corporation expressly junior to
the Series G Preferred Stock, an amount per share equal to the sum of (i) the
Stated Value and (ii) an amount equal to six (6%) percent of the Stated Value
multiplied by the fraction N/365, where N equals the number of days elapsed
since full payment for the shares of Series G Preferred Stock. After payment
shall have been made to the Holders of shares of the Series G Preferred Stock of
the full amount to which they shall be entitled, as aforesaid, the Holders of
shares of the Series G Preferred Stock shall be entitled to no further
distributions thereon and the Holders of shares of the Common Stock and of
shares of any other series of stock of the Corporation shall be entitled to
share, according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its shareholders.
2. A merger or consolidation of the Corporation with or into
any other corporation, or a sale, lease, exchange, or transfer of all or any
part of the assets of the Corporation which shall not in fact result in the
liquidation (in whole or in part) of the Corporation and the distribution of its
assets to its shareholders shall not be deemed to be a voluntary or involuntary
liquidation (in whole or in part), dissolution, or winding-up of the
Corporation.
D. CONVERSION OF SERIES G PREFERRED STOCK.
The Holders of Series G Preferred Stock shall have the following
conversion rights:
1. RIGHT TO CONVERT. Each share of Series G Preferred Stock
shall be convertible, on the Conversion Dates and at the Conversion Prices set
forth below, into fully paid and nonassessable shares of Common Stock (sometimes
referred to herein as "Conversion Shares").
2. MECHANICS OF CONVERSION. Commencing sixty (60) days after
the issuance of the shares of Series G Preferred Stock each Holder of Series G
Preferred Stock who desires to convert the same into shares of Common Stock
shall provide notice (the "Conversion Notice") via telecopy (or an original) to
the Corporation. The certificate or certificates representing the shares of
Series G Preferred Stock for which conversion is elected, shall accompany the
Conversion Notice. The date upon which a Conversion Notice is received by the
Corporation shall be a "Notice Date."
-2-
<PAGE>
The Corporation shall use all reasonable efforts to issue and deliver
to such Holder of Series G Preferred Stock at the address of the Holder on the
stock books of the Corporation, a certificate or certificates for the number of
shares of Common Stock to which the Holder shall be entitled as aforesaid.
3. LOST OR STOLEN CERTIFICATES. Upon receipt by the
Corporation of evidence of the loss, destruction, theft or mutilation of any
Series G Preferred Stock certificates (the "Certificates") and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Series G Preferred
Stock Certificates of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost or stolen Series G Preferred Stock Certificates
if the Holder thereof contemporaneously requests the Corporation to convert such
Series G Preferred Stock into Common Stock, in which event the Corporation shall
be entitle to rely on an affidavit of loss, destruction or theft of the Series G
Preferred Stock Certificate or, in the case of mutilation, tender of the
mutilated certificate, and shall issue the Conversion Shares.
4. CONVERSION PERIOD. The Series G Preferred Stock shall
become convertible into shares of Common Stock at any time commencing sixty (60)
days after the issuance of the shares of Series G Preferred Stock.
5. CONVERSION FORMULA/CONVERSION PRICE. Each share of Series G
Preferred Stock shall be convertible into the number of Conversion Shares based
upon a conversion price (the "Conversion Price") equal to 95% of the average
Closing Bid Price of the Common Stock for the three (3) trading days immediately
preceding the Notice Date. For purposes hereof, the term "Closing Bid Price"
shall mean the closing bid price on the NASDAQ SmallCap Stock Market system
("NASDAQ") as reported by Bloomberg, LP, or if no longer traded thereon, the
closing bid price on the principal national securities exchange on which the
Common Stock is so traded.
6. NO FRACTIONAL SHARES. If any conversion of the Series G
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
if the aggregate, shall be the next higher number of shares.
7. LIMITATION ON THE ISSUANCE OF SHARES OF COMMON STOCK. In no
event shall the Corporation be required to issue more than in the aggregate
twenty (20%) percent of the number of shares of Common Stock outstanding (as
determined on the date of issuance of the Series G Preferred Stock) upon the
conversion of the shares of Series G Preferred Stock, the Series F Preferred
Stock and the Series H Preferred Stock and warrants to purchase 200,000 shares
of Common Stock issued to Kaire International, Inc. (collectively, the
"Acquisition Securities"), unless the stockholders of the Corporation approve
the issuance of additional shares of Common Stock upon the conversion and/or
exercise of the Acquisition Securities, or the NASDAQ Stock Market, Inc.
("NASDAQ") waives the requirements of Market Place Rule
-3-
<PAGE>
4460(i)(1)(D). The Corporation agrees to use its best efforts to take such
corporate action as may be necessary to obtain the approval of the stockholders
to issue additional shares of Common Stock upon the conversion of the shares of
Series G Preferred Stock.
8. REDEMPTION BY THE COMPANY. At any time after issuance, and
from time to time, the Series G Preferred Stock, in whole or in part, at the
election of the Corporation, may be redeemed by the Corporation at a redemption
price equal to the sum of (i) the Stated Value of the shares of Series G
Preferred Stock being redeemed, and (ii) an amount equal to any accrued and
unpaid dividends thereon, within five (5) business days of the Corporation's
election.
9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series G Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of Series G Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series G Preferred Stock, the Corporation will take such corporate action as may
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
E. VOTING. Except as otherwise provided below or by the Florida
Statutes, the Holders of the Series G Preferred Stock shall have no voting power
whatsoever, and no Holder of Series G Preferred Stock shall vote or otherwise
participate in any proceeding in which action shall be taken by the Corporation
or the shareholders thereof or be entitled to notification as to any meeting of
the Board of Directors or the shareholders.
F. STATUS OF CONVERTED STOCK. In the event any shares of Series G
Preferred Stock shall be converted as contemplated by this Article IV, the
shares so converted shall be canceled, shall return to the status of authorized
but unissued Preferred Stock of no designated class or series, and shall not be
issuable by the Corporation as Series G Preferred Stock.
G. TAXES. All shares of Common Stock issued upon conversion of Series G
Preferred Stock will be validly issued, fully paid and nonassessable. The
Corporation shall pay any and all documentary stamp or similar issue or transfer
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series G Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Series G Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such transfer has paid to the Corporation the
amount of any such tax or has established to the satisfaction of the Corporation
that such tax has been paid or that no such tax is payable. The Corporation
shall adjust the amount of dividends paid or accrued so as to indemnify the
Holders of Series G Preferred Stock against any withholding or similar tax in
respect of such dividends.
-4-
<PAGE>
II. These Articles of Amendment of Articles of Incorporation were adopted by the
Board of Directors without shareholder action and shareholder action was not
required on _____________________, 1999.
Signed on _____________, 1999
NATURAL HEALTH TRENDS CORP.
By:_________________________________
Joseph P. Grace, President
-5-
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
NATURAL HEALTH TRENDS CORP.
Pursuant to the provisions of section 607.1006, Florida Statutes,
Natural Health Trends Corp. (the "Corporation") adopts the following articles of
amendment to its articles of incorporation:
I. ARTICLE IV is hereby amended by adding the following as Part J
PART J
Series H Preferred Stock
Four Thousand (4,000) of the 1,500,000 authorized shares of Preferred
Stock of the Corporation shall be designated Series H Preferred Stock (the
"Series H Preferred Stock") and shall possess the rights and privileges set
forth below:
A. PAR VALUE STATED VALUE, PURCHASE PRICE AND CERTIFICATES.
1. Each share of Series H Preferred Stock shall have a par
value of $.001, and a stated value (face amount) of One Thousand Dollars
($1,000) (the "Stated Value").
2. The Series H Preferred Stock shall be offered at a purchase
price of One Thousand Dollars ($1,000) per share.
3. Certificates representing the shares of Series H Preferred
Stock purchased shall be issued by the Corporation to the purchasers immediately
upon acceptance of the subscriptions to purchase such shares.
B. DIVIDENDS.
Holders of the shares of Series H Preferred Stock shall be entitled to
receive out of the assets of the Corporation legally available therefor cash
dividends at the rate of eight (8%) percent of the Stated Value per annum,
payable upon the conversion of the shares of Common Stock. Such dividend shall
be payable in shares of Common Stock of the Corporation, at the option of the
Corporation. If such dividends are paid in shares of Common Stock, then the
number of shares of Common Stock to be issued on account of the accrued
dividends shall be
<PAGE>
equal to the amount of the dividend divided by the lower of (i) $______________
(the "Fixed Conversion Price"), or (ii) seventy-five (75%) percent of the
Closing Bid Price for the five (5) trading days preceding the Notice Date, as
hereinafter defined.
C. LIQUIDATION PREFERENCE.
1. In the event of any liquidation, dissolution or winding-up
of the Corporation, either voluntary or involuntary (a "Liquidation"), the
Holders of shares of the Series H Preferred Stock then issued and outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any payment shall be made to the Holders of shares of the Common Stock or
upon any other series of Preferred Stock of the Corporation junior to the Series
H Preferred Stock, an amount per share equal to the sum of (i) the Stated Value
and (ii) an amount equal to ten (10%) percent of the Stated Value multiplied by
the fraction N/365, where N equals the number of days elapsed since full payment
for the shares of Series H Preferred Stock. If, upon any Liquidation of the
Corporation, the assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the Holders of shares of the Series H
Preferred Stock and the Holders of any other series of Preferred Stock with a
liquidation preference equal to the liquidation preference of the Series H
Preferred Stock the full amounts to which they shall respectively be entitled,
the Holders of shares of the Series H Preferred Stock and the Holders of any
other series of Preferred Stock with a liquidation preference equal to the
liquidation preference of the Series H Preferred Stock shall receive all the
assets of the Corporation available for distribution and each such Holder of the
Series H Preferred Stock and the Holders of any other series of preferred stock
with a liquidation preference equal to the liquidation preference of the Series
H Preferred Stock shall share ratably in any distribution in accordance with the
amounts due such shareholders. After payment shall have been made to the Holders
of shares of the Series H Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the Holders of shares of the Series H Preferred Stock
shall be entitled to no further distributions thereon and the Holders of shares
of the Common Stock and of shares of any other series of stock of the
Corporation shall be entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available for
distribution to its shareholders.
2. A merger or consolidation of the Corporation with or into
any other corporation, or a sale, lease, exchange, or transfer of all or any
part of the assets of the Corporation which shall not in fact result in the
liquidation (in whole or in part) of the Corporation and the distribution of its
assets to its shareholders shall not be deemed to be a voluntary or involuntary
liquidation (in whole or in part), dissolution, or winding-up of the
Corporation.
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<PAGE>
D. CONVERSION OF SERIES H PREFERRED STOCK.
The Holders of Series H Preferred Stock shall have the following
conversion rights:
1. RIGHT TO CONVERT. Each share of Series H Preferred Stock
shall be convertible, on the Conversion Dates and at the Conversion Prices set
forth below, into fully paid and nonassessable shares of Common Stock (sometimes
referred to herein as "Conversion Shares").
2. MECHANICS OF CONVERSION. Commencing sixty (60) days after
the issuance of the shares of Series H Preferred Stock each Holder of Series H
Preferred Stock who desires to convert the same into shares of Common Stock
shall provide notice (the "Conversion Notice") via telecopy (or an original) to
the Corporation. The certificate or certificates representing the shares of
Series H Preferred Stock for which conversion is elected, shall accompany the
Conversion Notice. The date upon which a Conversion Notice is received by the
Corporation shall be a "Notice Date."
The Corporation shall use all reasonable efforts to issue and deliver
within five (5) business days after the Notice Date, to such Holder of Series H
Preferred Stock at the address of the Holder on the stock books of the
Corporation, a certificate or certificates for the number of shares of Common
Stock to which the Holder shall be entitled as aforesaid.
3. LOST OR STOLEN CERTIFICATES. Upon receipt by the
Corporation of evidence of the loss, destruction, theft or mutilation of any
Series H Preferred Stock certificates (the "Certificates") and (in the case of
loss, theft or destruction) of indemnity or security reasonably satisfactory to
the Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Series H Preferred
Stock Certificates of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost or stolen Series H Preferred Stock Certificates
if the Holder thereof contemporaneously requests the Corporation to convert such
Series H Preferred Stock into Common Stock, in which event the Corporation shall
be entitle to rely on an affidavit of loss, destruction or theft of the Series H
Preferred Stock Certificate or, in the case of mutilation, tender of the
mutilated certificate, and shall issue the Conversion Shares.
4. CONVERSION PERIOD. The Series H Preferred Stock shall
become convertible into shares of Common Stock at any time commencing sixty (60)
days after the issuance of the shares of Series H Preferred Stock.
5. CONVERSION FORMULA/CONVERSION PRICE. Each share of Series H
Preferred Stock shall be convertible into the number of Conversion Shares based
upon a conversion price (the "Conversion Price") equal to the lower of (i) the
Closing Bid Price of the Common Stock on the date of issuance of the shares of
Series H Preferred Stock or (ii) seventy-five (75%) percent of the average
Closing Bid Price of the Common Stock for the Three (3) trading days immediately
preceding the Notice Date. For purposes hereof, the term "Closing Bid Price"
shall
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<PAGE>
mean the closing bid price on the NASDAQ SmallCap Stock Market ("NASDAQ") as
reported by Bloomberg, LP, or if no longer traded thereon, the closing bid price
on the principal national securities exchange on which the Common Stock is so
traded.
In the event that the Corporation shall at any time after the date of
issuance of the Series H Preferred Stock: (i) declare a dividend on the
outstanding Common Stock payable in shares of its capital stock; (ii) subdivide
the outstanding Common Stock; (iii) combine the outstanding Common Stock into a
smaller number of shares; or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Corporation is the
continuing corporation), then, in each case, the Fixed Conversion Price per
share in effect at the time of the record date for the determination of
stockholders entitled to receive such dividend or distribution or of the
effective date of such subdivision, combination, or reclassification shall be
adjusted so that it shall equal the price determined by multiplying such Fixed
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such action, and the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action. Such adjustment shall be made successively
whenever any event listed above shall occur and shall become effective at the
close of business on such record date or at the close of business on the date
immediately preceding such effective date, as applicable.
6. AUTOMATIC CONVERSION. Each share of Series H Preferred
Stock outstanding twenty four (24) months from the date of issuance
automatically shall be converted into Common Stock based upon the Conversion
Price then in effect, and such date shall be deemed to be the Notice Date with
respect to such conversion.
7. NO FRACTIONAL SHARES. If any conversion of the Series H
Preferred Stock would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares of Common Stock issuable upon conversion,
if the aggregate, shall be the next higher number of shares.
8. LIMITATION ON THE ISSUANCE OF SHARES OF COMMON STOCK. In no
event shall the Corporation be required to issue more than twenty (20%) percent
of the number of shares of Common Stock outstanding on the date of issuance of
the Series H Preferred Stock upon the conversion of the shares of Series H
Preferred Stock unless the stockholders of the Corporation approve the issuance
of additional shares of Common Stock upon the conversion of the shares of Series
H Preferred Stock or The NASDAQ Stock Market, Inc. ("NASDAQ") waives the
requirements of Market Place Rule 4460(i)(1)(D). In the event that twenty (20%)
percent of the number of shares of Common Stock outstanding on the date of
issuance of the Series H Preferred Stock have been issued upon the conversion of
the Series H Preferred Stock, and (i) NASDAQ has not waived the requirements of
Market Place Rule 4460(i)(1)(D) or (ii) the stockholders have not approved the
issuance of additional shares of Common Stock, then any shares of Series H
Preferred Stock that remain unconverted shall, at the election of the Holder, be
redeemed by the Corporation at a redemption price equal to 133% percent of the
sum of (i)
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<PAGE>
the face amount of the shares of Series H Preferred Stock and (ii) an amount
equal to any accrued and unpaid dividends thereon, within three (3) business
days of the Holder's election. The Corporation agrees to take such corporate
action as may be necessary to obtain the approval of the stockholders to issue
additional shares of Common Stock upon the conversion of the shares of Series H
Preferred Stock.
9. CONVERSION DEFAULTS.
(a) In the event that the Conversion Shares are
not delivered per the written instructions of the Holder, within five (5)
business days after the
Notice Date, then in such event the Corporation shall pay to Holder one (1%)
percent of the Stated Value in cash or shares of Common Stock, based upon the
Conversion Price, at the option of the Purchaser, of the shares of Series H
Preferred Stock being converted per each day after the fifth business day
following the Notice Date that the certificates for the Conversion Shares are
not delivered.
(b) To the extent that the failure of the
Corporation to issue the Conversion Shares is due to the unavailability of
authorized but unissued shares of Common Stock, the provisions of this Section
9 shall not apply but instead the provisions of Section 10 shall apply.
(c) The Corporation shall make any cash payments
in immediately available funds or issue such shares of Common Stock incurred
under this Section 9 within three (3) business days from the date of issuance
of the applicable shares of Common Stock. Nothing herein shall limit a Holder's
right to pursue actual damages or cancel the conversion for the Corporation's
failure to issue and deliver Common Stock to the Holder within ten (10) business
days after the Notice Date.
(d) If the original certificate(s) representing
the Conversion Shares have not been delivered to the Holder within ten (10)
business days after the Notice Date, the Conversion Notice shall become null
and void at the option of the Holder.
10. Lack of Authorized Shares. If, at any time a Holder
submits a Notice of Conversion and the Corporation does not have sufficient
authorized but unissued shares of Common Stock available to effect, in full, a
conversion of the shares of Series H Preferred Stock (a "Conversion Default"),
the date of such default being referred to herein as the "Conversion Default
Date"), the Corporation shall issue to the Holder all of the shares of Common
Stock which are available, and the Notice of Conversion as to any shares of
Series H Preferred Stock requested to be converted but not converted (the
"Unconverted Shares"), upon Holder's sole option. may be deemed null and void.
The Corporation shall provide notice of such Conversion Default ("Notice of
Conversion Default") to all existing Holders of outstanding shares of Series H
Preferred Stock, by facsimile, within one (1) business day of such default (with
the original delivered by overnight or two day courier), and the Holder shall
give notice to the Corporation by facsimile within five (5) business days of
receipt of the original Notice of
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<PAGE>
Conversion Default (with the original delivered by overnight or two day courier)
of its election to either nullify or confirm the Notice of Conversion.
The Corporation agrees to pay all Holders of outstanding shares of
Series H Preferred Stock payments for a Conversion Default ("Conversion Default
Payments") in the amount of (N/365) x (.24) x the initial Stated Value of the
outstanding and/or tendered but not converted shares of Series H Preferred Stock
held by each Holder where N = the number of days from the Conversion Default
Date to the date (the "Authorization Date") that the Corporation authorizes a
sufficient number of shares of Common Stock to effect conversion of all
remaining shares of Series H Preferred Stock by the fifth day of the following
calendar month. The Corporation shall send notice ("Authorization Notice") to
each Holder of outstanding shares of Series H Preferred Stock that additional
shares of Common Stock have been authorized, the Authorization Date and the
amount of Holder's accrued Conversion Default Payments. The accrued Conversion
Default Payments shall be paid in cash or shall be convertible into shares of
Common Stock at the Conversion Price, at the Holder's option, payable as
follows: (i) in the event Holder elects to take such payment in cash, cash
payments shall be made to such Holder or (ii) in the event that the Holder
elects to take such payment in Common Stock, the Holder may convert such payment
amount into Common Stock at the Conversion Price at anytime after the fifth day
of the calendar month following the month in which the Authorization Notice was
received, until the expiration of the twenty four month (24) conversion period.
Nothing herein shall limit the Holder's right to pursue actual damages
for the Corporation's failure to maintain a sufficient number of authorized
shares of Common Stock.
11. LIMITATION ON CONVERSION. Except in the case of the
provisions contained in Section 6, in no event shall the Holder be entitled to
convert any shares of Series H Preferred Stock in excess of that number of
shares of Series H Preferred Stock upon conversion of which the sum of(l) the
number of shares of Common Stock beneficially owned by the Holder and its
affiliates (other than shares of Common Stock which may be deemed beneficially
owned through the ownership of the unconverted portion of the shares of Series H
Preferred Stock), and (2) the number of shares of Common Stock issuable upon the
conversion of the shares of Series H Preferred Stock with respect to which the
determination of this provision is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.9% of the outstanding
shares of Common Stock of the Corporation. For purposes of this provision,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13 D-G thereunder,
except as otherwise provided in clause (1) above.
12. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series H Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of Series H Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the
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<PAGE>
conversion of all then outstanding shares of the Series H Preferred Stock, the
Corporation will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
E. VOTING. Except as otherwise provided below or by the Florida
Statutes, the Holders of the Series H Preferred Stock shall have no voting power
whatsoever, and no Holder of Series H Preferred Stock shall vote or otherwise
participate in any proceeding in which action shall be taken by the Corporation
or the shareholders thereof or be entitled to notification as to any meeting of
the Board of Directors or the shareholders.
F. PROTECTIVE PROVISIONS. So long as shares of Series H Preferred Stock
are outstanding, the Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by Jaw) of the Holders of at least
seventy-five (75%) percent of the then outstanding shares of Series H Preferred
Stock:
1. Alter or change the rights, preferences or privileges of
the Series H Preferred Stock so as to affect adversely the Series H Preferred
Stock;
2. Do any act or thing not authorized or contemplated by this
Article IV which would result in taxation of the Holders of shares of the Series
H Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended); or
3. Enter into a merger in which the Corporation is not the
surviving corporation; provided, however, that the provisions of this
subparagraph (3) shall not be applicable to any such merger if the authorized
capital stock of the surviving corporation immediately after such merger shall
include only classes or series of stock for which no such consent or vote would
have been required pursuant to this section if such class or series had been
authorized by the Corporation immediately prior to such merger or which have the
same rights, preferences and limitations and authorized amount as a class or
series of stock of the Corporation authorized (with such consent or vote of the
Series H Preferred Stock) prior to such merger and continuing as an authorized
class or series at the time thereof.
G. STATUS OF CONVERTED STOCK. In the event any shares of Series H
Preferred Stock shall be converted as contemplated by this Article IV, the
shares so converted shall be canceled, shall return to the status of authorized
but unissued Preferred Stock of no designated class or series, and shall not be
issuable by the Corporation as Series H Preferred Stock.
H. TAXES. All shares of Common Stock issued upon conversion of Series H
Preferred Stock will be validly issued, fully paid and nonassessable. The
Corporation shall pay any and all documentary stamp or similar issue or transfer
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series H Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a
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<PAGE>
name other than that in which the Series H Preferred Stock so converted were
registered, and no such issue or delivery shall be made unless and until the
person requesting such transfer has paid to the Corporation the amount of any
such tax or has established to the satisfaction of the Corporation that such tax
has been paid or that no such tax is payable. The Corporation shall adjust the
amount of dividends paid or accrued so as to indemnify the Holders of Series H
Preferred Stock against any withholding or similar tax in respect of such
dividends.
II. These Articles of Amendment of Articles of Incorporation were adopted by the
Board of Directors without shareholder action and shareholder action was not
required on ________________, 1999.
Signed on ________________ 1999
NATURAL HEALTH TRENDS CORP.
By:_________________________________
Joseph P. Grace, President
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THE WARRANT AND SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND THE WARRANT AND COMMON STOCK ISSUABLE ON EXERCISE OF THE WARRANT MAY
NOT BE SOLD UNLESS THERE IS A REGISTRATION STATEMENT IN EFFECT COVERING THE
WARRANT AND COMMON STOCK OR THERE IS AVAILABLE AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE ACT.
Void after 5:00 P.M., New York City time, on January ___, 2003
For the Purchase of up to
200,000 Shares of Common Stock
WARRANT TO PURCHASE SHARES OF COMMON STOCK
OF
NATURAL HEALTH TRENDS CORP.
This is to certify that, for value received, Kaire International, Inc.
with an address at 380 Lashley Street, Longmont, CO 80501 (the "Holder"), is
entitled to purchase, subject to the provisions of this warrant (this
"Warrant"), from Natural Health Trends Corp., a Florida corporation (the
"Company"), having a principal place of business located at 250 Park Avenue, New
York, New York 10177, Two Hundred Thousand (200,000) shares (the "Warrant
Shares") of common stock, $.001 par value per share, of the Company (the "Common
Stock"), at any time commencing from the date of issuance (the "Exercise
Commencement Date") until 5:00 P.M., New York City time, January ___, 2003
(which shall be referred to herein as the "Exercise Term"), at an exercise price
per share of Common Stock (the "Purchase Price") equal to $___________. This
Warrant and any warrant resulting from a transfer or subdivision of this Warrant
shall sometimes hereinafter be referred to as a "Warrant." The number of shares
of Common Stock to be received upon the exercise of this Warrant and the price
to be paid per share of Common Stock may be adjusted from time to time as set
forth in Section 6 below.
This Warrant is being issued in connection with the acquisition by
NHTC Acquisition Corp., a wholly-owned subsidiary of the Company, of
substantially all of the assets of the Holder pursuant to an Asset Purchase
Agreement between the Company, NHTC Acquisition Corp. and the Holder, dated as
of November 24, 1998.
<PAGE>
1. EXERCISE OF WARRANT. This Warrant shall entitle the Holder thereof
to purchase the number of shares of Common Stock set forth in the initial
paragraph of this Warrant at the Purchase Price. This Warrant may be exercised
in whole or in part at any time or from time to time during the period
commencing on the Exercise Commencement Date through the last day of the
Exercise Term, or if such day is a day on which banking institutions in the
State of New York are authorized by law to close, then on the next succeeding
day which shall not be such a day, by presentation and surrender hereof to the
Company at its principaloffice as set forth above or at the office of its stock
transfer agent, if any, with the Purchase Form annexed hereto duly executed and
accompanied by payment of the Purchase Price as provided below for the number of
shares specified in such form. If this Warrant should be exercised in part only,
the Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the shares purchasable hereunder. Upon receipt by the Company of
this Warrant at its office, or by the stock transfer agent of the Company at its
office, in proper form for exercise and accompanied by the appropriate payment
for the Warrant Shares issuable upon such exercise, the Holder shall be deemed
to be the holder of record of such Warrant Shares, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to the
Holder. Certificates for the Warrant Shares shall be delivered to the Holder
within a reasonable time, not to exceed three (3) business days following the
exercise of this Warrant.
Payment of the Purchase Price may be made by either of the following,
or a combination thereof, at the election of Holder:
(i) Cash Exercise: cash, certified check, cashiers check or wire
transfer; or
(ii) Cashless Exercise: surrender of this Warrant at the principal
office of the Company together with notice of cashless election, in which event
the Company shall issue the Holder a number of shares of Common Stock computed
using the following formula:
X = Y (A-B)/A
where: X = the number of shares of Common Stock to be issued to Holder.
Y = the number of shares of Common Stock for which this Warrant is
being exercised.
A = the Market Price of one (1) share of Common Stock (for purposes of
this Warrant, the "Market Price" shall mean the average last sale
price of the Common Stock for the five (5) trading days prior to the
Date of Exercise of this Warrant (the "Average Closing Price"), as
reported by the New York Stock Exchange ("NYSE") or the American Stock
Exchange ("AMEX"), or if the Common Stock is not traded on the NYSE or
AMEX, but on either the Nasdaq Small Cap Market, the Nasdaq National
Market System or the O-T-C Bulletin
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<PAGE>
Board, the average closing bid price for the three (3) trading days
prior to the date of exercise. If the Common Stock is/was not traded
during the three (3) trading days prior to the Date of Exercise, then
the closing price for the last publicly traded day shall be deemed to
be the closing price for any and all (if applicable) days during such
three (3) trading day period. If Common Stock is not so traded, the
"Market Price" shall be determined in good faith by the Company's
Board of Directors, but in no event shall it be less than the purchase
price (or conversion or exercise price if derivative securities are
sold) of any sales of the Company's Common Stock within the prior six
(6) months from the date of such determination. The definition of
"Market Price" in this paragraph shall constitute the meaning of the
term of "Market Price" whenever such term shall appear in this
Warrant.
B = the Purchase Price.
2. RESERVATION AND LISTING OF SHARES. The Company hereby agrees that
at all times there shall be reserved for issuance and delivery upon exercise of
this Warrant, such number of shares of Common Stock as shall be required for
issuance and delivery upon exercise of this Warrant.
3. FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. Subject to
Section 6(h) hereof, any fraction of a share called for upon any exercise hereof
shall be canceled and the Company shall pay to the Holder an amount of cash
equal to the fair market value of such fractional share, based upon the then
Market Price per share of Common Stock.
4. EXCHANGE; TRANSFER; ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company at its office or at the office of its stock
transfer agent, if any, for other Warrants of different denominations entitling
the Holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. Subject to Section 10 hereof, upon surrender
of this Warrant to the Company at its principal office or at the office of its
stock transfer agent, if any, with the Assignment Form annexed hereto duly
executed and funds sufficient to pay the applicable transfer tax, if any, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
Warrants which carry the same rights upon presentation thereof at the office of
the Company or at the office of its stock transfer agent, if any, together with
a written notice signed by the Holder hereof specifying the names and
denominations in which new Warrants are to be issued. Upon receipt by the
Company of evidence satisfactory to it of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
reasonably satisfactory indemnification, and upon surrender and cancellation of
this Warrant, if mutilated, the Company will execute and deliver a new Warrant
of like tenor and date.
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<PAGE>
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder of the Company until exercise hereof.
6. ADJUSTMENTS OF PURCHASE PRICE AND NUMBER OF SHARES.
(a) RECLASSIFICATION, CONSOLIDATION, MERGER, ETC. In case of
any reclassification or change of the outstanding Common Stock (other than a
change in par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), or in the case of any consolidation of
the Company with, or merger of the Company into, another corporation (other than
a consolidation or merger in which the Company is the surviving corporation and
which does not result in any reclassification or change of the outstanding
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in par value, as aforesaid), or in the case of a sale or
conveyance to another corporation of all or a substantial part of the property
of the Company, the Holder shall thereafter have the right to purchase the kind
and number of shares of Common Stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance as if the Holder were the owner of the Warrant Shares immediately
prior to any such events at a price equal to the product of (x) the number of
Warrant Shares and (y) the Purchase Price in effect immediately prior to the
record date for such reclassification, change, consolidation, merger, sale or
conveyance as if such Holder had exercised the Warrants; provided, however, that
nothing contained herein shall cause the number of Warrant Shares to be
decreased in the event of a combination of shares upon any such
reclassification, change, consolidation, merger, sale or conveyance.
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO
OUTSTANDING SECURITIES. In the event that the Company shall at any time prior to
the exercise of all Warrants declare a dividend (other than a dividend
consisting solely of Common Stock or a cash dividend or distribution payable out
of current or retained earnings) or otherwise distribute to its shareholders any
monies, assets, property, rights, evidences of indebtedness, securities (other
than Common Stock), whether issued by the Company or by another person or
entity, or any other thing of value, the Holder or Holders of the unexercised
Warrants shall thereafter be entitled, in addition to the Common Stock or other
securities receivable upon the exercise thereof, to receive, upon the exercise
of such Warrants, the same monies, property, assets, rights, evidences of
indebtedness, securities or any other thing of value that they would have been
entitled to receive at the time of such dividend or distribution. At the time of
any such dividend or distribution, the Company shall make appropriate reserves
to ensure the timely performance of the provisions of this Subsection 6(b).
(c) FRACTIONAL SHARES. As to any fraction of a share which
the Holder Warrant would be entitled to purchase upon exercise of this Warrant,
the Company shall pay, in lieu of such fractional interest, an amount in cash
equal to the fair market value of such fractional interest, to the nearest
one-hundredth of a share, computed on the basis of the Market Price, as set
forth above. The Holder, by his acceptance hereof, expressly waives any right to
receive any fractional share of stock or fractional Warrant upon exercise of
this Warrant.
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<PAGE>
(d) WARRANT CERTIFICATE AFTER ADJUSTMENT. Irrespective of any
change pursuant to this Section 6 in the Purchase Price or in the number, kind
or class of shares or other securities or other property obtainable upon
exercise of this Warrant, this Warrant may continue to express as the Purchase
Price and as the number of shares obtainable upon exercise, the same price and
number of shares as are stated herein.
(e) STATEMENT OF CALCULATION. Whenever the Purchase Price
shall be adjusted pursuant to the provisions of this Section 6, the Company
shall forthwith file at its principal office, a statement signed by an executive
officer of the Company specifying the adjusted Purchase Price determined as
above provided in such section and a certificate of the independent public
accountants regularly retained by the Company. Such statement shall show in
reasonable detail the method of calculation of such adjustment and the facts
requiring the adjustment and upon which the calculation is based. The Company
shall forthwith cause a notice setting forth the adjusted Purchase Price to be
sent by certified mail, return receipt requested, postage prepaid, to the
Holder.
7. DEFINITION OF "COMMON STOCK." For the purpose of this Warrant, the
term "Common Stock" shall mean, in addition to the class of stock designated as
the Common Stock of the Company on the date hereof, any class of stock resulting
from successive changes or reclassifications of the Common Stock consisting
solely of changes in par value, or from par value to no par value, or from no
par value to par value. If at any time, as a result of an adjustment made
pursuant to one or more of the provisions of Section 6 hereof, the shares of
stock or other securities or property obtainable upon exercise of this Warrant
shall include securities of the Company other than Common Stock or securities of
another corporation, then thereafter the amount of such other securities so
obtainable shall be subject to adjustment from time to time in a manner and upon
terms as nearly equivalent as practicable to the provisions with respect to
Common Stock contained in Section 6 hereof and all other provisions of this
Warrant with respect to Common Stock shall apply on like terms to any such other
shares or other securities.
8. TRANSFER TO COMPLY WITH THE SECURITIES ACT. Notwithstanding
anything herein to the contrary, this Warrant or the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may not be issued by
the Company or sold or otherwise disposed of except as follows:
(a) to a person who, in the opinion of counsel for the
Company, is a person to whom this Warrant or Warrant Shares may legally be
transferred without registration and without the delivery of a current
prospectus under the Securities Act of 1933, as amended (the "Securities Act")
with respect thereto and then only against receipt of a letter from such person
in which such person represents that he is acquiring the Warrants or Warrant
Shares for his own account for investment purposes and not with a view to
distribution, and in which such person agrees to comply with the provisions of
this Section 8 with respect to any resale or other disposition of such
securities; or
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(b) to any person upon delivery of a prospectus then meeting
the requirements of the Securities Act relating to such securities and the
offering thereof for such sale or disposition.
9. NOTICES TO WARRANT HOLDERS. Nothing contained in this Agreement
shall be construed as conferring upon the Holder or Holders the right to vote or
to consent or to receive notice as a shareholder in respect of any meetings of
shareholders for the election of directors or any other matter, or as having any
rights whatsoever as a shareholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) The Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) The Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the Company, or
any warrant, right or option to subscribe therefor; or
(c) A dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be proposed; or
(d) There shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another entity (other than as disclosed in the Memorandum);
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
shareholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, warrants or options, or entitled
to vote on such proposed dissolution, liquidation, winding up or sale. Such
notice shall specify such record date or the date of closing the transfer books,
as the case may be. Failure to give such notice or any defect therein shall not
affect the validity of any action taken in connection with the declaration or
payment of any such dividend or distribution, or the issuance of any convertible
or exchangeable securities or subscription rights, warrants or options, or any
proposed dissolution, liquidation, winding up or sale.
10. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing and shall be delivered personally, receipt
acknowledged, or mailed by registered or certified mail, postage prepaid, return
receipt requested, addressed to the parties hereto as follows:
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(a) If to the Holder, to it at the address set forth in the
preamble of this Warrant;
(b) If to the Company, to the address set forth in the
preamble of this Warrant; And
(c) In each case, to such other address as either party may
designate by notice to the other party.
11. BINDING EFFECT; SUCCESSORS. This agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors,
heirs, personal representatives, administrators, executors and permitted
assigns. Nothing contained in this Agreement is intended to confer upon any
person or entity, other than the parties hereto, or their respective successors,
heirs, personal representatives, administrators, executors or permitted assigns,
any rights, benefits, obligations, remedies or liabilities under or by reason of
this Agreement. All the covenants and provisions of this Warrant by or for the
benefit of the Holder shall inure to the benefit of his successors and assigns
hereunder.
12. TERMINATION. This Warrant will terminate on any earlier date when
it has been entirely exercised and all the Warrant Shares issuable upon exercise
of this Warrant have been resold to the public.
13. GOVERNING LAW; JURISDICTION. This Warrant shall be governed by and
construed in accordance with the laws of the State of New York with respect to
contracts made and to be fully performed therein, without regard to the
conflicts of laws principles thereof. The parties hereto hereby agree that any
suit or proceeding arising under this Warrant, or in connection with the
consummation of the transactions contemplated hereby, shall be brought solely in
a federal or state court located in the City, County and State of New York, or
in any court of competent jurisdiction selected by the Holder. By its execution
hereof, the Company hereby consents and irrevocably submits to the in personam
jurisdiction of the federal and state courts located in the City, County and
State of New York (or any such other court of competent jurisdiction selected by
a Holder) and agrees that any process in any suite or proceeding commenced in
such courts under this Warrant may be served upon it personally or by certified
or registered mail, return receipt requested, or by Federal Express or other
courier service, with the same force and effect as if personally served upon it
in New York City (or in the city or county in which such other court is
located). The parties hereto each waive any claim that any such jurisdiction is
not a convenient forum for any such suit or proceeding and any defense of lack
of in personam jurisdiction with respect thereto.
14. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Warrant and all
attachments hereto and all incorporation by references set forth herein, set
forth the entire agreement and understanding between the parties as to the
subject matter hereof and merges and supersedes all prior discussions,
agreements and understandings of any and every nature among them. This Warrant
may be amended, the Company may take any action herein prohibited or omit to
take any action herein required to be performed by it, and any breach of any
covenant, agreement,
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warranty or representation may be waived, only if the Company has obtained the
written consent or waiver of the Holder. No course of dealing between or among
any persons having any interest in this Warrant will be deemed effective to
modify, amend or discharge any part of this Warrant or any rights or obligations
of any person under or by reason of this Warrant.
NATURAL HEALTH TRENDS CORP.
By: ____________________________________
Joseph P. Grace, Acting President
54844
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NATURAL HEALTH TRENDS CORP.
ASSIGNMENT FORM
(To be signed only upon assignment of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
(Name and address of assignee must be printed or typewritten)
the rights of the undersigned represented by this Warrant, to the extent of
_________________________ (________) shares of Common Stock, $.001 par value per
share, of Natural Health Trends Corp. (the "Company") hereby irrevocably
constituting and appointing ________________ Attorney to make such transfer on
the books of the Company, with full power of substitution in the premises.
Dated: ______________________, 1999
______________________________
Signature of Registered Holder
Signature Guaranteed:
NOTE: The above signature must correspond with the name as it appears upon the
front page of this Warrant in every particular, without alteration or
enlargement or any change whatever.
<PAGE>
NATURAL HEALTH TRENDS CORP.
PURCHASE FORM
Natural Health Trends Corp.
250 Park Avenue, 19th Floor
New York, New York 10177
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by this Warrant for, and to purchase hereunder, __________
shares of common stock, $.001 par value per share, of Natural Health Trends
Corp. (the "Shares") provided for herein, and requests that certificates for the
Shares be issued in the name of ________________________________.
________________________________________________________________________________
(Please print name, address and social security number)
and, if said number of Shares shall not be all the Share purchasable hereunder,
that a new Warrant for the balance of the Shares purchasable under this Warrant
be registered in the name of the undersigned Warrant holder or his Assignee as
below indicated and delivered to the address stated below.
Dated: _________________________, 1999
Name of Warrant holder or Assignee: ____________________________________________
Address:________________________________________________________________________
________________________________________________________________________
Signature:______________________________________________________________________
Print Name:_____________________________________________________________________
Signature Guaranteed:
NOTE: The above signature must correspond with the name as it appears upon the
front page of this Warrant in every particular, without alteration or
enlargement or any change whatever, unless this Warrant has been assigned.
