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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 2000
REGISTRATION NO. 333-89419
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NATURAL HEALTH TRENDS CORP.
(Name of small business issuer in its charter)
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<TABLE>
<S> <C> <C>
FLORIDA 5122 59-2705336
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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380 LASHLEY STREET
LONGMONT, COLORADO 80501
(303) 682-4637
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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MARK D. WOODBURN, CHIEF FINANCIAL OFFICER
NATURAL HEALTH TRENDS CORP.
380 LASHLEY STREET
LONGMONT, COLORADO 80501
(303) 682-4637
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
MARTIN C. LICHT, ESQ.
SILVERMAN, COLLURA & CHERNIS, P.C.
381 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 779-8600
FACSIMILE: (212) 779-8858
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Approximate date of proposed sale to the public: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act Registration Statement number of the earlier effective Registration
Statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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The information in this Prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any State where the offer or sale is not permitted.
Subject to Completion dated May ___, 2000.
PROSPECTUS
2,413,504 Shares of Common stock
NATURAL HEALTH TRENDS CORP.
Selling Securityholders are offering 2,413,504 shares of common stock
which includes 456,315 shares of common stock underlying a certain convertible
note and warrants (which have not been converted and/or exercised to date). We
will not receive any of the proceeds from the sale of the shares of common
stock.
We are not selling any of the shares of our common stock under this
prospectus and we will not receive any of the proceeds from the sales by the
selling stockholders.
The selling stockholders may sell the shares of our common stock they
are offering in a number of different ways and at varying prices. We provide
more information about the selling stockholders and how they may sell their
shares in the section titled "Plan of Distribution".
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol NHTC. On May 8, 2000, the closing sale price of a share of our common
stock as reported on the Nasdaq SmallCap Market was $.50.
These are speculative securities and this investment involves a high
degree of risk. See "Risk Factors" beginning on page 9.
Neither the Securities and Exchange Commission (the "SEC") nor any
state securities commission has approved or disapproved these securities or
passed upon the adequacy of the prospectus. Any representation to the contrary
is a criminal offense.
The date of this Prospectus is May __, 2000.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary highlights selected information from this
document and may not contain information that is important to you. To understand
the offering fully, you should read this entire document carefully, including
the financial statements. In certain instances where appropriate, "the company,"
"we," "us," or "our" refers collectively to Natural Health Trends Corp. and its
wholly-owned subsidiaries.
This document contains forward-looking statements which involve risks
and uncertainties. Natural Health Trends' actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 9 of this document.
THE COMPANY
We market and distribute products that are intended to appeal to health
conscious customers and to promote human wellness. We have utilized an
acquisition strategy for our growth. Through our acquisition of substantially
all of the assets of Kaire International, Inc. in February 1999 by our
wholly-owned subsidiary Kaire Nutraceuticals, Inc. we market a line of
approximately 60 products. Our strategy is to focus on developing our business,
which is to identify natural products that have demonstrable health benefits and
can be marketed without prior approval of the United States Food and Drug
Administration and to promote and market those products. Specifically, we intend
to focus our resources on the development of Kaire Nutraceuticals, our network
marketing business.
We develop and distribute, through a network of independent associates,
a line of approximately 60 products which are divided into six categories,
including Energize, Enhance, Optimize, Renew, Restore and Revive.
Our marketing strategy revolves around associates actively recruiting
interested people to become new associates for us. These recruits are placed
beneath the recruiting associate in his or her "network" and are referred to us
as that associate's "organization." Associates earn commissions on sales
generated by the recruited associates in their organization as well as retail
profits on the sales they generate directly. We believe our marketing program is
designed to provide incentives for associates to build an organization of
recruited associates in their organization to maximize their earning potential.
We presently have 30,000 active associates, which we define as associates who
have made product purchases in excess of $50 during the past year.
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Our company was initially formed primarily to operate vocational
schools in Florida. In August 1998 we sold our school division to a corporation
controlled by our former president. The schools division consisted of three
vocational schools which offered preparation and training for licensing in
therapeutic massage and holistic skin care. In July 1997, we acquired all of the
outstanding capital stock of Global Health Alternatives, Inc., which operated
our Natural Health Care Products division. We also operated two alternative
medical clinics in 1997, which operations were discontinued in the third quarter
of 1997. In February 1999 we acquired substantially all of the assets of Kaire
International, Inc. Our company was incorporated under the name Florida
Institute of Massage Therapy, Inc. in Florida in December 1988 and changed its
name to Natural Health Trends Corp. in June 1993. Our principal offices are
located at 380 Lashley Street, Longmont, Colorado and our telephone number is
303-682-4637.
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THE OFFERING
<TABLE>
<S> <C>
Shares Offered by Selling Securityholders........................ 2,413,504 shares (which includes 456,315 shares of common stock
underlying a certain convertible note and warrants.)
Total Shares Outstanding Prior to Offering....................... 9,845,770 shares (assuming no exercise of outstanding options,
warrants or conversion rights.)
Total Shares Outstanding After Offering.......................... 10,302,085 shares (assuming no exercise of outstanding options,
warrants or conversion rights.)(1)
Offering Price................................................... The market price at the time of sale by the selling
securityholders.
Use of Proceeds.................................................. We will not receive any proceeds from the sale of securities by
the selling securityholders.
Nasdaq SmallCap Symbol........................................... NHTC
Risk Factors..................................................... The securities offered hereby involve a high degree of risk.
See "Risk Factors."
Dividend Policy.................................................. No dividend expected.
</TABLE>
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(1) except for 456,315 shares of common stock issuable upon the conversion
of a note payable and warrants which shares of common stock are being
offered hereby.
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SUMMARY PRO FORMA COMBINED SELECTED FINANCIAL DATA
Set forth below is certain selected unaudited summary pro forma
combined financial data for Natural Health Trends Corp. for the periods and as
of the dates, indicated. The summary pro forma combined selected financial data
for Natural Health Trends for the years ended December 31, 1998 and December 31,
1999 is based on the historical financial statements of Natural Health Trends
and has been prepared to illustrate the effects on such historical financial
data of the Kaire acquisition which occurred during February 1999 is presented
as if such transaction had occurred as of January 1, 1998. The Kaire acquisition
is reflected using the purchase method of accounting for business combinations.
The historical pro forma combined selected financial data for the years ended
December 31, 1998 and December 31, 1999 has been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The pro
forma combined selected financial data is provided for comparative purposes only
and does not purport to be indicative of the results that actually would have
been obtained if the Kaire acquisition had been effected on the dates indicated.
The information presented below is qualified in its entirety by, and should be
read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Selected Financial Data" and the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
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<S> <C> <C>
Revenues .................................................................. $ 27,366,830 $ 17,572,637
Cost of sales ............................................................. 6,704,803 4,693,264
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Gross profit .............................................................. 20,662,027 12,879,373
Distributor commissions ................................................... 13,537,777 8,374,907
Write-down of patents and goodwill ........................................ -- 3,166,841
Selling, general and administrative expenses .............................. 14,007,733 8,713,013
Interest expense and other, (net) ......................................... (1,139,687) (440,713)
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Loss from continuing operations ........................................... (8,023,170) (7,816,101)
Preferred stock dividends ................................................. 2,407,974 1,544,146
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Loss to common stockholders ............................................... $(10,431,144) $ (9,360,247)
============ ============
Basic and diluted loss per common share ................................... $ (4.72) $ (1.43)
============ ============
Basic and diluted weighted average common shares outstanding .............. 2,210,458 7,233,297
============ ============
</TABLE>
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SUMMARY FINANCIAL INFORMATION
The summary financial information for Natural Health Trends set forth
below is derived from the more detailed consolidated financial statements
appearing elsewhere in this Prospectus. This information should be read in
conjunction with such consolidated financial statements, including the notes
thereto. The information below is qualified in its entirety by, and should be
read in conjunction with, our consolidated financial statements and the related
notes, "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Selected Financial Data."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
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1999 1998 1997
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<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS:
Revenues .............................................. $ 15,269,631 $ 1,191,120 $ 1,133,726
Cost of sales ......................................... 4,267,045 454,370 375,034
------------ ------------ ------------
Gross profit .......................................... 11,002,586 736,750 758,692
Distributor commissions ............................... 7,229,758 -- --
Selling, general and administrative
expenses ........................................... 10,889,998 3,277,047 4,194,044
------------ ------------ ------------
Operating loss ........................................ (7,117,170) (2,540,297) (3,435,352)
Minority interest in loss of .......................... 89,756 -- --
subsidiaries
Other expense ......................................... (67,180) -- --
Gain on dissolution ................................... 200,000 -- --
------------ ------------ ------------
Interest expense (net) ................................ (663,289) (199,757) (868,721)
------------ ------------ ------------
Loss from continuing operations ....................... (7,557,883) (2,740,054) (4,304,073)
Gain (Loss) from discontinued ......................... 304,593 (86,234) (2,919,208)
operations
Gain (loss) on disposal ............................... (Y) 722,640 (501,839)
Gain (loss) from discontinued
operations ......................................... 304,593 636,406 (3,421,047)
------------ ------------ ------------
Loss before extraordinary gain ........................ (7,253,290) (2,103,648) (7,725,120)
Extraordinary gain-forgiveness of debt ................ (Y) 815,636 --
------------ ------------ ------------
Net loss .............................................. (7,253,290) (1,288,012) (7,725,120)
Preferred stock dividends ............................. 1,542,590 2,011,905 733,333
------------ ------------ ------------
Net loss to common stockholders ....................... $ (8,795,880) $ (3,299,917) $ (8,458,453)
============ ============ ============
Basic and diluted income (loss) per common share:
Continuing operations ................................. $ (1.26) $ (2.15) $ (11.60)
Discontinued operations ............................... 0.04 0.29 (7.88)
Extraordinary gain .................................... -- 0.37 --
------------ ------------ ------------
Net loss per share .................................... $ (1.22) $ (1.49) $ (19.48)
============ ============ ============
Basic and diluted weighted average
common shares outstanding .......................... 7,233,297 2,210,458 434,265
============ ============ ============
</TABLE>
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CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
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<S> <C> <C>
Working capital deficit ................ $ (6,455,055) $ (2,016,734)
Inventories ............................ $ 847,212 $ 314,367
Total assets ........................... $ 11,253,899 $ 6,852,716
Current liabilities .................... $ 8,416,806 $ 2,898,022
Long-term debt ......................... $ 53,158 $ --
Common stock subject to put ............ $ -- $ 380,000
Stockholders' equity ................... $ 2,783,935 $ 3,574,694
</TABLE>
RISK FACTORS
Your investment in the securities offered hereby is considered to be
highly speculative and involves a high degree of risk, including, but not
limited to, the risks described below. An investment should be made only if you
can afford the loss of your entire investment. As a prospective investor, you
should, prior to making an investment decision, carefully consider the following
risk factors in addition to all of the other information provided in this
Prospectus.
WE HAVE HAD SIGNIFICANT LOSSES AND WE MAY NOT BE ABLE TO ACHIEVE PROFITABILITY.
For the years ended December 31, 1999 and 1998, we had a net loss of
approximately $7,254,000 (on revenues of $15,269,631) and $1,288,012 (on
revenues of $1,191,120), respectively. We had a working capital deficit of
$6,455,055 at December 31, 1999. We cannot assure you that we can generate net
income, increase revenues or successfully expand our operations in the future.
We are subject to all of the problems, expenses, delays and other risks inherent
in a business with a relatively short history of operations and in a business
seeking to expand its operations. Therefore, we cannot predict with certainty
the success or failure of our future operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
OUR INDEPENDENT AUDITORS' REPORT WAS PREPARED ASSUMING THAT WE CONTINUE AS A
GOING CONCERN.
Our independent auditors' report on our financial statements was
prepared on the assumption that we will continue as a going concern. The report
acknowledges that we have incurred losses in each of the last three fiscal years
and that we anticipate that additional funding will be required to sustain
operations. These conditions cause substantial doubt as to our ability to
continue as a going concern. If we are unable to obtain sufficient financing or
achieve profitability during fiscal year 2000, then we would, in all likelihood,
experience severe liquidity problems and our ability to continue as a going
concern would be in doubt. See "Financial Statements."
OUR SUCCESS MAY DEPEND ON OUR ABILITY TO OBTAIN ADDITIONAL FINANCING.
We will require additional financing for our operations and to pursue
our expansion plans. We anticipate that we require approximately $1,500,000
within the next twelve months or we will have to curtail or cease operations
assuming that we do not have to satisfy certain existing obligations. We have no
definitive agreement for additional financing and we cannot assure you that we
will obtain any additional financing. If we secure such financing, we cannot
assure you that such financing will be sufficient. If our revenues are not
adequate to fund our operations, or to enable us to implement our present plans
for expansion, then we will have to seek further financing. In addition, we
intend to seek to acquire additional alternative health care product companies.
However, we cannot assure that we will do so. As it is likely that revenues from
our operations will not be sufficient, we will be required to raise additional
capital to make such acquisitions and finance the operations of such new
businesses. Additional financing may be in the form of indebtedness from
institutional lenders or other third parties or as equity financing. In
addition, such additional financing may cause dilution to investors in this
offering. We cannot assure you that such financing will be available, and if so,
on acceptable terms. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
WE MAY DISCONTINUE THE OPERATIONS OF GLOBAL HEALTH ALTERNATIVES, INC. AND FILE
FOR BANKRUPTCY.
Global Health Alternatives, Inc. had a working capital deficit of approximately
$2,090,000 as of December 31, 1999. We have been attempting to achieve
settlements with our creditors but we have not achieved satisfactory settlement
offers. We are considering filing for protection from our creditors under the
bankruptcy laws. If we discontinue the operations of Global Health Alternatives,
Inc., there would be a material adverse affect on our financial condition.
WE HAVE FUNDED OUR OPERATIONS THROUGH BORROWINGS AND THE SALE OF OUR SECURITIES.
We have incurred significant losses and have not achieved profitability
or positive cash flow from our operations. As a result we have relied on
borrowings, the sale of our securities and the sale of assets to fund our
working capital requirements and capital expenditures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
OUR SUCCESS DEPENDS ON OUR PROPOSED EXPANSION PLANS.
Our expansion plans are based primarily upon increasing our existing
sales and the acquisition of additional alternative health care product
companies. We intend to develop and market a proprietary line of alternative
health care products. Our growth will depend, in part, upon the development of
an alternative health care product line which will be dependent upon a number of
factors:
- our ability to identify and acquire suitable alternative
health care product companies;
- our ability to finance the expansion of sales and future
acquisitions;
- achieving market acceptance of our products;
- regulatory constraints;
- our ability to market and produce the alternative health care
products on a cost-effective basis; and
- whether anticipated performance levels of new alternative
health care products will be achieved.
Many of the factors required for the new operations to succeed will be
beyond our control. These include, but are not limited to, the effectiveness of
our marketing efforts in the sale of our products.
Our growth depends to a significant degree on our ability to carry out
our proposed expansion program. We cannot assure you that we will be able to
hire, train and integrate employees, and adapt our management, information and
other operating systems, to the extent necessary to grow in a profitable manner.
In addition, the costs associated with our planned expansion may be
significantly greater than anticipated and may have a materially adverse impact
upon our results and prospects. If our plans for expansion are not successful,
there could be a material adverse effect on our business. See "Business."
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OUR SUCCESS DEPENDS ON THE MARKET ACCEPTANCE OF OUR PRODUCTS.
We do not believe that the market for products related to alternative
health care, subject to certain limited exceptions, is either well-developed or
has an established history. We believe that, as is typical in an undeveloped
industry, demand and market acceptance for the products that we intend to market
will be subject to a high level of uncertainty. We do not intend to conduct any
formal marketing or other concept feasibility studies to predict the commercial
viability of our concepts. We have limited financial, personnel and other
resources to undertake marketing activities. Due to the undeveloped markets for
our products and the lack of significant funds for acquisitions and marketing,
we cannot assure you that substantial markets will develop and, if so, whether
we can exploit them profitably. See "Business-Products."
WE MAY BE ADVERSELY AFFECTED BY ONGOING PAYMENTS.
We have ongoing obligations to Troy Laboratories and H. Edward Troy, as
well as obligations for liabilities assumed in connection with the acquisition
of the Kaire assets. In addition, we purchase a significant portion of our
products from ENZO Nutraceuticals. We anticipate that these obligations will be
approximately $900,000 over the next twelve months and will have a significant
effect on our liquidity. See "Business-Product Acquisition and Licensing
Agreements" and "Business-Manufacturing."
OUR DEPENDENCE ON A LIMITED NUMBER OF MANUFACTURERS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
We do not intend to develop our own manufacturing capabilities since we
believe that the availability of manufacturing services from third parties on a
contract basis is adequate to meet our needs. With the exception of one
manufacturing and distribution agreement with ENZO Nutraceuticals, Inc., we
maintain no existing contractual commitments or other arrangements for the
future manufacture of our products. Rather, we place orders from component or
finished goods manufacturing services as required based upon price quotations
and other terms obtained from selected manufacturers. Should these relationships
terminate, our supply and ability to meet consumer demands will be adversely
affected. See "Business-Manufacturing."
WE ARE NOT IN COMPLIANCE WITH OUR MANUFACTURING AND DISTRIBUTION AGREEMENT WITH
ONE OF OUR PRIMARY SUPPLIERS.
For the year ended December 31, 1999 purchases of enzogenol pursuant to
our manufacturing and distribution agreement with ENZO Nutraceuticals, Inc.
accounted for 24% of our purchases and 27% of our sales. We are not in
compliance with the minimum purchase requirements or payment terms set forth in
the agreement. If the manufacturing and distribution agreement is terminated,
there would be a material adverse effect on our business. See
"Business-Manufacturing."
WE FACE SIGNIFICANT COMPETITION FROM MORE ESTABLISHED COMPANIES.
The sales of vitamin, mineral and other alternative health care related
products are highly competitive, and we expect competitive pressures to
continue. In the vitamin and mineral supplement line, we compete on a regional
basis directly with specialty health retailers and also with mass merchandisers
such as drug stores and supermarkets. Many of our competitors are larger and
have greater resources than us. Our future performance will be subject to a
number of factors beyond our control, including any future economic downturns
and any cyclical variations in the retail market for vitamin, mineral and other
alternative health care related products, as well as the publication of positive
or negative product safety and efficacy studies by the U.S. Department of Health
and Human Services and other health and medical authorities.
We also compete intensely with other network marketing companies in the
recruitment of associates, of which there are many such companies. Some of the
largest of these are Nutrition for Life International, Inc., Nature's Sunshine,
Inc., Herbalife International, Inc., Amway and Rexall Sundown, Inc. Each of
these companies is substantially larger than us and has significantly greater
financial and personnel resources. See "Business-Competition."
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WE DEPEND ON OUR PRESIDENT AND OTHER MANAGEMENT PERSONNEL TO OPERATE AND GROW.
We believe the efforts of our executive officers and other management
personnel, including Robert L. Richards, our president and Chief Executive
Officer are essential to our operations and growth. The loss of the services of
Mr. Richards and others would materially adversely affect us. We do not carry
key-man life insurance on any such individuals. See "Management."
REGULATORY CHANGES MAY IMPOSE SIGNIFICANT RESTRICTIONS AND ADDITIONAL COSTS OR
OTHER BURDENS ON OUR BUSINESS.
The processing, formulation, packaging, labeling and advertising of our
alternative health care products is subject to regulation by one or more federal
agencies, including the FDA, the Federal Trade Commission (the "FTC"), the
Consumer Product Safety Commission and the United States Department of
Agriculture and the Environmental Protection Agency. These activities are also
regulated by various agencies of the states and localities. The FDA, in
particular, regulates the advertising, labeling and sales of vitamin and mineral
supplements if the FDA believes they are unapproved drugs or food additives
rather than food supplements. Compliance with the rules and regulations of such
agencies is complex and entails continued diligence. In addition, the Compliance
Policy Guide issued by the FDA establishes the manner in which homeopathic drugs
are regulated. The Compliance Policy Guide provides that homeopathic drugs may
only contain ingredients that are generally recognized as homeopathic.
Compliance with the Compliance Policy Guide requires detailed scrutiny and
diligence.
Direct selling activities are regulated by various governmental
agencies. These laws and regulations are generally intended to prevent
fraudulent or deceptive schemes. Such schemes, often referred to as "pyramid" or
"chain sales" schemes, often promise quick rewards for little or no effort,
require high entry costs, use high pressure recruiting methods and/or do not
involve legitimate products.
We cannot determine the effect that future governmental regulations or
administrative orders may have on our business. Moreover, governmental
regulations in countries where we plan to commence or expand operations may
prevent, delay or limit market entry of certain products or require the
reformulation of such products. Regulatory action, whether or not it results in
a final determination adverse to us has the potential to create negative
publicity, with detrimental effects on the motivation and recruitment of
associates and, consequently, on our possible future sales and earnings. See
"Business-Government Regulation."
WE ARE SUBJECT TO FEDERAL, STATE AND FOREIGN TAXES.
We are subject to federal and state taxation in the United States. In
addition, each of our subsidiaries are subject to taxation in the country in
which they operate. We will in all likelihood be eligible for foreign tax
credits in the United States for the amount of foreign taxes actually paid in a
given period. In the event that our operations in high tax jurisdictions such as
Trinidad and Tobago grow disproportionately to the rest of our operations, we
may be unable to fully utilize our foreign tax credits in the United States,
which could, accordingly, result in us paying a higher overall effective tax
rate on our worldwide operations.
Because we operate outside of the United States, we are subject to the
jurisdiction of the relevant foreign tax authorities. In addition to closely
monitoring our locally based income, these tax authorities regulate and restrict
various corporate transactions, including intercompany transfers. We cannot
assure you that our organizational structures will not be challenged by foreign
tax authorities or that such challenges will not have a material adverse effect
on our business or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
WE MAY BE MATERIALLY AND ADVERSELY AFFECTED BY ECONOMIC, POLITICAL AND SOCIAL
CONDITIONS IN THE COUNTRIES IN WHICH WE OPERATE.
A change in policies by any government in our markets and proposed
markets, could adversely affect our future operations through, among other
things, changes in laws, rules or regulations, confiscatory taxation,
restrictions on currency conversion, currency repatriation or imports, or the
expropriation of private enterprises. This could be especially true in the event
of a change in leadership, social or political disruption or upheaval, or
unforeseen circumstances affecting economic, political or social conditions or
policies. We cannot assure you that such activities, or other similar activities
in such markets, will not result in passage of legislation or the enactment of
policies which could materially adversely affect our operations. In addition,
our ability to expand our current operations into new markets will directly
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depend on our ability to secure the requisite government approvals and comply
with the local government regulations. See "Business-Marketing and
Distribution."
WE MAY BE ADVERSELY AFFECTED BY FLUCTUATIONS IN EXCHANGE RATE.
Our foreign-derived sales are converted to U.S. dollars for reporting
purposes. Consequently, our reported earnings are significantly impacted by
changes in currency exchange rates, generally increasing with a weakening dollar
and decreasing with a strengthening dollar. Given the uncertainty of the extent
of exchange rate fluctuations, we cannot estimate the effect of these
fluctuations on our future business, product pricing, results of operations or
financial condition. However, because our revenue is realized in local
currencies and the majority of our cost of sales is incurred in U.S. dollars,
our gross profits are positively affected by a weakening in the U.S. dollar and
will be negatively affected by a strengthening in the U.S. dollar. We cannot
assure you that any of the foregoing currency risks will not have a material
adverse effect upon our results from operations or financial condition.
Fluctuations in currency exchange rates, particularly those caused by an
increase in the value of the United States dollar, could have a material adverse
effect on our financial position, results of operations and cash flows. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation."
WE ARE DEPENDENT UPON OUR INDEPENDENT ASSOCIATES.
We distribute a line of our products exclusively through independent
associates. Associate agreements are voluntarily terminable by the associates at
any time. Our revenue is directly dependent upon the efforts of these
independent associates, and any growth in future sales volume will require an
increase in the productivity of these associates and/or growth in the total
number of associates. As is typical in the direct selling industry, there is
turnover in associates from year to year, which requires the sponsoring and
training of new associates by existing associates to maintain or increase the
overall associate force and motivate new and existing associates. There may be
seasonal decreases in associate sponsoring and product sales in some of the
countries in which we operate because of local holidays and customary vacation
periods. The size of the associate force can also be particularly impacted by
general economic and business conditions and a number of intangible factors such
as adverse publicity or the public's perception of our products, product
ingredients, our associates or direct selling businesses in general. We cannot
assure you that the number or productivity of our associates will be sustained
at current levels or increased in the future. See "Business-Marketing and
Distribution."
WE MAY BE AFFECTED BY ADVERSE PUBLICITY.
The size of the distribution force and the results of our operations
can be particularly impacted by adverse publicity regarding us, or our
competitors, including the legality of network marketing, the quality of our
products and product ingredients or those of our competitors, regulatory
investigations of us or our competitors and their products, associate actions
and the public's perception of our associates and direct selling businesses
generally. We cannot assure you that such adverse publicity will not have a
material adverse effect on our ability to attract and retain customers or
associates, or on our results from operations or financial condition generally.
See "Business-Marketing and Distribution."
WE MAY LOSE OUR PATENT IF WE DO NOT FULFILL OUR AGREEMENT.
Global Health acquired Natural Health Laboratories, Inc., which held
certain rights under the Natural Relief 1222 trademark. Natural Health
Laboratories, Inc. acquired the rights to the patent from Troy Laboratories,
Inc. and H. Edward Troy. In April 1998, we agreed to make certain payments to
and on behalf of Troy Laboratories, Inc. and H. Edward Troy in relation to the
patent in settlement of accrued royalties. We have agreed to pay royalties in
connection with the patent equal to 3% of net sales up to $2,000,000, 2% of net
sales from $2,000,000 to $4,000,000 and 1% of net sales thereafter. In the event
of a default in the payment of royalties or other payments in connection with
the agreement, the patent will revert back to the original holders. We cannot
assure you that we will be able to make our payments of the royalties. If we do
not make such payments, we may lose our patent.
In addition, we may not be able to defend successfully our legal rights
in our trademarks. Our failure to protect our legal rights to our trademarks
from improper appropriations or otherwise may have a material adverse effect on
our business. See "Business-Product Acquisition and Licensing Agreements."
10
<PAGE> 11
WE ARE SUBJECT TO OUTSTANDING LITIGATION.
We are a defendant in certain litigation. In the event that the outcome
of any such litigation is adverse to us there would be a material adverse effect
on our financial condition. See "Business-Litigation."
OUR INSURANCE MAY NOT BE SUFFICIENT.
The offering of alternative health care products exposes us to the
possibility of personal injury, product or other liability claims. We carry
general liability insurance in the amount of $5,000,000 per occurrence limit and
$6,000,000 in the aggregate, including product liability insurance. A successful
claim against us which exceeds, or is not covered by, our insurance policies
could have a material adverse effect on us. In addition, we may be required to
expend significant resources and energy in defending against any claims. See
"Business-Insurance."
WE DO NOT INTEND TO PAY DIVIDENDS.
We have not paid any cash dividends on our common stock to date and we
do not anticipate declaring or paying any cash dividends in the foreseeable
future. In addition, future financing arrangements, if any, may preclude or
otherwise restrict the payment of dividends. See "Dividend Policy."
OUR COMMON STOCK MAY BE DELISTED FROM TRADING ON NASDAQ.
The common stock is presently quoted on the Nasdaq SmallCap Market.
There are a number of continuing requirements that must be met in order for the
common stock to remain eligible for quotation on Nasdaq. The failure to meet
Nasdaq's maintenance criteria in the future could result in the delisting of our
common stock from Nasdaq. In such event, trading, if any, in the common stock
may then continue to be conducted in the non-Nasdaq over-the-counter market. As
a result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the common stock. The following
table provides the most recent Nasdaq SmallCap guidelines with respect to
initial and continued listing.
<TABLE>
<CAPTION>
REQUIREMENTS INITIAL LISTING CONTINUED LISTING
- ------------ --------------- -----------------
<S> <C> <C> <C> <C>
Net Tangible Assets(1)................................................. $ 4,000,000 $ 2,000,000
or or
Market Capitalization.................................................. $50,000,000 $35,000,000
or or
Net Income (in latest fiscal year or 2 of last 3 fiscal years)......... $ 750,000 $ 500,000
Public Float (shares)(2)............................................... 1,000,000 500,000
Market Value of Public Float........................................... $ 5,000,000 $ 1,000,000
Minimum Bid Price...................................................... $ 4 $ 1
Market Makers.......................................................... 3 2
Shareholders (round lot holders)(3).................................... 300 300
Operating History(4)................................................... 1 year N/A
or
Market Capitalization.................................................. $50,000,000
Corporate Governance................................................... Yes Yes
</TABLE>
- -----------
1. For initial or continued listing, a company must satisfy one of the
following to be in compliance: the net tangible assets requirement,
(net tangible assets means total assets, excluding goodwill, minus
total liabilities) the market capitalization requirement or the net
income requirement.
11
<PAGE> 12
2. Public float is defined as shares that are not held directly or
indirectly by any officer or director of the issuer and by any other
person who is the beneficial owner of more than 10 percent of the total
shares outstanding.
3. Round lot holders are considered holders of 100 shares or more.
4. If operating history is less than 1 year, initial listing requires
market capitalization of at least $50 million.
In addition, if the common stock were delisted from trading on Nasdaq
and the trading price of the common stock were less than $5.00 per share,
trading in the common stock would also be subject to the requirements of certain
rules promulgated under the Securities Exchange Act of 1934, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a penny stock (generally, any non-Nasdaq equity security that
has a market price of less than $5.00 per share, subject to certain exceptions).
Such rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
with the penny stock market. These rules impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). For
these types of transactions, the broker-dealer must make a special determination
of the transactions' suitability for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers may discourage broker-dealers from effecting
transactions in penny stocks, which could reduce the liquidity of the shares of
common stock and thereby have a material adverse effect on the trading market
for the securities. See "Market for Common Equity and Related Stockholder
Matters."
THE EXISTENCE OF PREFERRED STOCK MAY PREVENT A CHANGE IN CONTROL.
Our Articles of Incorporation authorize the issuance of 1,500,000
shares of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors are empowered, without shareholder approval,
to issue preferred stock with dividends, liquidation, conversion, voting or
other rights which could decrease the amount of earnings and assets available
for distribution to holders of common stock and adversely affect the relative
voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be used, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of the
company. See "Description of Securities-Preferred Stock."
THE CONVERSION OF CONVERTIBLE PREFERRED STOCK AND PROMISSORY NOTES MAY EFFECT
OUR MARKET PRICE.
The exact number of shares of common stock issuable upon conversion of
our convertible preferred stock in the aggregate face amount of $5,163,695 will
vary inversely with the market price of our common stock. The holders of common
stock may be materially diluted by conversion of the shares of convertible
preferred stock depending on the future market price of the common stock. The
shares of convertible preferred stock are generally convertible into common
stock based upon the lower of the (i) closing bid price on Nasdaq of the shares
of our common stock on the date of issuance or (ii) the average of the closing
bid price for a fixed period preceding notice of conversion by the
securityholders at a discount. The issuance of shares of common stock issuable
upon the conversion of the shares of convertible preferred stock could result in
immediate and significant dilution. See "Description of Securities-Preferred
Stock."
SALES, OR THE EXPECTATION OF SALES, OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
AFTER THIS OFFERING COULD DECREASE OUR STOCK PRICE.
After this offering, 2,413,504 shares will become eligible for resale
by our current stockholders. Additional shares of common stock are reserved for
issuance pursuant to our outstanding options, warrants and conversion rights may
also become eligible for resale. See "Shares Eligible for Future Sale."
OUR SHARE PRICE MAY BE VERY VOLATILE IN THE FUTURE.
You may not be able to resell your shares at or above the price paid
for the shares due to a number of factors, including:
12
<PAGE> 13
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance
or changes in financial estimates of securities analysts;
- increased competition;
- the operating and stock price performance of other comparable
companies; and
- general stock market or economic conditions.
In addition, the stock market in general has experienced volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect the
trading price of the common stock regardless of our actual operating
performance. See "Market for Common Equity and Related Stockholder Matters."
PROVISIONS OF LAW MAY PREVENT TAKE-OVERS OF NATURAL HEALTH TRENDS AND DEPRESS
THE PRICE OF OUR SHARES.
Certain provisions of Florida law could make it more difficult for a
third party to acquire or discourage a third party from attempting to acquire,
control of Natural Health Trends Corp. Such provisions, which are summarized
below under "Description of Securities" could limit the price that investors
might be willing to pay in the future for the common stock because they believe
our management can defeat a take-over of us that could be beneficial to
non-management stockholders. See "Description of Securities-Articles and
Bylaws."
INDEMNIFICATION AND LIMITATION OF LIABILITY OF OUR OFFICERS AND DIRECTORS MAY
INSULATE THEM FROM ACCOUNTABILITY TO STOCKHOLDERS AT SUBSTANTIAL COST TO US.
Our articles of incorporation and by-laws include provisions whereby
our officers and directors are to be indemnified against liabilities to the
fullest extent permissible under Florida law. Our articles of incorporation also
limits a director's liability for monetary damages for breach of fiduciary duty,
including gross negligence. In addition, we have agreed to advance the legal
expenses of our officers and directors who are required to defend against
claims. These provisions and agreements may have the effect of reducing the
likelihood of suits against directors and officers even though such suits, if
successful, might benefit us and our stockholders. Furthermore, a stockholder's
investment in Natural Health Trends may be adversely affected if we pay the cost
of settlement and damage awards against directors and officers. See "Description
of Securities-Indemnification of Officers and Directors."
FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS MAY PROVE TO BE MATERIALLY
INACCURATE.
This prospectus contains forward-looking statements that involve risks
and uncertainties. The words "anticipate," "estimate," "expect," "will,"
"could," "may" and similar words are intended to identify forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including the
risks described above and elsewhere in this prospectus.
13
<PAGE> 14
USE OF PROCEEDS
Since this Prospectus relates to the offering of shares by the selling
securityholders, we will not receive any proceeds from the sales of the shares
of common stock offered hereby. See "Selling Securityholders."
14
<PAGE> 15
CAPITALIZATION
The following table sets forth the actual capitalization of Natural
Health Trends as of December 31, 1999.
<TABLE>
<S> <C>
Capital lease obligations, net of current portion .................................................. $ 53,158
------------
Stockholders' equity:
Preferred Stock, $1,000 par value; 1,500,000 shares authorized; 5,164 shares issued and ............ 5,163,695
outstanding:
Common Stock, $.001 par value: 50,000,000 shares authorized; 7,989,847 shares issued and ........... 7,990
outstanding:
Additional paid-in capital ......................................................................... 21,443,914
Accumulated deficit ................................................................................ (23,165,664)
Deferred compensation .............................................................................. (666,000)
------------
Total stockholders' equity ......................................................................... 2,783,935
------------
Total capitalization ............................................................................... $ 2,837,093
============
</TABLE>
15
<PAGE> 16
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
The common stock is quoted on the Nasdaq SmallCap Market under the
symbol "NHTC." The following table sets forth the range of high and low closing
sale prices as reported by The Nasdaq SmallCap Market for the common stock for
the quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
COMMON STOCK
------------------
<S> <C> <C>
1997
First Quarter............................................... $100.00 $40.00
Second Quarter.............................................. 90.00 35.00
Third Quarter............................................... 40.00 8.75
Fourth Quarter.............................................. 10.00 1.25
1998
First Quarter............................................... 5.00 1.88
Second Quarter.............................................. 3.75 .56
Third Quarter............................................... 2.13 .78
Fourth Quarter.............................................. 4.00 1.91
1999
First Quarter............................................... 5.63 3.56
Second Quarter.............................................. 4.34 3.31
Third Quarter............................................... 4.25 2.47
Fourth Quarter.............................................. 2.93 1.75
2000
First Quarter............................................... 2.00 1.22
</TABLE>
HOLDERS
As of January 22, 1999, we had approximately 192 record holders of its
common stock, and as of January 22, 1999, 1,669 beneficial holders of its common
stock.
16
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected consolidated statements of operations data for
the years ended December 31, 1999, 1998, 1997, 1996 and 1995 and the selected
consolidated balance sheet data at December 31, 1999, 1998, 1997, 1996, and
1995, are derived from the financial statements of Natural Health Trends
included elsewhere herein, which statements have been audited by Feldman Sherb
Horowitz & Co., P.C., independent auditors, whose report thereon is included
elsewhere in this prospectus. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of Natural Health Trends,
including the related notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues .............................................. $ 15,269,631 $ 1,191,120 $ 1,133,726 $ -- $ --
Cost of sales ......................................... 4,267,045 454,370 375,034 -- --
------------ ------------ ------------ ------------ ------------
Gross profit .......................................... 11,002,586 736,750 758,692 -- --
Distributor commissions ............................... 7,229,758 -- -- -- --
Selling, general and
administrative expenses ............................ 10,889,998 3,277,047 4,194,044 232,371 149,675
------------ ------------ ------------ ------------ ------------
Operating loss ........................................ (7,117,170) (2,540,297) (3,435,352) (232,371) (149,675)
Minority interest in loss of
subsidiaries ....................................... 89,756 -- -- -- --
Gain on dissolution ................................... 200,000 -- -- -- --
Other expense ......................................... (67,180) -- -- -- --
Interest expense (net) ................................ (663,289) (199,757) (868,721) (32,209) (Y)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations ....................... (7,557,883) (2,740,054) (4,304,073) (264,580) (149,675)
Gain (loss) from discontinued
operations ......................................... 304,593 (86,234) (2,919,208) (707,408) (1,789,194)
Gain (loss) on disposal ............................... -- 722,640 (501,839) 82,450 (Y)
------------ ------------ ------------ ------------ ------------
Gain (loss) from discontinued
operations ......................................... 304,593 636,406 (3,421,047) (624,958) (1,789,194)
------------ ------------ ------------ ------------ ------------
Loss before extraordinary gain ........................ (7,253,290) (2,103,648) (7,725,120) (889,538) (1,938,869)
Extraordinary gain-forgiveness
of debt ............................................ -- 815,636 (Y) (Y) (Y)
------------ ------------ ------------ ------------ ------------
Net loss .............................................. (7,253,290) (1,288,012) (7,725,120) (889,538) (1,938,869)
Preferred stock dividends ............................. 1,542,590 2,011,905 733,333 -- --
------------ ------------ ------------ ------------ ------------
Net loss to common stockholders ....................... $ (8,795,880) $ (3,299,917) $ (8,458,453) $ (889,538) $ (1,938,869)
============ ============ ============ ============ ============
Basic and diluted income (loss) per common share:
Continuing operations ................................. $ (1.26) $ (2.15) $ (11.60) $ (0.94) $ (0.65)
Discontinued operations ............................... 0.04 0.29 (7.88) (2.23) (7.78)
Extraordinary gain .................................... -- 0.37 (Y) (Y) (Y)
------------ ------------ ------------ ------------ ------------
Net loss .............................................. $ (1.22) $ (1.49) $ (19.48) $ (3.17) $ (8.43)
============ ============ ============ ============ ============
Basic and diluted weighted
average common shares
outstanding ........................................ 7,233,297 2,210,458 434,265 280,350 230,120
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) ............... $ (6,445,055) $ (2,016,734) $ (4,647,844) $ 517,323 $ 1,087,726
Inventories ............................. $ 847,212 $ 314,367 $ 719,726 $ -- $ 124,887
Total assets ............................ $ 11,253,899 $ 6,852,716 $ 8,865,335 $ 417,323 $ 1,957,573
Current liabilities ..................... $ 8,416,806 $ 2,898,022 $ 5,607,038 $ -- $ 869,847
Long-term debt .......................... $ 53,158 $ -- $ 171,875 $ -- $ 27,303
Common stock subject to put ............. $ -- $ 380,000 $ 380,000 $ 380,000 $ --
Stockholders' equity .................... $ 2,783,935 $ 3,574,694 $ 2,395,515 $ 6,205,927 $ 2,151,214
</TABLE>
17
<PAGE> 18
PRO FORMA FINANCIAL DATA
Set forth below is certain selected unaudited summary pro forma
combined financial data for Natural Health Trends Corp. for the periods and as
of the dates, indicated. The summary pro forma combined selected financial data
for Natural Health Trends for the years ended December 31, 1999 and 1998 is
based on our historical financial statements and has been prepared to illustrate
the effects on such historical financial data of the Kaire acquisition which
occurred during February 1999 is presented as if this transaction had occurred
as of January 1, 1998 with respect to the statement of operations. The Kaire
acquisition is reflected using the purchase method of accounting for business
combinations. The historical pro forma combined selected financial data for the
years ended December 31, 1999 and 1998 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The pro
forma combined selected financial data is provided for comparative purposes only
and does not purport to be indicative of the results that actually would have
been obtained if this transaction had been effected on the dates indicated. The
information presented below is qualified in its entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Selected Financial Data" and the
consolidated financial statements and notes thereto included elsewhere in this
Prospectus.
PRO FORMA COMBINED STATEMENT OF OPERATIONS:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------
NATURAL HEALTH KAIRE COMBINED
TRENDS CORP. INTERNATIONAL, INC. ADJUSTMENTS PRO FORMA
-------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues ......................................... $ 1,191,120 $ 26,175,710 $ -- $ 27,366,830
Cost of sales .................................... 454,370 6,250,433 -- 6,704,803
------------ ------------ ------------ ------------
Gross profit ..................................... 736,750 19,925,277 -- 20,662,027
Distributor commissions .......................... -- 13,537,777 -- 13,537,777
Selling, general and administrative
expenses ...................................... 3,277,047 10,155,191 575,495 14,007,733
Interest expense, (net) .......................... 199,757 939,930 -- 1,139,687
------------ ------------ ------------ ------------
Loss from continuing operations .................. (2,740,054) (4,707,621) (575,495) (8,023,170)
Preferred stock dividends ........................ 2,011,905 (Y) 396,069 2,407,974
------------ ------------ ------------ ------------
Loss to common stockholders ...................... $ (4,751,959) $ (4,707,621) $ (971,564) $(10,431,144)
============ ============ ============ ============
Basic and diluted loss per common share .......... $ (2.15) $ (4.72)
============ ============
Basic and diluted weighted average common
shares outstanding ............................ 2,210,458 2,210,458
============ ============
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
NATURAL HEALTH KAIRE COMBINED
TRENDS CORP. INTERNATIONAL, INC.(3) ADJUSTMENTS PRO FORMA
-------------- ---------------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues .................................... $ 15,269,631 $ 2,303,006 $ -- $ 17,572,637
Cost of sales ............................... 4,267,045 426,219 -- 4,693,264
------------ ------------ ------------ ------------
Gross profit ................................ 11,002,586 1,876,787 -- 12,879,373
Distributor commissions ..................... 7,229,758 1,145,149 -- 8,374,907
Write-down of patent and .................... 3,166,841 -- (Y) 3,166,841
goodwill
Selling, general and administrative ......... 7,723,157 866,724 123,132 8,713,013
expenses
Interest expense, (net) ..................... 586,589 (Y) (Y) (586,589)
------------ ------------ ------------ ------------
Loss from continuing operations ............. (7,557,883) (135,086) (123,132) (7,816,101)
Preferred stock dividends ................... 1,542,590 (Y) 1,556 1,544,146
------------ ------------ ------------ ------------
Loss to common stockholders ................. $ (9,100,473) $ (135,086) $ (124,688) $ (9,360,247)
============ ============ ============ ============
Basic and diluted loss per common
share .................................... $ (1.22) $ (1.43)
============ ============
Basic and diluted weighted average
common shares outstanding ................... 7,233,297 7,233,297
============ ============
</TABLE>
- -----------
(1) To reflect the amortization of goodwill and customer list incurred
through the Kaire acquisition over a period of 15 and 10 years,
respectively.
(2) To reflect imputed and accrued dividends on preferred stock issued in
the Kaire acquisition.
(3) To reflect the operations of Kaire International, Inc. from January 1,
1999 to February 19, 1999.
18
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Prior to August 1997, Natural Health Trends' operations consisted of
the operation of natural health care centers and vocational schools. Upon the
acquisition of Global Health on July 23, 1997, Natural Health Trends commenced
marketing and distributing a line of natural, over-the-counter homeopathic
pharmaceutical products. In February 1999, Natural Health Trends acquired
substantially all of the assets of Kaire International, Inc. and commenced
marketing and distributing a line of natural, herbal based dietary supplements
and personal care products through an established network marketing system. We
discontinued the operations of the natural health care centers during the third
quarter of 1997 and sold the vocational schools in August 1998. During most of
the year ended December 31, 1997, our ongoing lines of business were not in
operation, not having been acquired until July 1997 and February 1999.
In December 1999, we foreclosed on a $4,764,000 demand secured
promissory note held by us against Global Health. Among other rights, we
received all rights relating to Natural Relief 1222 and the Ellon brand name. We
plan to use our resources for the development of other less capital intensive
distribution channels such as network marketing through Kaire Nutraceuticals,
institutional sales and licensing agreements. As a result of a working capital
deficit of Global Health of approximately $2,090,000 as of December 31, 1999, we
are considering filing a petition for Global Health for protection from
creditors under the bankruptcy laws. However, we are presently attempting to
achieve settlements with our creditors and we are considering discontinuing the
operations of Global Health. In the event that we are unable to achieve
satisfactory settlements with our creditors and we file a petition for
protection from creditors under the bankruptcy laws, there could be a material
adverse effect on our financial condition.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenues
Revenues for the year ended December 31, 1999 were approximately
$15,270,000 as compared to revenues for the year ended December 31, 1998 of
approximately $1,191,000, an increase of approximately $14,079,000 or 1,282.1%.
Sales for the year ended December 31, 1998 were primarily from Global Health.
The increase in sales is primarily attributable to Kaire Nutraceuticals' sales
of approximately $14,401,000 which commenced on February 19, 1999. Global
Health's revenues declined approximately $132,000 or 13.2% during the year ended
December 31, 1999 as compared to the year ended December 31, 1998 due to a
change in the marketing approach used by Natural Health Trends to a less capital
intensive method.
Cost of Sales
Cost of sales for the year ended December 31, 1999 was approximately
$4,267,045 or 27.9% of revenues. Cost of sales for the year ended December 31,
1998 was $454,000 or 38.1% of revenues. The total cost of sales increased by
approximately $3,813,000 or 839.9% of which approximately $3,938,000 was
attributable to the Kaire Nutraceuticals and its related operations. The
decrease in the cost of sales as a percentage of revenues is also attributable
to the effect of Kaire Nutraceuticals' sales due to the different pricing
structure associated with Kaire Nutraceuticals' sales distribution channel.
Gross Profit
Gross profit increased from approximately $737,000 in the year ended
December 31, 1998 to approximately $11,003,000 in the year ended December 31,
1999. The increase was approximately $10,266,000 or 1,357.3%. The increase was
attributable to Kaire Nutraceuticals' gross profit.
19
<PAGE> 20
Commissions
Distributor commissions were approximately $7,230,000 or 47.3% of
revenues in the year ended December 31, 1999 attributable to Kaire
Nutraceuticals' marketing system.
Selling, General and Administrative Expenses
Selling, general and administrative costs increased from approximately
$3,277,000 or 275.1% of revenues in the year ended December 31, 1998 to
approximately $7,723,000 or 50.6% of revenues in the year ended December 31,
1999, an increase of approximately $4,446,000 or 135.7% which is attributable to
Kaire Nutraceuticals' operations.
Write-down of Patents and Goodwill
For the year ended December 31, 1999 we wrote down our patents and
goodwill by $3,167,000.
Loss from Operations
Operating losses increased from $2,540,000 in the year ended December
31, 1998 to approximately $7,117,000 in the year ended December 31, 1999
representing a 139.7% increase in the loss or approximately $4,577,000 between
comparable periods. This increase is due primarily to larger losses being
incurred by Global Health due to reduced revenues without a corresponding
reduction in operating expenses.
Interest Expense
Interest expense was approximately $200,000 or 16.8% of revenues in the
year ended December 31, 1998 increased to approximately $663,000 or 4.3% of
revenues in the year ended December 31, 1999, a change of approximately
$464,000. This increase is primarily due to the beneficial conversion feature of
certain debt instruments.
Income Taxes
Income tax benefits were not reflected in either period. The
anticipated benefits of utilizing net operating losses against future profits
was not recognized in the years ended December 31, 1999 or 1998 under the
provisions of Financial Standards Board Statement of Financial Accounting
Standards No. 109 (Accounting for Income Taxes), utilizing its loss carry
forwards as a component of income tax expense. A valuation allowance equal to
the net deferred tax asset has been recorded, as management of Natural Health
Trends has not been able to determine that it is more likely than not that the
deferred tax assets will be realized.
Net Loss from Continuing Operations
Net loss from continuing operations was approximately $7,558,000 in the
year ended December 31, 1999 or 49.5% of revenues as compared to approximately
$2,740,000 or 230.0% of revenues in the year ended December 31, 1998.
Discontinued Operations
In February, 1998, Natural Health Trends closed the natural health care
center in Pompano Beach, Florida. The anticipated gain on this discontinued
operation was reflected in the years ended December 31, 1999 and 1998,
respectively.
Gain on Forgiveness of Debt
During the year ended December 31, 1998, Natural Health Trends realized
a $816,000 gain on the work-out of various debt and payables of Global Health.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Total revenues for continuing operations for the year ended December
31, 1998 were $1,191,120, as compared to revenues of $1,133,726 for the year
ended December 31, 1997, an increase of 5.1%. Although revenues increased during
the year ended December 31, 1998, the revenues for the year ended December 31,
1998 reflect operations for a full year. However, the revenues for the year
ended December 31, 1997, reflect operations for five months. On an annualized
basis revenues decreased by 57%. Management believes that the decrease in
revenues is primarily attributable to a decrease in the sale of Natural Relief
1222 to mass market retailers and major drug chains. Management believes that
such decrease is due to a decrease in spending on marketing and advertising as a
result of management's decision to pursue less capital intensive channels of
distribution.
Cost of Sales
Cost of sales for the year ended December 31, 1998 were $454,370 (38.1%
of revenues), as compared to $375,034 (33.1% of revenues) for the year ended
December 31, 1997. Gross profit for the year ended December 31, 1998 was
$736,750 (61.9% as a percentage of revenues) as compared to $758,692 (66.9% as a
percentage of revenues) for the year ended December 31, 1997. Management
believes that the decrease in gross profit as a percentage of revenues is
primarily attributable to a write-down of $75,000 for obsolete inventory for the
year ended December 31, 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended
December 31, 1998 were $3,277,047, as compared to $4,194,044 for the year ended
December 31, 1997, a decrease of 21.9%. Management believes that the decrease in
selling, general and administrative expenses is primarily attributable to
reduced spending on advertising and promotion. Advertising and promotion
expenses were $1,771,095 for the year ended December 31, 1997 as compared to
$692,344 for the year ended December 31, 1998.
Interest Expense
Interest expense for the year ended December 31, 1998 was $199,757 as
compared to $868,721 for the year ended December 31, 1997. Excluding the
amortization of notes payable discount (related to Natural Health Trends'
convertible debentures) which amounted to $433,333 for the year ended December
31, 1997, interest expense decreased by 54.1%. Management believes that the
decrease in interest expense is primarily attributable to the conversion of
convertible debentures during the fourth quarter of the year ended December 31,
1998 and the first quarter of the year ended December 31, 1997.
Discontinued Operations
In October 1997, we closed our natural health care center in Boca
Raton, Florida. In February 1998, we sold our remaining natural health care
center in Pompano Beach, Florida. The anticipated losses on these discontinued
operations were reflected in the year ended December 31, 1997. In August 1998,
we sold our three vocational schools and certain related businesses, recognizing
a gain of $1,424,379 from the sale. In November 1998, we sold an office building
which previously accommodated our corporate headquarters and one of our
vocational schools, realizing an estimated loss of $829,000 which was reflected
in the quarter ended September 30, 1998.
Gain on Forgiveness of Debt
During the year ended December 1998, we realized a gain of $815,636 on
the work-out of various debt and trade payables.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our working capital and capital expenditure requirements
primarily from cash provided through borrowings from institutions and
individuals, and from the sale of our securities in private placements. Our
other ongoing source of cash receipts has been from the sale of Global Health's
and Kaire Nutraceuticals' products.
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In February 1998, we issued $300,000 face amount of Series B Preferred
Stock, net of expenses of $38,500. The Series B Preferred Stock has been
converted into 541,330 shares of common stock.
In April 1998, we issued $4,000,000 face amount of Series C Preferred
Stock, net of expenses of $492,500 from the proceeds raised, we paid $2,500,000
to retire $1,568,407 face value of Series A Preferred Stock outstanding. The
Series C Preferred Stock has been converted into 3,608,296 shares of common
stock.
In July 1998, we issued $75,000 face amount of Series D Preferred
Stock, which was redeemed in August 1998 for $91,291.
In August 1998, we issued $1,650,000 face amount of Series E Preferred
Stock, net of expenses of $210,500. The Series E Preferred Stock pays dividends
of 10% per annum and is convertible into shares of common stock at the lower of
the closing bid price on the date of issue or 75% of the market value of the
common stock. In September 1999, $610,000 of face amount of Series E Preferred
Stock was converted into 603,130 shares of common stock.
In August 1998, we sold our three vocational schools and certain
related businesses for $1,778,333 and other consideration. From the proceeds
from the sale of the schools, we paid $1,030,309 to retire the remaining
$631,593 face value of Series A Preferred Stock then outstanding, and $91,291 to
redeem all of the Series D Preferred Stock outstanding. The remaining proceeds
were used to pay down payables.
In March and April 1999, we issued $1,400,000 of Series H Preferred
Stock. The Series H Preferred Stock pays dividends of 10% per annum and is
convertible into shares of common stock at the lower of the closing bid price on
the date of issue or 75% of the market value of the common stock.
In June 1999, we borrowed $100,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion.
In July 1999, we borrowed $50,000 from H. Newcomb Eldredge and issued a
nine month secured promissory note bearing interest at the rate of 14% per
annum, but in no event shall the interest payable be less than $5,000. In
November 1999, the note to H. Newcomb Eldredge was repaid in full with interest.
In July 1999, we borrowed $50,000 from Capital Development S.A. and
issued a nine month secured promissory note bearing interest at the rate of 14%
per annum, but in no event shall the interest payable be less than $5,000. In
November 1999, the note was repaid in full with interest.
In July and August 1999 we borrowed $150,000 from Filin Corporation,
and issued a secured promissory note due on the earlier of 60 days from the date
of issuance or upon the sale of our securities resulting in gross proceeds of at
least $5,000,000 and bearing interest at the rate of 10% per annum, but in no
event less than $12,000. In October 1999 we amended the promissory note to
provide that the note is payable upon demand and is convertible into shares of
common stock at a discount equal to 60% of the average closing bid price of the
common stock on the three days preceding notice of conversion.
In October 1999, we borrowed $100,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion.
In November 1999, we borrowed $70,000 from Domain Investments, Inc. The
loan bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of common stock at a discount equal to 60% of the
average closing bid price of the common stock on the three days preceding notice
of conversion. This note was repaid with interest in March 2000.
During 1999, we have not made our payroll tax deposits with the
Internal Revenue Service and the various state taxing authorities on a timely
basis. The Company has filed all required payroll tax returns and is currently
negotiating a payment plan with the IRS. As of December 31, 1999, we owed
approximately $668,400 of delinquent payroll tax
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liabilities including interest and penalties. Our failure to pay our delinquent
payroll tax liabilities could result in tax liens being filed by various taxing
authorities.
During 1999, we did not make our sales tax deposits with the various
sales tax authorities on a timely basis. We have filed all required returns. As
of December 31, 1999, we owed approximately $189,900 in current and delinquent
sales taxes which is included in other current liabilities. Our failure to pay
our delinquent sales taxes could result in tax liens being filed by various
taxing authorities.
In March 2000, we sold 1,000 shares of Series J Preferred Stock with a
stated value of $1,000 per share realizing net proceeds of $1,000,000. The
preferred stock pays a dividend at the rate of 10% per annum. The preferred
stock and the accrued dividends thereon are convertible into shares of our
common stock at a conversion price equal to the lower of the closing bid price
on the date of issuance or 70% of the average closing bid price of the common
stock for the lowest three trading days during the twenty day period immediately
preceding the date on which we receive notice of conversion from a holder. In
connection with the offering of the Series J Preferred Stock, we issued warrants
to purchase 141,907 shares of common stock at an exercise price of $1.41.
At December 31, 1999, our ratio of current assets to current
liabilities was .23 to 1.0 and we had a working capital deficit of approximately
$6,455,000.
Cash used in operations for the period ended December 31, 1999 was
approximately $715,000. Cash used by investing activities during the period was
approximately $1,677,000, which primarily relates to the Kaire acquisition and
computer upgrades at Kaire. Cash provided by financing activities during the
period was approximately $2,532,000, primarily from the issuance of preferred
stock of approximately $3,724,000 and partially offset by the redemption of
preferred stock of approximately $1,552,000. Total cash increased by
approximately $140,000 during the period.
Our independent auditors' report on our consolidated financial statements stated
as of December 31, 1999 due to net losses and a working capital deficit, there
is substantial doubt about our ability to continue as a going concern. We
require additional financing to continue operations of which there can be no
assurance. Management has revised its business plan of marketing development and
support for Global Health's products, licensing rights to sell its products. We
believe that we will require approximately $1,500,000, primarily to finance
operations for the next 12 months. We intend to raise such additional financing
through additional debt and equity financings, of which there can be no
assurance and for which there are no commitments or definitive agreements. As of
December 31, 1999, Global Health owed approximately $2,090,000 to creditors and
had a working capital deficit of approximately $2,090,000. We have not reached
satisfactory settlements with Global Health's creditors and we have ceased the
operation of Global Health and may file for protection from creditors under the
bankruptcy laws. There can be no assurance that we will be able to achieve
satisfactory settlements with our creditors or secure such additional financing.
Our failure to achieve satisfactory settlements with our creditors and secure
additional financing would have a material adverse effect on our business,
prospects, financial conditions and results of operations and we may have to
curtail or cease operations.
BUSINESS
Natural Health Trends Corp. is a corporation which develops and
operates businesses, in one business segment, to promote human wellness. Through
Kaire Nutraceuticals, Inc., our wholly-owned subsidiary, we utilize a network of
independent associates to offer a line of approximately 60 products.
ACQUISITION OF SUBSTANTIALLY ALL OF THE ASSETS OF KAIRE INTERNATIONAL, INC.
In February 1999, our newly formed, wholly-owned subsidiary, Kaire
Nutraceuticals, Inc., acquired substantially all of the assets of Kaire
International, Inc. including, but not limited to, the names "Kaire," "Kaire
International, Inc." and all variations and any other product name and all other
registered or unregistered trademarks, tradenames, service marks, patents,
logos, and copyrights of Kaire International, Inc. all accounts receivable,
contractual rights and product formulations to any and all products of Kaire
International, Inc., product inventory, "800" and other "toll-free" telephone
numbers, product supply contracts (including, but not limited to, its
Enzogenol(TM)product), independent associate lists, and shares of capital stock
owned by Kaire International, Inc. in each of its wholly-owned and/or partially
owned subsidiaries including, but not limited to, Kaire New Zealand Ltd., Kaire
Australia Pty Ltd., Kaire Trinidad, Ltd. and Kaire Europe Ltd. (but excluding
Kaire Korea Ltd.). We subsequently ceased operations of Kaire Europe in March
2000.
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In exchange for the Kaire assets, we issued (i) to Kaire International,
Inc., $2,800,000 aggregate stated value of Series F Preferred Stock; (ii) to two
creditors of Kaire International, Inc., $350,000 aggregate stated value of
Series G Preferred Stock; and (iii) to Kaire International, Inc., five-year
warrants to purchase 200,000 shares of our common stock exercisable at $4.06 per
share. In addition, Kaire Nutraceuticals has agreed to make certain payments to
Kaire International, Inc. each year for a period of five years (the "Kaire
Nutraceuticals Net Income Payments") commencing with the year ending December
31, 1999, to be determined as follows:
(i) 25% of the net income of Kaire Nutraceuticals if the net sales
of Kaire Nutraceuticals in any such year are between $1 and
$10,000,000;
(ii) 33% of Kaire Nutraceuticals' net income if its net sales are
between $10,000,000 and $15,000,000;
(iii) 40% of Kaire Nutraceuticals' net income if its net sales are
between $15,000,000 and $40,000,000; and
(iv) 50% of Kaire Nutraceuticals' net income if its net sales are
in excess of $40,000,000.
The Kaire Nutraceuticals Net Income Payments shall be reduced on a
dollar-for-dollar basis to the extent of (A) all indebtedness of Kaire
International, Inc. assumed by Kaire Nutraceuticals; (B) all other direct and/or
indirect costs or expenses assumed and/or otherwise incurred by us, or resulting
from, Kaire International, Inc. including, but not limited to, litigation costs,
payments of sales or other taxes, expenses of officers of Kaire International,
Inc., and other payments or expenses resulting directly and/or indirectly from
the acquisition of the Kaire assets; and (C) any reasonable inter-company
obligations resulting from third party payments made by us on behalf of (or
allocable proportionately to) Kaire Nutraceuticals by us that resulted from the
acquisition of the Kaire assets. In addition, all amounts set-off against Kaire
Nutraceuticals Net Income Payments are cumulative and, if not set-off in the
year they are paid (or incurred) because Kaire Nutraceuticals did not have a
sufficient amount of Net Income (or for any reason), such set-off amounts shall
accrue and be used as a set-off in the earliest possible year or years.
In connection with the Kaire acquisition, Kaire Nutraceuticals assumed
certain specified liabilities of Kaire International, Inc. including: (i)
approximately $475,000 owed to MW International Inc.; (ii) approximately $50,000
owed to Manhattan Drug Company; (iii) approximately $120,000 in the aggregate
owed to Robert L. Richards and Mark Woodburn (both officers and directors of
Kaire International, Inc.); (iv) up to approximately $120,000 in unpaid payroll
taxes of Kaire International, Inc.; and (v) up to $180,000 owed to STAR
Financial Bank.
In addition, Kaire Nutraceuticals has agreed to indemnify certain
officers of Kaire International against all amounts paid following the
acquisition of the Kaire assets by such persons resulting from unpaid sales
taxes accrued by Kaire International prior to the closing date of the Kaire
acquisition.
In connection with the Kaire acquisition, we retained BLH, Inc. as a
consultant. In accordance with the terms of the consulting agreement, BLH was to
identify companies which we could effect a business combination. BLH introduced
Kaire International to us. Pursuant to the terms of the consulting agreement,
BLH, Inc. earned a fee of approximately $430,000 in connection with the Kaire
acquisition which was paid in February, 1999 by issuing 516 shares of Series I
Preferred Stock. The Series I Preferred Stock was converted into 160,104 shares
of common stock during July 1999.
INDUSTRY OVERVIEW
NATURAL HEALTH PRODUCTS
We believe that the market for natural products and supplements is
being driven by information in the mass media which continues to highlight
problems with the American diet; the fact that American consumers are becoming
increasingly disenchanted with and skeptical about many conventional medical
approaches to disease treatment; growing consumer interest in and acceptance of
natural and alternative therapies and products; and, finally, recent
clarifications and changes of food and drug laws that have eased significantly
the regulatory burdens associated with the introduction and sale of dietary
supplements.
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We believe that public awareness of the positive effects of nutritional
supplements and natural remedies on health has been heightened by widely
publicized reports and medical research findings indicating a correlation
between the consumption and use of a wide variety of nutrients and natural
remedies and the reduced incidence of certain diseases.
We believe, although there can be no assurance, that the aging of the
United States population, together with an increased focus on preventative and
alternative health care measures, will continue to fuel increased demand for
certain nutritional supplement products and natural remedies. Management also
believes that the continuing shift to managed healthcare delivery systems will
place greater emphasis on disease prevention and health maintenance, areas with
which natural health products are most identified.
With respect to the distribution of natural health products, while
distribution through small to large sized natural and health food stores remains
significant, the bulk of the growth is found in the mass merchandisers and
health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.
DIRECT SELLING
According to The Direct Selling Association, network marketing is one
of the fastest growing segments for the distribution of products. The Direct
Selling Association reports that worldwide, over 17.5 million individuals are
now involved in direct selling (of which network marketing is a major segment)
and that those involved in direct selling generate $80 billion in annual sales
around the world. Network marketing sales in the United States are estimated to
be approximately $23 billion annually.
Currently, we have associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand and Trinidad and
Tobago. Management believes that significant market potential exists for its
products in international markets, and it is our intention to explore expansion
into Japan, 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 us.
PRODUCT LICENSING AGREEMENTS
We have developed four products under the Natural Relief 1222 brand
name. Our initial mass market-oriented product, Natural Relief 1222 Arthritis
Relief is a topical, natural, homeopathic medicine. The active ingredients are
Bryonia 6X and Rhus Toxicodendron 6X, in a patented base of natural ingredients.
This product is intended to be utilized for the temporary relief of minor pains
and stiffness of muscles and joints associated with arthritis. Arthritis Relief
was introduced in July 1997 through a nationwide television direct response
advertising campaign. In December 1997, we introduced three extensions to the
Natural Relief 1222 product line-Sports Rub, Wart Remover, and Dermatitis &
Eczema Relief. We also introduced Arthritis Relief to the mass consumer
distribution channels through a broker network. We obtained distribution of
Arthritis Relief in several drug chains. However, due to the capital intensive
nature of mass market distribution, we have revised our business plan of
marketing and support for our products, decreasing its emphasis on mass market
advertising. Instead, we plan to use our resources for the development of other
less capital-intensive distribution channels (e.g., network marketing which will
be facilitated through Kaire Nutraceuticals).
In January 2000, we entered into a licensing agreement with GLI, Inc.,
of which our former president, Joseph Grace, is a principal. We licensed to GLI
certain rights to manufacture, distribute and sell the four Natural Relief 1222
products through various distribution channels and the exclusive right to the
trademark "Natural Relief 1222". The licensing agreement is for a percentage of
GLI's net sales for five years with a minimum royalty guaranteed. After five
years, the royalty is reduced to a lower percentage of net sales with no minimum
royalty guaranteed. As part of the licensing agreement, GLI agreed to purchase
any unused inventory of the product.
We marketed a line of homeopathic flower remedies under the Ellon trade
name, which consists of 38 individual flower remedies and one combination flower
remedy, sold as Calming Essence(R). These products are regulated
over-the-counter pharmaceuticals which are intended to be utilized for the
relief of a range of emotional and psychological stresses. Calming Essence has
been sold principally to natural and health food retailers and distributors, and
to alternative health
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care practitioners. We compete in this category with several other established
lines of homeopathic flower remedies, including the Bach and Flower Essence
Services product lines.
In February 2000, we entered into a licensing agreement with Ellon
Botanicals, Inc. in which we granted to Ellon Botanicals the exclusive license
to market and use all patents, service marks, trademarks associated with the
Ellon, Calming Essence and ContentMints brand names. The licensing agreement is
for a percentage of Ellon Botanicals net sales for a period of four years with a
minimum royalty guaranteed. As part of the licensing agreement, Ellon Botanicals
agreed to purchase any unused inventory of the product.
PRODUCTS
Kaire Nutraceuticals develops and distributes, through a network of
independent associates, products that are intended to appeal to health-conscious
consumers. Current products include health care supplements and personal care
products. Kaire Nutraceuticals offers a line of approximately 60 products which
it divides into six categories, including, including Energize, Enhance,
Optimize, Renew, Restore and Revive.
Energize
This line is primarily natural stimulants designed to enhance and
increase energy levels and endurance both mentally and physically. Products in
this category include Ginko Shield, which assists in mental alertness and the
circulatory system, Momentum, and RF5, that helps increase and balance energy
levels and gives one an overall sense of well-being.
Enhance
The Enhance product line is designed to support an individual's overall
health and includes such products as Immunol, Colloidal Silver Kaire, Colon
Complex, Synerzyme, Kavatu, Arthrokaire, Osteo Formula, CPM9, Royal Hawaiian
Noni, Slimkaire, and SinusKaire.
Immunol is a shark liver based capsule which we believe aids in the
human immune system. This product is imported exclusively by Kaire
Nutraceuticals.
Colloidal Silverkaire, 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.
A colon-cleansing product, Colon Complex, is 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.
CPM9 includes cetyl-myristoleate, which has been cited as a critical
nutrient for chronic pain due to connective tissue disorders. It assists the
body in modulating inflammatory response and adding flexibility to affected
tissues.
Noni is derived from a fruit grown only in the Central and South
Pacific, and 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.
Slimkaire is a new time-release, thermogenic weight management program
with five herbal blends; including a thyroid support blend, that is designed to
work as a system to assist weight loss safely while giving the dieter a higher
level of energy and maintaining a healthy body. This system concept is based
upon a complete program including Kaire Nutraceuticals products, walking or
other sensible exercise available to virtually all individuals and sensible
permanent eating habits. We believe that our proprietary formula, which has no
synthetic stimulant, is superior to competitor blends for the health conscious
individual.
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In addition, Kaire Nutraceuticals offers a second thermogenic weight
management program, SK II, for individuals seeking a product without Ma huang,
(ephedrine).
Developed exclusively for the Canadian market, Sinuskaire, is a similar
formulation to the United States product Slimkaire that also aids in a healthy
sinus function.
Optimize
This category provides for many of the basic vitamins and nutrients,
which are missing in the typical adult or child's diet such as Vita/Minkaire,
Prokids and MSM Complex.
In addition, Kaire Nutraceuticals acquired the right to distribute
Bio10, an organic live source of all 12 lactobacillus bacteria designed to
supplement and maintain optimum health.
Renew
Renew is a complete line of skin care, hair care and topical
analgesic's designed to assist in maintaning a youthful and healthy appearance.
Kaire Nutraceutical's products include Isomer (TM) Personal Solutions, Aloe Gel,
Kobi, Dermakaire with Pycnogenol (TM), and Dermunol.
Isomer (TM) is ourline of skin and hair care products and includes 20
different items to appeal to a wide range of consumers, both male and female.
Kobi combines Australian Aboriginal healing traditions and scientific
research with a patented Emu oil to provide temporary relief of minor aches and
pains associated with simple strains, sprains and arthritis.
DermaKaire with Pycnogenol is a mosturizing, whole-leaf Aloe product
combined with a powerful antioxidant to maintain healthy-looking skin.
Restore
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. We also market St. John's Wort.
In addition, Aloe has been studied for a number of years as everything
from a topical for skin irritations and sunburn to a supplement for improving
the general health of the body. Fruit-N-Aloe is a more palatable form of the
Aloe juice as it is mixed with fruit juices to get the Aloe benefits without the
strong taste of AloElite, a more concentrated form of the Aloe juice.
Revive
This line is primarily nutritional supplements based on antioxidants
including Maritime Prime and EnzoKaire Complete. Most of the products are based
on exclusive formulations in several combinations containing natural products
including Pycnogenol, Enzogenol(TM) and Arctic Root. Products containing
Pycnogenol have not been approved for direct importation into Australia.
Maritime Plus is not available in Canada due to Canadian regulations on the
ascorbate that is contained in this product.
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Pycnogenol, is believed to be highly bioavailable and retained in the
body for several days. Antioxidants have been shown to be effective in fighting
the effects of oxidation on the body. Oxidation is the same process that causes
metals to rust and apples to turn brown. Free radicals, which are molecules
damaged by oxidation, are being studied as the causes of various infirmities in
humans. A free radical is an unstable oxygen molecule seeking, at the molecular
level, to pair up with an electron. Free radicals can be created in the
atmosphere by the exposure of oxygen to sunlight and pollution. Free radicals
can also be created by natural metabolic processes. Antioxidants are molecules
which can combine with and, as a result, neutralize free radicals.
DHEA 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.
In December 1999, we acquired the distribution rights to HIM and HER,
gender-specific, anti-aging formulas designed to compliment the complete Kaire
Nutraceuticals product line.
New Product Development
Additional products being considered in these areas are additional
antioxidants, anti-aging, weight management, and energy products. In addition to
the introduction of single products, Kaire Nutraceuticals is also focusing on
promoting groups of products to be taken in conjunction with each other to
address specific needs (such as weight loss, stress, daily wellness, etc.) that
an individual may have.
Kaire Nutraceuticals intends to seek to identify, develop and introduce
innovative, effective and safe products. Management believes that its ability to
introduce new products increases its associates' visibility and competitiveness
in the marketplace.
Kaire Nutraceuticals maintains its own product review and evaluation
staff but relies upon independent research, vendor research departments,
research consultants and others for product research, development and
formulation services.
Product Warranties and Returns
Kaire Nutraceuticals' product warranties and policy regarding returns
of products are similar to those of other companies in its industry. If a
consumer who enrolled with Kaire subsequent to July 1, 1999, for any of Kaire
Nutraceuticals' products is not satisfied with the product, she/he may return it
to the associate from whom the purchase was made, within 90 days of enrollment.
The associate is required to refund the purchase price to the consumer. The
associate may then return the unused portion of the product to Kaire
Nutraceuticals for an exchange of equal value. If an associate requests a refund
in lieu of an exchange, a check or credit is issued. All associates enrolled
with Kaire prior to July 1, 1999 may return products for exchange or refund
within 30 days from the date of purchase. All products are warranted against
defect by the manufacturer of those products.
Manufacturing
We do not intend to develop our own manufacturing capabilities since
management believes that the availability of manufacturing services from third
parties on a contract basis is adequate to meet our needs. We have utilized a
number of manufacturers who have sufficient manufacturing capacity to meet our
anticipated production needs.
Kaire Nutraceuticals currently purchases all of its vitamins,
nutritional supplements and all other products and ingredients from parties that
manufacture such products to Kaire Nutraceuticals' specifications and standards.
All nutritional supplements, raw materials and finished products are subject to
sample testing, weight testing and purity testing by independent laboratories.
Our products are manufactured to our specifications in facilities in compliance
with Federal Good Manufacturing Practice regulations. The products are shipped
from an independent distribution center located in Texas.
Except for an agreement with Enzo Nutraceuticals, Inc., we have no
existing contractual commitments or other arrangements for the future
manufacture of our products. Rather, we place orders for component or finished
goods
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manufacturing services as required based upon price quotations and other terms
obtained from selected manufacturers. During the year ended December 31, 1999,
we purchased amounts of our products from a limited number of vendors. We
currently buy all of our Pycnogenol, an important component of our products,
from one supplier.
MARKETING AND DISTRIBUTION
Kaire Nutraceuticals' products are distributed through its network
marketing system of associates. Associates are independent contractors who
purchase products directly from Kaire Nutraceuticals 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 Nutraceuticals' products.
Our goal is to offer distributors a business opportunity that allows
the part-time and full-time network marketers to achieve income levels relative
to their business practices and sales levels. Distributors have the opportunity
to earn immediate, residual, and retirement incomes. Bonuses are paid to
qualified distributors based on sales for each month. Rank titles for the
distributors are Associate, Broker, Director, Executive, Managing Executive,
Senior Executive, and Master Executive. Each increased rank has additional
standards to achieve and maintain rank, as well as providing the ability to earn
additional bonuses.
To become an associate, a person must simply sign an agreement to
comply with the policies and procedures of Kaire Nutraceuticals. No investment
is necessary to become an associate. Kaire Nutraceuticals considers
approximately 30,000 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 Nutraceuticals has sponsored opportunity meetings in various key
cities and participates in motivational and training events in its market areas
designed to inform prospective and existing associates about Kaire
Nutraceuticals' product line and selling techniques. Associates give
presentations relating to their experiences with Kaire Nutraceuticals' products
and the methods by which they have developed their own organization of
associates. Specific selling techniques are explained, and emphasis is placed on
the need for consistency in using such techniques. Participants are encouraged
to ask questions regarding selling techniques and product developments, to share
information with other associates and to develop confidence in selling and
goal-setting techniques. Motivation is offered to participants in the form of
recognition, gifts, excursions and tours, which are intended to foster an
atmosphere of excitement throughout the associate organization. Prospective
associates are educated about the structure, dynamics and benefits of Kaire
Nutraceuticals' network marketing system.
Kaire Nutraceuticals continues to develop marketing strategies and
programs to motivate associates. These programs are designed to increase
associates' monthly product sales and the recruiting of new associates. An
example of these programs is the Kaire AutoShip Program.
Under the Kaire AutoShip Program, an associate may enroll in a minimum
ordering program to maintain eligibility for performance bonuses. Minimum orders
ranging from $50 to $550 per month are automatically placed by credit card or
autodraft. The associate also gets preferred pricing, no minimum purchase
requirement (once they have a qualifying select order set up), exclusive access
to some product introductions, and discounts on Kaire Nutraceuticals' sponsored
events.
As part of Kaire Nutraceuticals' maintenance of constant communication
with its associate network, Kaire Nutraceuticals offers the following support
programs to its associates:
Touchtalk and Faxback
An automated telephone system that associates can call 24 hours a day
to place orders, receive reports on the sales activity of their organization and
listen to selected messages on special offers, marketing program updates,
product information, and similar information. Certain information is also
available via facsimile to the associate.
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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 Nutraceuticals maintains a web-site at http:\www.kaireint.com.
There, the user can read news letters, learn more about products, place an order
or sign up to be an associate. In addition, associates can send messages and
orders to Kaire Nutraceuticals e-mail address of kaireint.com. This allows
associates to potentially be able to sponsor associates and order products 24
hours a day.
Product Literature
Kaire Nutraceuticals produces for its associates color catalogs and
brochures displaying and describing Kaire Nutraceuticals' products.
Toll Free Access
A toll free number is available to place orders, sponsor new
associates, and for consumer support.
Broadcast Fax/Broadcast E-mail
Kaire Nutraceuticals' announcements and product specials are
automatically sent via facsimile and/or e-mail to associates who have requested
this service.
Markets
Kaire Nutraceuticals has operations in the United States, Canada,
Australia and New Zealand and Trinidad and Tobago.
Upon deciding to enter a new market, Kaire Nutraceuticals hires local
counsel to assist ensuring that Kaire Nutraceuticals' network marketing system
and products comply with all applicable regulations and that Kaire
Nutraceuticals' profits may be expatriated. In addition, local counsel assists
in establishing favorable relations in the new market area by acting as liaison
between Kaire Nutraceuticals and local regulatory authorities, public officials
and business people. Local counsel also is responsible for explaining Kaire
Nutraceuticals' products and product ingredients to appropriate regulators and,
when necessary, will arrange for local technicians to conduct any required
ingredient analysis tests of Kaire Nutraceuticals' products.
If regulatory approval is required in a foreign market, Kaire
Nutraceuticals' local counsel interfaces with local regulatory agencies to
confirm that all of the ingredients of Kaire Nutraceuticals' products are
permissible within the new market. During the regulatory compliance process,
Kaire Nutraceuticals may alter the formulation, packaging or labeling of its
products to conform to applicable regulations as well as local variations in
customs and consumer habits, and Kaire Nutraceuticals may modify certain aspects
of its network marketing system as necessary to comply with applicable
regulations.
Following completion of the regulatory compliance phase, Kaire
Nutraceuticals undertakes the steps necessary to meet the operational
requirements of the new market. Kaire Nutraceuticals then initiates plans to
satisfy inventory, distribution, personnel and transportation requirements of
the new market, and modifies its associate training materials as may be
necessary to be suitable for the new market.
COMPETITION
Kaire Nutraceuticals competes with many companies which market and sell
products similar to our own products. It also competes intensely with other
network marketing companies in the recruitment of associates.
There are many network marketing companies with which Kaire
Nutraceuticals competes for associates. Some of the largest of these are
Nutrition for Life International, Inc., Nature's Sunshine, Inc., Herbalife
International, Inc., Amway and Rexall Sundown, Inc. Each of these companies is
substantially larger than Kaire Nutraceuticals and has significantly
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<PAGE> 31
greater financial and personnel resources than Kaire Nutraceuticals. Kaire
Nutraceuticals competes for associates by means of its marketing program that
includes its commission structure, training and support services, and other
benefits.
Not all competitors market all types of products marketed by Kaire
Nutraceuticals, and some competitors market products and services in addition to
those marketed by Kaire Nutraceuticals. For example, some competitors are known
for and are identified with sales of herbal formulations, some are known for and
are identified with sales of household cleaning and personal care products, and
others are known for and are identified with sales of nutritional and dietary
supplements. Kaire Nutraceuticals' principal methods of competition for the sale
of products are its responsiveness to changes in consumer preferences and its
commitment to quality, purity, and safety.
GOVERNMENT REGULATION
The Company's president and chief executive officer believe that all of its
existing products are homeopathic medicines which do not require governmental
approvals prior to marketing in the United States. The processing, formulation,
packaging, labeling and advertising of such products, however, are subject to
regulation by one or more federal agencies including the FDA, the Federal Trade
Commission, the Consumer Products Safety Commission, the Department of
Agriculture, the Department of Alcohol, Tobacco and Firearms and the
Environmental Protection Agency. The Company's activities are also subject to
regulation by various agencies of the states and localities in which its
products are sold. In addition, the sale of the Company's products by
distributors in foreign markets are subject to regulation and oversight by
various federal, state and local agencies in those markets.
The FDA traditionally has been the main agency regulating the types of
products sold by homeopathic and natural over-the-counter pharmaceutical firms.
Official legal recognition of homeopathic drugs in the United States dates to
the Federal Food, Drug and Cosmetic Act of 1938. The Food Drug and Cosmetic Act
provides that the term "drug" includes articles recognized in the official
Homeopathic Pharmacopoeia of the United States. The Food Drug and Cosmetic Act
further recognizes the separate nature of homeopathic drugs from traditional,
allopathic drugs by providing that whenever a drug is recognized in both the
U.S. Pharmacopoeia and the Homeopathic Pharmacopoeia, it shall be subject to the
requirements of the U.S. Pharmacopoeia unless it is labeled and offered for sale
as a homeopathic drug, in which case it shall be subject to the provisions of
the Homeopathic Pharmacopoeia and not to those of the U.S. Pharmacopoeia.
In 1988, the FDA issued a Compliance Policy Guide that formally established
the manner in which homeopathic drugs are regulated. The Compliance Policy Guide
provides that homeopathic drugs may only contain ingredients that are generally
recognized as homeopathic. Such recognition is most often obtained via the
publication of a monograph in the Homeopathic Pharmacopoeia. The FDA has also
noted that a product's compliance with a Homeopathic Pharmacopoeia monograph
system does not necessarily mean that it has been shown to be safe and
effective. According to the Compliance Policy Guide, and consistent with
established FDA principles regarding allopathic drugs, a homeopathic drug may
only be marketed without a prescription if it is intended solely for
self-limiting disease conditions amenable to self-diagnosis and treatment. Other
homeopathic drugs must be marketed as prescription products. In addition, if a
Homeopathic Pharmacopoeia monograph states that a drug should only be available
on a prescription basis, this criteria will apply even if the drug is intended
for a self limiting condition. The Compliance Policy Guide provides that the
FDA's general allopathic drug labeling requirements are also applicable to
homeopathic drugs. All firms that manufacture, prepare, compound, or otherwise
process homeopathic drugs must register their drug establishments with the FDA
and must also "list" their drugs with the agency. Homeopathic drugs must also be
manufactured in conformance with "current good manufacturing practices." In
addition, homeopathic drugs are exempt from FDA's requirements for expiration
date labeling.
The Homeopathic Pharmacopoeia is updated regularly. The Homeopathic
Pharmacopoeia was initially published by the Committee on Pharmacy of the
American Institute of Homeopathy and is currently published by the Homeopathic
Pharmacopoeia Convention of the United States, a private, non-profit entity
organized exclusively for charitable, educational, and scientific activities.
The Homeopathic Pharmacopoeia is an official publication that is cited in the
Federal Food and Drug Laws and Compliance Policy Guide. The Homeopathic
Pharmacopoeia contains hundreds of monographs for homeopathic ingredients that
have been found by the Homeopathic Pharmacopoeia Convention to be both safe and
effective. The Homeopathic Pharmacopoeia also contains general standards for the
preparation of homeopathic drugs.
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Based on information provided by the Company's president, 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" ("DSHEA") was enacted. Section 11 of the Dietary Supplement Law provided
that the advance notice of proposed rule making by the FDA concerning dietary
supplements was null and void. FDA regulations that became effective on June 1,
1994 require standard format nutrition labeling on dietary supplements. However,
because the new Dietary Supplement Law also addresses labeling of dietary
supplements, the FDA indicated that it would not enforce its labeling
regulations until January 1, 1998.
Based on information provided by the Company's president, in January 2000,
the FDA issued a final ruling, effective February 7, 2000, related to
structure/function statements that may be claimed on dietary supplement product
labels. The rule provides for clarification of when a structure/function claim
may be made without prior FDA approval and when a claim constitutes disease
related claims. The final rule provides for the adoption of previously issued
language by the Nutrition Labeling and Education Act ("NLEA") for `disease or
health related conditions' and among other things allows for express and implied
disease claims to be made through the name of a product, through a statement
about the formulation of a product, or through the use of pictures, vignettes,
or symbols. The finalized rule now interprets DSHEA to permit structure/function
claims for the effects of "natural states" or common conditions associated with
natural states and may include such phrases as "maintains a healthy circulatory
system". In addition, the FDA acknowledged permissible statements for minor
pain, calming, upset stomach, etc., but not tied to any particular condition or
symptom.
The Company's president believes that the above finalized rule loosens the
restrictions on its labeling of products regarding dietary supplements and
structure/function claims provided that any such statements by the Company does
not suggest that the supplement is intended to augment or replace a specific
prescription drug or therapy for a disease.
Kaire Nutraceuticals is unaware of any legal actions pending or threatened
by the FDA or any other governmental authority against Kaire Nutraceuticals.
Certain ingredients utilized in the Company's weight management products,
primarily ephedrine, are increasingly subject to regulations being promulgated
by various state agencies. These regulations generally limit the amount of the
ingredient or require a conspicuous warning labels be affixed to each product.
In addition, certain states have prohibited the sale of ephedrine based products
to minors or at all. The can be no assurances that the Company will not be
subject to additional regulation on its weight management product line.
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 the nature and
scope of inquiries from government regulatory authorities and the Company's
history of operations in such markets to date, the Company's president believes
that its method of distribution is in compliance in all material respects with
the laws and regulations relating to direct selling activities of the countries
in which Kaire Nutraceuticals currently operates. Even though the Company's
president believes that laws governing direct selling are generally becoming
more permissive, many countries currently have laws in place that would prohibit
Kaire Nutraceuticals from conducting business in such markets. There can be no
assurance that Kaire Nutraceuticals will be allowed to continue to conduct
business in each of its existing markets that it currently services or any new
market it may enter in the future.
The Company's president believes that Kaire Nutraceuticals is in material
compliance with all regulations applicable to it. Despite this belief, the
Company may be found not to be in material compliance with existing regulations
as a result of, among other things, the considerable interpretative and
enforcement discretion given to regulators or misconduct by associates. There
can be no assurances that the Company will not be subject to inquiries and
regulatory investigations or disputes and the effects of any adverse publicity
resulting therefrom. Any assertion or determination that the Company or any of
its associates are not in compliance with existing laws or regulations
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could have a material adverse effect on the Company' business and results of
operations. In addition, in any country or jurisdiction, the adoption of new
laws or regulations or changes in the interpretation of existing laws or
regulations could generate negative publicity and/or have a material adverse
effect on the Company' business and results of operations. The Company cannot
determine the effect, if any, that future governmental regulations or
administrative orders may have on the Company's business and results of
operations. Moreover, governmental regulations in countries where the Company
may commence or expand its operations may prevent, delay or limit market entry
of certain products or require the reformulation of such products. Regulatory
action, whether or not it results in a final determination adverse to the
Company, has the potential to create negative publicity, with detrimental
effects on the motivation and recruitment of associates and consequently, on the
Company's sales and earnings.
EMPLOYEES
As of March 31, 2000, we had 30 full time employees and 2 part time
employees of which 13 were involved in sales and marketing, 8 in administration
and finance and 11 in operations. None of our employees are represented by a
union, and we believe that our employee relations are good.
INSURANCE
We carry general liability insurance in the amount of $5,000,000 per
occurrence and $6,000,000 in the aggregate including product liability
insurance. There can be no assurance, however, that our insurance will be
sufficient to cover potential claims or that an adequate level of coverage will
be available in the future at a reasonable cost, if at all. A successful claim
could have a material adverse effect on us.
PATENTS AND TRADEMARKS
We have a United States Patent covering the use of certain inactive
botanical ingredients as a base for several of its Natural Relief 1222 products.
We have obtained marketing and manufacturing rights to a family of
Chinese-origin, patented, natural topical medical products. We have federal
trademark registrations for Natural Relief 1222, Ellon, Calming Essence,
Contentmints and Mesozoic Minerals. We also have trademark registrations for
Nature's Relief and Nature's Relief 1222 in Canada. Most Kaire Nutraceuticals'
products are packaged under Kaire Nutraceuticals' "private label." Kaire
Nutraceuticals has registered trademarks with the United States Patent and
Trademark Office for its name, logo and various products names. It has applied
for trademark registration in several countries outside of those it is currently
operating in for its name, logo and various product names.
Additional trademark registration applications which may be filed by us
with the United States Patent and Trademark Office and in other countries may or
may not be granted and the breadth or degree of protection of our existing or
future trademarks may not be adequate. Moreover, we may not be able to defend
successfully any of its legal rights with respect to our present or future
trademarks. Our failure to protect our legal rights to our trademarks from
improper appropriation or otherwise may have a material adverse effect on our
business.
LEASED PROPERTIES
Kaire Nutraceuticals leases an aggregate of approximately 8,500 square
feet of office and warehouse space in an office complex in Longmont, Colorado.
The lease term is month to month and the current rate is approximately $93,000
per year. The Australian and New Zealand subsidiaries also lease their office
and warehouse facilities of approximately 8,000 square feet for a period of four
years at an annual rental of $30,000 and $24,000, respectively. 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. We believe
that such properties are suitable and adequate for our current operating needs.
LEGAL PROCEEDINGS
On August 4, 1997 Samantha Haimes brought an action in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against us and National Health
Care Centers of America, Inc., our wholly-owned subsidiary. We have have
asserted counterclaims against Samantha Haimes and Leonard Haimes. The complaint
arises out of the defendant's alleged breach of contract in connection with our
natural health care center which was located in Boca Raton, Florida. We are
vigorously defending the action. The plaintiff is seeking damages in the amount
of approximately $535,000. On September 10, 1997 Rejuvenation Unlimited, Inc and
Sam Lilly, Inc. brought an action in the Fifteenth Judicial Circuit of Palm
Beach County, Florida, arising out of the Company's alleged breach of contract
in connection with the acquisition of
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the Company's natural health care center which was located in Boca Raton,
Florida from the plaintiff. The plaintiff is seeking damages in excess of
$15,000. We have agreed to settle such actions for shares of common stock with a
fair market value of $325,000, but not less than 125,000 shares of common stock.
We are registering the shares of common stock for resale in this offering.
In Global Health and Ellon, Inc. v. Leslie Kaslof, Ralph Kaslof, and
Ellon USA, Inc., pending in the United States District Court for the District of
Maine (the "Maine Kaslof Case") claims have been made arising out of the sale of
Ellon USA's ("Old Ellon") assets to Global Health's wholly-owned subsidiary,
Ellon, Inc. ("New Ellon"). In connection with that sale, Leslie Kaslof and Ralph
Kaslof, former shareholders and officers of Old Ellon, entered into employment
and consulting agreements with Global Health. Global Health's potential
obligation to the Kaslofs under the employment and consulting agreements was
approximately $525,000. The complaint in the Maine Kaslof Case seeks a
determination that the Kaslofs materially breached their respective obligations
under the agreements and that Global Health and New Ellon are excused from
further performance thereunder. The complaint includes a breach of fiduciary
claim against Ralph Kaslof, as well as a claim to recover approximately
$142,000. In a related civil action brought by the Kaslofs and Old Ellon in the
United States District Court for the Eastern District of New York (the "New York
Kaslof Action"). The Kaslofs have alleged breaches of the purchase and sale
agreement, the employment and consulting agreements, and other agreements
executed in connection with the sale of Old Ellon's assets. The complaint seeks
to recover damages in an unspecified amount, but not less than $1,300,000, costs
of court, reasonable attorney fees, and interest. Global Health intends to
vigorously defend any and all claims asserted by the Kaslofs and their
corporation.
Inter/Media Time Buying Corp. ("Inter/Media") v. Global Health, et al.,
which is pending in the United States District Court for the Central District of
California (the "Inter/Media Action"), is based on Inter/Media's provision of
marketing, media purchasing, and related advertising services to Global Health
in connection with Natural Relief 1222. The complaint seeks compensatory damages
of $144,500, unstated special damages, attorney fees and costs of court. Global
Health answered the complaint, denying all material allegations therein, and
asserting a counterclaim arising out of Inter/Media's creation of a defective
national direct response campaign which prevented a successful nationwide retail
launch for a clinically-proven product. By its counterclaim, which includes
claims for breach of contract, negligence, intentional interference with a
prospective economic advantage, fraud and intentional misrepresentation, and
negligent misrepresentation, Global Health seeks to recover general damages of
not less than $6,500,000, special damages, costs of suit, and reasonable
attorney fees. Inter/Media has sought an attachment against Global Health's
assets for the full amount of its claims. Global is continuing its settlement
discussions with Inter/Media.
In PIC-TV v. Global Health, et al., PIC-TV seeks to recover
compensatory damages of not less than $319,656, together with interest and costs
of suit, based on the sale of advertising time and sponsorships to Global
Health. Global Health has answered the complaint, and is also continuing its
settlement discussions with PIC-TV.
In September 1999 Command Financial Press Corp. commenced an action in
the Supreme Court of the State of New York in New York City against us for
unpaid invoices for printing services in the amount of approximately $65,000. We
are defending this action.
MANAGEMENT INFORMATION SYSTEMS
Kaire Nutraceuticals maintains a computerized system for processing
associate orders and calculating associate commission and bonus payments
enabling it to promptly remit payments to associates. Kaire Nutraceuticals
believes that prompt remittance of commissions and bonuses is vital to
maintaining a motivated network of associates and that associate loyalty has
been enhanced by Kaire Nutraceuticals making commission and bonus payments as
scheduled.
Kaire Nutraceuticals' computer system provides each associate a
detailed monthly accounting of all sales and recruiting activity in his or her
organization. These convenient statements eliminate the need for substantial
record keeping on behalf of the associate. As a precaution, duplicate copies of
Kaire Nutraceuticals' computer records are transferred daily to an off-site
location for safekeeping.
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MANAGEMENT
The following table sets forth certain information concerning our
directors and executive officers.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert L. Richards........................................... 53 President, Chief Executive Officer and Director
Mark D. Woodburn............................................. 29 Chief Financial Officer, Secretary and Treasurer
Martin C. Licht.............................................. 57 Director
Dirk D. Goldwasser........................................... 38 Director
</TABLE>
The following is a brief summary of the background of each executive
officer and director of us:
ROBERT L. RICHARDS is the Chief Executive Officer of Kaire
Nutraceuticals and became our director in April 1999 and president and chief
executive officer of Natural Health Trends in September 1999. He was a
co-founder and had been an executive officer and director of Kaire
International, Inc. since its inception in 1992.
MARK D. WOODBURN became the chief financial officer of the company in
April, 1999 and secretary in October 1999. He had been a secretary and a
director of Kaire International, Inc. from 1992 to the present.
MARTIN C. LICHT has been a practicing attorney since 1967. Mr. Licht
became our director in July 1995.
DIRK D. GOLDWASSER has been a consultant/trader with Filin Corp. from
August 1996 to the present. From June 1994 to July 1996 he was a vice president
with Bankers Trust Securities Company. From December 1993 to June 1994 he was an
associate with Oppenheimer and Co. From 1988 to December 1993, he was director
of sales for Galbreath Asset Advisors/Loews Organization. Mr. Goldwasser became
a director in September 1998.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended December 31, 1998 and
1999 with respect to the following officers of the Company:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-----------------------------------------
<S> <C> <C>
Robert L. Richards, President (2) 1999 $96,923
Joseph P. Grace, Former President (3) 1999 133,333
1998 162,500
</TABLE>
- --------------------------------
(1) Excludes perquisites and other personal benefits that in the aggregate
do not exceed 10% of each of such individual's total annual salary and
bonus.
(2) Mr. Richards became the Company's President in September 1999.
(3) Mr. Grace resigned in September 1999.
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OPTIONS GRANTS IN LAST FISCAL YEAR.
We did not grant any options during the fiscal year ended December 31,
1999 to the named executive officers. During the fiscal year ended December 31,
1999, none of the named executive officers exercised any options issued by us.
DIRECTORS' COMPENSATION
Our directors do not receive any fixed compensation for their services
as directors. Directors are reimbursed for their reasonable out-of-pocket
expenses incurred in connection with performance of their duties to us. We did
not pay our directors any cash or other form of compensation for acting in such
capacity, although directors who were also our executive officers received cash
compensation for acting in the capacity of executive officers. Mr. Goldwasser
received options to purchase 50,000 shares of common stock and Mr. Ellison, a
former director, received options to purchase 20,000 shares of common stock
during the year ended December 31, 1998 and 20,000 shares of common stock for
the year ending December 31, 1999 at an exercise price of $1.00 per share. See
"-executive Compensation." No director received any other form of compensation
for the fiscal year ended December 31, 1999.
CONSULTING AGREEMENTS
In October 1999, we entered into a two year consulting agreement with
Domain Investments, Inc. pursuant to which Domain Investments Inc. will provide
us with financial advisory services relating to mergers and acquisitions and
strategic alliances in consideration for the issuance of 95,000 shares of common
stock. We are registering the resale of these shares of common stock in this
offering.
In October 1999, we entered into a consulting agreement with Meridian
Equities Hong Kong, Ltd. pursuant to which Meridian Equities Hong Kong, Ltd.
will negotiate settlements with our creditors in consideration for the issuance
of 185,000 shares of common stock. We are registering the resale of these shares
of common stock in this offering.
STOCK OPTIONS
The 1998 Stock Option Plan (the "1998 Plan") provides for the granting
of options to key employees, including officers, non-employee directors and
consultants of ours and our subsidiaries to purchase up to 200,000 shares of
common stock which are intended to qualify either as Incentive Stock Options
within the meaning of the Code or as options which are Nonstatutory Stock
Options.
The 1997 Stock Option Plan (the "1997 Plan") provides for the granting
of options to key employees, including officers, non-employee directors and
consultants of ours and our subsidiaries to purchase up to 75,000 shares of
common stock which are intended to qualify either as incentive stock options
("Incentive Stock Options") within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, (the "Code"), or as options which are not
intended to meet the requirements of such section ("Nonstatutory Stock
Options").
We adopted the 1994 Stock Option Plan (the "1994 Plan") under which up
to 16,667 options to purchase shares of common stock may be granted to key
employees, officers, consultants and members of the Board of Directors. Options
granted under the 1994 Plan may be either Incentive Stock Options or
Nonstatutory Options.
The plans are administered by the Board of Directors. Under the plans,
the Board of Directors has the authority to determine the persons to whom
options will be granted, the number of shares to be covered by each option,
whether the options granted are intended to be incentive stock options, the
manner of exercise, and the time, manner and form of payment upon exercise of an
option.
Incentive stock options granted under the Plans may not be granted at a
price less than the fair market value of the common stock on the date of grant
(or less than 110% of fair market value in the case of employees holding 10% or
more of our voting stock). Non-qualified stock options may be granted at an
exercise price established by the Stock Option Committee selected by the Board
of Directors, but may not be less than 85% of fair market value of the shares on
the date of grant. Incentive stock options granted under the plans must expire
not more than ten years from the date of grant, and not more than five years
from the date of grant in the case of incentive stock options granted to an
employee holding 10% or more of our voting stock.
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In April 1999, we granted options to purchase shares of common stock,
subject to stockholder approval, to the following individuals at an exercise
price of $3.50 per share as a bonus for the year ended December 31, 1998:
<TABLE>
<CAPTION>
PERSON NUMBER OF OPTIONS
- ------ -----------------
<S> <C>
Joseph P. Grace.......................................................................................... 150,000
Dirk Goldwasser.......................................................................................... 50,000
Sir Brian Wolfson........................................................................................ 50,000
Martin C. Licht.......................................................................................... 25,000
Kevin Underwood.......................................................................................... 20,000
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as to the common
stock ownership of each of our directors, executive officers, all executive
officers and directors as a group, and all persons known by us to be the
beneficial owners of more than five percent of our common stock. Unless
otherwise noted, all persons named in the table have sole voting and dispositive
power with respect to all shares of common stock beneficially owned by them.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES BEFORE
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING(2)
---------------------- ------------------ -----------
<S> <C> <C>
Martin C. Licht ............................................ 35,300(3) *
Dirk D. Goldwasser ......................................... 66,125(4) *
Robert L. Richards ......................................... -- *
Mark D. Woodburn ........................................... (Y) *
------
All Executive Officers and Directors (4 persons) ........... 101,425 *
</TABLE>
- -----------
*Owns less than one (1%) percent.
(1) The address of each executive officer and director is c/o us at 380
Lashley St., Longmont, Colorado 80501.
(2) Does not include shares of common stock issuable upon the conversion of
our Series E, F, G, H and J Preferred Stock. Pursuant to the terms of
the Series E, F, G, H and J Preferred Stock, the holders thereof
generally are not entitled to convert such instruments to the extent
that such conversion would increase the holders' beneficial ownership
of common stock to in excess of 4.9%, except in the event of a
mandatory conversion. On the date of a mandatory conversion of the
Series E, F, G, H and J Preferred Stock, a change in control of us may
occur, based upon the number of shares of common stock issuable.
(3) Includes options to purchase 9,000 shares of Common Stock which are
exercisable within 60 days, but does not include options to purchase
16,000 shares of Common Stock which are not exercisable within 60 days.
(4) Includes options to purchase 65,000 shares of Common Stock, but does
not include options to purchase 35,000 shares of Common Stock which are
not exercisable within 60 days.
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<PAGE> 38
CERTAIN TRANSACTIONS
In August 1998, we sold our three vocational schools that we operated
as a junior college in Orlando, Pompano Beach and Miami, Florida that offer
training and preparation for licensing in therapeutic massage and skin care to
Florida College of Natural Health, Inc. Neal R. Heller, our former President,
Chief Executive Officer, a principal stockholder and a former director,
Elizabeth S. Heller, his wife, our former secretary, a principal stockholder and
a former director, and Mr. Arthur Kaiser, a former director of ours, were at the
time principal shareholders of Florida College. The purchase price for the
schools was $1,778,333 in cash. In addition, Florida College assumed all of the
liabilities in connection with the operations of the schools together with
additional liabilities in the aggregate amount of approximately $2,559,249. We
were not released from such liabilities despite such assumption by Florida
College.
In connection with the sale of the schools, Mr. and Mrs. Heller's
employment agreements were canceled, and they each resigned as directors and
officers of ours. Mr. and Mrs. Heller also transferred to us 79,175 shares of
common stock which were canceled and options to purchase 20,000 shares of common
stock.
Martin C. Licht, a director of Natural Health Trends, was a member of
law firms which received $263,221 attributable to 1998 and $79,000 attributable
to 1999.
As of December 31, 1999, we owed approximately $37,000 to Robert L.
Richards, the president and a director of us, in connection with liabilities
assumed in connection with the Kaire acquisition. In addition we owed two
current employees and one former employee approximately $112,000. Mr. Woodburn,
our chief financial officer, and Mr. Richards have guaranteed a loan to us in
the amount of $87,000 from STAR Financial Bank.
In January 2000, we entered into a licensing agreement with GLI, Inc.,
of which our former president, Joseph Grace, is a principal. We licensed to GLI
certain rights to manufacture, distribute and sell the four Natural Relief 1222
products through various distribution channels and the exclusive right to the
trademark "Natural Relief 1222". The licensing agreement is for a percentage of
GLI's net sales for five years with a minimum royalty guaranteed. After five
years, the royalty is reduced to a lower percentage of net sales with no minimum
royalty guaranteed. As part of the licensing agreement, GLI agreed to purchase
any unused inventory of the product.
We believe that the transactions between us and any of our officers,
directors and/or 5% stockholders have been on terms no less favorable to us than
could have been obtained from independent third parties. Future transactions, if
any, between us and any of its officers, directors and/or 5% stockholders will
be on terms no less favorable to us than could be obtained from independent
third parties and will be approved by a majority of the independent,
disinterested directors. In addition, any forgiveness of indebtedness of
officers, directors or 5% stockholders will be approved by a majority of
disinterested directors who do not have an interest in the transactions and who
have access, at our expense, to counsel.
DESCRIPTION OF SECURITIES
GENERAL
Our total authorized capital stock is 50,000,000 shares of common
stock, $.001 par value per share, and 1,500,000 shares of Preferred Stock, $.001
par value per share. As of the date of this Prospectus we had 9,845,770 shares
of common stock issued and outstanding, which are held by approximately 1,669
shareholders, excluding shares of common stock issuable upon exercise of
outstanding options, warrants and conversion rights.
COMMON STOCK
Each share of common stock entitles the holder thereof to one vote on
all matters submitted to a vote of the shareholders. Since the holders of common
stock do not have cumulative voting rights, holders of more than 50% of the
outstanding shares can elect all of our directors then being elected and holders
of the remaining shares by themselves cannot elect any directors. The holders of
common stock do not have preemptive rights or rights to convert their common
stock into other securities. Holders of common stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of us, holders of the common stock have the right to a ratable
portion of the assets remaining after payment of liabilities subject to any
superior claims of any shares of Preferred Stock hereafter issued. See
"-Preferred Stock." All shares of common stock outstanding and to be outstanding
upon completion of the Offering are and will be fully paid and nonassessable.
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<PAGE> 39
PREFERRED STOCK
We are authorized by its Articles of Incorporation to issue a maximum
of 1,500,000 shares of Preferred Stock, in one or more Series and containing
such rights, privileges and limitations, including voting rights, dividend
rates, conversion privileges, redemption rights and terms, redemption prices and
liquidation preferences, as the Board of Directors may, from time to time,
determine.
The issuance of shares of Preferred Stock pursuant to the Board's
authority could decrease the amount of earnings and assets available for
distribution to holders of common stock, and otherwise adversely affect the
rights and powers, including voting rights, of such holders and may have the
effect of delaying, deferring or preventing a change in control of us. We are
not required by current Florida Law to seek shareholder approval prior to any
issuance of authorized but unissued stock and the Board of Directors does not
currently intend to seek shareholder approval prior to any issuance of
authorized but unissued shares of Preferred Stock or common stock, unless
otherwise required by law.
Series E Preferred Stock
The Series E Preferred Stock in the face amount of $1,650,000 was
issued in a private placement in August 1998 and pays a dividend (provided that
we have either sufficient surplus or net profits), at a rate of ten percent of
the stated value per annum, payable upon conversion of the shares of Series E
Preferred Stock, in cash or in shares of common stock. The shares of Series E
Preferred Stock are non-voting prior to conversion, and, subject to certain
limitations, are convertible by the holder at any time into shares of common
stock of us, at a conversion price per share determined by dividing the stated
value by the lower of the closing bid price on the date of issuance or 75% of
the average closing bid price of the common stock for the five trading days
immediately preceding the date on which we receive notice of conversion from a
holder. As of the date of this prospectus, shares of Series E Preferred Stock in
the face amount of $610,000 have been converted into 603,130 shares of common
stock.
Except in the case of the automatic conversion 24 months from the date
of issuance, the holder of shares of Series E Preferred Stock can convert any
portion of such holder's shares of Series E Preferred Stock if such conversion
would not increase such holder's beneficial ownership of common stock (other
than shares of common stock owned through ownership of the Series E Preferred
Stock) to in excess of 4.9%.
The holder of each share of Series E Preferred Stock is entitled to a
payment of 2% of the face amount of the Series E Preferred Stock for each 30 day
period after 120 days after the issuance of the Series E Preferred Stock that
the registration statement is not effective, payable in cash or shares of common
stock at the option of the holder. Shares of Series E Preferred Stock are
converted automatically into shares of common stock 24 months from their date of
issuance. As of the date of this Prospectus the outstanding shares of Series E
Preferred Stock including the accrued interest and penalty charges are
convertible into approximately 3,272,000 shares of common stock.
In connection with the offering of the Series E Preferred Stock, we
issued warrants to purchase 300,000 shares of common stock to BLH, Inc. The
warrants were exchanged for 185,769 shares in July 1999.
Series F Preferred Stock
The Series F Preferred Stock in the face amount of $2,800,000 issued to
Kaire International, Inc. in connection with the Kaire acquisition pays a
dividend (provided we have either sufficient surplus or net profits), at the
rate of six percent of the stated value per annum, payable upon conversion of
the shares of Series F Preferred Stock, in cash or in shares of common stock.
The shares of the Series F Preferred Stock are non-voting prior to conversion,
and, subject to certain limitations, are convertible by the holder at any time
into shares of our common stock, at a conversion price per share determined by
dividing the stated value by 95% of the average closing bid price of the common
stock for the three trading days immediately preceding the date on which we
receive notice of conversion from a holder. The terms of the Series F Preferred
Stock permit us, at any time, on five days prior written notice, to redeem the
outstanding Series F Preferred Stock at a redemption price equal to the stated
value and the accrued dividends thereon. The shares of common stock issuable
upon conversion of the Series F Preferred Stock are subject to a lock-up
preventing the sale, pledge, hypothecation or other transfer of such shares, for
a period of one year from the closing date of the Kaire acquisition in the case
of $1,000,000 aggregate stated value of Series F Preferred Stock, and a lock-up
of two years from the closing date of the Kaire acquisition with respect to the
remaining $1,800,000 aggregate stated value of Series F Preferred Stock.
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<PAGE> 40
Series G Preferred Stock
The Series G Preferred Stock in the face amount of $350,000 pays a
dividend (provided we have either sufficient surplus or net profits), at the
rate of 6% of the stated value per annum, payable upon conversion of the shares
of Series G Preferred Stock, in cash or in shares of common stock. The shares of
the Series G Preferred Stock are non-voting prior to conversion, and, subject to
certain limitations, are convertible by the holder at any time into shares of
our common stock, at a conversion price per share determined by dividing the
stated value by 95% of the average closing bid price of the common stock for
three trading days immediately preceding the date on which we receive notice of
conversion from a holder. The terms of the Series G Preferred Stock permit us,
at any time, on five days prior written notice, to redeem the outstanding Series
G Preferred Stock at a redemption price equal to the stated value and the
accrued dividends thereon. The shares of common stock underlying the Series G
Preferred Stock have been registered for resale. As of the date of this
prospectus, the shares of Series G Preferred Stock are convertible into
approximately 781,000 shares of common stock.
Series H Preferred Stock
The Series H Preferred Stock in the face amount of $1,400,000 was
issued in a private placement in March and April 1999 and pays a dividend
(provided we have either sufficient surplus or net profits), at a rate of 8% of
the stated value per annum, payable upon conversion of the shares of Series H
Preferred Stock, in cash or in shares of common stock. The shares of Series H
Preferred Stock are non-voting prior to conversion, and, subject to certain
limitations, are convertible by the holder at any time into shares of common
stock of us, at a conversion price per share determined by dividing the lower of
the closing bid price on the date of issuance or the stated value by 75% of the
average closing bid price of the common stock for the three trading days
immediately preceding the date on which we receive notice of conversion from a
holder.
Except in the case of the automatic conversion 24 months from the date
of issuance, the shares of Series H Preferred Stock, the holder can convert any
portion of such holder's shares of Series H Preferred Stock if such conversion
would not increase such holder's beneficial ownership of common stock (other
than shares of common stock owned through ownership of the Series H Preferred
Stock) to in excess of 4.9%.
The holder of each share of Series H Preferred Stock is entitled to a
payment of 2% of the face amount of the Series H Preferred Stock for each 30 day
period after 90 days after the issuance of the Series H Preferred Stock that a
registration statement is not declared effective, payable in cash or shares of
common stock at the option of the holder. Shares of Series H Preferred Stock are
converted automatically into shares of common stock 24 months from their date of
issuance. As of the date of this prospectus 785 shares of Series H Preferred
Stock in the face amount of approximately $785,000 have been converted into
689,874 shares of common stock. The shares of Series H Preferred Stock
outstanding are convertible into approximately 1,640,000 shares of common stock.
Series J Preferred Stock
The Series J Preferred Stock in the face amount of $1,000,000 was
issued in a private placement in March 2000 and pays a dividend (provided we
have either sufficient surplus or net profits), at a rate of 10% of the stated
value per annum, payable upon conversion of the shares of Series J Preferred
Stock, in cash or in shares of common stock. The shares of Series J 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 us, at
a conversion price per share determined by dividing the lower of the closing bid
price on the date of issuance or the stated value by 70% of the average closing
bid price of the common stock for the three trading days immediately preceding
the date on which we receive notice of conversion from a holder.
Except in the case of the automatic conversion 24 months from the date
of issuance, the shares of Series J Preferred Stock, the holder can convert any
portion of such holder's shares of Series J Preferred Stock if such conversion
would not increase such holder's beneficial ownership of common stock (other
than shares of common stock owned through ownership of the Series H Preferred
Stock) to in excess of 4.9%.
The holder of each share of Series J Preferred Stock is entitled to a
payment of 2% of the face amount of the Series J Preferred Stock for each 30 day
period after 90 days after the issuance of the Series J Preferred Stock that a
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<PAGE> 41
registration statement is not declared effective, payable in cash or shares of
common stock at the option of the holder. Shares of Series J Preferred Stock are
converted automatically into shares of common stock 24 months from their date of
issuance.
The Kaire Acquisition Warrants
The warrants issued to Kaire International, Inc. are exercisable for a
period of five years from the closing date of the Kaire acquisition into an
aggregate of 200,000 shares of common stock at an exercise price of $4.06 per
share. The exercise price may be payable at the option of the holder thereof in
cash and/or by a cashless exercise based on the difference between the fair
market value of the shares of common stock for which the warrants are being
exercised, and the exercise price, by delivering to us for cancellation the
warrants owned by such holders. The shares of common stock issuable upon
exercise of the warrants contain certain "piggyback" registration rights and
anti-dilution protection.
TRANSFER AGENT AND REGISTRAR
We have appointed Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004, as our transfer agent and registrar for our
common stock and warrants.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Articles of Incorporation provide that we shall indemnify to the
fullest extent permitted by Florida law any person whom we may indemnify
thereunder, including directors, officers, employees and agents. Such
indemnification (other than as ordered by a court) shall be made by us only upon
a determination that indemnification is proper in the circumstances because the
individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. In addition, the
Articles of Incorporation provides for the elimination, to the extent permitted
by Florida law, of personal liability of our directors and our stockholders for
monetary damages for breach of fiduciary duty as directors. We carry directors'
and officers' liability insurance coverage in the amount of $3 million.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of us
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person of us in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
ARTICLES OF INCORPORATION AND BYLAWS
Pursuant to Florida law, the power to adopt, amend and repeal bylaws is
conferred solely upon the shareholders and the board of directors unless the
corporation's articles of incorporation reserves the power to amend the bylaws
or any part thereof solely to the shareholders. Under our Articles of
Incorporation, the Board of Directors retains the power to amend our Bylaws.
Such Bylaws provide that each director has one vote on each matter for which
directors are entitled to vote. The Articles of Incorporation and/or the Bylaws
also provide that (i) from time to time, by resolution, the Board has the power
to decrease the number of directors to one and increase the number of directors
to up to ten members, provided that no decrease will have the effect of
shortening the term of any incumbent director, (ii) the directors will hold
office until the next annual meeting of shareholders and until their respective
successors are elected and qualified, and (iii) special meetings of shareholders
may only be called by the Board of Directors or officers of ours. These
provisions, in addition to the existence of authorized but unissued capital
stock, may have the effect, either alone or in combination with each other, of
making more difficult or discouraging an acquisition of us deemed undesirable by
the Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, 10,302,085 shares of Common
Stock will be issued and outstanding. In addition to other shares of common
stock not held by affiliates, the shares offered hereby will be freely tradeable
without
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restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of us (as defined in Rule 144 promulgated under
the Securities Act) will be subject to the resale limitations of Rule 144, as
described below.
The shares of Common Stock outstanding held by affiliates are deemed
"restricted securities," as that term is defined under Rule 144, and may only be
sold pursuant to an effective registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144 or pursuant to another
exemption under the Securities Act. Such restricted shares of Common Stock will
become eligible for sale, under Rule 144, subject to certain volume and manner
of sale limitations prescribed by Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including a person who may be
deemed an "affiliate" of ours, who has beneficially owned restricted securities
for at least one year may sell, within any three-month period, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the date on which notice of such sale
was filed under Rule 144. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current public
information about us. A person who is not deemed to have been an affiliate of us
at any time during the 90 days preceding a sale by such person, and who has
beneficially owned the restricted shares for at least two years, is entitled to
sell such shares under Rule 144(k) without regard to any of the restrictions
described above.
SELLING SECURITYHOLDERS
The following table sets forth the name and the number of shares of common
stock beneficially owned by each selling securityholder as of May 9, 2000, the
number of shares of common stock to be offered by each selling securityholder
pursuant to this prospectus and the number of shares to be beneficially owned by
each selling securityholder after the offering if all of the shares of common
stock offered hereby by such selling securityholder are sold as described
herein. Except as noted below, the selling securityholders have not held any
position or office with, been employed by, or otherwise had a material
relationship with us other than as securityholders of ours subsequent to their
respective acquisition of shares of common stock. The shares of common stock are
being registered to permit public secondary trading of the shares of common
stock, and the securityholders may offer the shares of common stock for resale
from time to time. See "Plan of Distribution."
The shares of common stock being sold by the selling securityholders include
the resale of (i) 430,000 shares of common stock, (ii) an aggregate of 120,000
shares of common stock issuable upon the exercise of certain options and
warrants and of such presently indeterminate number of shares of common stock as
shall be issued in respect of all shares of common stock issuable upon (iii)
conversion of convertible notes in the aggregate amount of $350,000. The number
of shares of common stock indicated to be issuable in connection with such
transactions and offered for resale hereby is an estimate determined in
accordance with a formula based on the market prices of the common stock, as
described in this prospectus, and is subject to adjustment and could be
materially less or more than such estimated amount depending upon factors which
cannot be predicted by us at this time.
In recognition of the fact that selling securityholders may wish to be
legally permitted to sell their shares of common stock when they deem
appropriate, we have filed with the Commission, under the Securities Act, a
Registration Statement, of which this prospectus forms a part, with respect to
the resale of the shares from time to time on the Nasdaq SmallCap Market or in
privately-negotiated transactions and has agreed to prepare and file such
amendments and supplements to the Registration Statement as may be necessary to
keep the Registration Statement effective until the shares of common stock are
no longer required to be registered for the sale thereof by the selling
securityholders.
We have agreed to pay for all costs and expenses incident to the issuance,
offer, sale and delivery of the shares of common stock, including, but not
limited to, all expenses and fees of preparing, filing and printing the
Registration Statement and prospectus and related exhibits, amendments and
supplements thereto and mailing of such items. We will not pay selling
commissions and expenses associated with any such sales by the selling
securityholders. We have agreed to indemnify the selling securityholders against
civil liabilities including liabilities under the Securities Act.
Except as otherwise indicated, to the knowledge of us, all persons listed
below have sole voting and investment power with respect to their securities.
The information in the table concerning the selling securityholders who may
offer shares of common stock hereunder from time to time is based on information
provided to us by such security holders, except for
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the assumed conversion price of the securities, which is based solely on the
assumptions discussed or referenced in the footnotes to the table. Information
concerning such selling securityholders may change from time to time and any
changes of which we are advised will be set forth in a prospectus supplement to
the extent required. See "Plan of Distribution."
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NUMBER OF SHARES OF COMMON STOCK NUMBER OF SHARES
COMMON STOCK OFFERED BENEFICIALLY OWNED AFTER
NAME OF SELLING SECURITYHOLDER BENEFICIALLY OWED HEREBY OFFERING
------------------------------ ------------------ ------------------- ------------------------
<S> <C> <C> <C>
Meridian Equities Hong Kong
Ltd(1)............................ 185,000 185,000 --
Domain Investments, Inc.(2)......... 1,127,189 1,127,189 --
Samantha Haimes..................... 125,000 125,000 --
Martin C. Licht(3).................. 25,000 25,000 --
Filin Corporation(4)................ 861,315 861,315 --
Dirk Goldwasser(5).................. 50,000 50,000 --
Ralph Ellison(6).................... 40,000 40,000 --
</TABLE>
(1) Meridian Equities Hong Kong, Ltd. is a consultant for us.
(2) Domain Investments, Inc. is a consultant for us.
(3) Mr. Licht is a director of ours and a member of Silverman, Collura and
Chernis, P.C., counsel to us.
(4) Includes warrants to purchase 30,000 shares of common stock and a
convertible note in the aggregate amount of $75,000 convertible at a
60% discount off the market price of our common stock.
(5) Mr. Goldwasser is a director of ours. Includes options to purchase
50,000 shares of common stock.
(6) Mr. Ellison is a former director of ours.
The selling securityholders are offering the shares of common stock for
their own account, and not for the account of us. We will not receive any
proceeds from the sale of the shares of common stock by the selling
securityholders.
PLAN OF DISTRIBUTION
The shares of common stock may be sold from time to time by the selling
securityholders. Such sales may be made through ordinary brokerage transactions,
the over-the-counter market, or otherwise at prices and at terms then
prevailing, at prices related to the then current market price or at negotiated
prices. The shares of common stock may be sold by any one or more of the
following methods: (a) a block trade in which the broker or dealer so engaged
will attempt to sell the securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker as principal and resale by such broker or dealer for its account,
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and (d) privately negotiated transactions. In addition, any
shares of common stock that qualify for sale pursuant to Rule 144 may be sold
under Rule 144 rather than pursuant to this prospectus.
The selling securityholders and any broker-dealers, agents or underwriters
that participate with the selling securityholders in the distribution of the
shares may be deemed to be "underwriters" within the meaning of the Securities
Act and any commissions received by such broker-dealer, agent or underwriter and
any profit on the resale of the shares of common stock purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the shares offered by this prospectus may simultaneously
engage in market making activities with respect to the common stock during any
applicable "Cooling off" periods prior to the commencement of such distribution.
In addition, and without limiting the foregoing, the selling securityholders
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder.
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We have agreed to indemnify the selling securityholders against liabilities
incurred by the selling securityholders by reason of misstatements or omissions
to state material facts in connection with the statements made in this
prospectus and the Registration Statement of which it forms a part. The selling
securityholders, in turn, have agreed to indemnify us against liabilities
incurred by us by reason of misstatements or omissions to state material facts
in connection with statements made in the Registration Statement and prospectus
based on information furnished in writing by the selling securityholders. To the
extent that such section of the Registration Rights Agreement may purport to
provide exculpation from possible liabilities arising under the Federal
securities laws, it is the opinion of the Commission that such indemnification
is contrary to public policy and unenforceable.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon for us by Silverman Collura & Chernis, P.C.,
New York, New York. Martin C. Licht, Esq., a member of such firm, owns 26,300
shares of common stock and options to purchase 9,000 shares of common stock and
is a member of the Board of Directors.
EXPERTS
The consolidated financial statements at December 31, 1999 and 1998 and
for the three years ended December 31, 1999, 1998 and 1997 included in this
Registration Statement have been audited by Feldman Sherb Horowitz & Co., P.C.,
independent certified public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports. Their report contains an explanatory
paragraph regarding our ability to continue as a going concern.
The consolidated financial statements of Kaire International, Inc. as
of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997
and 1996 have been included herein and in the Registration Statement in reliance
upon the report of BDO Seidman, LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of such firm as experts in
auditing and accounting. Their report contains an explanatory paragraph
regarding Kaire International, Inc.'s ability to continue as a going concern.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed our Form S-1 registration statement with the SEC. This
prospectus does not contain all the information set forth in the registration
statement. You'll find additional information about us and our common stock in
the registration statement. For example, in this prospectus we have summarized
or referred to some contracts, agreements, and other documents that have been
filed as exhibits to the registration statement. The registration statement,
including its exhibits and schedules, may be inspected without charge at the
SEC's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies may be obtained from that office, upon payment of the applicable fees.
The registration statement, including its exhibits and schedules, are also
available on the SEC's website at www.sec.gov.
We are subject to the information requirements of the Securities
Exchange Act of 1934, and accordingly will file reports, proxy statements, and
other information with the SEC. These materials can be inspected and copies at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of these materials can be obtain from the SEC's
Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Some information about us is also available on the SEC's
website at www.sec.gov.
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NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.................................... F-2
Consolidated Balance Sheets..................................... F-3
Consolidated Statements of Operations........................... F-4
Consolidated Statements of Stockholders' Equity................. F-5
Consolidated Statements of Cash Flows........................... F-6
Notes to Consolidated Financial Statements...................... F-8 - 24
F-1
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheets of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1999, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, the financial position of Natural Health Trends Corp. and Subsidiaries
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years ended December 31, 1999, 1998 and 1997, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred losses in
each of the last three fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 2000. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb Horowitz & Co., P.C.
Certified Public Accountants
New York, New York
March 10, 2000
F-2
<PAGE> 47
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash............................................................... $ 434,063 $ 294,220
Restricted cash.................................................... 152,505 --
Account receivables................................................ 407,490 19,331
Inventory.......................................................... 847,212 314,367
Due from affiliate................................................. -- 250,000
Prepaid expenses and other current asset........................... 120,481 3,370
------------ ------------
Total Current Assets...................... 1,961,751 881,288
Property and Equipment, net........................................ 567,065 78,436
Long Term Prepaids................................................. 54,228 498,125
Patents and Customer Lists......................................... 7,912,594 4,415,049
Goodwill........................................................... 682,654 829,468
Deposits and Other Assets.......................................... 75,607 150,350
------------ ------------
Total Assets.......................... $ 11,253,899 $ 6,852,716
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Checks written in excess of deposits............................... $ 556,884 $ --
Accounts payable................................................... 4,511,772 1,685,313
Accrued expenses................................................... 404,458 139,566
Accrued bonus payable.............................................. 472,503 --
Payroll taxes payable.............................................. 668,390 --
Accrued expenses for discontinued operations....................... -- 314,593
Notes payable...................................................... 854,684 314,684
Current portion of capital lease obligations....................... 75,995 --
Notes payable related parties...................................... 112,363 --
Accrued consulting contract........................................ -- 405,385
Other current liabilities.......................................... 231,926 38,481
Deferred revenue................................................... 527,831 --
------------ ------------
Total Current Liabilities.................... 8,416,806 2,898,022
Capital Lease Obligations, net of current portion.................. 53,158 --
------------ ------------
Total Liabilities........................ 8,469,964 2,898,022
Common Stock Subject to Put........................................... -- 380,000
Stockholders' Equity:
Preferred Stock, $.001 par value; 1,500,000 shares authorized;
5,164, and 1,650 shares issued and outstanding..................... 5,163,695 1,650,000
Common Stock, $.001 par value; 50,000,000 shares authorized;
7,989,847 and 6,220,331 shares issued and outstanding.............. 7,990 6,221
Additional Paid in Capital......................................... 21,443,914 16,668,257
Accumulated Deficit................................................ (23,165,664) (14,369,784)
Deferred Compensation.............................................. (666,000) --
Common Stock subject to put........................................ -- (380,000)
------------ ------------
Total Stockholders' Equity................... 2,783,935 3,574,694
------------ ------------
Total Liabilities and Stockholders' Equity......................... $ 11,253,899 $ 6,852,716
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 48
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.................................................. $ 15,269,631 $ 1,191,120 $ 1,133,726
Cost of sales............................................. 4,267,045 454,370 375,034
------------ ------------ ------------
Gross profit.............................................. 11,002,586 736,750 758,692
Distributor commissions................................... 7,229,758 -- --
Write-down of patents and goodwill........................ 3,166,841 --
Selling, general and administrative expenses.............. 7,723,157 3,277,047 4,194,044
------------ ------------ ------------
Operating loss............................................ (7,117,170) (2,540,297) (3,435,352)
Minority interest in loss of subsidiaries................. 89,756 -- --
Other (expense)........................................... (67,180) -- --
Gain on dissolution....................................... 200,000 -- --
Interest, net............................................ (663,289) (199,757) (868,721)
------------ ------------ ------------
Loss from continuing operations........................... (7,557,883) (2,740,054) (4,304,073)
------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued operations................ 304,593 (86,234) (2,919,208)
Gain (loss) on disposal................................... -- 722,640 (501,839)
------------ ------------ ------------
Gain (loss) from discontinued operations.................. 304,593 636,406 (3,421,047)
------------ ------------ ------------
Loss before extraordinary gain............................ (7,253,590) (2,103,648) (7,725,120)
Extraordinary gain - forgiveness of debt.................. -- 815,636 --
------------ ------------ ------------
Net loss.................................................. (7,253,590) (1,288,012) (7,725,120)
Preferred stock dividends................................. 1,542,590 2,011,905 733,333
------------ ------------ ------------
Net loss to common shareholders........................... $ (8,795,880) $ (3,299,917) $ (8,458,453)
============ ============ ============
Basic and diluted loss per common share:
Continuing operations..................................... $ (1.26) $ (2.15) $ (11.60)
Discontinued operations................................... 0.04 0.29 (7.88)
Extraordinary gain........................................ -- 0.37 --
------------ ------------ ------------
Net loss to common shareholders........................... $ (1.22) $ (1.49) $ (19.48)
============ ============ ============
Basic and diluted weighted common shares used............. 7,233,297 2,210,458 434,265
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 49
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
------- -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996......................... 308,650 $ 309 -- $ -- $ 6,242,689
Sales of Convertible Series A preferred stock....... -- -- 2,200 1,900,702 --
Preferred stock dividends imputed................... -- -- -- -- 733,333
Conversion of debentures............................ 303,986 303 -- -- 1,207,172
Stock issued for acquisition........................ 145,000 145 -- -- 2,899,855
Other issuances..................................... 500 1 -- -- 24,999
Issuances of stock options.......................... -- -- -- -- 400,000
Amortization of deferred stock compensation......... -- -- -- -- --
Discount on debentures.............................. -- -- -- -- 433,333
Net loss............................................ -- -- -- -- --
--------- -------- ------ ------------ ------------
BALANCE - DECEMBER 31, 1997......................... 758,136 758 2,200 1,900,702 11,941,381
Sales of Convertible Series B preferred stock....... -- -- 300 261,500 --
Sales of Convertible Series C preferred stock...... -- -- 4,000 3,507,500 --
Sales of Convertible Series D preferred stock...... -- -- 75 75,000 --
Sales of Convertible Series E preferred stock...... -- -- 1,650 1,650,000 (210,500)
Preferred stock dividends imputed................... -- -- -- -- 2,011,905
Redemption of Convertible Series A preferred
stock............................................. -- -- (2,200) (1,900,702) (1,629,607)
Redemption of Convertible Series D preferred
stock............................................. -- -- (75) (75,000) --
Conversion of debentures............................ 206,603 207 -- -- 188,418
Conversion of Convertible Series B preferred
stock............................................. 541,330 541 (300) (261,500) 260,959
Conversion of Convertible Series C preferred
stock............................................. 3608,296 3,608 (4,000) (3,507,500) 3,503,892
Conversion of notes payable......................... 1,195,473 1,196 -- -- 697,917
Redemption of shares re: school sale................ (79,175) (79) -- -- (96,118)
Shares cancelled in reverse stock split............. (10,332) (10) -- -- 10
Amortization of deferred stock compensation......... -- -- -- -- --
Net loss............................................ -- -- -- -- --
--------- -------- ------ ------------ ------------
BALANCE - DECEMBER 31, 1998......................... 6,220,331 6,221 1,650 1,650,000 16,668,257
Issuance of Convertible Series F preferred
stock............................................. -- -- 2,800 2,800,000 --
Issuance of Convertible Series G preferred
stock............................................. -- -- 350 350,000 --
Sale of Convertible Series H preferred stock
Issuance of Convertible Series I preferred.......... -- -- 1,400 1,400,000 (198,985)
stock............................................. -- -- 516 516,000 --
Issuance of common stock warrants................... -- -- -- -- 682,000
Preferred stock dividends imputed................... -- -- -- -- 632,455
Accrued preferred stock dividends................... -- -- -- -- 910,135
Conversion of Convertible Series I preferred
stock............................................. 160,104 160 (516) (516,000) 515,840
Conversion of Convertible Series E preferred
stock............................................. 603,130 603 (610) (610,000) 609,397
Exercise of Series E warrants....................... 185,769 186 -- -- (186)
Conversion of Convertible Series H preferred
stock............................................. 255,254 255 (426) (426,305) 426,050
Deferred stock compensation......................... -- -- -- -- --
Exercise of put..................................... -- -- -- -- --
Shares issued for services.......................... 433,018 433 -- -- 1,122,383
Net loss............................................ -- -- -- -- --
--------- -------- ------ ------------ ------------
BALANCE - December 31, 1999......................... 7,857,606 $ 7,858 5,164 $ 5,163,695 $ 21,367,346
========= ======== ====== ============ ============
<CAPTION>
Common
Stock Deferred
Accumulated Subject Stock
Deficit to Put Compensation Total
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996........................ $ (2,595,123) $ (380,000) $ (96,250) $ 3,171,625
Sales of Convertible Series A preferred stock...... -- -- -- 1,900,702
Preferred stock dividends imputed.................. (733,333) -- -- --
Conversion of debentures........................... -- -- -- 1,207,475
Stock issued for acquisition....................... -- -- -- 2,900,000
Other issuances.................................... -- -- -- 25,000
Issuances of stock options......................... -- -- -- 400,000
Amortization of deferred stock compensation........ -- -- 82,500 82,500
Discount on debentures............................. -- -- -- 433,333
Net loss........................................... (7,725,120) -- -- (7,725,120)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1997........................ (11,053,576) (380,000) (13,750) 2,395,515
Sales of Convertible Series B preferred stock...... -- -- -- 261,500
Sales of Convertible Series C preferred stock..... -- -- -- 3,507,500
Sales of Convertible Series D preferred stock..... -- -- -- 75,000
Sales of Convertible Series E preferred stock..... -- -- -- 1,439,500
Preferred stock dividends imputed.................. (2,011,905) -- -- --
Redemption of Convertible Series A preferred
stock............................................ -- -- -- (3,530,309)
Redemption of Convertible Series D preferred
stock............................................ (16,291) -- -- (91,291)
Conversion of debentures........................... -- -- -- 188,625
Conversion of Convertible Series B preferred
stock............................................ -- -- -- --
Conversion of Convertible Series C preferred
stock............................................ -- -- -- --
Conversion of notes payable........................ -- -- -- 699,113
Redemption of shares re: school sale............... -- -- -- (96,197)
Shares cancelled in reverse stock split............ -- -- -- --
Amortization of deferred stock compensation........ -- -- 13,750 --
Net loss........................................... (1,288,012) -- -- (1,288,012)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998........................ (14,369,784) (380,000) -- 3,574,694
Issuance of Convertible Series F preferred
stock............................................ -- -- -- 2,800,000
Issuance of Convertible Series G preferred
stock............................................ -- -- -- 350,000
Sale of Convertible Series H preferred stock....... -- -- -- 1,201,015
Issuance of Convertible Series I preferred
stock............................................ -- -- -- 516,000
Issuance of common stock warrants.................. -- -- -- 682,000
Preferred stock dividends imputed.................. (632,455) -- -- --
Accrued preferred stock dividends.................. (910,135) -- -- --
Conversion of Convertible Series I preferred
stock............................................ -- -- -- --
Conversion of Convertible Series E preferred
stock............................................ -- -- -- --
Exercise of Series E warrants...................... -- -- -- --
Conversion of Convertible Series H preferred
stock............................................ -- -- --
Deferred stock compensation........................ -- -- (666,000) (666,000)
Exercise of put.................................... -- 380,000 -- 380,000
Shares issued for services......................... -- -- -- 1,122,816
Net loss........................................... (7,253,290) -- -- (7,253,290)
------------ ------------ ------------ ------------
BALANCE - December 31, 1999........................ $(23,165,664) $ -- $ (666,000) $ 2,783,935
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 50
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................... $ (7,253,290) $ (1,288,012) $ (7,725,120)
Adjustments to reconcile net loss to net
cash used in operating activities:
(Gain) on dissolution................................................ (200,000) -- --
Loss from discontinued operations.................................... (304,593) 86,234 2,919,208
(Gain) loss on disposal of discontinued operations................... -- (722,640) 501,839
Depreciation and amortization........................................ 374,154 549,668 255,345
Loss on disposal of fixed asset...................................... (3,802) -- --
Interest settled by issuance of stock................................ 97,868 112,971 116,065
Write down of patents and goodwill................................... 3,166,841 200,000 --
Amortization of note payable discount................................ -- -- 433,333
Gain on forgiveness of debt.......................................... (81,260) (815,636) --
Changes in assets and liabilities, net of business combination:
(Increase) decrease in accounts receivable............................ 253,684 141,774 (62,446)
(Increase) decrease in inventories.................................... 253,033 405,359 (219,144)
(Increase) decrease in prepaid expenses............................... (134,364) 7,970 102,353
(Increase) decrease in prepaid royalties.............................. 498,125 (491,825) --
Decrease in deposits and other assets................................. 283,200 42,514 66,775
Increase in accounts payable.......................................... 1,113,501 154,963 1,380,509
Increase (decrease) in accrued expenses............................... 179,690 (698,805) 506,021
Increase (decrease) in accrued expenses for discontinued operations... (10,000) (41,469) 356,062
Increase in accrued interest.......................................... 352,906 -- --
Increase in accrued consulting contract............................... -- 45,254 360,131
Increase in deferred revenue.......................................... 453,744 -- --
Increase (decrease) in other current liabilities...................... 245,478 (121,339) 33,397
------------ ------------ ------------
Net cash used in continuing operations................................... (715,085) (2,433,019) (975,672)
Net cash used in discontinued operations................................. -- (2,057,177) (3,455,155)
------------ ------------ ------------
NET CASH USED IN OPERATING ACTIVITIES...................................... (715,085) (4,490,196) (4,430,827)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................................... (127,077) (7,510) (32,658)
Business acquisitions net of assets acquired.............................. (1,353,573) -- --
Increase in cash overdraft................................................ (168,792) -- --
Increase in restricted cash............................................... (27,505) -- --
Proceeds from disposition of discontinued operations...................... -- 4,349,700 --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........................ (1,676,947) 4,342,190 (32,658)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to affiliate................................... 250,000 (250,000) --
Loan origination costs - preferred stock.................................. -- -- (299,299)
Proceeds from preferred stock............................................. 3,724,195 5,283,000 2,200,000
Redemption of preferred stock............................................. (1,552,305) (3,621,600) --
Proceeds from sale of debentures.......................................... -- -- 1,626,826
Payments of debentures.................................................... -- -- (355,650)
Proceeds from notes payable and long-term debt............................ 581,899 -- 850,000
Payments of notes payable and long-term debt.............................. (471,914) (940,000) (8,692)
Redemption of common stock................................................ -- (96,197) --
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................................. 2,531,875 375,203 4,013,185
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH............................................ 139,843 227,197 (450,300)
CASH, BEGINNING OF YEAR.................................................... 294,220 67,023 517,323
------------ ------------ ------------
CASH, END OF YEAR.......................................................... $ 434,063 $ 294,220 $ 67,023
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 51
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C> <C>
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
(1) Conversion of preferred stock to common stock..... $1,552,305 $3,769,000 $ --
(2) Conversion of debentures, notes payable and
related accrued interest to common stock........ $ -- $ 887,738 $1,207,475
(3) Stock and warrants issued for acquisition......... $ -- $ -- $2,900,000
(4) Preferred stock dividends......................... $1,542,590 $2,011,905 $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE> 52
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida Institute of
Massage Therapy, Inc.) (the "Company") was incorporated under the laws of the
State of Florida in December 1988.
In 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.
In July 1997, the Company acquired Global Health Alternatives, Inc.,
("Global") a company incorporated in Delaware, which is in the business of
marketing and distribution of over-the-counter homeopathic pharmaceutical health
products. Global operates its business through its wholly owned subsidiaries:
Ellon, Inc. ("Ellon"), Maine Naturals, Inc. ("MNI") and Natural Health
Laboratories, Inc.
In 1998, the Company sold its schools and related facilities, that
offered curricula in therapeutic massage training and skin care therapy. These
operations are being accounted for as discontinued operations.
In February 1999, the Company's newly formed, wholly-owned subsidiary,
Kaire Nutraceuticals, Inc., ("Kaire Nutraceuticals") acquired substantially all
the assets of Kaire International Inc., ("Kaire"). Kaire Nutraceuticals is
engaged in the distribution of health and personal care products through network
marketers throughout the United States, Canada, New Zealand, Australia, and
Trinidad and Tobago. Included in the purchase was shares of common stock owned
by Kaire in each of its wholly-owned and /or majority owned subsidiaries
including, but not limited to Kaire New Zealand Ltd., Kaire Australia Pty. Ltd.,
Kaire Trinidad, Ltd., and Kaire Europe Ltd., (subsequently closed in March
2000). Kaire Nutraceuticals acquired 100% of the common stock of Kaire Europe,
Ltd. and Kaire Trinidad, Ltd., and it acquired 51% of the common stock of Kaire
New Zealand Ltd. and Kaire Australia Pty. Ltd.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of Natural Health Trends Corp. and its
subsidiaries. All material inter-company transactions have been eliminated in
consolidation.
B. Accounts Receivable--Accounts receivable are stated net of allowance
for doubtful accounts of approximately $0 for 1999 and $2,000 for 1998.
C. Inventories--Inventories consisting primarily of nutritional
supplements 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 are carried at cost.
Depreciation is computed using the straight-line method over the useful lives of
the various assets.
E. Cash Equivalents--Cash equivalents consist of money market accounts
and commercial paper with an initial term of fewer than three months. For
purposes of the statement of cash flows, the Company considers highly liquid
debt instruments with original maturities of three months or less to be cash
equivalents.
F-8
<PAGE> 53
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Earnings (Loss) Per Share--In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128 ("SFAS 128") "Earnings Per Share", which became effective for both
interim and annual financial statements for periods ending after December 15,
1997. SFAS 128 requires a presentation of "Basic" and (where applicable)
"Diluted" earnings per share. Generally, Basic earnings per share is computed on
only the weighted average number of common shares actually outstanding during
the period, and the Diluted computation considers potential shares issuable upon
exercise or conversion of other outstanding instruments where dilution would
result. Furthermore, SFAS 128 requires the restatement of prior period reported
earnings per share to conform to the new standard. The per share presentations
in the accompanying financial statements reflect the provisions of SFAS 128.
Diluted earnings per share is not being shown due to the fact that the years
ended December 31, 1999, 1998 and 1997 show a net loss and the conversion of the
preferred stock and common stock outstanding during those years would be
anti-dilutive.
G. Accounting Estimates--The preparation of financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
H. Income Taxes--Pursuant to Statement of Financial Accounting
Standards No. 109 ("SFAS 109") "Accounting for Income Taxes", the Company
accounts for income taxes under the liability method. Under the liability
method, a deferred tax asset or liability is determined based upon the tax
effect of the differences between the financial statement and tax basis of
assets and liabilities as measured by the enacted rates which will be in effect
when these differences reverse.
I. Fair Value of Financial Instruments--The carrying amounts reported
in the balance sheet for cash, receivables, accrued expenses, and long-term debt
approximate fair value based on the short-term maturity of these instruments.
J. Stock Based Compensation--The Company accounts for stock
transactions in accordance with APB Opinion No. 25, "Accounting For Stock Issued
To Employees." In accordance with Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting For Stock-Based Compensation," the Company
adopted the pro forma disclosure requirements of SFAS 123.
K. Impairment of Long-Lived Assets--The Company reviews long-lived
assets, certain identifiable assets and goodwill related to those assets on a
quarterly basis for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be recovered. At
December 31, 1999 and 1998, the Company recorded a charge against patents and
goodwill upon such review (Note 4).
L. Basis of Presentation--The Company had a working capital deficiency
of approximately $6,455,000 and $2,017,000 for the years ended December 31, 1999
and 1998, and they recorded net losses of approximately $7,253,000 and
$1,288,000 respectively, that raise substantial doubt about the Company's
ability to continue as a going concern. The Company's continued existence is
dependent on its ability to obtain additional debt or equity financing and to
generate profits from operations.
M. Royalty Expense--Royalties that are incurred on a per unit sold
basis are included in Cost of Sales. Additional royalty amounts incurred to meet
contractual minimum levels are classified as Selling, General and Administrative
Expenses.
N. Reclassifications--The Company has reclassified certain expenses in
its consolidated statements of operations for the year ended December 31, 1997
as a result of the sale of its schools and related facilities. These changes had
no significant impact on previously reported results of operations or
stockholders' equity.
F-9
<PAGE> 54
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
O. Foreign Currency Translations--Assets and liabilities of
subsidiaries are translated at the rate of exchange in effect on the balance
sheet date; income and expenses of subsidiaries are translated at the average
rates of exchange prevailing during the year or period then ended. The related
transaction adjustments are reflected as a cumulative translation adjustment in
consolidated stockholders' equity. Foreign currency gains and losses resulting
from transactions are included in results of operations in the period in which
the transaction occurred.
P. Revenue Recognition--Kaire Nutraceuticals sells its product directly
to independent distributors. Sales are recorded when products are shipped. Kaire
Nutraceuticals has a program that provides a 100% refund (less shipping and
handling) to all end users, for any unopened product that is returned within 30
days from the date of purchase in resalable condition. Kaire Nutraceuticals
provides a 100% product exchange for any product that does not meet customer
satisfaction if returned within 30 days under this program. An associate is
allowed 90 days from order date for exchange or refund only if product bottles
(empty, partial or full) are returned. SFAS No. 48 "Revenue Recognition When
Right of Return Exists" requires that Kaire Nutraceuticals accrue losses that
may be expected from sales returns. Kaire Nutraceuticals monitors its historical
sales returns and accrues a liability for sales returns when and if sales
returns become significant.
Q. Comprehensive Income--Subsequent to the acquisition of Kaire, the
Company has adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130") "Reporting Comprehensive Income". Comprehensive income is comprised of net
loss and all changes to the consolidated statements of stockholders' equity,
except those due to investments by stockholders, changes in paid in capital and
distribution to stockholders. For the year ended December 31, 1999, the Company
has deemed comprehensive income to be negligible, due to the purchase of Kaire
in February, and has reported comprehensive income as such.
R. 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.
Kaire Nutraceuticals sells its products through network marketers
throughout the United States, Canada, New Zealand, Australia, and Trinidad and
Tobago. Credit is extended for returned checks and/or until credit card
purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial
statements and are based on management's expectations. The Company's accounts
receivable are subject to potential concentrations of credit risk. The Company
does not believe that it is subject to any unusual or significant risk, in the
normal course of business.
S. Restricted Cash--Kaire Nutraceuticals has three restricted cash
accounts (i) two (2) with credit card processing companies. The primary purpose
of these accounts is to provide a reserve for potential uncollectible amounts
and chargebacks by Kaire Nutraceuticals' credit card customers. The credit card
processing companies may periodically increase the restricted cash account. The
amount on deposit is calculated at 2% of net sales over a rolling six month
average and (ii) a third account is maintained with a bank as security for a
note payable which was refinanced in January 2000 using this restricted cash (of
approximately $27,000), to pay down a portion of the note principal (see Note
5).
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C> <C>
Equipment, furniture and fixtures ...... 5 to 7 $ 641,579 $ 91,795
Leasehold improvements ................. 3 to 5 -- 4,190
--------- ---------
641,579 95,985
Less: Accumulated depreciation ......... (74,514) (17,549)
--------- ---------
$ 567,065 $ 78,436
========= =========
</TABLE>
F-10
<PAGE> 55
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. PATENTS, CUSTOMER LISTS AND GOODWILL
Patents and customer lists consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Patents and trademarks, net of accumulated amortization of
$1,076,984 and $873,540 for 1999 and 1998 respectively ....... $1,739,736 $4,374,674
Customer lists, net of accumulated amortization of $29,316 and
$16,625 for 1999 and 1998 respectively ........................ 6,172,825 40,375
---------- ----------
$7,912,594 $4,415,049
========== ==========
Goodwill, net of accumulated amortization of $89,319 and
$28,071 for 1999 and 1998 respectively ...................... $ 82,654 $ 829,468
========== ==========
</TABLE>
The goodwill, the patents and trademarks, and the customer lists arose
in connection with the acquisitions of businesses made by the Company in 1997
and 1999. The goodwill, the patents and trademarks, and the customer lists are
being amortized over their estimated useful lives which are 5 to 10 years for
the customer lists, 15 years for goodwill and 11 and 17 years for patents. In
1999 and 1998, the Company under Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed" evaluated the recoverability of its patent and
trademarks, by comparing its carrying amount to income generated. As a result of
such evaluation the Company recorded a charge of approximately $3,166,841 and
$200,000 against the patent and trademarks in 1999 and 1998, respectively.
In connection with the acquisition of Kaire in February 1999, the
Company has recognized $7,719,459 in goodwill and customer list (Note 18).
<TABLE>
<S> <C>
Goodwill ........... $ 771,947
Customer List ...... 6,947,512
----------
$7,719,459
==========
</TABLE>
F-11
<PAGE> 56
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
(i) $375,000 note payable, non-interest bearing, due October 1, 2000 (less
unamortized discount based on imputed interest rate of 12% per annum
($41,385)) Initial payment of $93,750 on October 15, 1996, then
monthly payments of $7,813 beginning on November 1, 1997 and ending
October 1, 2000............................................................. $ 239,865 $ 239,865
(i) $75,000 note payable, non-interest bearing, due September 15, 1998
(less unamortized discount based on imputed interest rate of 12% per
annum ($1,349))............................................................. 47,819 47,819
(i) $69,000 note payable, non-interest bearing, due October 15, 1997.............. 27,000 27,000
(ii) $120,000 note payable, 10% interest, due January 15, 2000 .................... 120,000 --
(iii) $270,000 notes payable, 10% interest, due on demand .......................... 270,000 --
(iv) $150,000 note payable, 10% interest, due on demand .......................... 150,000 --
---------- ----------
$ 854,684 $ 314,684
========== ==========
</TABLE>
(i) The above notes were issued upon the purchase of Ellon, Inc. in 1996.
Scheduled payments have not been made since 1997, due to disputes with
the note holders, and accordingly all unpaid balances are included in
notes payable.
(ii) In accordance with the asset purchase agreement of Kaire (Note 18), the
Company assumed a note payable to a bank that bears interest at 10.5%
per annum and is collateralized by inventories, accounts receivable,
certain assets, and the personal guarantees of certain officers and
directors of Kaire. The term loan is payable in monthly principal
installment of $5,000 plus accrued interest and is due in January 2000.
In January 2000, this note was refinanced at the same terms and is now
due July 15, 2001.
(iii) In the event the note is not paid on demand, the holder has the option
to convert the note at any time into shares of common stock at a
discount equal to 40% of the five day average closing bid price of the
common stock on the five days preceding notice of conversion. Due to
the beneficial conversion feature in this note, imputed interest of
$405,000 has been recorded.
(iv) In October 1999, the Company amended the promissory note to provide
that the note is payable upon demand and is convertible into shares of
common stock at a discount equal to 40% of the average closing bid
price of the common stock on three days preceding notice of conversion.
Due to the beneficial conversion feature in this note, imputed interest
of $225,000 has been recorded.
6. NOTES PAYABLE RELATED PARTY
As of December 31, 1999, the Company owed $112,363 to four of its
executive officers and directors. All four notes bear interest at 10% and are
payable upon demand.
7. PAYROLL TAX AND SALES TAX LIABILITIES
During 1999, the Company has not made its payroll tax deposits with the
Internal Revenue Service ("IRS") and the various state taxing authorities on a
timely basis. The Company has filed all required payroll tax returns and is
currently negotiating a payment plan with the IRS. As of December 31, 1999, the
Company owes approximately $668,400 of delinquent payroll tax liabilities
including interest and penalties. The Company's failure to pay its delinquent
payroll tax liabilities could result in tax liens being filed by various taxing
authorities.
F-12
<PAGE> 57
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. PAYROLL TAX AND SALES TAX LIABILITIES (CONTINUED)
During 1999, the Company did not make its sales tax deposits with the
various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of December 31, 1999, the Company owed
approximately $189,900 in current and delinquent sales taxes which is included
in other current liabilities. The Company's failure to pay its delinquent sales
taxes could result in tax liens being filed by various taxing authorities.
8. STOCKHOLDERS' EQUITY
A. Common Stock--The Company is authorized to issue 50,000,000
shares of common stock, $.001 par value share.
In October 1999, the Company entered into a two year
consulting agreement with a consultant pursuant to which the
consultant will provide the Company with advisory services
relating to mergers and acquisitions and strategic alliances
in consideration for the issuance of 95,000 shares of common
stock.
In October 1999, the Company entered into a consulting
agreement with a consultant pursuant to which the consultant
will negotiate settlements with the Company's creditors in
consideration for the issuance of 185,000 shares of common
stock.
In November 1999, the Company issued 125,000 shares of common
stock pursuant to a settlement agreement.
In November 1999, the Company issued 3,018 shares of common
stock to a former employee pursuant to an employment
agreement.
In November 1999, the Company issued 25,000 shares of common
stock to a Director in connection with legal services
performed on the Company's behalf.
B. Preferred Stock--The Company is authorized to issue a maximum
of 1,500,000 shares of $.001 par preferred stock, in one or
more series and containing such rights, privileges and
limitations, including voting rights, dividend rates,
conversion privileges, redemption rights and terms, redemption
prices and liquidation preferences, as the Company's board of
directors may, from time to time, determine.
Series A Preferred Stock--In June 1997, the Company sold 2,200
shares of its convertible Series A Preferred Stock for $1,000
a share realizing net proceeds of $1,900,702. The preferred
stock pays dividends at the rate of 8% per annum payable in
cash or shares of the Company's common stock valued at 75% of
the closing bid price. The preferred stock has a liquidation
preference of $1,000 per share. The preferred stock is
convertible commencing 60 days after issuance, provided that a
registration statement covering the resale of the shares of
common stock is effective, at the rate of 75% of the average
closing bid price of the common stock over the five days
preceding the notice of redemption. The Company has the right
to redeem the preferred stock for 240 days after the date of
issuance at the rate of 125% of the stated value. If a
registration statement is not deemed effective within 60 days
of the date of issuance, then the Company is obligated to pay
a penalty at the rate of 2.5% per month.
In 1998 all 2,200 shares of Series A preferred stock were
redeemed for $3,530,309, inclusive of face amount, redemption
value, penalties and dividends.
Series B Preferred Stock--In February 1998, the Company issued
300 shares of Series B Preferred Stock with a stated value of
$1,000 per share realizing net proceeds of $261,500. The
preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a
price equal to the lower of 70% of the average closing bid
price of the common stock for the three trading days
immediately preceding the notice of conversion or $0.625 per
share. Due to the beneficial conversion features in the
issuance of this series of preferred stock, an imputed
dividend of $128,572 has been recorded.
F-13
<PAGE> 58
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)
In 1998 all 300 shares of Series B Preferred Stock converted
to a total of 541,330 shares of the Company's common stock.
Series C Preferred Stock--In April 1998, the Company issued
4,000 shares of Series C Preferred Stock with a stated value
of $1,000 per share realizing net proceeds of $3,507,500. The
preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a
conversion price equal to 75% of the average closing bid
prices of the common stock for the five day trading period
ending on the day before conversion date, or 100% of the
closing bid price on the day of funding. Due to the beneficial
conversion features in the issuance of this series of
preferred stock, an imputed dividend of $1,333,333 has been
recorded.
In 1998 all 4,000 shares of Series C Preferred Stock converted
to a total of 3,608,296 shares of the Company's common stock.
Series D Preferred Stock--In July 1998, the Company issued 75
shares of Series D Preferred Stock with a stated value of
$1,000 per share. The stated value and the accrued dividends
thereon are convertible into shares of the Company's common
stock at a conversion price equal to 70% of the average
closing bid prices of the common stock for the five day
trading period ending on the day before conversion date.
In August 1998 all 75 shares of Series D Preferred Stock were
redeemed for a total of $91,291.
Series E Preferred Stock--In August 1998, the Company issued
1,650 shares of Series E Preferred Stock with a stated value
of $1,000 per share realizing net proceeds of $1,439,500. The
preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a
conversion price equal to the lower of 75% of the average
closing bid price of the common stock for the five trading
days immediately preceding the conversion date or 100% of the
closing bid price on the day of funding. This series of stock
is convertible commencing 60 days after issuance. Due to the
beneficial conversion features in the issuance of this series
of preferred stock, an imputed dividend of $550,000 has been
recorded.
If the Company does not have an effective common stock
registration 120 days subsequent to the issuance of Series E
Preferred Stock, a 2% penalty on the face amount of $1,650,000
accrues for every 30 days without an effective registration
statement. As of the year ended December 31, 1999 the Company
has recorded a charge of $369,800 due to non-compliance with
this clause.
In the year ended December 31, 1999, $159,510 in accrued
dividends was recorded for the period such stock was
outstanding.
In September 1999, 610 shares of Series E Preferred Stock was
converted to 603,130 of the Company's common stock.
Series F Preferred Stock--In February 1999, the Company issued
2,800 shares of Series F Preferred Stock with a stated value
of $1,000 per share realizing a net value of $2,800,000. This
issuance is in accordance with the asset purchase agreement of
Kaire (Note 18). The preferred stock pays a dividend at 6% per
annum and is payable upon conversion into either cash or
common stock. The preferred stock and the accrued dividends
thereon are convertible into shares of the Company's common
stock at a conversion price equal to 95% of the average
closing bid price of the Common stock for the three trading
days immediately preceding the date on which the Company
receives notice of conversion from a holder. The Company is
permitted at any time, on five days prior to written notice,
to redeem the outstanding preferred stock at a redemption
price equal to the stated value and the accrued dividends
thereon.
In the year ended December 31, 1999, the Company recorded an
imputed dividend of $147,368 due to the beneficial conversion
features in the Series F Preferred Stock. An additional
$145,135 in accrued dividends was recorded for the period such
stock was outstanding.
F-14
<PAGE> 59
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)
Series G Preferred Stock--In February 1999, the Company issued
350 shares of Series G Preferred Stock with a stated value of
$1,000 per share realizing a net value of $350,000. The
preferred stock pays a dividend at the rate of 6% per annum.
The preferred stock and the accrued dividends thereon are
convertible into shares of the Company's common stock at a
conversion price equal to 95% of the average closing bid price
of the common stock for the three trading days immediately
preceding the date on which the Company receives notice of
conversion. The Company is permitted at any time, on five days
prior written notice, to redeem the outstanding preferred
stock at a redemption price equal to the stated value and the
accrued dividends thereon.
In the year ended December 31, 1999, the Company recorded an
imputed dividend of $18,421 due to the beneficial conversion
features in the Series G Preferred Stock. An additional
$18,142 in accrued dividends was recorded for the period such
stock was outstanding.
Series H Preferred Stock--In March and April 1999, the Company
sold 1,400 shares of Series H Preferred Stock with a stated
value of $1,000 per share realizing net proceeds of
$1,201,015. The preferred stock pays a dividend at the rate of
8% per annum. The preferred stock and the accrued dividends
thereon are convertible into shares of the Company's common
stock at a conversion price equal to the lower of the closing
bid price on the date of issuance or 75% of the average
closing bid price of the common stock for the three trading
days immediately preceding the date on which the Company
receives notice of conversion from a holder.
If the Company does not have an effective common stock
registration 120 days subsequent to the issuance of the Series
H Preferred Stock, a 2% penalty on the face amount of
$1,400,000 accrues for every 30 days without an effective
registration statement. As of the year ended December 31,
1999, the Company recorded a charge of $123,500 due to
non-compliance with this clause.
In the year ended December 31, 1999, the Company recorded an
imputed dividend of $466,667 due to the beneficial conversion
features in the Series H Preferred Stock. An additional
$79,155 in accrued dividends was recorded for the period such
stock was outstanding.
During the year ended December 31, 1999, the Company had
converted 426 shares of the Series H Preferred Stock into
255,254 shares of common stock.
Series I Preferred Stock--In February 1999, the Company
authorized the issuance of 516 shares of Series I Preferred
Stock with a stated value of $1,000 per share realizing a net
value of $516,000. These shares were issued in connection to
services rendered in connection with the Kaire acquisition.
The preferred stock pays a dividend at the rate of 8% per
annum. The preferred stock and the accrued dividends thereon
are convertible into shares of the Company's common stock at a
conversion price equal to the average closing bid price of the
Common stock for the five trading days immediately preceding
the date of conversion.
In the year ended December 31, 1999, $16,048 in accrued
dividends was recorded for the period such stock was
outstanding.
In July 1999 all 516 shares, plus the accrued interest payable
of $16,048 of Series I Preferred stock was converted to
160,104 shares of the Company's common stock.
C. Convertible Debentures--In April 1997, the Company issued
$1,300,000 of 6% convertible debentures (the "Debentures").
Principal on the Debentures is due in March 2000. The
principal and accrued interest on the Debentures are
convertible into shares of common stock of the Company. The
Debentures are convertible into shares of common stock at a
conversion price equal to the lesser of $1.4375 or 75% of the
average closing bid price of the common stock for the five
trading days immediately preceding the notice of conversion.
In June 1997, the Company repaid $300,000 of the Debentures.
As of December 1997, $820,233 of such debentures were
converted into 303,986 shares of common stock. As of December
1998, the remaining $179,767 were converted into 206,603
shares of common stock.
F-15
<PAGE> 60
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY (CONTINUED)
In conjunction with the issuance of the Debentures, the
Company issued warrants to purchase an aggregate of 5,000
shares of Common Stock. The warrants are exercisable until
April 3, 2002. Warrants to purchase 2,500 shares of Common
Stock are exercisable at $97.50 per share, and the balance are
exercisable at $130.00 per share.
D. Options--During the quarter ended September 30, 1997, the
Company's president and secretary were issued an aggregate of
20,000, 10 year options, exercisable at $.001 per share. The
Company has recorded a non-cash expense of $400,000
representing the difference between the exercise price and the
fair value of the common stock.
In connection with the sale of the schools, to the Company's
former president and secretary, the above options were
canceled.
In April 1999, the Company issued an aggregate of 295,000, 5
year options, exercisable at $3.50 per share, to the Company's
president, chairman of the board of directors, two directors,
and an employee. The options were granted at fair market
value, accordingly, no expense has been recognized.
In connection with a licensing agreement, in February 2000, to
the Company's former president, 150,000 of the above options
were canceled.
E. 1 For 40 Reverse Stock Split--On April 6, 1998, the Company
effected a 1 for 40 reverse split of its common stock,
amending its certificate of incorporation to provide for the
authority to issue 50,000,000 shares of $.001 par value common
stock. All per share data in these financial statements is
retroactively restated to reflect this reverse split.
F. Conversion of Notes Payable--In May 1998 the Company converted
$595,000 of its 12.5% promissory notes, plus accrued interest
of $104,113 into 1,195,473 shares of common stock.
G. Redemption of Shares--In connection with the sale of the
schools, the Company redeemed 79,175 shares of common stock
from its former president and secretary.
9. DISCONTINUED OPERATIONS
During the third quarter of 1998, the Company sold its three vocational
schools and certain related businesses. Net assets of the schools were
approximately $2,875,285 consisting primarily of furniture and equipment,
accounts receivable and goodwill. Liabilities were approximately $2,559,249.
Accordingly, the results of the vocational school operations are shown
separately as "discontinued operations."
Revenues of the discontinued vocational school business were $3,351,959
in 1998 and $5,858,790 for the full year 1997.
In November 1998, the Company sold an office building located in
Pompano Beach, Florida that previously accommodated the Company's corporate
headquarters and one of its vocational schools. Gross proceeds were
approximately $2,900,000, less net book value of $3,238,000 plus closing and
financing costs of $498,000.
During the third quarter of 1997, the Company reached a decision to
discontinue the medical clinic line of business. Net assets of the medical
clinics were approximately $1,509,405 consisting primarily of furniture and
equipment, accounts receivable and goodwill. Liabilities were approximately
$213,987. The Company has accrued an estimated loss on disposal of approximately
$716,193 representing primarily an accrued employment contract and lease
terminations. Accordingly, the results of the clinic operations are shown
separately as "discontinued operations." As of December 31, 1999 accrued
expenses on this discontinued operation totaled $0.
Revenues of the discontinued clinic line of business were $1,754,066
for 1997.
F-16
<PAGE> 61
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. KAIRE EUROPE, LTD.
In March 2000, Kaire Europe, Ltd. (a subsidiary of the Company) which
had been served an Involuntary Winding Up Order was placed in liquidation. At
December 31, 1999, the remaining assets and liabilities were written off,
resulting in a $200,000 gain.
11. INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS 109.
SFAS No. 109 requires the recognition of deferred tax assets and liabilities for
both the expected impact of differences between the financial statement and tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. SFAS 109 additionally
requires the establishment of a valuation allowance to reflect the likelihood of
realization of deferred tax assets. At December 31, 1999 and 1998, the Company
had net deferred tax assets of approximately $7,000,000 and $4,464,000,
respectively. The Company has established a valuation allowance for the full
amount of such deferred tax assets at December 31, 1999 and 1998, as management
of the Company has not been able to determine that it is more likely than not
that the deferred tax assets will be realized.
The following table reflects the Company's deferred tax assets and
(liabilities) at December 31, 1999 and 1998:
<TABLE>
DECEMBER 31,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net operating loss deduction....................... $ 7,000,000 $ 4,464,000
Valuation allowance................................ (7,000,000) (4,464,000)
------------ -----------
$ -- $ --
============ ===========
</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,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Income tax (benefit) computed at statutory
rate........................................ $(2,500,000) $ (451,000)
Effect of permanent differences................ 450,000 --
----------- ----------
Tax benefit not recognized..................... (2,150,000) 451,000
----------- ----------
Provision for income taxes (benefit)........... $ -- $ --
=========== ==========
</TABLE>
The net operating loss carryforward at December 31, 1999 was
approximately $15,145,000 and expires in the years 2012 to 2019.
F-17
<PAGE> 62
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. COMMITMENTS AND CONTINGENCIES
A. Leases--The Company leases its Longmont, Colorado office under a
lease expiring in 2000. Rent expense for the years ended December 31, 1999 and
1998 was $240,000 and $24,000, respectively. In October 1999, the Company
consolidated it's operations from Portland, Maine to Longmont, Colorado. The
Company is liable for lease payments in Maine until November 2001. In January
2000, the Company assigned a portion of it's Maine obligation to a third party
with consent. In 1998 Corporate headquarters rented facilities in New York City.
In December 1999, the Company consolidated it's Corporate headquarters to
Longmont, Colorado. Minimum rental commitments for the Longmont, Portland and
New York City facilities over the next five years are as follows:
<TABLE>
<S> <C>
2000..................................................... $65,461
2001..................................................... 23,840
2002..................................................... 19,934
2003..................................................... --
2004..................................................... --
</TABLE>
B. Employment Agreement--During the quarter ended March 31, 1997, the
Company renegotiated with a former stockholder of Sam Lilly, Inc. with whom it
was obligated under an employment agreement, to cancel the employment agreement
and replace it with a consulting agreement. The consulting agreement required
the individual to provide services to the Company for one day per week through
December 1998 at the rate of $5,862 per week. The Company determined that the
future services, if any, that it will require will be of little or no value and
accounted for this obligation as a cost of severing the employment contract.
Accordingly all future payments have been accrued in full at September 1997. The
expense associated with this accrual is recorded as part of the loss from
discontinued operations in 1997.
C. Renegotiation of Patent Agreement--In April 1998, the Company
renegotiated the terms of its acquisition of the Troy Patent, due to the
agreement being in breach because of unpaid minimum royalties. Under the new
agreement, royalties are payable at the rate of 3% of the first $2,000,000 of
related product sales; 2% of the next $2,000,000 in sales and 1% of sales in
excess of $4,000,000.
D. Litigation--On August 4, 1997, Samantha Haimes brought an action in
the Fifteenth Judicial Circuit of Palm Beach County, Florida, against us and
National Health Care Centers of America, Inc., the Company's wholly-owned
subsidiary. We have asserted counterclaims against Samantha Haimes and Leonard
Haimes. The complaint arises out of the defendant's alleged breach of contract
in connection with the Company's natural health care center which was located in
Boca Raton, Florida. The plaintiff is seeking damages in the amount of
approximately $535,000. On September 10, 1997, Rejuvenation Unlimited, Inc. and
Sam Lilly, Inc. brought an action in the Fifteenth Judicial Circuit of Palm
Beach County, Florida, arising out of the Company's alleged breach of contract
in connection with the acquisition of the Company's natural health care center
in Boca Raton, Florida from the plaintiff. The plaintiff is seeking damages in
excess of $15,000. The Company has agreed to settle such actions for shares of
common stock with a fair market value of $325,000, but not less than 125,000
shares of common stock and has agreed to register shares of Common Stock.
In Global Health and Ellon, Inc. v. Leslie Kaslof, Ralph Kaslof, and
Ellon USA, Inc., pending in the United States District Court for the District of
Maine (the "Maine Kaslof Case") claims have been made arising out of the sale of
Ellon USA's ("Old Ellon") assets to Global Health's wholly-owned subsidiary,
Ellon, Inc. ("New Ellon"). In connection with that sale, Leslie Kaslof and Ralph
Kaslof, former shareholders and officers of Old Ellon, entered into employment
and consulting agreements with Global Health. Global Health's potential
obligation to the Kaslofs under the employment and consulting agreements was
approximately $525,000. The complaint in the Maine Kaslof Case seeks a
determination that the Kaslof's materially breached their respective obligations
under the agreements and that Global Health and New Ellon are excused from
further performance thereunder. The complaint includes a breach of fiduciary
claim against Ralph Kaslof, as well as a claim to recover approximately
$142,000. In a related civil action brought by the Kaslofs and Old Ellon in the
United States District Court for the Eastern District of New York (the "New York
Kaslof Axtion"). The Kaslofs have alleged breaches of the purchase and sale
agreement, the employment and consulting agreements, and other agreements
executed in connection with the sale of Old Ellon's assets. The complaint seeks
to recover damages in an unspecified amount, but not less than $1,300,000, costs
of court, reasonable attorney fees, and interest. Global Health intends to
vigorously defend any and all claims asserted by the Kaslofs and their
corporation.
F-18
<PAGE> 63
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Inter/Media Time Buying Corp. ("Inter/Media") v. Global Health, et al.,
which is pending in the United States District Court for the Central District of
California (the "Inter/Media Action"), is based on Inter/Media's provision of
marketing, media purchasing, and related advertising services to Global Health
in connection with Natural Relief 1222. The complaint seeks compensatory damages
of $144,500, unstated special damages, attorney fees and costs of court. Global
Health answered the complaint, denying all material allegations therein, and
asserting a counterclaim arising out of Inter/Media's creation of a defective
national direct response campaign which prevented a successful nationwide retail
launch for a clinically-proven product. By its counterclaim, which includes
claims for breach of contract, negligence, intentional interference with a
prospective economic advantage, fraud and intentional misrepresentation, and
negligent misrepresentation, Global Health seeks to recover general damages of
not less than $6,500,000, special damages, costs of suit, and reasonable
attorney fees. Inter/Media has sought an attachment against Global Health's
assets for the full amount of its claims.
The Company is currently negotiating with Inter/Media for settlement of
the case.
In PIC-TV v. Global Health, et al., PIC-TV seeks to recover
compensatory damages of not less than $319,656, together with interest and costs
of suit, based on the sale of advertising time and sponsorship to Global Health.
PIC-TV has received default judgment in its suit against Global Health. Such
amount has been accrued for the financial statements.
In September 1999, Command Financial Press Corp. commenced an action in
the Supreme Court of the State of New York in New York City against the Company
for unpaid invoices for printing services in the amount of approximately
$65,000. The Company is defending the action.
As of December 31, 1999, Global had a working capital deficit of
$2,090,000 and Global is attempting to achieve settlements with its creditors.
Also at December 31, 1999, Global is a defendant in various legal actions
brought by creditors to whom Global is attempting settlement offers with.
E. Major Supplier
Kaire Nutraceuticals currently buys all of its Pycnogenol, an important
component of its products, from one supplier.
For a period of five years, Kaire Nutraceuticals must purchase no less
than $73,750 per month of a different product from another supplier.
Although there are a limited number of manufacturers of this component,
management believes that other suppliers could provide similar
components on comparable terms. Kaire Nutraceuticals does not maintain
any other contractual commitments or similar arrangements with other
suppliers.
Kaire Nutraceuticals purchases its products from manufacturers and
suppliers on an as needed basis. Should these relationships terminate,
Kaire Nutraceuticals' supply and ability to meet consumer demands would
be adversely affected.
13. 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 $2,029 to
$33,933.
Future minimum lease payments and the present value of the minimum
lease payments under the noncancelable capital lease obligations as of December
31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
- ------------ --------
<S> <C>
2000........................................................... $ 75,995
2001........................................................... 52,903
2002........................................................... 26,931
--------
Total future minimum lease payments............................ 155,829
Less amounts representing interest............................. 26,676
--------
Present value of minimum lease payments........................ 129,153
Less current maturities........................................ 75,995
Total long-term obligations.................................... 53,158
</TABLE>
F-19
<PAGE> 64
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
14. COMMON STOCK SUBJECT TO PUT
In connection with the January 1996 acquisition of the net assets of
Sam Lilly, Inc., the 9,500 shares issued in connection with the acquisition are
subject to the seller's ability to require the Company to repurchase such shares
for a three year period for $380,000, in the event that the aggregate market
value of the shares falls below $380,000. Such shares are excluded from
permanent equity on the accompanying balance sheet. As of March 1998, the seller
had exercised the put and this matter is now subject to litigation.
15. STOCK OPTION PLANS AND WARRANTS
Under the Company's 1994 Stock Option Plan, up to 16,667 shares of
common stock are reserved for issuance. The exercise price of the options will
be determined by the Stock Option Committee selected by the board of directors,
but the exercise price will not be less than 85% of the fair market value on the
date of grant. Towards the end of 1995, 50 options were issued to each of two
directors at an exercise price equal to the market price at the time. During
1996 the Company issued 250 options to a director at a price equal to the fair
market value on the date of grant.
In August 1997, the Company adopted a stock option plan covering
officers, directors, employees and consultants. In August the Company issued
43,750 ten year options under the 1997 Plan, exercisable at fair market value
(which was $22.40 per share) to certain of its officers who were former
principals of Global. Options to purchase 21,875 shares became exercisable in
August 1998, and the remaining 21,875 will be exercisable in August 1999.
In 1998 the Company issued 100,000 warrants to two directors at an
exercise price of $1.00, which was equal to the fair market value at the date of
grant.
The following table summarizes the changes in options and warrants
outstanding, and the related exercise price for shares of the Company's common
stock:
<TABLE>
<CAPTION>
STOCK OPTIONS WARRANTS
------------------------------------- --------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE EXERCISABLE SHARES PRICE EXERCISABLE
------- -------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996 .. 350 50.13 350 2,110,757 8.35 2,110,757
Granted ..................... 63,750 5.77 20,000 5,000 113.75 5,000
------- ----- ------- --------- ------ ---------
Outstanding at December 31, 1997 .. 64,100 71.00 20,350 2,115,757 8.60 2,115,757
Granted ..................... -- -- -- 407,500 1.16 407,500
Canceled .................... (20,000) 0.00 1,875 -- -- --
------- ----- ------- --------- ------ ---------
Outstanding at December 31, 1998 .. 44,100 15.68 22,225 2,523,257 7.30 2,523,257
Granted ..................... 295,000 3.50 295,000 250,000 3.93 250,000
------- ----- ------- --------- ------ ---------
Outstanding at December 31, 1999 .. 339,100 6.01 317,225 2,773,257 7.00 2,773,257
======= ===== ======= ========= ====== =========
<CAPTION>
OPTIONS WARRANTS
------- --------
Weighted Average fair value of options and warrants granted during 1996......................... $40.42 None
Weighted Average fair value of options and warrants granted during 1997......................... $10.55 $78.03
Weighted Average fair value of options and warrants granted during 1998......................... None $0.84
Weighted Average fair value of options and warrants granted during 1999......................... 1.79 1.90
</TABLE>
F-20
<PAGE> 65
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. STOCK OPTION PLANS AND WARRANTS (CONTINUED)
The following table summarizes information about exercisable stock
options and warrants at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------ -------------------------
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options:.................... $3.50 - 101.20 339,100 2-8 years $6.01 317,225 $4.35
Warrants:................... -- 2,523,257 1-5 years $7.00 2,773,257 $7.00
</TABLE>
In fiscal 1997, the Company adopted the disclosure provisions of SFAS
123. For disclosure purposes, the fair value of options is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for stock options granted during the years
ended December 31, 1999, 1998 and 1997 respectively: annual dividends of $0;
expected volatility of 50%; risk free interest rate of 7% and expected life of
10 years. The weighted average fair value of stock options granted during the
years ended December 31, 1999, 1998 and 1997 was $1.79, $0 and $21.60,
respectively. If the Company had recognized compensation cost of stock options
in accordance with SFAS 123, the Company's proforma loss and net loss per share
would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss to common stockholders
As reported.................................... $(8,795,880) $(3,299,917) $(8,458,453)
Pro forma...................................... $(8,925,006) $(3,299,917) $(9,214,453)
Net loss from continuing operations:
As reported.................................... $(9,100,473) $(2,740,054) $(4,304,073)
Pro forma...................................... $(9,229,599) $(2,740,054) $(5,060,073)
Net loss per share to common stockholders
Basic
As reported................................. $(1.22) $(1.49) $(19.48)
Pro forma................................... $(1.24) $(1.49) $(21.22)
Net loss per share to common stockholders
continuing operations:
Basic
As reported................................. $(1.26) $(2.15) $(11.60)
Pro forma................................... $(1.28) $(2.15) $(13.34)
</TABLE>
16. FORGIVENESS OF DEBT
During the year ended December 31, 1998 the Company realized a gain of
approximately $869,516 due to its ongoing efforts to restructure Global
and its various wholly owned subsidiaries.
The Company for the years ended December 31, 1999 and 1998, reviewed
the fair value of its accounts payable, accrued expenses and other
liabilities, and adjusted their gain on forgiveness of debt to
approximately $816,000, resulting in an approximate decrease of $54,000
in gain that had been realized in the year ended December 31, 1998.
F-21
<PAGE> 66
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
17. RELATED PARTY TRANSACTION
The Company sold its three vocational schools (Note 8) in 1998 to a
company controlled by the Company's former President and Chief Executive
Officer, the Company's former Secretary, and a former director.
The Company has paid legal fees to a law firm, whose member is a
director of the Company. Fees of approximately $79,000, $263,000 and $153,000
were paid in the year's ended December 31, 1999, 1998 and 1997, respectively.
The Company as of December 31, 1999 owed $45,000 to its chief financial
officer and $37,360 to its chief executive officer of the Company, both in
connection with liabilities assumed in connection with the Kaire acquisition.
18. FOREIGN SALES
Since the acquisition of Kaire and its foreign subsidiaries in February
1999, the Company has substantially increased its international presence both in
sales and long-lived assets. The Company's sales and long-lived assets by
country as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
UNITED AUSTRALIA AND OTHER
STATES NEW ZEALAND SUBSIDIARIES CONSOLIDATED
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers... $13,167,421 $1,334,770 $767,440 $15,269,631
=========== ========== ======== ===========
Long-lived assets at December 31,
1999........................... $ 9,452,993 $ 39,320 $ 43,260 $ 9,535,573
=========== ========== ======== ===========
</TABLE>
19. ACQUISITIONS
On July 23, 1997, the Company closed on the acquisition of the capital
stock of Global. The purchase price for the acquisition of Global was settled
with the issuance of 145,000 shares of the Company's common stock. The Company
has agreed to issue to former Global shareholders additional shares of common
stock as follows: i) up to 20,000 shares if Global's pre-tax operating earnings
equal or exceed $1,200,000 for the period from July 1, 1997 through June 30,
1998, which did not occur and ii) shares equal in market value to the lesser of
$45 million or eight times Global pre-tax operating earnings for the period from
July 1, 1999 through June 30, 2000 minus the fair market value on the date of
issuance of the 145,000 share initial consideration.
The acquisition was recorded using the purchase method of accounting by
which the assets are valued at fair market value at the date of acquisition. The
following table summarizes the acquisition.
<TABLE>
<S> <C>
Purchase price........................... $ 2,900,000
Liabilities assumed...................... 4,530,741
Fair value of assets acquired............ (6,511,954)
------------
Goodwill................................. $ 918,787
============
</TABLE>
The assets acquired included two patents, one (the "Troy Patent") was
valued at $4,819,000, (subsequently written down to $2,500,000 in 1999 -- see
note 4), and is being amortized over its remaining life of 11 years, the other
(the "Xu Patent") was valued at $404,000. In December 1998 management evaluated
the recoverability of the Xu patent, by comparing its carrying amount to income
generated. As a result of such evaluation the Company recorded a charge of
$200,000 against this patent (subsequently written down to $0 in 1999 -- see
note 4). The Troy Patent is being amortized over its remaining life of 17 years,
from the date of purchase, with adjustments for future amortization in regards
to the charge against it. Additionally, the Company acquired a customer list
valued at $57,000, which is being amortized over 5 years.
F-22
<PAGE> 67
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
19. ACQUISITIONS (CONTINUED)
The following schedule combines the unaudited pro-forma results of
operations the Company and Global, as if the acquisition occurred on January 1,
1997 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 acquisition
actually occurred on January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------
<S> <C>
Revenues........................................................... $ 7,856,071
Loss from continuing operations.................................... $ (7,709,728)
Net loss........................................................... $(10,234,169)
Basic and diluted loss per share from continuing operations........ $ (15.21)
Basic and diluted net loss per share............................... $ (20.20)
Shares used in computation......................................... 506,765
</TABLE>
The Company in February 1999, pursuant to an asset purchase agreement
acquired substantially all the assets of Kaire in exchange for the (i) issuance
to Kaire, of $2,800,000 aggregate stated value of the Company's Series F
Preferred Stock, par value of $.001, (ii) issuance to creditors of Kaire of
$350,000 aggregate stated value of the Company's Series G Preferred Stock, par
value of $.001, (iii) issuance to Kaire of five year warrants to purchase
200,000 shares of the Company's common stock, par value of $.001, and
acquisition costs of $622,587 of which $516,000 will be paid with the issuance
of $516,000 aggregate stated value of the Company's Series I Preferred Stock,
par value $.001 and $106,587 was paid in cash. The Company has computed an
aggregate $682,000 value on the warrants for acquisition purposes. The value was
derived by using the Black-Scholes Option Pricing model, (iv) the assumption of
certain indebtedness of Kaire, as defined in the agreement and as agreed to
outside of the asset purchase agreement, (v) indemnification to certain officers
of Kaire against certain liabilities accrued prior to the closing date of the
asset purchase, and (vi) certain annual payments to Kaire for a period of five
years commencing December 31, 1999 based upon revenues and net income.
The acquisition was recorded using the purchase method of accounting,
by which assets are valued at fair value on the date of acquisition. The
following table summarized the acquisition:
<TABLE>
<S> <C>
Purchase price including acquisition costs............... $ 5,347,513
Liabilities assumed...................................... 4,205,012
Fair value of assets acquired............................ (2,546,070)
-----------
Goodwill and customer list............................... $ 7,006,455
===========
</TABLE>
The Goodwill acquired is approximately $772,000 and is being amortized
over its remaining useful life of 15 years. The customer list acquired is
approximately $6,948,000 and is being amortized over its remaining useful life
of 10 years.
The following schedule combines the unaudited pro-forma results of
operations of the Company and Kaire, as if the acquisition occurred on January
1, 1996 and includes such adjustments which are directly attributable to the
acquisition, including the amortization of goodwill. It should not be considered
indicative of the results that would have been achieved had the acquisition
actually occurred on January 1, 1996.
F-23
<PAGE> 68
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
19. ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................... $ 17,572,637 $ 27,366,830 $ 36,815,238
Net income (loss) to common
stockholder......................... $ (10,302,249) $ (10,431,144) $ (15,362,756)
Basic and diluted loss per common
share from continuing operations.... $ (1.27) $ (3.63) $ (25.28)
Basic and diluted net income (loss)
to common stockholder per share..... $ (1.43) $ (4.72) $ (35.38)
Shares used in computation............. 7,233,297 2,210,458 434,265
</TABLE>
20. FOURTH QUARTER ADJUSTMENTS
Fourth quarter adjustments include the following:
<TABLE>
<S> <C>
Write-down of patents............. $ 2,398,841
Write-off of prepaid royalty...... $ 163,000
Write-off of goodwill............. $ 768,000
Write-off of inventory............ $ 167,000
</TABLE>
21. SUBSEQUENT EVENTS
In January 2000, the Company entered into a Licensing Agreement with
GLI, Inc., ("GLI") a Delaware corporation with whom Joseph Grace, former C.E.O.
and director of the Company, is a principal. The License agreement allows GLI
certain worldwide rights to manufacture, distribute and sell certain products
under the Natural Relief 1222 trademark. The licensing agreement calls for the
Company to receive a royalty based upon GLI's net sales with a minimum royalty
guaranteed thorough the year 2004.
In February 2000, the Company entered into an Asset Purchase and
Licensing Agreement with Ellon Botanicals, Inc. ("EBI"). The agreement allows
EBI the exclusive license market products under the "Ellon", "Calming Essence"
and "ContentMints" tradenames. The agreement calls for the Company to receive a
royalty based upon EBI's sales with a minimum royalty through the year 2004.
In March 2000, the Company sold 1,000 shares of Series J Preferred
Stock with a stated value of $1,000 per share realizing net proceeds of
$936,000. The preferred stock pays a dividend at the rate of 10% per annum
payable in cash or stock at the Company's option.. The preferred stock and the
accrued dividends thereon are convertible into shares of the Company's common
stock at a conversion price equal to the lower of the closing bid price on the
date of issuance or 70% of the average closing bid price of the common stock for
the lowest three trading days during the twenty day period immediately preceding
the date on which the Company receives notice of conversion from a holder.
In connection with the offering of the Series J Preferred Stock, the
Company issued warrants to purchase 200,000 shares of common stock. The exercise
price shall be equal to 110% of the closing bid price on the day of funding.
F-24
<PAGE> 69
KAIRE INTERNATIONAL, INC.
CONTENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................. F-26
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS................................................... F-27
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS.................. F-28
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT.............................. F-29
CONSOLIDATED STATEMENTS OF CASH FLOWS......................................... F-30
SUMMARY OF ACCOUNTING POLICIES................................................ F-31 - 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................... F-35 - 49
</TABLE>
F-25
<PAGE> 70
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Kaire International, Inc.
Longmont, Colorado
We have audited the accompanying consolidated balance sheets of Kaire
International, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997 and the related consolidated statements of operations and comprehensive
loss, stockholders' deficit and cash flows for the years ended December 31,
1998, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kaire International,
Inc. and subsidiaries at December 31, 1998 and 1997 and the results of their
operations and their cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit of $9,862,931 and a capital deficit of $9,322,895
at December 31, 1998. These conditions raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
March 8, 1999
F-26
<PAGE> 71
KAIRE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Notes 1, 4 and 5)
CURRENT:
Cash and cash equivalents....................................... $ 372,633 $ 460,663
Restricted cash................................................. 125,000 --
Accounts receivable, less allowance of $0 and
$168,805 for possible losses (Notes 4 and 5).................. 262,944 301,135
Inventories (Note 4)............................................ 1,061,144 1,612,960
Prepaid expenses and other...................................... 61,281 267,123
------------ ------------
Total current assets.............................................. 1,883,002 2,641,881
------------ ------------
PROPERTY AND EQUIPMENT (Note 3):
Computer equipment.............................................. 901,491 914,451
Computer software............................................... 579,955 579,955
Office equipment................................................ 424,310 424,714
Furniture and fixtures.......................................... 152,544 322,171
Leasehold improvements and other................................ 135,029 174,985
------------ ------------
2,193,329 2,416,276
Accumulated depreciation and amortization....................... (1,655,178) (1,344,463)
------------ ------------
Net property and equipment........................................ 538,151 1,071,813
------------ ------------
OTHER ASSETS:
Deposits and other.............................................. 139,397 405,638
Debt issuance costs, net of accumulated
amortization of $347,230 and $143,886 (Note 5)................ -- 204,344
------------ ------------
Total other assets................................................ 139,397 609,982
------------ ------------
$ 2,560,550 $ 4,323,676
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable (Note 5).......................................... $ 2,075,000 $ 1,787,166
Note payable to bank (Note 4)................................... 180,000 240,000
Notes payable--related parties (Note 2)......................... 2,362,247 984,667
Current portion of capital lease obligations (Note 3)........... 19,606 116,079
Checks written in excess of deposits............................ 1,035,195 1,322,910
Accounts payable................................................ 3,500,778 2,495,829
Accounts payable, related party (Note 2)........................ -- 26,255
Accrued commissions payable..................................... 815,513 1,369,305
Accrued payroll taxes payable and other (Note 6)................ 411,075 281,841
Sales taxes payable (Note 6).................................... 603,995 268,299
Other accrued liabilities....................................... 742,524 241,818
------------ ------------
Total current liabilities......................................... 11,745,933 9,134,169
CAPITAL LEASE OBLIGATION, less current maturities (Note 3)........ 8,146 14,713
------------ ------------
Total liabilities................................................. 11,754,079 9,148,882
------------ ------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES.................... 129,366 199,636
COMMITMENTS AND CONTINGENCIES
(Notes 3, 5 and 9).............................................. -- --
STOCKHOLDERS' DEFICIT (Note 7):
Preferred stock: $.01 par value; 5,000,000 shares authorized;
-0- shares issued and outstanding............................. -- --
Common stock: $.01 par value; 25,000,000 shares authorized;
2,296,226 and 2,209,176 shares issued and outstanding......... 22,962 22,092
Additional paid-in capital...................................... 1,366,188 1,365,317
Other accumulated comprehensive loss............................ (11,153) (418,980)
Retained deficit................................................ (10,700,892) (5,993,271)
------------ ------------
Total stockholders' deficit....................................... (9,322,895) (5,024,842)
------------ ------------
.................................................................. $ 2,560,550 $ 4,323,676
============ ============
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to consolidated financial statements.
F-27
<PAGE> 72
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES (Note 11)........................................ $ 26,175,710 $ 35,681,512 $ 51,498,562
COST OF SALES (Notes 2 and 10)............................. 6,250,433 8,387,963 13,321,062
------------ ------------ ------------
GROSS PROFIT............................................... 19,925,277 27,293,549 38,177,500
------------ ------------ ------------
OPERATING EXPENSES:
Distributor commissions.................................. 13,537,777 19,968,230 27,965,416
Selling general and administrative expenses.............. 9,291,933 13,008,859 12,975,915
------------ ------------ ------------
Total operating expenses................................... 22,829,710 32,977,089 40,941,331
------------ ------------ ------------
Loss from operations....................................... (2,904,433) (5,683,540) (2,763,831)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Other income............................................. 56,216 195,899 40,432
Interest income.......................................... 31,446 54,573 79,029
Interest expense......................................... (971,376) (726,392) (126,663)
Abandoned offering costs................................. (357,770) - -
Loss on foreign exchange................................. (568,424) (29,202) (17,335)
Other expense............................................ (57,253) (56,430) (2,775)
------------ ------------ ------------
Total other income (expenses).............................. (1,867,161) (561,552) (27,312)
------------ ------------ ------------
Loss before income taxes and minority interest............. (4,771,594) (6,245,092) (2,791,143)
Benefit from income taxes (Note 8)......................... - 12,973 1,103,000
Minority interest in (income) loss of subsidiaries......... 63,973 133,590 (114,643)
------------ ------------ ------------
NET LOSS................................................... (4,707,621) (6,098,529) (1,802,786)
Other comprehensive income (loss):
Foreign currency translation adjustment................ 407,827 (430,117) 11,137
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS)................................ $ (4,299,794) $ (6,528,646) $ (1,791,649)
============ ============ ============
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to consolidated financial statements.
F-28
<PAGE> 73
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
-------------------------------- PAID-IN COMPREHENSIVE
SHARES (NOTE 7) AMOUNT CAPITAL INCOME/(LOSS)
--------------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996.......................... 1,470,000 $ 14,700 $ (6,604) $ --
Comprehensive income/(loss):
Net loss -- -- -- --
Foreign currency translation adjustment......... -- -- -- 11,137
----------- ----------- ----------- -----------
Balance, December 31, 1996........................ 1,470,000 14,700 (6,604) 11,137
Issuance of common stock for services............. 316,676 3,167 61,769 --
Issuance of common stock for cash net
of offering costs of $78,543 (Note 7)........... 250,000 2,500 168,957 --
Issuance of common stock in connection with debt
net of offering costs of $29,580 (Note 5)....... 172,500 1,725 141,195 --
Conversion of debt to additional paid-in capital
(Note 7)........................................ -- -- 1,000,000 --
Comprehensive income/(loss):
Net loss........................................ -- -- -- --
Foreign currency translation adjustment......... -- -- -- (430,117)
----------- ----------- ----------- -----------
Balance, December 31, 1997........................ 2,209,176 22,092 1,365,317 (418,980)
Issuance of common stock from
exercise of stock options....................... 87,050 870 871 --
Comprehensive income/(loss):
Net loss........................................ -- -- -- --
Foreign currency translation adjustment,
includes $381,429 transfer of loss on foreign
exchange from writedown of investment in
foreign subsidiary............................. -- -- -- 407,827
----------- ----------- ----------- -----------
Balance, December 31, 1998........................ 2,296,226 $ 22,962 $ 1,366,188 $ (11,153)
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
RETAINED TOTAL
EARNINGS COMPREHENSIVE STOCKHOLDERS'
(DEFICIT) INCOME/(LOSS) DEFICIT
-------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1, 1996.......................... $ 1,908,044 [ $1,186,351 ] $ 1,916,140
==============
Comprehensive income/(loss):
Net loss........................................ (1,802,786) [$(1,802,786)] (1,802,786)
Foreign currency translation adjustment......... -- [ 11,137 ] 11,137
-------------- -------------- --------------
Balance, December 31, 1996........................ 105,258 [$(1,791,649)] 124,491
==============
Issuance of common stock for services............. -- -- 64,936
Issuance of common stock for cash net
of offering costs of $78,543 (Note 7)........... -- -- 171,457
Issuance of common stock in connection with debt
net of offering costs of $29,580 (Note 5)....... -- -- 142,920
Conversion of debt to additional paid-in capital
(Note 7)........................................ -- -- 1,000,000
Comprehensive income/(loss):
Net loss........................................ (6,098,529) [$(6,098,529)] (6,098,529)
Foreign currency translation adjustment......... -- [ (430,117)] (430,117)
-------------- -------------- --------------
Balance, December 31, 1997........................ (5,993,271) [$(6,528,646)] (5,024,842)
==============
Issuance of common stock from exercise of stock
options......................................... -- -- 1,741
Comprehensive income/(loss):
Net loss........................................ (4,707,621) [$(4,707,621)] (4,707,621)
Foreign currency translation adjustment,
includes $381,429 transfer of loss on foreign
exchange from writedown of investment in
foreign subsidiary............................. -- [ 407,827 ] 407,827
-------------- -------------- --------------
Balance, December 31, 1998........................ $ (10,700,892) [$(4,299,794)] $ (9,322,895)
============== ============== ==============
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to consolidated financial statements.
F-29
<PAGE> 74
KAIRE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (4,707,621) $ (6,098,529) $ (1,802,786)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization......................... 873,003 876,836 440,873
Minority interest..................................... (63,973) (133,590) 114,643
Loss on disposal of fixed assets...................... -- 17,217 --
Common stock issued for services...................... -- 17,500 --
Deferred income taxes................................. -- -- (84,000)
Provision for doubtful accounts....................... 148,119 259,369 41,210
Write off of inventories.............................. 276,871 -- --
Loss on foreign exchange.............................. 562,128 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (102,117) (435,517) 317,451
Related party receivable................................ -- -- 238,638
Inventories............................................. 371,272 293,087 123,341
Prepaid expenses and other.............................. 386,288 (315,748) (55,909)
Refundable income taxes................................. -- 1,025,000 (725,000)
Accounts payable........................................ 412,982 1,218,959 157,490
Accounts payable, related party......................... (26,255) 26,254 --
Accrued liabilities and other........................... 432,693 (184,223) (322,349)
Income taxes payable.................................... -- -- (65,755)
------------- ------------- -------------
Net cash used in operating activities..................... (1,436,610) (3,433,385) (1,622,153)
------------- ------------- -------------
INVESTING ACTIVITIES:
Restricted cash......................................... (125,000) -- --
Deposits and other...................................... 283,094 (289,238) --
Purchases of intangibles................................ -- (20,106) (172,488)
Purchases of property and equipment..................... (74,891) (274,679) (243,415)
Advances - other........................................ -- 226,855 (224,804)
Proceeds from sale of investment........................ -- 250,000 --
Purchase of investment.................................. -- -- (250,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities....... 83,203 (107,168) (890,707)
------------- ------------- -------------
FINANCING ACTIVITIES:
Checks written in excess of deposits.................... (287,715) (53,155) 1,376,065
Proceeds from note payable to bank...................... -- -- 250,000
Payments on note payable to bank........................ (60,000) (10,000) --
Proceeds from notes payable............................. 150,000 4,217,463 200,000
Payments on notes payable............................... -- (1,017,463) --
Proceeds from notes payable--related party.............. 1,760,470 1,165,531 75,000
Payments on notes payable--related party................ (382,890) (561,192) (228,738)
Payments on capital lease obligations................... (103,040) (241,610) (223,902)
Issuance of common stock................................ 1,741 171,457 --
Offering costs paid..................................... -- (29,580) --
Payments for debt issue costs........................... -- (300,794) --
------------- ------------- -------------
Net cash provided by financing activities................. 1,078,566 3,340,657 1,448,425
------------- ------------- -------------
Effect of foreign exchange rates changes on cash.......... 186,811 (78,708) 33,570
------------- ------------- -------------
Net decrease in cash and cash equivalents................. (88,030) (278,604) (1,030,865)
Cash and cash equivalents, beginning of year.............. 460,663 739,267 1,770,132
------------- ------------- -------------
Cash and cash equivalents, end of year.................... $ 372,633 $ 460,663 $ 739,267
============= ============= =============
</TABLE>
See accompanying independent auditors' report, summary of accounting policies
and notes to consolidated financial statements.
F-30
<PAGE> 75
KAIRE INTERNATIONAL, INC.
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Kaire International, Inc. (the "Company"), was incorporated in Nevada in
October 1992. The Company is engaged in the distribution of health and personal
care products through network marketers throughout the United States, Canada,
New Zealand, Australia, Trinidad and Tobago, and the United Kingdom.
On March 18, 1997, the Company merged into a newly formed Delaware
corporation of the same name with the Nevada corporation ceasing to exist. The
transaction was accounted for on a basis similar to a pooling of interest with
no change in the historical financial statements of the Company. The newly
formed corporation had no operations prior to the merger.
The Company expanded its markets in 1995 by entering New Zealand and
Australia with its health and personal care products. Kaire New Zealand Ltd.
("Kaire New Zealand") and Kaire Australia Pty. Ltd. ("Kaire Australia") were
incorporated in August 1995 and began operations on November 1, 1995. The
Company acquired a 51% interest in these two subsidiaries on the date of
incorporation.
During 1997, the Company expanded its markets into South Korea, Trinidad
and Tobago, and the United Kingdom. Kaire Korea, Ltd. ("Kaire Korea") was
incorporated on March 19, 1997 in South Korea as a wholly owned subsidiary of
the Company through November 15, 1997. On November 15, 1997, the Company sold
15% of Kaire Korea, in consideration of $143,375 of interest expense due on a
note payable. Operations and sales began during July 1997. During October 1998,
the Company began trying to sell its South Korean subsidiary, and as of December
31, 1998, the Company wrote off all of its assets in its South Korean subsidiary
as the Company does not anticipate recovering its investment. The Company
recorded a $884,600 writedown of its assets in its South Korean subsidiary,
which included a writedown of $132,863 in property and equipment and $210,736 in
inventories. Kaire Europe Limited ("Kaire Europe") was incorporated as a wholly
owned subsidiary, of the Company on July 24, 1997 in the United Kingdom,
commencing sales during November 1997. Kaire Trinidad Limited ("Kaire
Trinidad"), a wholly owned subsidiary of the Company, was incorporated on May
21, 1997 in the Republic of Trinidad and Tobago and began operations during June
1997.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries Kaire New Zealand, Kaire Australia
and Kaire Korea, and its wholly owned subsidiaries Kaire Europe, and Kaire
Trinidad. All significant intercompany accounts and transactions have been
eliminated in consolidation.
CONCENTRATION OF RISK
The Company maintains its cash accounts in several bank accounts. Accounts
in the United States are insured by the Federal Deposit Insurance
F-31
<PAGE> 76
Corporation (FDIC) up to $100,000. The Company's cash balance in some of its
bank accounts generally exceeds the insured limits.
The Company sells its products through network marketers throughout the
United States, Canada, New Zealand, Australia, Trinidad and Tobago, and the
United Kingdom. Credit is extended for returned checks and or until credit card
purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial statements
and are based on management's expectations. The Company's accounts receivable
are subject to potential concentrations of credit risk. The Company does not
believe that it is subject to any unusual or significant risks, in the normal
course of business.
CASH AND CHECKS WRITTEN IN EXCESS OF DEPOSITS
The cash balance on the accompanying balance sheet represents cash from the
Company's subsidiaries which are not overdrawn. The checks in excess of deposits
represents bank overdrafts on the parent company's financial statements. The
cash held in the Company's subsidiary accounts is not available to cover the
Company's bank overdrafts.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three months or
less to be cash equivalents.
RESTRICTIVE CASH
The Company has a restricted cash account with a credit card processing
company. The primary purpose of this account is to provide a reserve for
potential uncollectible amounts and chargebacks by the Company's credit card
customers. The credit card processing company may periodically increase the
restricted cash account. However, the Company's restricted cash account will not
go below $125,000. Subsequent to December 31, 1998, the credit card processing
company increased the restricted cash account to $200,000.
INVENTORIES
Inventories consist mainly of health and personal care products and are
stated at lower of cost (first-in, first-out) or market.
PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment are stated at cost. Depreciation and amortization
are computed, using primarily the straight-line method, over the estimated
useful lives of the assets which range from three to seven years. Maintenance
and repair costs are expensed as incurred.
LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the expected undiscounted future cash flow from the
use of the assets and its eventual disposition is less than the carrying amount
of the assets, an impairment loss is recognized and measured using the asset's
fair value.
DEBT ISSUE COSTS
Debt issue costs are being amortized using the straight-line method over
the term of the notes payable.
REVENUE RECOGNITION
The Company sells its products directly to independent distributors. Sales
are recorded when products are shipped.
Under the Kaire Direct program the Company provides a 100% refund (less
shipping and handling), to all end users, for any unopened product that is
returned within 30 days from the date of purchase in resalable condition. The
Company provides a 100% product exchange for any product that does
F-32
<PAGE> 77
not meet customer satisfaction if returned within 30 days under the Kaire Direct
program. An Associate is allowed 90 days from order date for exchange or refund
only if product bottles (empty, partial or full) are returned. Statement of
Financial Accounting Standards No. 48 "Revenue Recognition When Right of Return
Exists" requires the Company to accrue losses that may be expected from sales
returns. The Company recorded sales returns of $458,337, $869,305 and $861,213
for the years ended December 31, 1998, 1997 and 1996. The Company monitors its
historical sales returns and will accrue a liability for sales returns when and
if sales returns become significant.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the "liability method". Accordingly, deferred tax
liabilities and assets are determined based on the temporary differences between
the financial statement and tax basis of assets and liabilities, using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Fair values of accounts receivable, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair value or they are receivable or payable on demand.
NOTES PAYABLE TO RELATED PARTIES
Due to its related party nature and terms of the notes payables to related
parties, the Company cannot estimate the fair market value of such financial
instruments.
NOTES PAYABLE
Substantially all of these notes bear interest at fixed rates of interest
based upon the terms of the Agreements. The fair value of these notes are not
materially different than their reported carrying amounts at December 31, 1998
and 1997.
FOREIGN CURRENCY TRANSLATIONS
Assets and liabilities of subsidiaries are translated at the rate of
exchange in effect on the balance sheet date; income and expenses of
subsidiaries are translated at the average rates of exchange prevailing during
the year. The related translation adjustments are reflected as a cumulative
translation adjustment in consolidated stockholders' equity. Foreign currency
gains and losses resulting from transactions are included in results of
operations in the period in which the transactions occurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles necessarily requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
F-33
<PAGE> 78
STOCK OPTIONS
The Company applies Accounting Pronouncements Bulletin Opinion 25,
"Accounting for Stock Issued to Employee", ("APB 25") and related
interpretations in accounting for all stock option plans. Under APB 25, no
compensation cost has been recognized for stock options granted as the option
price equals or exceeds the market price of the underlying common stock on the
date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro
forma information regarding net loss as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair value based
method prescribed in SFAS No. 123. To provide the required pro forma
information, the Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model.
COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The
implementation of SFAS No. 130 required comparative information for earlier
years to be presented. The Company has elected to report comprehensive income on
the consolidated statements of operations and the consolidated statements of
stockholders' deficit. Comprehensive income is comprised of net loss and all
changes to the consolidated statements of stockholders' deficit, except those
due to investments by stockholders, changes in paid in capital and distributions
to stockholders.
SEGMENT REPORTING
During 1998, the Company implemented Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This standard establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements. The adoption of SFAS No. 131 did not have a
material impact on the Company's consolidated financial statements.
F-34
<PAGE> 79
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GOING CONCERN
The Company incurred significant losses during the years ended December 31,
1998 and 1997 and, at December 31, 1998, has a negative working capital of
$9,862,931 and a capital deficit of $9,322,895. Additionally, the Company has
not made its payroll tax and sales tax deposits on a timely basis. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
Subsequent to December 31, 1998 (see Note 13), the Company sold
substantially all of its assets and certain liabilities to Natural Health Trends
Corporation ("NHTC") and NHTC Acquisition Corp. As part of the purchase price,
commencing December 31, 1999 and each year for a period of five years
thereafter, NHTC will pay certain amounts to the Company based upon NHTC
Acquisition Corp.'s net income and sales levels. The Company believes that this
amount will be sufficient to pay its existing, outstanding indebtedness. There
are no assurances that the Company will receive the payments from NHTC or that
the payments will be sufficient to pay its existing indebtedness. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
2. RELATED PARTY TRANSACTIONS
ACCOUNTS PAYABLE, OFFICERS AND DIRECTORS
As of December 31, 1997, the Company owed $26,255 in accounts payable to
officers and directors. The amounts were paid during 1998.
NOTES PAYABLE, RELATED PARTIES
During 1997, three officers of the Company advanced funds to the Company
for working capital requirements. The Company recorded these advances as current
liabilities. On November 28, 1997, the Company issued 10% promissory notes
payable to the officers. The notes are uncollateralized and due on demand. As of
December 31, 1998 and 1997, the Company owed $258,337 and $262,037 to the
officers.
During 1997 and 1998, two individual directors advanced funds to the
Company for working capital requirements. The advances are evidenced by note
agreements. The notes bear interest at 10%, are uncollateralized, and due upon
demand. As of December 31, 1998 and 1997, the Company owed $242,410 under these
notes to the directors. In addition, during 1997, the two directors advanced an
additional $113,000 to the Company which was repaid by the Company during 1997.
F-35
<PAGE> 80
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. RELATED PARTY TRANSACTIONS (CONTINUED)
In December 1997, the directors and officers entered into an agreement with the
Company to which they agreed that the Company not make repayments on the notes
issued to them until after the end of the first calendar quarter in which the
Company has achieved positive cash flow. The agreement requires payments only
after calendar quarters during which the Company has received positive cash flow
and that the Company is only required to pay the officers and directors on a pro
rata basis as to their indebtedness in an aggregate amount equal to 50% of the
positive net cash flow for each such quarter.
During 1998, the Company borrowed $443,000 from directors of the Company
for notes payable. The notes bear interest at 10%. The notes are collateralized
by all the assets of the Company and are due on demand. As of December 31, 1998,
the Company owed $136,500 under these notes to the directors.
Kaire Korea, pursuant to a demand promissory note guaranteed by the Company
and personally guaranteed by certain officers of the Company, borrowed $500,000
from a corporation during May 1997 pursuant to the terms of a note payable at an
annual interest rate of 9.5%. The note was due in principal installments of:
$25,000 due August 31, 1997, $125,000 due September 30, 1997, $175,000 due
October 31, 1997 and $175,000 due November 30, 1997. An option to acquire 15% of
the capital stock of Kaire Korea Ltd. at the par value of Kaire Korea's capital
stock expiring May 2000 was granted to the lender. During 1997, Kaire Korea
defaulted under the note agreement. On November 15, 1997, the Corporation
exercised its option to acquire 15% of Kaire Korea from the Company in
consideration of $143,375 in interest expense due by Kaire Korea under the note
agreement. The Company renegotiated the terms of the original note agreement on
January 1, 1998. The January 1, 1998 agreement modifies the repayment provisions
of principal and interest, stipulating that the Company make monthly interest
only payments until the note is paid in full. The note was due on September 15,
1998. The Company is currently in default on its note payable. The Company has
classified this liability as a current liability. The Company also pledged its
stock in Kaire Korea as collateral on this note. As of December 31, 1998 and
1997, Kaire Korea owes $475,000 to its minority stockholder.
During November 1997, Interactive Medical Technologies, Ltd. ("IMT") loaned
the Company $700,000. Pursuant to an Agreement and Plan of Reorganization, IMT
agreed to convert its $700,000 of debt to equity in the Company (see Note 7).
F-36
<PAGE> 81
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During March and April 1998, Global Marketing, LLC, a stockholder of the
Company, advanced a total of $1,000,000 to the Company for working capital
requirements. On April 16, 1998, the Company entered into a $1,000,000 note
payable with the stockholder. The note bears interest at 10% per annum, is
uncollateralized and is payable upon demand.
During December 1998, the Company borrowed $250,000 from Natural Health
Trends Corporation ("NHTC") (see Note 13). The note bears interest at 10% per
annum, is collateralized by the Company's supplier agreement (see Note 9) and is
payable on demand. The note is personally guaranteed by certain officers of the
Company.
3. CAPITAL LEASE OBLIGATIONS
The Company has various capital lease obligations which are collateralized
by equipment. Interest rates under the agreements range from 7.1% to 31.9%, with
monthly principal and interest payments ranging from $51 to $11,349.
Future minimum lease payments and the present value of the minimum lease
payments under the noncancelable capital lease obligations as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- ----------- --------
<S> <C>
1999 ....................................... $15,694
2000 ....................................... 15,347
-------
Total future minimum lease payments ........ 31,041
Less amounts representing interest ......... 3,289
-------
Present value of minimum lease payments..... 27,752
Less current maturities .................... 19,606
-------
Total long-term obligations ................ $ 8,146
=======
</TABLE>
At December 31, 1998 and 1997, property and equipment includes equipment
under capital lease obligations with a total cost of $757,689 and accumulated
amortization of $560,794 and $489,056.
4. NOTE PAYABLE TO BANK
The term loan bears interest at 10.5% per annum and is collateralized by
inventories, accounts receivable, certain other assets, and the personal
guarantees of certain officers and directors of the Company. The term loan is
payable in monthly principal payments of $5,000 plus accrued interest and is due
January 1999. As of December 31, 1998 and 1997, the balance was $180,000 and
$240,000. As of December 31, 1998 and 1997, the term loan is classified as a
current liability. In accordance with the Asset Purchase Agreement, NHTC assumed
the term loan subsequent to year end (see Note 13).
F-37
<PAGE> 82
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Note payable to a corporation (1) ............................ $ 200,000 $ 200,000
Notes payable to individuals (2) ............................. 1,725,000 1,587,166
Note payable to a corporation (3) ............................ 150,000 -
----------- -----------
Total notes payable .......................................... $ 2,075,000 $ 1,787,166
=========== ===========
</TABLE>
(1) During January 1997, the Company borrowed $200,000 from a corporation for a
note payable at an interest rate of 10% per month, with interest payments
due monthly. The note is guaranteed by certain officers and directors and
is due upon demand. The Company renegotiated the terms of the original
agreement on August 25, 1997, as the Company had not met the interest
payment requirements of the agreement. The August 25, 1997 agreement
modifies the repayment provisions of principal and interest, stipulating
that the Company repay all interest and principal due under the original
agreement by December 31, 1997. Also, the interest rate was reduced from
10% per month to 2% per month payable monthly, retroactive to March 5,
1997. On January 15, 1998, the note was amended and changed to a demand
note as the Company was unable to repay the note by December 31, 1997 as
stated in the August 25, 1997 amendment. The Company is required to make
monthly interest only payments of $4,000 per month. In connection with the
original terms of this borrowing, the lender was issued warrants to
purchase 12,500 shares of the Company's common stock at $6.60 per share.
The warrants expire six years after the effective date of the initial
public offering. As of December 31, 1998, the warrants had not been
exercised. On October 1, 1998, the lender was issued additional warrants to
purchase 12,500 shares of the Company's common stock at $6.60 per share as
a result of the reverse stock split (see Note 7). Subsequent to December
31, 1998, the note was paid in full (see Note 13).
(2) During 1997, the Company borrowed $1,725,000 pursuant to a private
placement offering consisting of the issuance of promissory notes and
F-38
<PAGE> 83
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
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 December
31, 1998 and 1997, the notes payable are disclosed net of unamortized
original issue discount of $0 and $137,834. Subsequent to December 31,
1998, the notes were paid in full (see Note 13).
(3) During January 1998, the Company borrowed $150,000 from a corporation for a
note payable at an annual interest rate of 24%. Interest and principal are
due on demand. The note is uncollateralized and is personally guaranteed by
certain officers and directors of the Company. Subsequent to December 31,
1998, the note was paid in full (see Note 13).
All warrants issued in connection with the above financing transactions
have been valued using the Black-Scholes Model and are considered to be nominal
in value.
6. PAYROLL TAX AND SALES TAX LIABILITIES
During 1998 and 1997, the Company has not made its payroll tax deposits
with the Internal Revenue Service ("IRS") and the various state taxing
authorities on a timely basis. The Company has filed all required payroll tax
returns and is currently negotiating a payment plan with the IRS. As of December
31, 1998 and 1997, the Company owes approximately $312,800 and $51,096 of
delinquent payroll tax liabilities including interest and penalties. The
Company's failure to pay its delinquent payroll tax liabilities could result in
tax liens being filed by various taxing authorities.
During 1998 and 1997, the Company did not make its sales tax deposits with
the various sales tax authorities on a timely basis. The Company has filed all
required sales tax returns. As of December 31, 1998 and 1997, the Company owed
approximately $603,995 and $268,299 in current and delinquent sales taxes. The
Company's failure to pay its delinquent sales taxes could result in tax liens
being filed by various taxing authorities.
F-39
<PAGE> 84
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
STOCK SPLIT AND AUTHORIZATION OF SHARES
On October 1, 1998, the Board of Directors authorized a 1 for 2 reverse
stock split for shareholders of record on October 1, 1998. All references to
common share and per share amounts in the accompanying financial statements have
been restated to reflect the effect of this reverse stock split. As a result of
the 1 for 2 reverse stock split, certain warrant holders received an additional
712,500 warrants to purchase common stock of the Company at $6.60 per share. The
warrants expire six years after the effective date of the initial public
offering. These warrants granted on October 1, 1998 were considered nominal
value.
On February 1, 1997, the Board of Directors authorized a stock split,
effected in the form of a dividend of 2,800 shares of common stock for each
common share held by shareholders of record on February 1, 1997. All references
to common share and per share amounts in the accompanying financial statements
have been restated to reflect the effect of this stock dividend.
During March 1997, the Board of Directors adopted certain resolutions which
were approved by the Company's stockholders to increase the number of authorized
shares of common stock from 1,000,000 to 25,000,000 shares. The stockholders
also approved the authorization of the issuance of a new class of 5,000,000
shares of preferred stock. The preferred stock of the Company can be issued in
series. With respect to each series issued, the Board of Directors of the
Company will determine, among other things, the number of shares in the series,
voting rights and terms, dividend rates and terms, liquidation preferences and
redemption and conversion privileges. No preferred stock has been issued as of
December 31, 1998.
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
F-40
<PAGE> 85
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
result of the reverse stock split. The warrants are exercisable for a period of
four years commencing two years from the date the Securities and Exchange
Commission declares the Company's registration statement effective. The
effective date is the first date the Company may offer the sale of its common
stock in an initial public offering. The Company may redeem the warrants
commencing one year from the effective date at a redemption price of $.05 per
warrant if: (1) the closing bid price of the common stock for twenty (20)
consecutive trading days exceeds $10.00, (2) the redemption occurs during the
first two years following the effective date and the Company receives the prior
written consent of the underwriter for such redemption, and (3) the warrants are
exercisable. The warrants issued in connection with this transaction are
considered nominal in value. As discussed in Note 13, the Company finalized the
Asset Purchase Agreement with NHTC during February 1999. These warrants remained
with the Company.
During 1997, the Company borrowed $700,000 from IMT. On December 9, 1997,
the Company entered into an Agreement and Plan of Reorganization (the
"Agreement") with IMT whereby IMT agreed to convert its $700,000 of debt
previously borrowed by the Company to equity in the Company, and invest an
additional $300,000 in equity in the Company at closing. The Agreement for
reorganization of the Company contemplated an exchange between the shareholders
of Kaire International, Inc. for IMT shares whereby IMT issued, in total, shares
equal to forty-five percent (45%) of its common stock outstanding (as defined in
the agreement) immediately prior to the closing date of the Agreement in
exchange for not less than 80% of the issued and outstanding common stock of the
Company. During March 1998, IMT exchanged 57% of the common stock of the Company
to Global Marketing, LLC. IMT's controlling interest in the Company was deemed
temporary and as such did not result in any adjustment to the Company's
consolidated financial statements as of the date of the Agreement.
STOCK OPTIONS AND WARRANTS
During 1997, the Company adopted a stock option plan. No options have been
granted under this Plan as of December 31, 1998. The Company has reserved
500,000 shares of its common stock for future grants under this Plan.
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss and net loss per share as if compensation costs for the
Company's stock option plans and other stock awards had been determined in
accordance with the fair value based method prescribed in SFAS No. 123.
F-41
<PAGE> 86
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
No stock awards were issued to employees during the years ended 1998, 1997 and
1996. For stock awards issued to non-employees, the Company estimates the fair
value of each stock award at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1997 and 1996. The options and warrants granted during 1997 and 1996
to non-employees were considered nominal in value. No stock awards were issued
to non-employees during the year ended 1998.
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Dividend yield ..................................................................... 0% 0%
Expected volatility ................................................................ 0% 0%
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 December 31, 1998, 1997 and 1996 is presented below. As discussed in Note 13,
the Company finalized the Asset Purchase Agreement with NHTC during February
1999. The Company's stock options and warrants remained with the Company.
<TABLE>
<CAPTION>
OPTIONS WARRANTS
-------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C>
OUTSTANDING, JANUARY 1, 1996 ........... -- $ -- -- $ --
GRANTED ............................. -- -- 14,700 0.02
-------- -------- -------- --------
OUTSTANDING, DECEMBER 31, 1996 ......... -- -- 14,700 0.02
GRANTED ............................. 65,000 0.02 719,850 6.53
-------- -------- -------- --------
OUTSTANDING, DECEMBER 31, 1997 ......... 65,000 0.02 734,550 6.40
GRANTED ............................. -- -- -- --
EXERCISED ........................... (65,000) 0.02 (22,050) 0.02
-------- -------- -------- --------
OUTSTANDING, DECEMBER 31, 1998 ......... -- $ -- 712,500 $ 6.60
======== ======== ======== ========
EXERCISABLE, DECEMBER 31, 1996 ......... -- $ -- 14,700 $ 0.02
======== ======== ======== ========
EXERCISABLE, DECEMBER 31, 1997 ......... 65,000 $ 0.02 22,050 $ 0.02
======== ======== ======== ========
EXERCISABLE, DECEMBER 31, 1998 ......... -- $ -- -- $ --
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WARRANTS
--------- --------
<S> <C> <C>
Weighted average fair value of options and warrants granted
during 1996 ............................................... None $ 0.48
Weighted average fair value of options and warrants granted
during 1997 ............................................... $ 0.49 None
Weighted average fair value of options and warrants granted
during 1998 ............................................... None None
</TABLE>
The following table summarizes information about exercisable stock options
and warrants at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------------------------------- ----------------------------
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
DECEMBER 31, 1998 PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ---------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
WARRANTS $ 6.60 712,500 $ 6.60 -- $ --
========== ========== ========== ========== ==========
</TABLE>
F-42
<PAGE> 87
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
INCOME TAXES CONSIST OF THE FOLLOWING:
Current benefit:
Federal................................... $ -- $ 12,973 $ 1,017,000
Foreign................................... -- -- --
State..................................... -- -- 2,000
-------------- -------------- --------------
-- 12,973 1,019,000
-------------- -------------- --------------
Deferred benefit:
Federal................................... 1,188,000 1,440,000 68,000
Foreign................................... 175,000 205,000 --
State..................................... 51,000 62,000 100,000
-------------- -------------- --------------
1,414,000 1,707,000 168,000
-------------- -------------- --------------
1,414,000 1,719,973 1,187,000
Change in valuation allowance................... (1,414,000) (1,707,000) (84,000)
-------------- -------------- --------------
Income tax benefit.............................. $ -- $ 12,973 $ 1,103,000
============== ============== ==============
</TABLE>
At December 31, 1998, the Company had available net operating loss
carryforwards as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRE
----------- ----------
<S> <C> <C>
Federal net operating loss carryforwards ..................... $ 8,004,000 2018
State net operating loss carryforwards ....................... 8,984,000 2010 to 2018
Foreign net operating loss carryforwards ..................... 242,000 2003 to 2005
Foreign net operating loss carryforwards ..................... 243,000 Indefinite
</TABLE>
The utilization of certain of the loss carryforwards are limited under
Section 382 of the Internal Revenue Code of approximately $233,000 per year. The
types of temporary differences between the tax basis of assets and liabilities
that give rise to a significant portion of the net deferred tax liability and
their approximate tax effects are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards ............................. $ 3,036,000 $ 1,436,000
Foreign operating loss carryforwards ......................... 127,000 205,000
Property and equipment ....................................... (64,000) (90,000)
Inventories .................................................. 93,000 216,000
Accounts receivable allowance ................................ -- 11,000
Contribution carryforwards ................................... 13,000 13,000
----------- -----------
Net deferred tax assets ...................................... 3,205,000 1,791,000
Less valuation allowance ..................................... (3,205,000) (1,791,000)
----------- -----------
Net deferred taxes ........................................... $ -- $ --
=========== ===========
</TABLE>
F-43
<PAGE> 88
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
A valuation allowance equal to the net deferred tax assets has been
recorded, as management of the Company has not been able to determine that it is
more likely than not that the net deferred tax assets will be realized. A
reconciliation of the income taxes at the federal statutory rate to the
effective tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Federal income tax benefit computed at
the federal statutory rate ......... $ (1,188,000) $ (1,452,973) $ (1,085,000)
State income tax benefit, net of federal
benefit ............................ (51,000) (62,000) (102,000)
Foreign tax benefit at statutory rates ... (175,000) (205,000) --
Increase in valuation allowance .......... 1,414,000 1,707,000 84,000
-------------- -------------- --------------
Income tax benefit ...................... $ -- $ (12,973) $ (1,103,000)
============== =============== ==============
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under operating leases for office space, office
equipment and vehicles. Seven leases are on a month-to-month basis and seven
require future minimum lease payments as follows:
<TABLE>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1999....................................................... $216,000
2000....................................................... 110,000
2001....................................................... 69,000
2002....................................................... 69,000
2003....................................................... 50,000
Thereafter................................................. 298,000
--------
Total...................................................... $812,000
========
</TABLE>
Lease expense for all operating leases was $744,000, $605,000 and $291,000
for the years ended December 31, 1998, 1997 and 1996.
COMMITMENT WITH SUPPLIER
During August 1998, the Company entered into an agreement with a supplier
where the supplier will be the exclusive manufacturer of the product for the
Company. For a period of five years, the Company must purchase no less than
$22,500 per month for the first three months, no less than $45,000 per month for
months four through six, and no less than $73,750 per month thereafter.
F-44
<PAGE> 89
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENT
On February 4, 1997, the Company entered into a consulting agreement with
Magic Consulting Group, Inc. ("Consultant"). Consultant is to receive the
following compensation for services: (i) an option to purchase 50,000 shares of
common stock of the Company for $.02 per share; (ii) 50,000 warrants to purchase
an aggregate of 50,000 shares of common stock of the Company at $6.60 per share
and; (iii) $2,500 per month for a period of 60 months. As of December 31, 1998,
no warrants were exercised. On October 1, 1998, Consultant was issued additional
warrants to purchase 50,000 shares of the Company's common stock at $6.60 per
share as a result of the reverse stock split (see Note 7). During October 1998,
Consultant exercised its $.02 per share option to purchase 50,000 shares of
common stock of the Company.
401(k) PROFIT SHARING PLAN
On January 1, 1996, the Company established a 401(k) profit sharing
retirement plan. The plan requires one year of service and attainment of age 21
to become eligible. Employer contributions vest over a five year period. The
Company's contributions to the plan for the years ended December 31, 1998, 1997
and 1996 were approximately $0, $53,000 and $67,000. As discussed in Note 13,
the Company finalized the Asset Purchase Agreement with NHTC during February
1999. The Company anticipates that the plan will be transferred into NHTC's
401(k) profit sharing retirement plan.
LEGAL PROCEEDINGS
As part of its ordinary course of business, the Company is involved in
certain litigious activities from time to time. No litigation exists at December
31, 1998 or to the date of this report that management or legal counsel believe
will have a material impact on the financial position or operations of the
Company.
The Company is the subject of an investigation by the United States
Department of Justice, Office of Consumer Litigation, into the actions by
certain specifically named individuals active in the dietary supplement
industry. The Company was initially contacted in January 1997 and was advised,
in writing, that it is not a "target" of the Department's investigation, but
that it is a "subject" (meaning that its conduct is deemed to be within the
scope of the investigation) thereof. The Company has completed all obligations
and requests pertaining to this matter.
F-45
<PAGE> 90
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has also received a voluntary request for information from the
FTC regarding a separate investigation into dietary supplement interactions with
certain disorders. The Company voluntarily produced information to the FTC with
regards to the initial request, and has received a subsequent request for
additional information. The Company is currently responding with clarifications
to previous inquiries.
10. MAJOR SUPPLIERS
During the years ended December 31, 1998, 1997 and 1996, the Company
purchased amounts of its products from a limited number of vendors, including
significant amounts from MW International of 44%, 48% and 57%. During 1996, the
Company also purchased 22% of its products from Manhattan Drug. The Company
currently buys all of its Pycnogenol, an important component of its products,
from one supplier. Although there are a limited number of manufacturers of this
component, management believes that other suppliers could provide similar
components on comparable terms. A change in suppliers, however, could cause a
delay in manufacturing and a possible loss of sales, which would affect
operating results adversely.
F-46
<PAGE> 91
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. FOREIGN SALES
The Company sells its product in the United States and internationally. Net
sales and long-lived assets by country are as follows:
<TABLE>
<CAPTION>
UNITED NEW
YEAR ENDED DECEMBER 31, 1998 STATES ZEALAND KOREA OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers...... $19,605,047 $ 3,586,561 $ 1,825,382 $ 1,158,720 $ -- $26,175,710
Transfers between geographic areas... 1,660,926 -- -- (1,660,926) --
----------- ----------- ----------- ----------- ----------- -----------
Net sales ........................... $21,265,973 $ 3,586,561 $ 1,825,382 $ 1,158,720 $(1,660,926) $26,175,710
=========== =========== =========== =========== =========== ===========
Long-lived assets at December 31,
1998 ................................ $ 546,122 $ 18,122 $ -- $ 83,100 $ -- $ 647,344
=========== =========== =========== =========== =========== ===========
<CAPTION>
UNITED NEW
YEAR ENDED DECEMBER 31, 1997 STATES ZEALAND KOREA OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers ..... $29,278,545 $ 4,527,170 $ 808,117 $ 1,067,680 $ -- $35,681,512
Transfers between geographic areas... 2,211,101 -- -- -- (2,211,101) --
----------- ----------- ----------- ----------- ----------- -----------
Net sales ........................... $31,489,646 $ 4,527,170 $ 808,117 $ 1,067,680 $(2,211,101) $35,681,512
=========== =========== =========== =========== =========== ===========
Long-lived assets at December 31,
1997 ................................ $ 852,593 $ 32,889 $ 233,468 $ 85,118 $ -- $ 1,204,068
=========== =========== =========== =========== =========== ===========
<CAPTION>
UNITED NEW
YEAR ENDED DECEMBER 31, 1996 STATES ZEALAND KOREA OTHER ELIMINATIONS CONSOLIDATED
- ---------------------------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated customers ..... $44,122,950 $ 6,183,359 $ -- $ 1,192,253 $ -- $51,498,562
Transfers between geographic areas... 1,784,815 -- -- -- (1,784,815) --
----------- ----------- ----------- ----------- ----------- -----------
Net sales ........................... $45,907,765 $ 6,183,359 $ -- $ 1,192,253 $(1,784,815) $51,498,562
=========== =========== =========== =========== =========== ===========
Long-lived assets at December 31,
1996................................. $ 1,344,889 $ 39,049 $ -- $ 66,710 $ -- $ 1,450,648
=========== =========== =========== =========== =========== ===========
</TABLE>
F-47
<PAGE> 92
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUPPLEMENTAL DATA TO STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
---------- ----------- ------------
<S> <C> <C> <C>
Cash paid during the period for:
Interest ................................... $ 169,257 $ 278,139 $ 120,839
Non-cash investing and financing transactions:
Note payable converted to capital ............ $ -- $ 1,000,000 $ --
Note receivable - related party offset to
notes payable - related parties ............. $ -- $ 94,670 $ --
Equipment acquired under capital lease
obligations ................................. $ -- $ -- $ 79,374
Issuance of common stock in connection with
long-term debt .............................. $ -- $ 172,500 $ --
Increase in minority interest from sale of 15%
interest in subsidiary ...................... $ -- $ 143,375 $ --
Common stock issued for debt issue costs ..... $ -- $ 47,436 $ --
Common stock issued for services ............. $ -- $ 17,500 $ --
</TABLE>
13. SUBSEQUENT EVENTS
ASSET PURCHASE AGREEMENT WITH NATURAL HEALTH TRENDS CORPORATION AND
NHTC ACQUISITION CORP.
On November 24, 1998, the Company entered into an Asset Purchase Agreement
with Natural Health Trends Corporation ("NHTC"), a publicly traded company, and
NHTC Acquisition Corporation, where NHTC, in exchange for the Company assets and
assumption of certain liabilities, issued to the Company $2,800,000 of its
Series F Preferred stock, to two creditors of the Company $350,000 of its Series
G Preferred stock and to the Company warrants to purchase 200,000 shares of
common stock. Furthermore, based upon NHTC Acquisition Corporation's net income
and sales levels, NHTC has agreed to pay certain amounts to the Company each
year for a period of five years, commencing with the year ended December 31,
1999. This transaction was approved by the stockholders of NHTC and closed on
February 19, 1999.
F-48
<PAGE> 93
KAIRE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS (CONTINUED)
In connection with the Asset Purchase Agreement, the Company transferred
$2,000,000 of its Series F Preferred stock in NHTC in payment in full on its
$1,725,000 notes payable due to individuals including accrued interest (see Note
5). In addition, the Company's corporate noteholders received $350,000 of NHTC's
Series G Preferred stock in payment on their $350,000 notes payable (see Note
5).
14. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1998........ $ 168,805 $ 148,119 $ 316,924 $ --
Year ended December 31, 1997........ $ 30,000 $ 259,369 $ 120,564 $ 168,805
Year ended December 31, 1996........ $ 56,000 $ 41,210 $ 67,210 $ 30,000
</TABLE>
15. YEAR 2000 ISSUES (UNAUDITED)
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the latter two digit year value
to 00. The issue is whether computer systems will property recognize date
sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Company's management has assessed the "Year 2000" compliance
expense to be approximately $250,000. The "Year 2000" problem may impact other
entities with which the Company transacts business, and the Company cannot
predict the effect of the "Year 2000" problem on such entities or the resulting
effect on the Company. The Company has not yet established a contingency plan in
the event that it is unable to correct the "Year 2000" problem and has no plans
to do so. There can be no assurance that such problem can be resolved by the
Company in a timely or cost effective fashion, or at all, or that any difficulty
or inability in resolving such problem will not have a material adverse effect
upon the Company.
F-49
<PAGE> 94
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
-----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................. 3
Risk Factors....................................... 7
Use of Proceeds.................................... 14
Capitalization..................................... 15
Market for Common Equity and Related
Stockholders Matters.......................... 16
Selected Financial Data............................ 17
Pro Forma Financial Data........................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................. 19
Business........................................... 23
Management......................................... 35
Principal Stockholders............................. 37
Certain Transactions............................... 38
Description of Securities.......................... 38
Shares Eligible for Future Sale.................... 41
Selling Securityholders............................ 42
Plan of Distribution............................... 43
Legal Matters...................................... 44
Experts............................................ 44
Where You Can Find Additional Information.......... 44
Index to Financial Statements...................... F-1
</TABLE>
-----------------------
UNTIL , 2000, ALL DEALERS EFFECTING TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
2,413,504 SHARES OF
COMMON STOCK
NATURAL HEALTH TRENDS CORP.
-----------------------
PROSPECTUS
-----------------------
, 2000
<PAGE> 95
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all estimated costs and expenses in
connection with the issuance and distribution of the securities being
registered, All such expenses will be paid by the company; none will be paid by
the company's stockholders.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 2,475
NASD filing fee............................................. 1,402
Blue sky fee and expenses (including legal fees)............ 25,000
*Printing and engraving expenses............................ 75,000
*Legal fees and expenses.................................... 35,000
*Accounting fees and expenses............................... 75,000
Transfer agent fees......................................... 5,000
*Miscellaneous.............................................. 6,123
--------
*TOTAL.................................................. $225,000
========
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 607.0850 of the Florida Business Corporation Act (the "FBCA")
permits, in general, a Florida corporation to indemnify any person who was or is
a party to an action or proceeding by reason of the fact that he or she was a
director or officer of the corporation, or served another entity in any capacity
at the request of the corporation, against liability incurred in connection with
such proceeding including the estimated expenses of litigating the proceeding to
conclusion and the expenses, actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof, if
such person acted in good faith, for a purpose he or she reasonably believed to
be in, or not opposed to, the best interests of the corporation and, in criminal
actions or proceedings, in addition had no reasonable cause to believe that his
or her conduct was unlawful. Section 607.0850(6) of the FBCA permits the
corporation to pay in advance of a final disposition of such action or
proceeding the expenses incurred in defending such action or proceeding upon
receipt of an undertaking by or on behalf of the director or officer to repay
such amount as, and to the extent, required by statute. Section 607.0850 of the
FBCA provides that the indemnification and advancement of expense provisions
contained in the FBCA shall not be deemed exclusive of any rights to which a
director or officer seeking indemnification or advancement of expenses may be
entitled.
The company's Certificate of Incorporation provides, in general, that the
company shall indemnify, to the fullest extent permitted by Section 607.0850 of
the FBCA, any and all persons whom it shall have power to indemnify under said
section from and against any and all of the expenses, liabilities or other
matters referred to in, or covered by, said section. The Certificate of
Incorporation also provides that the indemnification provided for therein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to actions taken in his or her official capacity
and as to acts in another capacity while holding such office.
In accordance with that provision of the Certificate of Incorporation, the
company shall indemnify any officer or director (including officers and
II-1
<PAGE> 96
directors serving another corporation, partnership, joint venture, trust, or
other enterprise in any capacity at the company's request) made, or threatened
to be made, a party to an action or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that he or she was
serving in any of those capacities against judgments, fines, amounts paid in
settlement and reasonable expenses (including attorney's fees) incurred as a
result of such action or proceeding. Indemnification would not be available if a
judgment or other final adjudication adverse to such director or officer
establishes that (i) his or her acts were committed in bad faith or were the
result of active and deliberate dishonesty or (ii) he or she personally gained
in fact a financial profit or other advantage to which he or she was not legally
entitled.
The registration rights agreements contain, among other things, provisions
whereby the selling securityholders agree to indemnify the company, each officer
and director of the company who has signed the Registration Statement, and each
person who controls the company within the meaning of Section 15 of the
Securities Act, against any losses, liabilities, claims or damages arising out
of alleged untrue statements or alleged omissions of material facts with respect
to information furnished to the company by the selling securityholders for use
in the Registration Statement or Prospectus. See Item 17, "Undertakings."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Unless otherwise noted, the sale of the securities were exempt from
registration under the Securities Act under Section 4(2) and/or Regulation D
promulgated thereunder. All such sales being made to sophisticated investors
and/or accredited investors who had access to information about the Company and
were able to bear the risk of loss of their investment.
1. In January 1996, the Company issued 9,500 shares of Common Stock to Sam
Lily, Inc. in connection with the acquisition of a natural health center in Boca
Raton, Florida.
2. In February 1996, the Company issued 2,500 shares of Common Stock to
Richard Schuman pursuant to a consulting agreement.
3. In February 1996, the Company issued an aggregate of 150 shares of
Common Stock to 26 employees.
4. In December 1996, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued $900,000 of the Company's 10% convertible debentures to
Kingsbridge Capital Ltd. ($300,000), Dominion Capital Fund, Ltd. ($300,000) and
Canadian Advantage, L.P. ($300,000). The placement agent for the private
placement was Meridian Equities, Inc. and a placement agent fee of $90,000 was
paid. Upon the conversion of the debentures, the Company issued 28,522 shares of
Common Stock.
5. In December 1996, the Company issued 250 shares of Common Stock to
Russell Newman, an employee.
6. In January 1997, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued $100,000 of convertible debentures to FT Trading Company. The
placement agent for the private placement was Meridian Equities, Inc. and a
placement agent fee of $10,000 was paid. Upon the conversion of the debentures,
the Company issued 2,866 shares of Common Stock.
7. In February 1997, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued $300,000 of convertible debentures to Canadian Advantage L.P.
($150,000) and Dominion Capital Fund Ltd. ($150,000) In connection with the
issuance of the debentures, the Company paid a placement agent fee of $30,000 to
Meridian Equities, Inc. The debentures were subsequently converted into 8,265
shares of Common Stock.
8. On March 18, 1997, the Company issued 500 shares of common stock to
Samantha Haimes in connection with the acquisition of the natural health care
center in Boca Raton, Florida.
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<PAGE> 97
9. In April 1997, the Company sold $1,300,000 of its convertible debentures
to the Endeavour Capital Fund, S.A. ($1,000,000) and The Gross Foundation, Inc.
($300,000). In connection with the issuance of the debentures, the Company paid
a placement agent fee of $97,500 to J.W. Charles Securities, Inc. In connection
with the issuance of the debentures the Company issued warrants to purchase
2,500 shares of Common Stock to each of Windward, Island, Ltd. and J.W. Charles
Securities, Inc. Of such debentures $300,000 was repaid and the balance were
converted into 499,458 shares of Common Stock.
10. In June 1997, the Company sold 2,200 shares of its convertible Series A
preferred stock to Sovereign Partners, L.P. (950 shares), FT Trading Company
(250 shares), Canadian Advantage, L.P. (500 shares) and Dominion Capital Fund
(500 shares). In connection with the issuance of the Series A preferred stock,
the Company paid a placement agent fee of $264,000 to Meridian Equities Inc..
The shares of Series A preferred stock were subsequently redeemed.
11. In July 1997, the Company's President, Neal R. Heller and the Company's
secretary, Elizabeth S. Heller were issued an aggregate of 20,000, options,
which were cancelled in August 1998.
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<PAGE> 98
12. In July 1997, in connection with the acquisition of all of the capital
stock of Global Health Alternatives, Inc., the Company issued an aggregate of
145,000 shares of Common Stock to the following individuals:
<TABLE>
<S> <C>
Azure Limited Partnership I................................. 41,569
Capital Development S.A..................................... 20,516
Cosmo Finance & Investments, S.A............................ 162
William Nelson.............................................. 1,501
Carl F. Berner.............................................. 1,051
Tom Farmer.................................................. 4,082
Alfred S. Ross.............................................. 2,689
Golden Union International.................................. 3,067
N. K. Verwaltungs, Inc...................................... 3,434
N. Foss & Co. A/S........................................... 1,080
Benjamin B. Tregoe Ttee u/a 07/20/79........................ 540
Benjamin B. Tregoe.......................................... 108
Didgemere Consultants Limited............................... 540
Z & M Capital Corporation................................... 540
Robert A. Seibel............................................ 210
International Marketing Group Ltd........................... 210
Robert E. Cleaves IV........................................ 7,256
Stephen W. Batzell.......................................... 2,841
Thomas P. Pinansky.......................................... 3,843
John M. Eldredge............................................ 2,030
H. Newcomb Eldredge......................................... 216
Robert C. Bruce............................................. 1,929
Virginia M. King............................................ 243
Clarissa Rowe............................................... 121
Arthur B. Page.............................................. 121
Douglas M. Costle........................................... 121
Kimball C. Chen............................................. 97
Westminster Associates...................................... 540
Peter Thompson.............................................. 648
Stuart Ungar................................................ 150
Bradford S. Weeks........................................... 901
Complimentary Medical Associates Inc........................ 300
Patrick Killorin............................................ 11,475
Kevin Underwood............................................. 11,475
Joe Grace................................................... 11,475
David Cohen................................................. 162
H. Edward Troy.............................................. 1,221
Mark Colosi................................................. 732
William Deehan.............................................. 488
Alexandra W. Hopkins........................................ 108
Carol B. A. Lee............................................. 43
Promenade Investments Limited............................... 1,080
Leslie J. Kaslof............................................ 2,792
Ralph Kaslof................................................ 991
Dennis Bookshester.......................................... 300
</TABLE>
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<PAGE> 99
13. In February 1998, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued 300 shares of Series B preferred stock to Investquest, Inc. In
connection with the issuance of the Series B Preferred stock, the Company paid a
placement agent fee of $30,000 to Domain Investments, Inc. and issued warrants
to purchase 7,500 shares of common stock to Domain Investments, Inc. The shares
of Series B Preferred Stock have been converted into 541,330 shares of Common
Stock.
14. In April 1998, pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act, the
Company issued 4,000 shares of Series C preferred stock to Canadian Advantage
Limited Partnership (1,250 shares) and Dominion Capital Fund, Ltd. (2,750
shares). In connection with the issuance of the Series A preferred stock, the
Company paid a placement agent fee in the aggregate amount of $480,000 to
Meridian Equities, Inc. and BLH, Inc. The shares of Series C Preferred Stock
have been converted into a total of 3,608,296 shares of Common Stock.
15. In July 1998, the Company issued 75 shares of Series D preferred stock
at a purchase price of $1,000 per share to H. Newcombe Eldredge (50 shares) and
Carol Lee (25 shares). The shares of Series D preferred stock were redeemed in
August 1998.
16. In August 1998, the Company issued 1,650 shares of Series E Preferred
Stock to Dominion Capital Fund, Ltd. (850 shares) and Sovereign Partners, LP.
(800 shares) of which 610 shares have been converted into 603,130 shares of
common stock. In connection with the issuance of the Series E Preferred Stock,
the Company paid a placement agent fee of $198,000 to BLH, Inc., and issued BLH,
Inc. warrants to purchase 300,000 shares of common stock, which have been
exercised for 185,769 shares of common stock.
17. In August 1998, the Company converted $595,000 of its 12.5% promissory
notes into 1,195,473 shares of common stock as follows: N.K. Verwaltungs, Inc.
(404,140 shares), Golden Union International, S.A. (451,986 shares), Alfred Ross
(101,926 shares), Sir Peter Thompson (99,580 shares), Benjamin B. Tregoe (98,022
shares), and Carol Lee (39,818 shares).
18. In connection with the acquisition of substantially all of the assets
of Kaire International, Inc., the Company issued to Kaire International, Inc.
(i) 2,800 shares of Series F Preferred Stock, (ii) 350 shares of Series G
Preferred Stock and (iii) warrants to purchase 200,000 shares of Common Stock.
19. In March and April 1999, the Company issued 1,400 shares of Series H
preferred stock with a face amount of $1,000 per share to Endeavour Capital
Fund, S.A. (1,000 shares) and Dominion Capital Fund, Ltd. (400 shares). In
connection with the issuance of the Series H preferred stock the Company paid a
placement fee of $168,000 to BLH, Inc.
20. In June 1999, the Company issued a convertible note in the amount of
$100,000 to Domain Investments, Inc.
21. In July 1999, the Company issued a promissory note in the amount of
$50,000 and warrants to purchase 10,000 shares of common stock to each of
Capital Development, S.A. and H. Newcombe Eldredge.
22. In July and August 1999 the Company issued a promissory note in the
amount of $150,000 and warrants to purchase 30,000 shares of common stock to
Filin Corporation.
23. In October 1999, the Company issued a convertible note in the amount of
$100,000 to Domain Investments, Inc.
24. In October 1999, the Company issued 125,000 shares of Common Stock to
Samantha Haimes in a litigation settlement.
25. In October 1999, the Company issued 3,018 shares of Common Stock to an
employee and 25,000 shares to a director.
26. In October 1999, the Company issued 95,000 shares of Common Stock to
Domain Investments, Inc. and 185,000 shares of Common Stock to Meridian Equities
Hong Kong, Ltd. for consulting services.
27. In March 2000 pursuant to the exemption from rgistration under
Regulation S, the Company sold 1,000 shares of Series J Preferred Stock of
purchase price at $1,000 per share.
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<PAGE> 100
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
2.1 Asset Purchase Agreement dated April 29, 1998 by and among
Natural Health Trends Corp., Neal Heller & Elizabeth S.
Heller and Florida College of Natural Health, Inc. (1)
2.2 Acquisition Agreement among the Company, NHTC Acquisition
Corp. and Kaire International, Inc. (the "Acquisition
Agreement").(2)
3.1 Amended and Restated Certificate of Incorporation of the
Company.(3)
3.2 Amended and Restated By-Laws of the Company.(3)
4.1 Specimen Certificate of the Company's Common Stock.(3)
4.2 Form of Class A Warrant.(3)
4.3 Form of Class B Warrant.(3)
4.7 Form of Representative's Warrant Agreement, including Form
of Representative's Warrant.
4.8 1994 Stock Option Plan.(3)
4.9 1997 Stock Option Plan.(9)
4.10 1998 Stock Option Plan.(9)
4.11 Articles of Amendment of Articles of Incorporation of the
Company.(5)
4.12 Articles of Amendment of Articles of Incorporation- Series C
Preferred Stock.(6)
4.13 Articles of Amendment of Articles of Incorporation- Series E
Preferred Stock.(2)
4.14 Articles of Amendment of Articles of Incorporation- Series F
Preferred Stock.(2)
4.15 Articles of Amendment of Articles of Incorporation- Series G
Preferred Stock.(2)
4.16 Articles of Amendment of Articles of Incorporation- Series H
Preferred Stock.(2)
4.17 Form of Warrant in connection with the Acquisition
Agreement.(2)
4.18 Article of Amendment of Articles of Incorporation - Series J(11)
10.1 Intentionally omitted.
10.2 Leases (Two) for Registrant's Denver, Colorado
facilities.(9)
10.3 Manufacturing and Distribution Agreement between Kaire
International Inc. and ENZO Nutraceuticals, Ltd.(9)
10.4 Assignment of Patents Agreement dated May 23, 1997 between
MikeCo., Inc. and Troy Laboratories, Inc. and H. Edward
Troy.(9)
10.5 Agreement dated April 8, 1998 among Global Health
Alternatives, Inc. and MikeCo., Inc., Troy Laboratories,
Inc., H. Edward Troy, Kevin Underwood and Patrick
Killorin.(9)
10.6 Assumption Agreement and Amendment of Commercial Security
Agreement dated February 19, 1999 by and between STAR
Financial Bank, Kaire International, Inc. and NHTC
Acquisition Corp.(9)
10.7 Agreement dated September 17, 1999 between the Company and
Joseph P. Grace.(9)
10.8 Promissory Note in the amount of $150,000 from the Company
to Filin Corporation.(9)
10.9 Promissory Note in the amount of $50,000 from the Company to
H. Newcomb Eldredge.(9)
10.10 Promissory Note in the amount of $50,000 from the Company to
Capital Development S.A.(9)
10.11 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
</TABLE>
II-6
<PAGE> 101
<TABLE>
<S> <C>
10.12 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.13 Consulting Agreement between the Company and Meridian
Equities Hong Kong, Ltd.(10)
10.14 Consulting Agreement between the Company and Domain
Investments, Inc.(10)
10.15 Promissory Note in the amount of $70,000 from the Company to Domain
Investments, Inc. (8)
10.16 Licensing Agreement between the Company and GLI.(9)
21.1 List of Subsidiaries.(8)
23.1 Consent of Feldman Sherb Horowitz & Co P.C.(10)
23.2 Consent of Silverman Collura & Chernis, P.C., Esq., (10)
23.3 Consent of BDO Seidman, LLP.(10)
27.1 Financial Data Schedule.(10)
</TABLE>
- ------------------------
(1) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
May 14, 1998.
(2) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
January 25, 1999.
(3) Previously filed with Registration Statement No. 33-91184.
(4) Previously filed with the Company's Form 8-K dated August 7, 1997.
(5) Previously filed with the Company's Form 10-QSB dated June 30, 1997.
(6) Previously filed with the Company's Form 10-QSB dated September 30, 1998.
(7) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1996.
(8) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1999.
(9) Previously filed with the Company's Registration Statement, File No.
333-80465.
(10) Filed herewith.
(11) Filed with the Company's Form 8-K dated March 17, 2000.
II-7
<PAGE> 102
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
1. The Registrant will:
(a) for determining any liability under the Securities Act of 1933, as
amended (the "Securities Act"), treat the information omitted from the form
of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as
part of this registration statement as of the time the Commission declared
it effective;
(b) for determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
2. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
3. If the company relies on Rule 430A under the Securities Act, the company
will:
(a) For determining any liability under the Securities Act, treat the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the company under rule 424(b)(1), or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the
time the Commission declared it effective; and
(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement and treat the offering of such securities at that time as the
initial bona fide offering of those securities.
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<PAGE> 103
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Amendment No. 2 to Form S-1 and authorized this
registration statement to be signed on its behalf by the undersigned, in the
County of Bolder, State of Colorado, on the 10th day of May 2000.
NATURAL HEALTH TRENDS CORP.
BY: /s/ ROBERT L. RICHARDS
------------------------
Robert L. Richards,
President,
Chief Executive Officer and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert L. Richards his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and agent
or either of them or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
<TABLE>
<CAPTION>
DATE SIGNATURE TITLE
- ---- --------- -----
<S> <C>
/s/ MARTIN C. LICHT Director
- -------------------------------------------
May 9, 2000
Martin C. Licht
/s/ DIRK D. GOLDWASSER Director
- -------------------------------------------
May 9, 2000
Dirk D. Goldwasser
/s/ MARK D. WOODBURN Chief Financial Officer and
- ------------------------------------------- Treasurer (principal
May 9, 2000 accounting officer)
Mark D. Woodburn
</TABLE>
II-9
<PAGE> 104
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
2.1 Asset Purchase Agreement dated April 29, 1998 by and among
Natural Health Trends Corp., Neal Heller & Elizabeth S.
Heller and Florida College of Natural Health, Inc. (1)
2.2 Acquisition Agreement among the Company, NHTC Acquisition
Corp. and Kaire International, Inc. (the "Acquisition
Agreement").(2)
3.1 Amended and Restated Certificate of Incorporation of the
Company.(3)
3.2 Amended and Restated By-Laws of the Company.(3)
4.1 Specimen Certificate of the Company's Common Stock.(3)
4.2 Form of Class A Warrant.(3)
4.3 Form of Class B Warrant.(3)
4.7 Form of Representative's Warrant Agreement, including Form
of Representative's Warrant.
4.8 1994 Stock Option Plan.(3)
4.9 1997 Stock Option Plan.(9)
4.10 1998 Stock Option Plan.(9)
4.11 Articles of Amendment of Articles of Incorporation of the
Company.(5)
4.12 Articles of Amendment of Articles of Incorporation- Series C
Preferred Stock.(6)
4.13 Articles of Amendment of Articles of Incorporation- Series E
Preferred Stock.(2)
4.14 Articles of Amendment of Articles of Incorporation- Series F
Preferred Stock.(2)
4.15 Articles of Amendment of Articles of Incorporation- Series G
Preferred Stock.(2)
4.16 Articles of Amendment of Articles of Incorporation- Series H
Preferred Stock.(2)
4.17 Form of Warrant in connection with the Acquisition
Agreement.(2)
4.18 Article of Amendment of Articles of Incorporation - Series J(11)
10.1 Intentionally omitted.
10.2 Leases (Two) for Registrant's Denver, Colorado
facilities.(9)
10.3 Manufacturing and Distribution Agreement between Kaire
International Inc. and ENZO Nutraceuticals, Ltd.(9)
10.4 Assignment of Patents Agreement dated May 23, 1997 between
MikeCo., Inc. and Troy Laboratories, Inc. and H. Edward
Troy.(9)
10.5 Agreement dated April 8, 1998 among Global Health
Alternatives, Inc. and MikeCo., Inc., Troy Laboratories,
Inc., H. Edward Troy, Kevin Underwood and Patrick
Killorin.(9)
10.6 Assumption Agreement and Amendment of Commercial Security
Agreement dated February 19, 1999 by and between STAR
Financial Bank, Kaire International, Inc. and NHTC
Acquisition Corp.(9)
10.7 Agreement dated September 17, 1999 between the Company and
Joseph P. Grace.(9)
10.8 Promissory Note in the amount of $150,000 from the Company
to Filin Corporation.(9)
10.9 Promissory Note in the amount of $50,000 from the Company to
H. Newcomb Eldredge.(9)
10.10 Promissory Note in the amount of $50,000 from the Company to
Capital Development S.A.(9)
10.11 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
</TABLE>
II-6
<PAGE> 105
<TABLE>
<S> <C>
10.12 Promissory Note in the amount of $100,000 between the
Company and Domain Investments, Inc.(10)
10.13 Consulting Agreement between the Company and Meridian
Equities Hong Kong, Ltd.(10)
10.14 Consulting Agreement between the Company and Domain
Investments, Inc.(10)
10.15 Promissory Note in the amount of $70,000 from the Company to Domain
Investments, Inc. (8)
10.16 Licensing Agreement between the Company and GLI.(9)
21.1 List of Subsidiaries.(8)
23.1 Consent of Feldman Sherb Horowitz & Co P.C.(10)
23.2 Consent of Silverman Collura & Chernis, P.C., Esq., (10)
23.3 Consent of BDO Seidman, LLP.(10)
27.1 Financial Data Schedule.(10)
</TABLE>
- ------------------------
(1) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
May 14, 1998.
(2) Previously filed with the Company's Proxy Statement on Schedule 14A, dated
January 25, 1999.
(3) Previously filed with Registration Statement No. 33-91184.
(4) Previously filed with the Company's Form 8-K dated August 7, 1997.
(5) Previously filed with the Company's Form 10-QSB dated June 30, 1997.
(6) Previously filed with the Company's Form 10-QSB dated September 30, 1998.
(7) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1996.
(8) Previously filed with the Company's Form 10-KSB for the year ended December
31, 1999.
(9) Previously filed with the Company's Registration Statement, File No.
333-80465.
(10) Filed herewith.
(11) Filed with the Company's Form 8-K dated March 17, 2000.
<PAGE> 1
EXHIBIT 10.11
PROMISSORY NOTE
THESE SECURITIES AND THE SHARES ISSUABLE UPON CONVERSION HEREOF, HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.
$100,000 October , 1999
---
FOR VALUE RECEIVED, NATURAL HEALTH TRENDS CORP., a Florida corporation,
having an office at 250 Park Avenue, New York, New York (the "Maker"), hereby
promises to pay to the order of Domain Investments, Inc., (the "Payee"), at the
office of the Payee at ______________________________________, or at such other
place as the Payee of this Note may designate in writing from time to time, the
principal sum of $100,000 together with interest thereon at the rate of 10% per
annum on demand.
The following shall be deemed "Events of Default" hereunder:
(a) If any payment hereunder shall not be made when due;
(b) if the Maker shall fail to perform or comply with any of the other
terms, covenants, or conditions of this Note;
(c) if Maker ceases doing business as a going concern, or makes or
sends notice of an intended bulk sale or makes an assignment for the benefit of
creditors;
(d) if any proceedings are commenced by or against Maker under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, liquidation or dissolution law or statute of any jurisdiction,
whether now or hereafter in effect; or
(e) if a receiver, trustee or conservator be appointed for any of
Maker's property.
Unless the Payee otherwise elects, in the Payee's sole discretion, this
Note shall automatically become immediately due and payable, without further
notice or demand, upon the occurrence of any event of default hereinabove
described. Upon the acceleration of the entire or any portion of the unpaid
balance of this Note, the holder, without prejudice to any other rights, is
authorized to proceed against Maker and shall not be required to have recourse
to any security given for payment of this Note.
<PAGE> 2
In the event that this Note is not paid within five (5) days of demand,
this Note shall bear additional interest at the rate of 1.5% per month.
Nothing contained in this Note shall require the Maker to pay interest
at a rate exceeding the maximum rate permitted by applicable law. If the amounts
payable to the Payee on any date shall exceed the maximum permissible amount,
such amounts shall be automatically reduced to the maximum permissible amount,
and the payments for any subsequent period, to the extent less than that
permitted by applicable law, shall, to that extent, be increased by the amount
of such reduction. In the event that the period from the due date of such
payment is not long enough to cause the payments due hereunder not to exceed the
maximum amount permitted by applicable law, then the Payee at its option shall
have the right (i) to extend the amount of time for such payment such that the
payments shall not be deemed to exceed the maximum amount permitted by
applicable law or (ii) to reduce the amounts payable under this Note.
Except as otherwise expressly provided herein, Payee hereby waives
presentment, demand for payment, dishonor, notice of dishonor, protest and
notice of protest.
Except as otherwise provided herein at the option of Maker, the unpaid
balance of this Note may be prepaid in whole or in part, from time to time,
without penalty or premium.
The liability of Maker hereunder shall be unconditional. No act,
failure or delay by the Payee hereof to declare a default as set forth herein or
to exercise any right or remedy it may have hereunder, or otherwise, shall
constitute a waiver of its rights to declare such default or to exercise any
such right or remedy at such time as it shall determine in its sole discretion.
Maker further agrees to pay all costs of collection, including a
reasonable attorney's fee and all costs of levy or appellate proceedings or
review, or both, in case the principal or any interest thereon is not paid at
the respective maturity thereof, or in case it becomes necessary to protect the
security hereof, whether suit be brought or not.
Any and all notices or other communications required or permitted to be
given under this Note shall be in writing and shall be deemed to have been duly
given upon personal delivery or the mailing thereof by certified or registered
mail (a) if to Maker, addressed to it at its address set forth above; and (b) if
to Payee, addressed to it at its address set forth above or at such other
address any person or entity entitled to receive notices may specify by written
notice given as aforesaid.
This Note may not be amended, modified, supplemented or terminated
orally.
This Note shall be binding upon Maker, its legal representatives,
successors or assigns and shall inure to the benefit of Payee and its
successors, endorsees, assigns or holder(s) in due course.
-2-
<PAGE> 3
The Payee of this Note is entitled, at its option, in the event that
this Note is not paid within two (2) days of demand, to convert at any time, the
principal amount of this Note at a conversion price equal to forty (40%) of the
five day average closing bid price of the Common Stock, as reported by The
NASDAQ SmallCap Market for the five trading days immediately preceding the
applicable Conversion Date (the "Conversion Price"). Conversion, shall be
effectuated by surrendering the Note to be converted to the Maker with the form
of conversion notice attached hereto as Exhibit A (the "Conversion Notice"),
executed by the Payee of the Note evidencing the Payee's intention to convert
this Note or a specified portion (as above provided) hereof, and accompanied, if
required by the Maker, by proper assignment hereof in blank. No fractional
shares or scrip representing fractions of shares will be issued on conversion,
but the number of shares issuable shall be rounded to the nearest whole share.
The date on which notice of conversion is given (the "Conversion Date") shall be
deemed to be the date on which the Payee has delivered this Note, with the
Conversion Notice duly executed, to the Maker. Facsimile delivery of the
Conversion Notice shall be accepted by the Maker. Certificates representing
shares of Common Stock upon conversion will be delivered within five (5)
business days from the Conversion Date.
The shares to be issued pursuant to this Note shall contain unlimited
piggyback registration rights. Payee's piggyback registration rights shall
commence on the date hereof and shall terminate three (3) years after the date
hereof. The Maker shall bear the costs of such registrations. In the event of
the sale of the shares contemplated hereunder, Payee shall pay any and all
underwriting commissions and non-accountable expenses of any underwriter
selected by Payee to sell the common stock (the "Registrable Securities"). As to
Payee's registration rights, the Maker agrees to qualify or register the
Registrable Securities in such additional states as are reasonably requested by
Payee and the Maker shall bear all costs and expenses, of the qualification of
registration of the Registrable Securities in such additional states as are
reasonably requested by the Payee. In no event shall the Maker be required to
register the Registrable Securities in more than five (5) states or in a state
in which such registration would cause (i) the Maker to be obligated to do
business in such state, or (ii) the principal stockholders of the Maker to be
obligated to escrow any of their securities.
In no event shall the Payee be entitled to convert that amount of the
Note in excess of that amount upon conversion of which the sum of (1) the number
of shares of Common Stock beneficially owned by the Payee and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Note), and (2) the
number of shares of Common Stock issuable upon the conversion of the Note with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Payee and its affiliates of more than 4.9% of the
outstanding shares of Common Stock of the Maker. For purposes of the immediately
preceding sentence, 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) of the immediately
preceding sentence.
The certificates for the shares of Common Stock shall bear the
following legend:
-3-
<PAGE> 4
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL
OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
The Payee of the Note, by acceptance hereof, agrees that this Note is
being acquired for investment and that such Payee will not offer, sell or
otherwise dispose of this Note or the shares of Common Stock issuable upon
conversion thereof except under circumstances which will not result in a
violation of the Act or any applicable state Blue Sky or foreign laws or similar
laws relating to the sale of securities.
In no event shall the Maker be required to issue more than 20% of the
number of shares of Common Stock outstanding on the date hereof (the "Maximum
Number") upon the conversion of the Note unless the stockholders of the Maker
approve the issuance of additional shares of Common Stock upon the conversion of
the Note or NASDAQ waives the requirements of Market Place Rule 4460(i)(l)(D).
In the event that the Maximum Number of shares of Common Stock have been issued
upon the conversion of the Note, 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 Note that remains
unconverted shall, at the election of the Payee, be immediately due and payable.
This Note shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to principles of conflicts
of law. By signing below, Maker hereby irrevocably submits to the jurisdiction
of such state and to service of process by certified or registered mail at
Maker's last known address. No provision of this Note may be changed unless in
writing signed by the Payee and Maker.
IN WITNESS WHEREOF, Maker has caused this note to be duly executed and
delivered by its duly authorized representative as of the date and year first
above written.
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D. WOODBURN
---------------------------------
Name: Mark D. Woodburn
Title: Chief Financial Officer
-4-
<PAGE> 1
EXHIBIT 10.12
PROMISSORY NOTE
THESE SECURITIES AND THE SHARES ISSUABLE UPON CONVERSION HEREOF, HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN
OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.
$100,000 June , 1999
---
FOR VALUE RECEIVED, NATURAL HEALTH TRENDS CORP., a Florida corporation,
having an office at 250 Park Avenue, New York, New York (the "Maker"), hereby
promises to pay to the order of Domain Investments, Inc., (the "Payee"), at the
office of the Payee at ______________________________________, or at such other
place as the Payee of this Note may designate in writing from time to time, the
principal sum of $100,000 together with interest thereon at the rate of 10% per
annum on demand.
The following shall be deemed "Events of Default" hereunder:
(a) If any payment hereunder shall not be made when due;
(b) if the Maker shall fail to perform or comply with any of the other
terms, covenants, or conditions of this Note;
(c) if Maker ceases doing business as a going concern, or makes or
sends notice of an intended bulk sale or makes an assignment for the benefit of
creditors;
(d) if any proceedings are commenced by or against Maker under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, liquidation or dissolution law or statute of any jurisdiction,
whether now or hereafter in effect; or
(e) if a receiver, trustee or conservator be appointed for any of
Maker's property.
Unless the Payee otherwise elects, in the Payee's sole discretion, this
Note shall automatically become immediately due and payable, without further
notice or demand, upon the occurrence of any event of default hereinabove
described. Upon the acceleration of the entire or any portion of the unpaid
balance of this Note, the holder, without prejudice to any other rights, is
authorized to proceed against Maker and shall not be required to have recourse
to any security given for payment of this Note.
<PAGE> 2
In the event that this Note is not paid within five (5) days of demand,
this Note shall bear additional interest at the rate of 1.5% per month.
Nothing contained in this Note shall require the Maker to pay interest
at a rate exceeding the maximum rate permitted by applicable law. If the amounts
payable to the Payee on any date shall exceed the maximum permissible amount,
such amounts shall be automatically reduced to the maximum permissible amount,
and the payments for any subsequent period, to the extent less than that
permitted by applicable law, shall, to that extent, be increased by the amount
of such reduction. In the event that the period from the due date of such
payment is not long enough to cause the payments due hereunder not to exceed the
maximum amount permitted by applicable law, then the Payee at its option shall
have the right (i) to extend the amount of time for such payment such that the
payments shall not be deemed to exceed the maximum amount permitted by
applicable law or (ii) to reduce the amounts payable under this Note.
Except as otherwise expressly provided herein, Payee hereby waives
presentment, demand for payment, dishonor, notice of dishonor, protest and
notice of protest.
Except as otherwise provided herein at the option of Maker, the unpaid
balance of this Note may be prepaid in whole or in part, from time to time,
without penalty or premium.
The liability of Maker hereunder shall be unconditional. No act,
failure or delay by the Payee hereof to declare a default as set forth herein or
to exercise any right or remedy it may have hereunder, or otherwise, shall
constitute a waiver of its rights to declare such default or to exercise any
such right or remedy at such time as it shall determine in its sole discretion.
Maker further agrees to pay all costs of collection, including a
reasonable attorney's fee and all costs of levy or appellate proceedings or
review, or both, in case the principal or any interest thereon is not paid at
the respective maturity thereof, or in case it becomes necessary to protect the
security hereof, whether suit be brought or not.
Any and all notices or other communications required or permitted to be
given under this Note shall be in writing and shall be deemed to have been duly
given upon personal delivery or the mailing thereof by certified or registered
mail (a) if to Maker, addressed to it at its address set forth above; and (b) if
to Payee, addressed to it at its address set forth above or at such other
address any person or entity entitled to receive notices may specify by written
notice given as aforesaid.
This Note may not be amended, modified, supplemented or terminated
orally.
This Note shall be binding upon Maker, its legal representatives,
successors or assigns and shall inure to the benefit of Payee and its
successors, endorsees, assigns or holder(s) in due course.
-2-
<PAGE> 3
The Payee of this Note is entitled, at its option, in the event that
this Note is not paid within two (2) days of demand, to convert at any time, the
principal amount of this Note at a conversion price equal to forty (40%) of the
five day average closing bid price of the Common Stock, as reported by The
NASDAQ SmallCap Market for the five trading days immediately preceding the
applicable Conversion Date (the "Conversion Price"). Conversion, shall be
effectuated by surrendering the Note to be converted to the Maker with the form
of conversion notice attached hereto as Exhibit A (the "Conversion Notice"),
executed by the Payee of the Note evidencing the Payee's intention to convert
this Note or a specified portion (as above provided) hereof, and accompanied, if
required by the Maker, by proper assignment hereof in blank. No fractional
shares or scrip representing fractions of shares will be issued on conversion,
but the number of shares issuable shall be rounded to the nearest whole share.
The date on which notice of conversion is given (the "Conversion Date") shall be
deemed to be the date on which the Payee has delivered this Note, with the
Conversion Notice duly executed, to the Maker. Facsimile delivery of the
Conversion Notice shall be accepted by the Maker. Certificates representing
shares of Common Stock upon conversion will be delivered within five (5)
business days from the Conversion Date.
The shares to be issued pursuant to this Note shall contain unlimited
piggyback registration rights. Payee's piggyback registration rights shall
commence on the date hereof and shall terminate three (3) years after the date
hereof. The Maker shall bear the costs of such registrations. In the event of
the sale of the shares contemplated hereunder, Payee shall pay any and all
underwriting commissions and non-accountable expenses of any underwriter
selected by Payee to sell the common stock (the "Registrable Securities"). As to
Payee's registration rights, the Maker agrees to qualify or register the
Registrable Securities in such additional states as are reasonably requested by
Payee and the Maker shall bear all costs and expenses, of the qualification of
registration of the Registrable Securities in such additional states as are
reasonably requested by the Payee. In no event shall the Maker be required to
register the Registrable Securities in more than five (5) states or in a state
in which such registration would cause (i) the Maker to be obligated to do
business in such state, or (ii) the principal stockholders of the Maker to be
obligated to escrow any of their securities.
In no event shall the Payee be entitled to convert that amount of the
Note in excess of that amount upon conversion of which the sum of (1) the number
of shares of Common Stock beneficially owned by the Payee and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of the Note), and (2) the
number of shares of Common Stock issuable upon the conversion of the Note with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Payee and its affiliates of more than 4.9% of the
outstanding shares of Common Stock of the Maker. For purposes of the immediately
preceding sentence, 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) of the immediately
preceding sentence.
The certificates for the shares of Common Stock shall bear the
following legend:
-3-
<PAGE> 4
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL
OR OTHER EVIDENCE ACCEPTABLE TO THE CORPORATION THAT
SUCH REGISTRATION IS NOT REQUIRED.
The Payee of the Note, by acceptance hereof, agrees that this Note is
being acquired for investment and that such Payee will not offer, sell or
otherwise dispose of this Note or the shares of Common Stock issuable upon
conversion thereof except under circumstances which will not result in a
violation of the Act or any applicable state Blue Sky or foreign laws or similar
laws relating to the sale of securities.
In no event shall the Maker be required to issue more than 20% of the
number of shares of Common Stock outstanding on the date hereof (the "Maximum
Number") upon the conversion of the Note unless the stockholders of the Maker
approve the issuance of additional shares of Common Stock upon the conversion of
the Note or NASDAQ waives the requirements of Market Place Rule 4460(i)(l)(D).
In the event that the Maximum Number of shares of Common Stock have been issued
upon the conversion of the Note, 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 Note that remains
unconverted shall, at the election of the Payee, be immediately due and payable.
This Note shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to principles of conflicts
of law. By signing below, Maker hereby irrevocably submits to the jurisdiction
of such state and to service of process by certified or registered mail at
Maker's last known address. No provision of this Note may be changed unless in
writing signed by the Payee and Maker.
IN WITNESS WHEREOF, Maker has caused this note to be duly executed and
delivered by its duly authorized representative as of the date and year first
above written.
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D. WOODBURN
-------------------------
Name: Mark D. Woodburn
Title: Chief Financial Officer
-4-
<PAGE> 1
EXHIBIT 10.13
AGREEMENT
This Agreement is entered into and is effective this _____ day of
October, 1999 is by and between Natural Health Trends Corp. (the "Company"), and
Meridian Equities Hong Kong, Ltd. ("MEHK").
WHEREAS, the Company desires to retain MEHK to provide services to the
Company.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto do covenant and
agree, as follows:
1. RETENTION. MEHK shall consult with the Company with regard to strategic
alliances and potential joint venture partners, as well as identify merger and
acquisition candidates for the Company in Hong Kong, China, and other parts of
Asia. MEHK's duties shall also include attempting to identify new and unique
products that may have appeal to the Asian marketplace. MEHK shall be
responsible for any legal, accounting and other expenses including travel in
connection with its duties pursuant to this Agreement. This shall be a
non-exclusive agreement on the part of the Company and MEHK agrees not to
represent any other companies in the same business as the Company in Asia.
2. TERM. The Term of this Agreement shall be twenty-four (24) months from the
date hereof, but within the 24-month period, the Company may, without cause,
elect to terminate the Agreement by giving thirty (30) days' notice. Upon such
termination, MEHK shall be relieved of any further obligation of performance to
the Company; provided, however that all obligations of confidentiality,
non-disclosure and non-competition will continue in full force and effect for
one (1) year from the effective date of any termination. If this agreement shall
be terminated prior to the end of the Term, MEHK shall not, in any event, be
liable to return any pre-payment. The parties hereby agree that any pre-payment
made to MEHK shall be fully earned by MEHK at the time such pre-payment is made
and shall be in consideration of MEHK's agreement to expend time, effort and
energy on behalf of Company to the exclusion of other clients.
3. COMPENSATION. The Company shall pay to MEHK $10,000 per month for a 24-month
term. MEHK shall also be entitled to a fee equal in value to 10% of any
transaction that it initiates and is consummated. The monthly payments shall be
applied against any transaction fee earned by MEHK. Failing the Company's
ability to make the necessary monthly payments, the Company shall have the
ability to issue, in lieu of cash, 185,000 shares of its common stock to MEHK.
Given the latter option, the Company will have no further obligation to MEHK.
The Company has the right to redeem any unsold shares of MEHK for a price of
$1.25 per share.
4. ASSIGNABILITY OF SHARES. MEHK represents and warrants to the Company that it
is not acquiring the Shares with a view to, or for resale in connection with,
any distribution in violation of the Securities Act of 1933, as amended. The
Shares have not been registered under the Securities Act or any state securities
law and shall not be transferred, sold, assigned or hypothecated in
<PAGE> 2
violation thereof. If permitted by law, any such transfer, sale, assignment or
hypothecation shall be effected by MEHK only by surrendering the Shares for
assignment at the office of the Company, accompanied by an opinion of counsel
satisfactory to the Company, and its counsel, stating that such transfer does
not violate the Securities Act or any applicable state securities law.
5. REGISTRATION RIGHTS. The shares to be issued pursuant to subsection 4 of this
Agreement shall contain unlimited piggyback registration rights. MEHK's
piggyback registration rights shall commence on the date hereof and shall
terminate three (3) years after the Company shall register any of its shares of
common stock for sale pursuant to the Securities Act of 1933, as amended (the
"Act"). The Company shall bear the costs of such registrations except
underwriting commissions and non-accountable expenses of any underwriter
selected by MEHK to sell the common stock (the "Registrable Securities"). The
Company agrees to use its prompt best efforts to cause the filing required
herein to become effective and to qualify or register the Registrable Securities
in such states as are reasonably requested by MEHK. As to MEHK's registration
rights, the Company agrees to qualify or register the Registrable Securities in
such additional states as are reasonably requested by MEHK and the Company shall
bear all costs and expenses, of the qualification of registration of the
Registrable Securities in such additional states as are reasonably requested by
MEHK. In no event shall the Company be required to register the Registrable
Securities in more than five (5) states or in a state in which such registration
would cause (i) the Company to be obligated to do business in such state, or
(ii) the principal stockholders of the Company to be obligated to escrow any of
their securities.
6. COMPANY DISCLOSURE OF INFORMATION. The Company hereby agrees to timely
provide MEHK with the documents and the information enumerated below. MEHK
agrees that it shall keep all such information and the contents of such
documents confidential and shall utilize such information solely for the purpose
of performing the Services, and for no other purpose. The information and/or
documents that Company shall provide are:
a. all of the Company's current filings with the SEC or other regulatory
bodies with jurisdiction over the Company's activities;
b. copies of any meetings of the Company's shareholders, directors or
committees of its board of directors;
c. the Company's current audited financial statement and any unaudited
financial statements produced currently by the Company's auditors; and
d. all public releases of information.
7. MEHK'S NON-DISCLOSURE OF INFORMATION/NON-COMPETITION.
a. MEHK acknowledges that in the course of its engagement it may become
familiar with trade secrets and other confidential information
(collectively, "Confidential Information" ) concerning the Company and
MEHK shall hold in a fiduciary capacity for the benefit of the Company
all secret, confidential proprietary information, knowledge or data
relating to the Company that shall have been obtained by MEHK
2
<PAGE> 3
during its engagement by the Company and that shall have not been or
now or hereafter have become public knowledge (other than by acts by
MEHK or its representatives in violation of this Agreement). MEHK
agrees that it shall not disclose to any third party any Confidential
Information for any purpose other than the performance of its duties
under this Agreement. During the Term and at all times thereafter,
regardless of the reason for the termination of this Agreement, MEHK
shall not, without the prior written consent of the Company or as
otherwise may be required by law or legal process, communicate or
divulge any such information, knowledge or data to anyone other than
the Company and those designated by the Company.
b. Upon completion of the Term or earlier termination of this Agreement
for any reason, MEHK will return to the Company any confidential
materials or information which the Company may have supplied to MEHK.
MEHK may retain a copy of such materials or information for MEHK's
own due diligence file. However, MEHK hereby agrees not to distribute
or release such confidential materials or information without giving
the Company at least five (5) days' written notice so that Company
shall have the opportunity, at Company's sole cost and expense, to
move to prevent MEHK's distribution or release of the confidential
material or information.
c. Subject to the limitations set forth herein, MEHK agrees that during
the Term and for a period of one year thereafter it shall not directly
or indirectly, own, manage, control, participate in, consult with,
render services for, or in any manner engage in any business competing
with the business of the Company as such business exists within any
geographical area in which the Company conducts its business. In
addition, MEHK shall not solicit, interfere with or conduct business
with any vendors, customers or employees of the Company during the
term of this Agreement or for a period of one year after the
termination hereof. In the event the Company breaches any of its
duties or obligations under this Agreement, the Company agrees that
MEHK shall not be bound by the provisions of this Agreement, except
for the provisions concerning Confidential Information.
8. INDEMNIFICATION. The Company agrees to indemnify and hold harmless MEHK and
its directors, officers, and affiliates against any and all losses, claims,
damages, obligations, penalties, judgment, awards, liabilities, costs, expenses,
and disbursements (and all actions, suits, proceedings and investigations in
respect thereof and any and all legal or other costs, expenses and disbursements
in giving testimony or furnishing documents in response to a subpoena or
otherwise), including, without limitation, the costs, expenses, and
disbursements, as and when incurred, of investigating, preparing or defending
any such action, proceeding or investigation (whether or not in connection with
litigation to which MEHK is a party), directly or indirectly, caused by,
relating to, based upon, arising out of or in connection with information
provided by the Company which contains a material misrepresentation or material
omission in connection with the provision of services by MEHK under this
Agreement; provided, however, such indemnity agreement shall not apply to
any portion of any
3
<PAGE> 4
such loss, claim, damage, obligation, penalty, judgement, award, liability,
cost, expense or disbursements, to the extent that it is found by a court of
competent jurisdiction to have resulted from the gross negligence or willful
misconduct of MEHK. The Company also agrees MEHK shall not have any liability
(whether direct or indirect in contract or tort or otherwise) to the Company or
to any person (including, without limitation, Company shareholders) claiming
through the Company except to the extent that any such liability result from
MEHK gross negligence or willful misconduct. This indemnification shall survive
the termination of this Agreement.
Each party entitled to indemnification under this agreement (the
"Indemnified Party"), shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnify may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party (whose approval shall not be unreasonably withheld), and the Indemnified
Party may participate in such defense at such party's expense, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnified Party of its obligations under this
Section 8. Each Indemnified Party shall furnish such information regarding
itself or the claim in question as an Indemnifying Party may reasonably request
in writing and as shall be reasonably required in connection with the defense of
such claim and any litigation resulting therefrom.
9. ARBITRATION. Any dispute, controversy or claim between the Company and MEHK
arising out of or related to this Agreement shall be conducted solely in a
proceeding held in accordance with the rules of the American Arbitration
Association then in effect. This Agreement, or breach thereof, shall be settled
by arbitration, and any award shall be binding and conclusive for all purposes
thereof, may include injunctive relief (but only as ordered by a Court of
competent jurisdiction), as well as orders for specific performance and may be
entered as a final judgment in any court of competent jurisdiction. No
arbitration arising out of or relating to this Agreement shall include, by
consolidation or joinder or in any other manner, parties other than the Company
and MEHK and other persons substantially involved in common question of fact or
law whose presence is required if complete relief is to be afforded in
arbitration. The cost and expenses of such arbitration shall be borne in
accordance with the determination of the arbitrator and may include reasonable
attorney's fees, provided, however, that if either party shall commence any
action or proceeding against the other in order to enforce the provisions
hereof, or to recover damages resulting from the alleged breach of any of the
provisions hereof, the prevailing party therein shall be entitled to recover all
reasonable costs incurred in connection therewith, including, but not limited
to, reasonable attorneys' fees. Each party hereby further agrees that service of
process may be made upon it by registered or certified mail, express delivery or
personal service at the address provided for herein.
10. REMEDIES. In the event of the actual or threatened breach of the provisions
of this Agreement by a party, the other party shall have the right to obtain
injunctive relief and/or specific performance and to seek any other remedy
available to it.
4
<PAGE> 5
11. LAW, VENUE, JURISDICTION. This agreement and all matters and issued
collateral thereto shall be governed by the laws and the courts of the
State of New York without regard to the principles of conflicts of laws.
12. SEVERABILITY. If any provisions of this Agreement becomes or is found to be
illegal or unenforceable for any reason, such clause or provision must
first be modified to the extent necessary to make this Agreement legal and
enforceable and then if necessary, second, severed from the remainder of
the Agreement to allow the remainder of the Agreement to remain in full
force and effect.
13. COUNTERPARTS. This Agreement may be executed in several counterparts, and
all of such counterparts taken together shall be deemed to be one
Agreement.
14. ATTORNEYS' FEES. If either party shall commence any action or proceeding
against the other in order to enforce the provisions hereof, or to recover
damages resulting from the alleged breach of any of the provisions hereof,
the prevailing party therein shall be entitled to recover all reasonable
costs incurred in connection therewith, including, but not limited to,
reasonable attorneys' fees.
15. WAIVER OF BREACH. The waiver by any party of a breach of any provision of
this Agreement shall not operate be construed as a waiver of any subsequent
breach by any party.
16. NOTICES. Each notice, demand, request, approval or communication ("Notice")
which is or may be required to be given by any party to any other party in
connection with this Agreement and the transactions contemplated hereby,
shall be in writing, and given by personal delivery, certified mail, return
receipt requested, prepaid, or by overnight express mail delivery and
properly addressed to the party to be served at such address as set forth
above. Notices shall be effective on the date delivered personally, the
next day if delivered by overnight express mail or three days after the
date mailed by certified mail.
17. ENTIRE AGREEMENT. This Agreement contains the entire agreement between MEHK
and Company, and correctly sets forth the rights and duties of each of the
parties to each other concerning such matter as of this date. Any agreement
or representation concerning the subject matter of this Agreement or the
duties of MEHK in relation to Company not set forth in this Agreement is
null and void.
18. BINDING EFFECT. The rights created by this Agreement shall inure to the
benefit of, and the obligations created hereby shall be binding upon the
parties, their heirs, successors, assigns and personal representatives.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first hereinabove written.
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D WOODBURN
-------------------------------
Name: Mark D Woodburn
Title: Chief Financial Officer
MERIDIAN EQUITIES HONG KONG, LTD.
By:
-------------------------------
Name:
Title:
6
<PAGE> 1
EXHIBIT 10.14
CONSULTING AGREEMENT
This Consulting Agreement is made and entered into as of this _____ day
of October, 1999 by and between Natural Health Trends Corp. (the "Company"), and
Domain Investments, Inc. (the "Consultant") (the "Agreement").
In consideration of and for the mutual promises and covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. PURPOSE AND TERM. The Company hereby retains the Consultant upon the terms
and conditions contained herein for a period of 24 months commencing upon the
date of execution of this Agreement (the "Term").
2. DUTIES OF CONSULTANT. During the Term of this Agreement, the Consultant will
provide the Company with such regular and customary consulting advice as is
reasonably requested by the Company, including but not limited to, assisting the
Company with restructuring and reorganizing debt, negotiations with creditors,
administration of debts and voluntary workouts. Consultant shall assist the
Company in maximizing the value of both the Global Health Alternatives, Inc. and
the Ellon product lines. All information obtained by the Consultant in
connection with this Agreement and relating to the Company shall be the property
of the Company.
3. CONSULTING FEE. For its services, Consultant shall be paid a consulting fee
of $5,000 per month. The Company shall have the ability to issue to Consultant
95,000 shares of the Company's common stock, in lieu of cash. In the event the
Company exercises its right to issue the shares of common stock, the Company
shall have no further obligation to Consultant. Consultant shall also be
responsible for all accounting, legal and other costs incurred by Consultant
pursuant to this Agreement.
4. ASSIGNABILITY OF SHARES. Consultant represents and warrants to the Company
that it is not acquiring the Shares with a view to, or for resale in connection
with, any distribution in violation of the Securities Act of 1933, as amended.
The Shares have not been registered under the Securities Act or any state
securities law and shall not be transferred, sold, assigned or hypothecated in
violation thereof. If permitted by law, any such transfer, sale, assignment or
hypothecation shall be effected by Consultant only by surrendering the Shares
for assignment at the office of the Company, accompanied by an opinion of
counsel satisfactory to the Company, and its counsel, stating that such transfer
does not violate the Securities Act or any applicable state securities law.
5. REGISTRATION RIGHTS. The shares to be issued pursuant to subsection 3 of this
Agreement shall contain unlimited piggyback registration rights. Consultant's
piggyback registration rights shall commence on the date hereof and shall
terminate three (3) years after the Company shall register any of its shares of
common stock for sale pursuant to the Securities Act of 1933, as amended (the
"Act"). The Company shall bear the costs of such registrations. In the event of
the sale of the shares contemplated hereunder, Consultant shall pay any and all
underwriting commissions and non-
<PAGE> 2
accountable expenses of any underwriter selected by Consultant to sell the
common stock (the "Registrable Securities"). The Company agrees to use its
prompt best efforts to cause the filing required herein to become effective and
to qualify or register the Registrable Securities in such states as are
reasonably requested by the Consultant. As to Consultant's registration rights,
the Company agrees to qualify or register the Registrable Securities in such
additional states as are reasonably requested by Consultant and the Company
shall bear all costs and expenses, of the qualification of registration of the
Registrable Securities in such additional states as are reasonably requested by
the Consultant. In no event shall the Company be required to register the
Registrable Securities in more than five (5) states or in a state in which such
registration would cause (i) the Company to be obligated to do business in such
state, or (ii) the principal stockholders of the Company to be obligated to
escrow any of their securities.
6. COMPANY DISCLOSURE OF INFORMATION. The Company hereby agrees to timely
provide the Consultant with the documents and the information enumerated below.
The Consultant agrees that it shall keep all such information and the contents
of such documents confidential and shall utilize such information solely for the
purpose of performing the Services, and for no other purpose. The information
and/or documents that Company shall provide are:
a. all of the Company's current filings with the SEC or other
regulatory bodies with jurisdiction over the Company's
activities;
b. copies of any meetings of the Company's shareholders,
directors or committees of its board of directors;
c. the Company's current audited financial statement and any
unaudited financial statements produced currently by the
Company's auditors; and
d. all public releases of information.
7. CONSULTANT'S NON-DISCLOSURE OF INFORMATION/NON-COMPETITION.
a. The Consultant acknowledges that in the course of its
engagement it may become familiar with trade secrets and other
confidential information (collectively, "Confidential
Information") concerning the Company and Consultant shall
hold in a fiduciary capacity for the benefit of the Company
all secret, confidential proprietary information, knowledge or
data relating to the Company that shall have been obtained by
the Consultant during its engagement by the Company and that
shall have not been or now or hereafter have become public
knowledge (other than by acts by the Consultant or its
representatives in violation of this Agreement). Consultant
agrees that it shall not disclose to any third party any
Confidential Information for any purpose other than the
performance of its duties under this Agreement. During the
Term and at all times thereafter, regardless of the reason for
the termination of this Agreement, Consultant shall not,
without the prior written consent of the Company or as
otherwise may be required by law or legal process, communicate
or divulge any such information, knowledge or data to anyone
other than the Company and those designated by the Company.
-2-
<PAGE> 3
b. Upon completion of the Term or earlier termination of this
Agreement for any reason, Consultant will return to the
Company any confidential materials or information which the
Company may have supplied to the Consultant. Consultant may
retain a copy of such materials or information for
Consultant's own due diligence file. However, Consultant
hereby agrees not to distribute or release such confidential
materials or information without giving the Company at least
five (5) days' written notice so that Company shall have the
opportunity, at Company's sole cost and expense, to move to
prevent Consultant's distribution or release of the
confidential material or information.
c. Subject to the limitations set forth herein, Consultant agrees
that during the Term and for a period of one year thereafter
it shall not directly or indirectly, own, manage, control,
participate in, consult with, render services for, or in any
manner engage in any business competing with the business of
the Company as such business exists within any geographical
area in which the Company conducts its business. In addition,
Consultant shall not solicit, interfere with or conduct
business with any vendors, customers or employees of the
Company during the term of this Agreement or for a period of
one year after the termination hereof. In the event the
Company breaches any of its duties or obligations under this
Agreement, the Company agrees that Consultant shall not be
bound by the provisions of this Agreement, except for the
provisions concerning Confidential Information.
8. SEVERABILITY. Every provision of this Agreement is intended to be severable.
If any term or provision hereof is deemed unlawful or invalid for any reason
whatsoever, such unlawfulness or invalidity shall not affect the validity of the
remainder of this Agreement.
9. MISCELLANEOUS.
a. Any notice or other communication between the parties hereto
shall be sent by certified or registered mail, postage
prepaid, if to the Company, addressed to it at 380 Lashley
Street, Longmont, CO 80501 or, if to the Consultant, addressed
to it at ________________________________or to such address as
may hereafter be designated in writing by any of such entities
to the others. Such notice or other communication shall be
deemed to be given on the date of receipt.
b. If, during the term hereof, the Consultant shall cease to do
business, the provisions hereof relating to the duties of the
Consultant and the compensation by the Company as it applies
to the Consultant shall thereupon cease to be in effect,
except for the Company's obligation of payment for services
rendered prior thereto. This Agreement shall survive any
merger of, acquisition of, or acquisition by the Consultant
and, after any such merger or acquisition, shall be binding
upon the Company and the corporation surviving such merger or
acquisition.
-3-
<PAGE> 4
c. This Agreement embodies the entire agreement and understanding
between the Company and the Consultant and supersedes any and
all negotiations, prior discussions and preliminary and prior
agreements and understandings related to the central subject
matter hereof.
d. This Agreement has been duly authorized, executed and
delivered by and on behalf of the Company and the Consultant.
e. This Agreement shall be governed by and construed in all
respects under the laws of the State of New York, without
reference to its conflict of laws, rules or principles. Any
suit, action, proceeding or litigation arising out of or
relating to this Agreement shall be brought and prosecuted in
such federal or state court or courts located within the State
of New York as provided by law. The parties hereby irrevocably
and unconditionally consent to the jurisdiction of each such
court or courts located within the State of New York and to
service of process by registered or certified mail, return
receipt requested, or by any other manner provided by
applicable law, and hereby irrevocably and unconditionally
waive any right to claim that any suit, action, proceeding or
litigation so commenced has been commenced in an inconvenient
forum.
f. This Agreement and the rights hereunder may not be assigned by
either party (except by operation of law) and shall be binding
upon and inure to the benefit of the Parties and their
respective successors, assigns and legal representatives.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date hereof.
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D. WOODBURN
---------------------------------
Name: Mark D. Woodburn
Title: Chief Financial Officer
DOMAIN INVESTMENTS, INC.
By:
---------------------------------
Name:
Title:
-4-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We Consent To use in this Registration Statement on Amendment No. 2 to
Form S-1 of our report dated March 10, 2000, relating to the financial
statements of Natural Health Trends Corp. and Subsidiaries for the years ended
December 31, 1999, 1998 and 1997, and the reference to our firm under the
caption `Experts' in this Registration Statement.
/s/ FELDMAN SHERB HOROWITZ & CO., P. C.
---------------------------------------
FELDMAN SHERB HOROWITZ & CO., P. C.
Certified Public Accountants
New York, New York
May 10, 2000
<PAGE> 1
EXHIBIT 23.2
[SILVERMAN, COLLURA & CHERNIS, P.C. LETTERHEAD]
May 9, 2000
Natural Health Trends Corp.
380 Lashley Street
Longmont, CO 80501
Attn: Mark D. Woodburn, Chief Financial Officer
Re: Registration Statement on Form S-1, as amended (the "Registration
Statement") SEC File No. 333-89419
Gentlemen:
We refer to the public offering (the "Offering") of the
following securities (collectively, the "Securities") of Natural Health Trends
Corp., a Florida corporation (the "Company"), as described in the Registration
Statement on Form S-1:
o 2,413,504 shares of common stock of the Company, $.001 par value
(the "Common Stock");
The undersigned hereby consents to the use of its name in the
Registration Statement and in the prospectus forming a part of the Registration
Statement.
Very truly yours,
SILVERMAN, COLLURA & CHERNIS, P.C.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Kaire International, Inc.
Longmont, Colorado
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 8, 1999, relating to the
consolidated financial statements of Kaire International, Inc. which is
contained in that Prospectus. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Denver, Colorado
May 10, 2000
<TABLE> <S> <C>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 434,063
<SECURITIES> 0
<RECEIVABLES> 152,505
<ALLOWANCES> 0
<INVENTORY> 847,212
<CURRENT-ASSETS> 1,961,751
<PP&E> 641,579
<DEPRECIATION> 74,514
<TOTAL-ASSETS> 11,253,899
<CURRENT-LIABILITIES> 8,416,806
<BONDS> 0
0
5,163,695
<COMMON> 7,990
<OTHER-SE> (2,387,750)
<TOTAL-LIABILITY-AND-EQUITY> 11,253,899
<SALES> 15,269,631
<TOTAL-REVENUES> 15,269,631
<CGS> 4,267,045
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<OTHER-EXPENSES> 7,117,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663,289
<INCOME-PRETAX> (7,557,883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,557,883)
<DISCONTINUED> 304,593
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,253,290)
<EPS-BASIC> (1.22)
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