UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
(Amendment No. 1)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2002
Commission file number 0-011228
NATURAL HEALTH TRENDS CORP.
(Name of Small Business Issuer in Its Charter)
Florida 59-2705336
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12901 Hutton Drive, Dallas, Texas 75234
(Address of principal executive office) (Zip Code)
Issuer's Telephone Number, Including Area Code: (972) 241-4080
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $36,968,048.
The aggregate market value of the voting stock held by non-affiliates
of the Issuer as of March 27, 2003 was approximately $5,063,000 (based upon a
closing price of $1.10 per share).
The number of shares of the Common Stock of the issuer outstanding as
of March 27, 2003 was 4,628,731.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates certain information by reference from the
Registrant's Definitive Proxy Statement for the Registrant's Annual Meeting to
be held during the second quarter of 2003.
Natural Health Trends Corp.
Form 10-KSB/A
(Amendment No. 1)
2002 Annual Report
Explanatory Note:
-----------------
The purpose of this amendment is to amend Part II Item 6 - Management's
Discussion and Analysis and Part II, Item 7 - Financial Statements for the
restatements identified below and in note 1 to the consolidated financial
statements and to give effect to the 1 for 100 reverse stock split in March
2003. All other items remain unchanged from the original filing.
During the quarters ended September 30 and December 31, 2003, the Company
re-evaluated its financial statements for the years ended December 31, 2002 and
2001, the quarterly periods included in such years and the quarterly periods
ended March 31, June 30 and September 30, 2003. As a result of such review, the
Company determined that it inadvertently applied the incorrect accounting
treatment with respect to the following items:
(i) revenue recognition with respect to administrative enrollment fees;
(ii) revenue cut-off between 2002 and 2003;
(iii) reserves established for product returns and refunds;
(iv) the gain recorded in connection with the sale of a subsidiary in
2001;
(v) income tax provisions; and
(vi) stock option based compensation.
Consequently, the Company is amending and restating its financial statements for
each quarter in 2001, 2002 and 2003 as well as the Form 10-KSB for the years
ended December 31, 2001 and 2002.
2
PART II
-------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
BACKGROUND
NHTC was incorporated on December 1, 1988 in the state of Florida as
"Florida Institute of Massage Therapy, Inc.", and changed its name to "Natural
Health Trends Corp." on June 24, 1993. The Florida Institute of Massage Therapy,
Inc. was initially formed to primarily operate vocational schools in Florida. In
August 1998, we sold the 3 vocational schools that we operated. In July 1997, we
acquired all of the outstanding capital stock of Global Health Alternatives,
Inc. ("GHA") which operated our natural health care product division. NHTC's
Common Stock, par value $0.001 per share (the "Common Stock") is listed on the
OTCBB. In March 2003, NHTC effected a 1-for-100 reverse stock split with respect
to our outstanding shares of Common Stock. In addition, the trading symbol for
the shares of our Common Stock changed from "NHTC" to "NHLC". All share
references will give effect to the reverse stock split.
NHTC is a holding company that operates two businesses, which
distribute products that promote health, wellness and vitality through a
multi-level marketing ("MLM") channel. The following paragraphs will outline the
progression of NHTC as it is organized today.
NHTC's largest operation is its Lexxus subsidiaries ("Lexxus"). The
U.S. company is called Lexxus International, Inc. a Delaware corporation and a
majority-owned subsidiary of NHTC. Lexxus sells products that can be described
as "quality of life" products, heightening sexual arousal, health and beauty.
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus International,
Inc. ("Lexxus"), a Delaware corporation. The original founders of Lexxus
International received an aggregate of 100,000 shares of Common Stock.
In the second quarter of 2001, NHTC incorporated Lexxus International
(SW Pacific) Pty. Ltd., an Australian corporation and majority-owned subsidiary
of NHTC, which does business in Australia ("Lexxus Australia"). In addition,
NHTC incorporated Lexxus International (New Zealand) Limited, a New Zealand
corporation and majority-owned subsidiary of NHTC, which does business in New
Zealand ("Lexxus New Zealand").
In June 2001, NHTC incorporated Lighthouse Marketing Corporation
("Lighthouse"), a Delaware Corporation and a wholly owned subsidiary of NHTC. On
January 31, 2003, NHTC entered into a Database Purchase Agreement with
NuEworld.com Commerce, Inc. and Lighthouse, pursuant to which Lighthouse
purchased a database of distributors from NuEworld in exchange for the issuance
of 360,000 shares of our Common Stock.
3
In June 2001, NHTC sold 100% of the Common Stock in Kaire
Nutraceuticals, Inc., Delaware Corporation, to a South African firm.
In November 2001, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of the Republic of China and a
majority-owned subsidiary of NHTC ("Lexxus Taiwan").
In January 2002, NHTC incorporated MyLexxus Europe AG, a corporation
organized under the laws of Switzerland and a majority-owned subsidiary of NHTC
("MyLexxus Europe").
In March 2002, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of Hong Kong and a wholly owned subsidiary
of NHTC ("Lexxus Hong Kong").
In April 2002, NHTC incorporated Personal Care International India Pvt.
Ltd., a corporation organized under the laws of India and a wholly owned
subsidiary of NHTC ("MyLexxus India").
In June 2002, NHTC incorporated Lexxus International Marketing Ltd., a
corporation organized under the laws of Singapore and a majority-owned
subsidiary of NHTC ("Lexxus Singapore").
In November 2002, NHTC incorporated Lexxus International (Philippines)
Inc., a corporation organized under the laws of the Philippines and a
majority-owned subsidiary of NHTC ("Lexxus Philippines").
NHTC's other business, eKaire.com, Inc. ("eKaire"), distributes
nutritional supplements aimed at general health and wellness through the
Internet and other channels. eKaire consists of companies operating in the U.S.,
in Canada as Kaire International Canada Ltd. ("Kaire Canada"), in Australia as
Kaire Nutraceuticals Australia Pty. Ltd. ("Kaire Australia"), and in New Zealand
as Kaire Nutraceuticals New Zealand Limited ("Kaire New Zealand").
In February 1999, NHTC Holdings Inc. acquired certain assets (the
"Kaire Assets") of Kaire International, Inc., a Delaware corporation ("KII").
The assets included, but not limited to, the corporate name, all variations and
any other product name, registered and unregistered trademarks, tradenames,
servicemarks, patents, logos and copyrights of KII, and independent associate
lists. In exchange for the Kaire Assets, NHTC made the following issuances:
o to 11 secured creditors of KII, $2,800,000 aggregate stated value of
Series F preferred stock, par value $1,000 per share, of NHTC (the
"Series F Preferred Stock");
o to two secured creditors of KII, $350,000 aggregate stated value of
Series G preferred stock, par value $1,000 per share, of NHTC (the
"Series G Preferred Stock")
4
In March 2001, Global Health Alternatives, Inc. ("GHA"), a Delaware
corporation and wholly owned subsidiary of NHTC, and Ellon, Inc. ("Ellon"), a
Delaware corporation and wholly-owned subsidiary of GHA, filed for Chapter 7
bankruptcy liquidation in the United States Bankruptcy Court of the Northern
District of Texas. Neither GHA nor Ellon had operations during 2001. Both GHA
and Ellon were dissolved in June 2001.
Restatement of Previously Issued Financial Statements
During the quarters ended September 30 and December 31, 2003, the
Company re-evaluated its financial statements for the years ended December 31,
2002 and 2001, the quarterly periods included in such years and the quarterly
periods ended March 31, June 30 and September 30, 2003. As a result of such
review, the Company determined that it inadvertently applied the incorrect
accounting treatment with respect to the following items:
(i) revenue recognition with respect to administrative enrollment
fees;
(ii) revenue cut-off between 2002 and 2003;
(iii) reserves established for product returns and refunds;
(iv) the gain recorded in connection with the sale of a subsidiary in
2001;
(v) income tax provisions; and
(vi) stock option based compensation.
Consequently, the Company is amending and restating its financial
statements for each quarter in 2001, 2002 and 2003 as well as the Form 10-KSB
for the years ended December 31, 2001 and 2002.
In connection with the engagement of a new independent accounting firm
and the review of the Company's financial statements, the Company has revised
its accounting treatment for administrative enrollment fees received from
distributors in accordance with the principles contained in Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", ("SAB 101") and
related guidance. The Company determined that under SAB 101, such fees actually
received and recorded as current sales in prior quarters should have been
deferred and recognized as revenue on a straight-line basis over the
twelve-month term of the membership. The restatement resulted in net sales for
the years ended December 31, 2002 and 2001 being decreased by approximately
$1,336,000 and $1,155,000, respectively. The restatement in net sales resulted
in a corresponding adjustment to cost of sales for direct costs paid to a third
party associated with the administrative enrollment fees received from
distributors. Compared to amounts previously reported, the restatement decreased
cost of sales by approximately $336,000 and $416,000 for the years ended
December 31, 2002 and 2001, respectively.
In connection with the 2003 annual audit, the Company reviewed its
revenue cut-off as of the beginning of 2003. It was noted that approximately
$1,008,000 of sales originally recorded in 2002 were not actually shipped until
early 2003. The restatement resulted in net sales for the year ended December
31, 2002 being decreased by $1,008,000 and net sales for the three months ended
March 31, 2003 being increased by the same amount. The restatement also resulted
in distributor commissions for the year ended December 31, 2002 being decreased
by $459,000 and distributor commissions for the three months ended March 31,
2003 being increased by the same amount.
5
The Company had not recorded reserves for distributor returns and
refunds as of September 30, 2003 and for prior periods. Based upon analysis of
the Company's historical returns and refund trends by country, it was determined
that a reserve for returns and refunds for prior quarters was required and
should have been recorded. The restatement resulted in net sales for the years
ended December 31, 2002 and 2001 being decreased by approximately $350,000 and
$650,000, respectively, with corresponding adjustments to cost of sales for the
estimated cost of products returned.
In 2001, the Company sold all of the outstanding common stock in Kaire
Nutraceuticals, Inc. ("Kaire"), a Delaware corporation and wholly-owned
subsidiary, to an unrelated third party. The gain on the sale of Kaire was
approximately $3.1 million, a portion of which was previously deferred. The
Company subsequently recognized into income approximately $1.9 million from the
transaction over the period from the fourth quarter of 2001 through the second
quarter of 2003. Based upon a review of the transaction, the Company now
believes the gain on sale of Kaire should have been recognized only in 2001 and
2002 and not in 2003. For the year ended December 31, 2002, the Company is now
recognizing $2,400,000 of gain on the sale of Kaire as Discontinued Operations
and is reducing its Other Income by $800,000. For the year ended December 31,
2001, the Company is now recognizing approximately $710,000 of gain as
Discontinued Operations and is reducing its Other Income by approximately
$710,000.
The Company disclosed in its 2002 Form 10-KSB that it had a net
operating loss carry forward at December 31, 2002 of approximately $6,000,000,
subject to certain limitations. Consequently, the Company made no provision for
income taxes for any period in 2002 or 2001. Upon further review, it has been
determined that the available net operating loss was not expected to be
sufficient to offset all of the domestic and foreign taxable income in 2002 or
2001 and that an estimated tax provision in the amount of $300,000 was necessary
for the year ended December 31, 2002 and an estimated tax provision in the
amount of $210,000 was necessary for the year ended December 31, 2001.
The Company has determined that the stock options (the "Options")
granted in January 2001 and October 2002 to senior executive officers of the
Company should be accounted for as variable stock options due to the provision
in the stock option plan that allowed the holder to exercise the stock option in
an immaculate cashless fashion. The cashless exercise feature allows option
holders to use the "in the money" value of the options (or the spread between
the exercise price and the fair market price of the underlying shares as of the
exercise date) as payment for all, or a portion, of the exercise price of an
option. The Options were amended in November 2002 to require the option holder
to obtain Company approval before the Option holder could use the cashless
exercise feature. Subsequent to the modification, fixed option accounting will
be applied to the options. Under variable accounting, changes in the intrinsic
value of the stock option result in recording a charge or credit to stock based
compensation expense. For the year ended December 31, 2002, the restatement
resulted in $1,434,000 being charged to stock option based compensation expense.
For the year ended December 31, 2001, the restatement resulted in $120,000 being
charged to stock option based compensation expense.
The following table presents amounts from operations as previously reported and
as restated (in thousands, except for per share data):
Year Ended Year Ended
------------------- -------------------
December 31, 2002 December 31, 2001
------------------- -------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- -------- ---------- --------
Net sales $ 39,662 $ 36,968 $ 24,794 $ 22,989
Cost of sales 7,391 6,985 5,876 5,298
-------- -------- -------- --------
Gross profit 32,271 29,983 18,918 17,691
Operating expenses 28,770 29,745 17,636 17,756
-------- -------- -------- --------
Income from operations 3,501 238 1,282 (65)
Other income (expense) 601 (199) 741 31
-------- -------- -------- --------
Income (loss) from continuing operations
before taxes 4,102 39 2,023 (34)
Income tax expense -- 300 -- 210
-------- -------- -------- --------
Income (loss) before discontinued operations 4,102 (261) 2,023 (244)
-------- -------- -------- --------
Gain on discontinued operations, net -- 2,400 -- 710
-------- -------- -------- --------
Net income (loss) 4,102 2,139 2,023 466
Preferred stock dividends 70 70 1,089 1,089
-------- -------- -------- --------
Net income (loss) available to common
stockholders $ 4,032 $ 2,069 $ 934 $ (623)
======== ======== ======== ========
Basic income (loss) per share:
Continuing operations $ 1.29 $ (0.11) $ 0.70 $ (0.98)
Discontinued operations -- $ 0.77 -- 0.52
-------- -------- -------- --------
Net income (loss) $ 1.29 $ 0.66 $ 0.70 $ (0.46)
======== ======== ======== ========
Basic weighted common shares used 3,118 3,118 1,342 1,342
Diluted income per share:
Continuing operations $ 1.24 $ (0.11) $ 0.39 $ (0.98)
Discontinued operations -- 0.77 -- 0.52
-------- -------- -------- --------
Net income (loss) $ 1.24 $ 0.66 $ 0.39 $ (0.46)
======== ======== ======== ========
Diluted weighed common shares used 3,247 3,118 2,393 1,342
======== ======== ======== ========
6
The adjustments in net sales, cost of sales, operating expenses, other
income and income taxes resulted in a net decrease in income before discontinued
operations of approximately $4,363,000 from the amounts previously reported for
the year ended December 31, 2002. Net income available to stockholders decreased
by approximately $1,963,000 from the amounts previously reported. Restated basic
and diluted income per share from continuing operations decreased by $1.40 and
$1.35, respectively, from the amounts previously reported for the year ended
December 31, 2002. Net income for basic and diluted income per share decreased
by $0.63 and $0.58, respectively, from the amounts previously reported for the
year ended December 31, 2002.
The adjustments in net sales, cost of sales, operating expenses, other
income and income taxes resulted in a net decrease in income before discontinued
operations of approximately $2,267,000 from the amounts previously reported for
the year ended December 31, 2001. Net income available to stockholders decreased
by approximately $1,557,000 from the amounts previously reported. Restated basic
and diluted income per share from continuing operations decreased by $1.68 and
$1.37, respectively, from the amounts previously reported for the year ended
December 31, 2001. Net income for basic and diluted income per share decreased
by $1.16 and $0.85, respectively, from the amounts previously reported for the
year ended December 31, 2001.
RESULTS OF OPERATIONS
As discussed in Note 1 to the consolidated financial statements, we
have restated our results for the year December 31, 2002 and 2001. All of the
following analyses apply the basis of the restated amounts.
7
Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001
Revenues
Revenues for the year ended December 31, 2002 were approximately
$36,968,000 as compared to revenues for the year ended December 31, 2001 of
approximately $22,989,000, an increase of approximately $13,979,000 or
approximately 61%. The increased sales for the year ended December 31, 2002 were
primarily from the sale of Lexxus products with an expansion into many other
countries and with eKaire showing a slight rise in sales from the year ended
December 31, 2001.
Cost of Sales
Cost of sales for the year ended December 31, 2002 was approximately
$6,985,000 or 19% of revenues. Cost of sales for the year ended December 31,
2001 was $5,298,000 or 23% of revenues. The total cost of sales increased by
approximately $1,688,000 or 32%, most of which was attributable to Lexxus
product mix and sales volume compared to 2001 sales of eKaire products and a
smaller Lexxus product mix in fewer countries. The decrease in the cost of sales
as a percentage of revenues is attributable to lower manufactured cost of Lexxus
products in conjunction with the higher sales volume of Lexxus products than
eKaire products.
Gross Profit
Gross profit increased from approximately $17,691,000 in the year ended
December 31, 2001 to approximately $29,983,000 in the year ended December 31,
2002. The increase was approximately $12,292,000 or 69%. The increase was
attributable to the increase in gross sales by both Lexxus and eKaire and the
reduction of cost of sales as a percentage of sales due to the growth of Lexxus
into more international markets.
Commissions
Associate commissions were approximately $16,834,000 or 46% of revenues
in the year ended December 31, 2002 compared with approximately $12,449,000 or
54% of revenues for the year ended December 31, 2001. The increase of commission
expense is directly related to the increase in gross sales and the terms of the
compensation plans. The decrease in the commission as a percentage of revenue is
due to the normal fluctuations that occur in the compensation plan and also due
to the amount of revenue allocated to the compensation plan.
Selling, General and Administrative Expenses
Selling, general and administrative costs increased from approximately
$5,187,000 or 23% of revenues in the year ended December 31, 2001 to
approximately $11,477,000 or 31% of revenues in the year ended December 31,
2002, an increase of approximately $6,290,000 or 121% which is attributable to
the significant international expansion of Lexxus in 2002 with increased
administrative expenses related to the opening of new offices.
8
Stock Option Based Compensation
Stock option based compensation increased to $1,434,000 for the year ended
December 31, 2002 from $120,000 for the year ended December 31, 2001 due to the
variable accounting triggered by a "cashless exercise" feature of certain stock
options granted during 2001 and 2002.
Income Taxes
Income taxes were approximately $300,000 or 20% of net income before
taxes for the year ended December 31, 2002 compared to $210,000 or 247% of net
income before taxes for the year ended December 31, 2001. The increase in income
taxes for 2002 was due to greater net income before taxes in the foreign
subsidiaries not offset by the net operating losses of the US parent.
Loss before Discontinued Operations
Loss before discontinued operations was approximately $261,000 in the year
ended December 31, 2002 as compared to a loss before discontinued operations of
approximately $244,000 in the year ended December 31, 2001.
Discontinued Operations
During the year ended December 31, 2002, NHTC realized a gain of
approximately $2,400,000 related to the sale and resulting discontinued
operations of Kaire Nutraceuticals, Inc. During the year ended December 31,
2001, NHTC realized a gain of approximately $710,000 pertaining to this
transaction.
Net Income
Net income was approximately $2,139,000 in the year ended December 31,
2002 or approximately 10% of revenues as compared to net income of approximately
$466,000 in the year ended December 31, 2001.
Liquidity and Capital Resources
NHTC has funded the working capital and capital expenditure
requirements primarily from cash provided through sales of products and through
borrowings from institutions and individuals.
In March 2000, NHTC sold 1,000 shares of Series J Preferred Stock, par
value $1,000 per share, (the "Series J Preferred Stock") realizing net proceeds
of $1,000,000. Series J Preferred Stock pays a dividend at the rate of 10% per
annum. Series J Preferred Stock and the accrued dividends thereon are
convertible into shares of Common Stock at a conversion price equal to the lower
of the closing bid price on the conversion date 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 NHTC receives notice
of conversion from a holder thereof. During 2001, $206,194 face amount of Series
J Preferred Stock was converted into 122,604 shares of Common Stock. During
2002, $777,476 face amount of Series J Preferred Stock was converted into
1,025,397 shares of Common Stock. At the end of 2002, $16,330 face amount of
Series J Preferred Stock was still outstanding.
9
In May 2000, NHTC borrowed $20,700 from Tyler Pipeline, Inc. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bore interest at 10% per annum and was payable on demand. The note was
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 of the note. In April 2001, this note was fully satisfied through
conversion into an aggregate of 21,637 shares of Common Stock.
In October 2000, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. 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 conversion date or 75% of the market value
of the Common Stock on the conversion date. In April 2002, these 50 shares of
Series H Preferred Stock and $5,666 of accrued dividends were converted into
37,739 shares of Common Stock.
In October 2000, NHTC borrowed $10,000 from Meridian Investments, Inc.
This indebtedness was evidenced by NHTC's issuance of a convertible promissory
note. The note bore interest at 10% per annum and was payable on demand. The
note was 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. The note was repaid in November 2001.
In November 2000, NHTC borrowed $25,000 from Filin Corp. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bore interest at 10% per annum and was payable on demand. The note was
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. The note was converted into an aggregate of 14,528 shares of
Common Stock in August 2001.
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus. The original
founders of Lexxus International received an aggregate of 100,000 shares of
Common Stock.
In April 2001, NHTC borrowed $100,000 from Augusta Street LLC. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bore interest at 10% per annum and was payable on demand. The note was
convertible into shares of Common Stock at a discount equal to 75% of the
average closing bid price of the Common Stock on the five days preceding notice
of conversion. The note was converted into an aggregate of 78,343 shares of
Common Stock in September 2002.
In April 2001, NHTC issued an aggregate of 2,000 shares of Common Stock
to an individual in exchange for a loan of $50,000.
In April 2001, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. The Series H Preferred Stock pays
dividends of 10% per annum and was convertible into shares of Common Stock at
the lower of the closing bid price on the conversion date or 75% of the market
value of the Common Stock on the conversion date. In November 2002, these 50
10
shares of Series H Preferred Stock and $6,389 of accrued dividends were
converted into 40,422 shares of Common Stock.
In May 2001, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. 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 conversion date or 75% of the market value
of the Common Stock on the conversion date. In September 2002, 25 shares of
Series H Preferred Stock were converted into 23,087 shares of Common Stock. In
November 2002, 25 shares of Series H Preferred Stock and $5,440 of accrued
dividends were converted into 36,248 shares of Common Stock.
In December 2001, NHTC borrowed $138,000 from Augusta Street LLC. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bore interest at 4.75% per annum and was payable on demand. The note
was convertible into shares of Common Stock at a discount equal to 75% of the
average closing bid price of the Common Stock on the five days preceding notice
of conversion. The note was converted into an aggregate of 106,562 shares of
Common Stock in September 2002.
During 2002, $1,200,960 face amount of Series F Preferred Stock was
converted into 610,995 shares of Common Stock.
In November 2002, NHTC paid $100,000 and issued a promissory note of
$120,000 to redeem 180 shares of Series F Preferred Stock. The note is due on
December 31, 2003.
At December 31, 2002, the ratio of current assets to current
liabilities was .89 to 1.0 and NHTC had a working capital deficit of
approximately $1,187,000.
Cash provided by operations for the period ended December 31, 2002 was
approximately $4,486,000. Cash used by investing activities during the period
was approximately $933,000, which primarily relates to the capital expenditures
relating to the expansion of several international offices and to the increase
of restricted cash related to the credit card reserve. Cash used in financing
activities during the period was approximately $5,000, primarily utilized for
the repayment of notes payable and long-term debt partially offset by capital
contributions of minority shareholders of certain subsidiaries. Total cash
increased by approximately $3,540,000 during the period.
ITEM 7. FINANCIAL STATEMENTS.
---------------------
NHTC's consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
11
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of Natural Health Trends Corp.
are included in response to Item 7:
PAGE
Report of Independent Auditors' .......................................... F-2
Consolidated Balance Sheet ............................................... F-3
Consolidated Statements of Operations .................................... F-4
Consolidated Statements of Stockholders' Equity .......................... F-5
Consolidated Statements of Comprehensive Income .......................... F-6
Consolidated Statements of Cash Flows .................................... F-7
Notes to Consolidated Financial Statements ............................... F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
New York, New York
We have audited the accompanying consolidated balance sheet of Natural Health
Trends Corp. and Subsidiaries ("NHTC") as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 2002. These consolidated financial statements are
the responsibility of NHTC's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 consolidated 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 consolidated financial statements referred to above present,
in all material respects, the consolidated financial position of Natural Health
Trends Corp. and Subsidiaries as of December 31, 2002, and the consolidated
results of its operations and its cash flows for the year ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
The consolidated financial statements for the year ended December 31, 2002 have
been restated (see Note 2).
/s/ Sherb & Co., P.C.
------------------------------------
Sherb & Co., P.C.
Certified Public Accountants
New York, New York
March 7, 2003 (except for note 2
which is dated as of March 24, 2004)
F-2
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
2002
------------
ASSETS As Restated
------------
Current Assets:
Cash $ 3,863,946
Restricted cash 327,885
Account receivables 519,752
Inventories 3,153,624
Prepaid expenses and other current assets 1,618,650
------------
Total Current Assets 9,483,857
Property and equipment, net 698,918
Goodwill 207,765
Website 55,417
Deposits and other assets 331,606
------------
Total Assets Total $ 10,777,563
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,249,417
Accrued expenses 1,475,639
Accrued commission payable 677,409
Notes payable 401,523
Current portion of long term debt 204,337
Income tax payable 510,000
Deferred revenue 3,499,392
Other current liabilities 653,043
------------
Total Current Liabilities 10,670,760
Long term debt 77,750
------------
Total Liabilities 10,748,510
Minority interest 426,747
Stockholders' Equity:
Preferred stock ($1,000 par value;
authorized 1,500,000 shares;
issued and outstanding 16 shares) 16,330
Common stock ($0.001 par value;
authorized 500,000,000 shares;
issued and outstanding 4,239,439 shares) 4,240
Additional paid in capital 33,504,514
Accumulated deficit (33,766,962)
Deferred compensation (146,250)
Cumulative currency translation adjustment (9,566)
------------
Total Stockholders' Equity (397,694)
------------
Total Liabilities and Stockholders' Equity $ 10,777,563
============
See Notes to Consolidated Financial Statements
F-3
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------
2002 2001
------------ ------------
As Restated As Restated
------------ ------------
Revenues $ 36,968,048 $ 22,988,943
Cost of sales 6,985,139 5,297,637
------------ ------------
Gross Profit 29,982,909 17,691,306
Associate commissions 16,834,000 12,449,357
Selling, general and administrative expenses 11,477,024 5,186,633
Stock option based compensation 1,434,000 120,000
------------ ------------
Income from operations 237,885 (64,684)
Minority interest in subsidiary (231,991) 105,686
Gain (loss) on foreign exchange 20,557 (5,861)
Other income, net 73,132 87,246
Interest expense, net (60,850) (156,549)
------------ ------------
Income from continuing operations before taxes 38,733 (34,162)
Income taxes 300,000 210,000
------------ ------------
Income before discontinued operations (261,267) (244,162)
Gain on discontinued operations, net of taxes 2,400,000 710,023
------------ ------------
Net income 2,138,733 465,861
Preferred stock dividends 70,111 1,089,231
------------ ------------
Net income available to common shareholders $ 2,068,622 $ (623,370)
============ ============
Basic income per common share:
Continuing operations $ (0.11) $ (0.98)
Discontinued operations 0.77 0.52
------------ ------------
Net income $ 0.66 $ (0.46)
============ ============
Basic weighted common shares used 3,118,196 1,342,068
Diluted income per common share:
Continuing operations $ (0.11) $ (0.98)
Discontinued operations 0.77 0.52
------------ ------------
Net income $ 0.66 $ (0.46)
============ ============
Diluted weighted common shares used 3,118,196 1,342,068
See Notes to Consolidated Financial Statements.
F-4
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Preferred Stock
------------------------- --------------------------
Shares Amount Shares Amount APIC
--------- ------------ ---------- ------------ ------------
BALANCE -December 31, 2000 157,621 $ 157 5,752 $ 5,752,410 $ 23,759,408
--------- ------------ ---------- ------------ ------------
Conversion of Convertible
Series E Preferred Stock 355,230 355 (947) (946,768) 946,413
Conversion of Convertible
Series F Preferred Stock 515,592 516 (1,416) (1,416,408) 1,415,892
Conversion of Convertible
Series G Preferred Stock 157,322 157 (344) (344,200) 344,043
Conversion of Convertible
Series H Preferred Stock 276,994 277 (615) (614,542) 614,265
Issuance of Convertible
Series H Preferred Stock -- -- 100 100,000 --
Conversion of Convertible
Series J Preferred Stock 122,604 123 (206) (206,194) 206,071
Conversion of Notes Payable
to Common Stock 228,870 229 422,784
Shares issued for services 212,246 212 521,338
Penalties 82,900 83 8,207
Preferred Stock dividends 1,089,231
Stock option based compensation 120,000
Foreign currency translation
Acquisition 100,000 100 109,900
Deferred Compensation
Net Income
--------- ------------ ---------- ------------ ------------
BALANCE -December 31, 2001 (restated) 2,209,379 $ 2,209 2,324 $ 2,324,298 $ 29,557,552
--------- ------------ ---------- ------------ ------------
Conversion of Convertible
Series F Preferred Stock 610,995 611 (1,201) (1,200,960) 1,200,349
Conversion of Convertible
Series H Preferred Stock 137,497 137 (150) (150,000) 149,863
Conversion of Convertible
Series J Preferred Stock 1,025,397 1,026 (777) (777,476) 776,450
Conversion of Notes Payable
to Common Stock 236,663 237 279,885
Conversion of Series F Preferred
Stock to note payable (180) (179,532)
Shares issued for services 19,510 20 36,304
Preferred Stock dividends 70,111
Stock option based compensation 1,434,000
Foreign currency translation
Deferred Compensation
Net Income
--------- ------------ ---------- ------------ ------------
BALANCE -December 31, 2002 (restated) 4,239,441 $ 4,240 16 $ 16,330 $ 33,504,514
========= ============ ========== ============ ============
Accum Foreign
Deficit Currency Comp Total
------------ ------------ ------------ ------------
BALANCE -December 31, 2000 ($35,212,214) ($ 37,203) -- ($ 5,737,442)
------------ ------------ ------------ ------------
Conversion of Convertible
Series E Preferred Stock --
Conversion of Convertible
Series F Preferred Stock --
Conversion of Convertible
Series G Preferred Stock --
Conversion of Convertible
Series H Preferred Stock --
Issuance of Convertible
Series H Preferred Stock 100,000
Conversion of Convertible
Series J Preferred Stock --
Conversion of Notes Payable
to Common Stock 423,013
Shares issued for services 521,550
Penalties 8,290
Preferred Stock dividends (1,089,231) --
Stock option based compensation 120,000
Foreign currency translation 34,962 34,962
Acquisition 110,000
Deferred Compensation (416,250) (416,250)
Net Income 465,861 465,861
------------ ------------ ------------ ------------
BALANCE -December 31, 2001 (restated) $(35,835,584) $ (2,241) $ (416,250) $ (4,370,016)
------------ ------------ ------------ ------------
Conversion of Convertible
Series F Preferred Stock --
Conversion of Convertible
Series H Preferred Stock --
Conversion of Convertible
Series J Preferred Stock --
Conversion of Notes Payable
to Common Stock 280,122
Conversion of Series F Preferred
Stock to note payable (179,532)
Shares issued for services 36,324
Preferred Stock dividends (70,111) --
Stock option based compensation 1,434,000
Foreign currency translation (7,325) (7,325)
Deferred Compensation 270,000 270,000
Net Income 2,138,733 2,138,733
------------ ------------ ------------ ------------
BALANCE -December 31, 2002 (restated) $(33,766,962) $ (9,566) $ (146,250) $ (397,694)
============ ============ ============ ============
F-5
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
----------------------------
2002 2001
----------- -----------
As Restated As Restated
----------- -----------
Net Income $ 2,138,733 $ 465,861
Other comprehensive income, net of tax:
Foreign currency translation adjustments (7,325) 34,962
----------- -----------
Comprehensive Income $ 2,131,408 $ 500,823
=========== ===========
See Notes to Consolidated Financial Statements.
F-6
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
2002 2001
----------- -----------
As Restated As Restated
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,138,733 $ 465,861
Less gain from discontinued operations (2,400,000) (710,023)
----------- -----------
Income from continuing operations (261,267) (244,162)
----------- -----------
Adjustments to reconcile income from continuing
operations to net cash provided:
Depreciation and amortization 199,698 121,659
Impairment of fixed assets -- 35,448
Minority interest in subsidiary 231,991 (105,686)
Common Stock issued for services and penalties 36,324 529,841
Stock option based compensation 1,434,000 120,000
Change in deferred compensation 270,000 (416,250)
Changes in assets and liabilities
Accounts receivable (399,935) (68,049)
Inventories (2,066,363) (890,192)
Prepaid expenses (496,922) (645,432)
Deposits and other assets (465,625) (237,646)
Accounts payable 1,613,742 1,698,929
Accrued expenses 642,182 (713,728)
Accrued commissions 557,557 (31,832)
Deferred revenue 2,344,299 1,035,680
Income tax payable 300,000 210,000
Other current liabilities 545,820 (177,432)
----------- -----------
Total adjustments 4,746,768 465,310
----------- -----------
Net Cash Provided by Operating Activities 4,485,501 221,148
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (706,364) (141,707)
Purchase of websites -- (133,000)
Increase in restricted cash (227,076) (27,975)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (933,440) (302,682)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock -- 100,000
Minority interest contribution 194,756 --
Payments of capital lease obligation -- (46,590)
Proceeds from notes payable and long-term debt 25,000 288,000
Payments of notes payable and long-term debt (224,861) (78,942)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,105) 262,468
----------- -----------
EFFECT OF EXCHANGE RATE (7,325) 34,962
NET INCREASE IN CASH 3,539,631 215,896
CASH, BEGINNING OF PERIOD 324,315 108,419
----------- -----------
CASH, END OF PERIOD $ 3,863,946 $ 324,315
=========== ===========
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
(1) Conversion of Preferred Stock to Common Stock 2,128,436 3,528,112
(2) Conversion of debentures, notes payable and
related accrued interest to Common Stock 280,122 521,550
(3) Preferred Stock dividends 70,111 1,089,231
(4) Common Stock issued for acquisition -- 110,000
(5) Preferred Stock redeemed for notes payable 179,532 --
See Notes to Consolidated Financial Statements.
F-7
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 and 2001
1. ORGANIZATION
NHTC was incorporated on December 1, 1988 in the state of Florida as
"Florida Institute of Massage Therapy, Inc.", and changed its name to "Natural
Health Trends Corp." on June 24, 1993. The Florida Institute of Massage Therapy,
Inc. was initially formed to primarily operate vocational schools in Florida. In
August 1998, we sold the 3 vocational schools that we operated. In July 1997, we
acquired all of the outstanding capital stock of Global Health Alternatives,
Inc. ("GHA"), which operated our natural health care product division. NHTC's
Common Stock, par value $0.001 per share (the "Common Stock") is listed on the
Over-the-Counter Bulletin Board (the "OTCBB"). In March 2003, NHTC effected a
1-for-100 reverse stock split with respect to our outstanding shares of Common
Stock. In addition, the trading symbol for the shares of our Common Stock
changed from "NHTC" to "NHLC". All share references will give effect to the
reverse stock split.
NHTC is a holding company that operates two businesses, which distribute
products that promote health, wellness and vitality through a multi-level
marketing ("MLM") channel. The following paragraphs will outline the progression
of NHTC as it is organized today.
NHTC's largest operation is its Lexxus subsidiaries ("Lexxus"). The U.S.
company is called Lexxus International, Inc. a Delaware corporation and a
majority-owned subsidiary of NHTC. Lexxus sells products that can be described
as "quality of life" products, heightening sexual arousal, health and beauty.
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus International,
Inc. ("Lexxus"), a Delaware corporation. The original founders of Lexxus
International received an aggregate of 100,000 shares of Common Stock.
In the second quarter of 2001, NHTC incorporated Lexxus International (SW
Pacific) Pty. Ltd., an Australian corporation and majority-owned subsidiary of
NHTC, which does business in Australia ("Lexxus Australia"). In addition, NHTC
incorporated Lexxus International (New Zealand) Limited, a New Zealand
corporation and majority-owned subsidiary of NHTC, which does business in New
Zealand ("Lexxus New Zealand").
In June 2001, NHTC incorporated Lighthouse Marketing Corporation
("Lighthouse"), a Delaware Corporation and a wholly owned subsidiary of NHTC. On
January 31, 2003, NHTC entered into a Database Purchase Agreement with
NuEworld.com Commerce, Inc. and Lighthouse, pursuant to which Lighthouse
purchased a database of distributors from NuEworld in exchange for the issuance
of 360,000 shares of our Common Stock.
F-8
In June 2001, NHTC sold 100% of the Common Stock in Kaire Nutraceuticals,
Inc., Delaware Corporation, to a South African firm.
In November 2001, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of the Republic of China and a
majority-owned subsidiary of NHTC ("Lexxus Taiwan").
In January 2002, NHTC incorporated MyLexxus Europe AG, a corporation
organized under the laws of Switzerland and a majority-owned subsidiary of NHTC
("MyLexxus Europe").
In March 2002, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of Hong Kong and a wholly owned subsidiary
of NHTC ("Lexxus Hong Kong").
In April 2002, NHTC incorporated Personal Care International India Pvt.
Ltd., a corporation organized under the laws of India and a wholly owned
subsidiary of NHTC ("MyLexxus India").
In June 2002, NHTC incorporated Lexxus International Marketing Ltd., a
corporation organized under the laws of Singapore and a majority-owned
subsidiary of NHTC ("Lexxus Singapore").
In November 2002, NHTC incorporated Lexxus International (Philippines)
Inc., a corporation organized under the laws of the Philippines and a
majority-owned subsidiary of NHTC ("Lexxus Philippines").
NHTC's other business, eKaire.com, Inc. ("eKaire"), distributes nutritional
supplements aimed at general health and wellness through the Internet and other
channels. eKaire consists of companies operating in the U.S., in Canada as Kaire
International Canada Ltd. ("Kaire Canada"), in Australia as Kaire Nutraceuticals
Australia Pty. Ltd. ("Kaire Australia"), and in New Zealand as Kaire
Nutraceuticals New Zealand Limited ("Kaire New Zealand").
In February 1999, NHTC Holdings Inc. acquired certain assets (the "Kaire
Assets") of Kaire International, Inc., a Delaware corporation ("KII"). The
assets included, but not limited to, the corporate name, all variations and any
other product name, registered and unregistered trademarks, tradenames,
servicemarks, patents, logos and copyrights of KII, and independent associate
lists. In exchange for the Kaire Assets, NHTC made the following issuances:
o to 11 secured creditors of KII, $2,800,000 aggregate stated value of
Series F preferred stock, par value $1,000 per share, of NHTC (the
"Series F Preferred Stock");
o to two secured creditors of KII, $350,000 aggregate stated value of
Series G preferred stock, par value $1,000 per share, of NHTC (the
"Series G Preferred Stock")
In March 2001, Global Health Alternatives, Inc. ("GHA"), a Delaware
corporation and wholly owned subsidiary of NHTC, and Ellon, Inc. ("Ellon"), a
F-9
Delaware corporation and wholly-owned subsidiary of GHA, filed for Chapter 7
bankruptcy liquidation in the United States Bankruptcy Court of the Northern
District of Texas. Neither GHA nor Ellon had operations during 2001. Both GHA
and Ellon were dissolved in June 2001.
Restatement of Previously Issued Financial Statements
During the quarters ended September 30 and December 31, 2003, the Company
re-evaluated its financial statements for the years ended December 31, 2002 and
2001, the quarterly periods included in such years and the quarterly periods
ended March 31, June 30 and September 30, 2003. As a result of such review, the
Company determined that it inadvertently applied the incorrect accounting
treatment with respect to the following items:
(i) revenue recognition with respect to administrative enrollment fees;
(ii) revenue cut-off between 2002 and 2003;
(iii) reserves established for product returns and refunds;
(iv) the gain recorded in connection with the sale of a subsidiary in
2001;
(v) income tax provisions; and
(vi) stock option based compensation.
Consequently, the Company is amending and restating its financial
statements for each quarter in 2001, 2002 and 2003 as well as the Form 10-KSB
for the years ended December 31, 2001 and 2002.
In connection with the engagement of a new independent accounting firm and
the review of the Company's financial statements, the Company has revised its
accounting treatment for administrative enrollment fees received from
distributors in accordance with the principles contained in Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", ("SAB 101") and
related guidance. The Company determined that under SAB 101, such fees actually
received and recorded as current sales in prior quarters should have been
deferred and recognized as revenue on a straight-line basis over the
twelve-month term of the membership. The restatement resulted in net sales for
the years ended December 31, 2002 and 2001 being decreased by approximately
$1,336,000 and $1,155,000, respectively. The restatement in net sales resulted
in a corresponding adjustment to cost of sales for direct costs paid to a third
party associated with the administrative enrollment fees received from
distributors. Compared to amounts previously reported, the restatement decreased
cost of sales by approximately $336,000 and $416,000 for the years ended
December 31, 2002 and 2001, respectively.
In connection with the 2003 annual audit, the Company reviewed its revenue
cut-off as of the beginning of 2003. It was noted that approximately $1,008,000
of sales originally recorded in 2002 were not actually shipped until early 2003.
The restatement resulted in net sales for the year ended December 31, 2002 being
decreased by $1,008,000 and net sales for the three months ended March 31, 2003
being increased by the same amount. The restatement also resulted in distributor
commissions for the year ended December 31, 2002 being decreased by $459,000 and
distributor commissions for the three months ended March 31, 2003 being
increased by the same amount.
F-10
The Company had not recorded reserves for distributor returns and refunds
as of September 30, 2003 and for prior periods. Based upon analysis of the
Company's historical returns and refund trends by country, it was determined
that the reserves for returns and refunds for prior quarters were required and
should be recorded. The restatement resulted in net sales for the years ended
December 31, 2002 and 2001 being decreased by approximately $350,000 and
$650,000, respectively, with corresponding adjustments to cost of sales for the
estimated cost of products returned.
In 2001, the Company sold all of the outstanding common stock in Kaire
Nutraceuticals, Inc. ("Kaire"), a Delaware corporation and wholly-owned
subsidiary, to an unrelated third party. The gain on the sale of Kaire was
approximately $3.1 million, a portion of which was previously deferred. The
Company subsequently recognized into income approximately $1.9 million from the
transaction over the period from the fourth quarter of 2001 through the second
quarter of 2003. Based upon a review of the transaction, the Company now
believes the gain on sale of Kaire should have been recognized only in 2001 and
2002 and not in 2003. For the year ended December 31, 2002, the Company is now
recognizing $2,400,000 of gain on the sale of Kaire as Discontinued Operations
and is reducing its Other Income by $800,000. For the year ended December 31,
2001, the Company is now recognizing approximately $710,000 of gain as
Discontinued Operations and is reducing its Other Income by approximately
$710,000.
The Company disclosed in its 2002 Form 10-KSB that it had a net operating
loss carry forward at December 31, 2002 of approximately $6,000,000, subject to
certain limitations. Consequently, the Company made no provision for income
taxes for any period in 2002 or 2001. Upon further review, it has been
determined that the available net operating loss was not expected to be
sufficient to offset all of the domestic and foreign taxable income in 2002 or
2001 and that an estimated tax provision in the amount of $300,000 was necessary
for the year ended December 31, 2002 and an estimated tax provision in the
amount of $210,000 was necessary for the year ended December 31, 2001.
The Company has determined that the expense incurred in connection with the
issuance of certain stock options (the "Options") granted in January 2001 and
October 2002 to senior executive officers of the Company should be reported
using variable accounting rather than the fixed accounting method because the
Options contained a "cashless" exercise feature. A cashless exercise feature
allows option holders to use the "in the money" value of the options (or the
spread between the exercise price and the fair market price of the underlying
shares as of the exercise date) as payment for all, or a portion, of the
exercise price of an option. The Options were amended in November 2002 to
require the option holder to obtain Company approval before the Option holder
could use the cashless exercise feature. Under variable accounting, changes in
the market value of a company's shares will generally result in recording a
charge or credit to stock based compensation expense. For the year ended
December 31, 2002 and 2001, the restatement resulted in $1,434,000 and $120,000,
respectively, being charged to stock option based compensation expense.
The following table presents amounts from operations as previously reported
and as restated (in thousands, except for per share data):
Year Ended Year Ended
------------------- -------------------
December 31, 2002 December 31, 2001
------------------- -------------------
As As
Previously As Previously As
Reported Restated Reported Restated
---------- -------- ---------- --------
Net sales $ 39,662 $ 36,968 $ 24,794 $ 22,989
Cost of sales 7,391 6,985 5,876 5,298
-------- -------- -------- --------
Gross profit 32,271 29,983 18,918 17,691
Operating expenses 28,770 29,745 17,636 17,756
-------- -------- -------- --------
Income from operations 3,501 238 1,282 (65)
Other income (expense) 601 (199) 741 31
-------- -------- -------- --------
Income (loss) from continuing operations
before taxes 4,102 39 2,023 (34)
Income tax expense -- 300 -- 210
-------- -------- -------- --------
Income (loss) before discontinued operations 4,102 (261) 2,023 (244)
-------- -------- -------- --------
Gain on discontinued operations, net -- 2,400 -- 710
-------- -------- -------- --------
Net income (loss) 4,102 2,139 2,023 466
Preferred stock dividends 70 70 1,089 1,089
-------- -------- -------- --------
Net income (loss) available to common
stockholders $ 4,032 $ 2,069 $ 934 $ (623)
======== ======== ======== ========
Basic income (loss) per share:
Continuing operations $ 1.29 $ (0.11) $ 0.70 $ (0.98)
Discontinued operations -- $ 0.77 -- 0.52
-------- -------- -------- --------
Net income (loss) $ 1.29 $ 0.66 $ 0.70 $ (0.46)
======== ======== ======== ========
Basic weighted common shares used 3,118 3,118 1,342 1,342
Diluted income per share:
Continuing operations $ 1.24 $ (0.11) $ 0.39 $ (0.98)
Discontinued operations -- 0.77 -- 0.52
-------- -------- -------- --------
Net income (loss) $ 1.24 $ 0.66 $ 0.39 $ (0.46)
======== ======== ======== ========
Diluted weighed common shares used 3,247 3,118 2,393 1,342
======== ======== ======== ========
F-11
The adjustments in net sales, cost of sales, operating expenses, other
income and income taxes resulted in a net decrease in income before discontinued
operations of approximately $4,363,000 from the amounts previously reported for
the year ended December 31, 2002. Net income available to stockholders decreased
by approximately $1,963,000 from the amounts previously reported. Restated basic
and diluted income per share from continuing operations decreased by $1.40 and
$1.35, respectively, from the amounts previously reported for the year ended
December 31, 2002. Net income for basic and diluted income per share decreased
by $0.63 and $0.58, respectively, from the amounts previously reported for the
year ended December 31, 2002.
The adjustments in net sales, cost of sales, operating expenses, other
income and income taxes resulted in a net decrease in income before discontinued
operations of approximately $2,267,000 from the amounts previously reported for
the year ended December 31, 2001. Net income available to stockholders decreased
by approximately $1,557,000 from the amounts previously reported. Restated basic
and diluted income per share from continuing operations decreased by $1.68 and
$1.37, respectively, from the amounts previously reported for the year ended
December 31, 2001. Net income for basic and diluted income per share decreased
by $1.16 and $0.85, respectively, from the amounts previously reported for the
year ended December 31, 2001.
F-12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Natural Health Trends Corp. and all of its wholly and majority-owned
subsidiaries, after the elimination of intercompany balances and transactions.
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 and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results may differ from these estimates.
Foreign Currency Translation
The assets and liabilities of NHTC and its subsidiaries are translated at
the exchange rate prevailing at the balance sheet date. The income and expenses
of NHTC and its subsidiaries are translated at the exchange rate prevailing
during the year or period then ended. 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 transaction
occurred.
Reclassifications
NHTC has reclassified certain expenses in its consolidated statements of
operations for the years ended December 31, 2002 and 2001. These changes had no
significant impact on previously reported results of operations or stockholders'
equity.
Cash and Cash Equivalents
Cash and 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, NHTC considers highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily cash equivalents, short-term
investments and receivables.
NHTC maintains its cash in several bank accounts. Accounts in the United
States are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$100,000. Some of NHTC's cash balances exceed the insured limits.
F-13
Virtually all of Lexxus and eKaire product sales are generated through the
Internet and utilize credit cards for payment. Credit is extended until credit
card purchases have cleared the bank, which is on average 5 to 7 days. Credit
losses, if any, have been provided for in the financial statements and are based
on management's estimates. NHTC's accounts receivable are subject to potential
concentrations of credit risk. NHTC does not believe that it is subject to any
unusual or significant risk in the normal course of business.
Accounts Receivable
Accounts receivable represent the lag time between credit card purchases
and the settlement of the credit card funds into the bank. Therefore, the
allowance for doubtful accounts is zero.
Inventories
Inventories consisting primarily of nutritional supplements and "quality of
life" products and are stated at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
Restricted Cash
NHTC is required to maintain two restricted cash accounts: a reserve with
the credit card processing company and a reserve with a Canadian bank as
security for a bank drafting process utilized by eKaire in the ordinary course
of business. The primary purpose of the reserve with the credit card company is
to provide for potential uncollectible amounts and chargebacks by Lexxus and
eKaire credit card customers. The credit card processing company may
periodically increase the restricted cash requirement. The amount on deposit is
calculated at an average 2% of net sales over a rolling six month time period.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is computed for financial reporting purposes using the straight-line
method over the estimated useful lives of the various assets.
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. NHTC believes that no impairment exists
at December 31, 2002.
F-14
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable, accrued expenses and notes payable approximate fair value
based on the short-term maturity of these instruments.
Revenue Recognition
The Company's revenues are primarily derived from sales of products, sales
of starter and renewal administrative enrollment packs and shipping fees.
Substantially all product sales are sales to associates at published wholesale
prices. The Company defers a portion of its revenue from the sale of its starter
and renewal packs related to its administrative enrollment fee. The Company
amortizes its deferred revenue and its associated direct costs over twelve
months, the term of the membership. Total deferred revenue for the Company was
approximately $3,499,000 as of December 31, 2002.
The Company also estimates and records sales return reserve for possible
sales refunds based on its historical experience
Income Taxes
Pursuant to Statement of Financial Accounting Standards No. 109 ("SFAS
109") "Accounting for Income Taxes", NHTC accounts for income taxes under the
asset and liability method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. This method also
requires the recognition of future tax benefits such as net operating loss
carryforwards, to the extent that realization of such benefits is more likely
than not.
Earnings Per Share
Statement of Financial Accounting Standards No. 128, ("SFAS 128") "Earnings
Per Share", 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.
Accounting for Stock-Based Compensation
NHTC accounts for employee stock options using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and the associated interpretations. Generally,
no expense is recognized to NHTC stock options because the options' exercise
price is set at the stocks' fair market value on the date the option is granted.
F-15
In accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," NHTC discloses the
compensation cost based on the estimated fair value of the options at the grant
dates.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations". SFAS 141 requires that any business combination initiated after
June 30, 2001 be accounted for using the purchase method of accounting instead
of the pooling of interests method of accounting. Additionally, SFAS 141
specifies that intangible assets acquired in a purchase method business
combination must need to be recognized and reported apart from goodwill. The
implementation of SFAS 141 did not have an impact on NHTC's consolidated
financial statements as it had no business combinations during the year.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Accounting for Goodwill and Intangible Assets". SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment annually. Any impairment
loss will be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle. Statement 142 also
requires that intangible assets with definite useful lives be amortized over
their estimated useful lives to the estimated residual values, and reviewed for
impairment in accordance with the FASB's Statement of Financial Accounting
Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" or SFAS 144 upon adoption.
SFAS 142 is effective for the fiscal years beginning after December 15, 2001.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets". SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets.
This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by
the amount by which the carrying amount of the asset exceeds the fair value of
the asset. SFAS 144 requires companies to separately report discontinued
operations and extends that reporting to a component of an entity that either
has been disposed of (by sale, abandonment, or in a distribution to owners) or
is classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying value less cost to sell. The Company adopted SFAS 144 on
January 1, 2002 and it did not have any impact on the Company's consolidated
financial statements.
F-16
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure." This statement amends SFAS 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Certain
disclosure modifications are required for fiscal years ending after December 15,
2002 and are included in the notes to these consolidated financial statements.
The adoption of SFAS 148 as of December 31, 2002 had no effect on the Company's
consolidated financial position or results of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated Useful
Type of Property or Equipment Lives Amount
------------------------------------ ------------------- -----------
Equipment, furniture and fixtures 5 to 7 $ 403,265
Computers and peripherals 3 207,655
Software 3 to 5 99,227
Leasehold improvements 3 to 5 223,222
----------
Property and equipment $ 933,369
Less: Accumulated depreciation (234,451)
----------
Property and equipment, net $ 698,918
==========
4. NOTES PAYABLE
Notes Payable consisted of the following at December 31, 2002:
Note Payable Amount
---------------------------------------------------------------------------------
(i) Naline Thompson $50,000 note payable, 12% interest $ 50,000
Merrill Corp. $145,496 note payable, 8% interest, due upon demand $145,496
Aloe Commodities International, Inc.,
non-interest bearing, due upon demand $ 46,000
(ii) Lightfoot $ 15,027
Life Dynamics, Inc. note payable, interest-free $ 20,000
(iii) Dr. Michael Jessen $100,000
General Note Payable non-interest bearing, due upon demand $ 25,000
--------
Notes Payable $401,523
========
(i) The investor received 2,000 shares of NHTC Common Stock as well as a warrant
to purchase 2,000 shares of the Common Stock of NHTC at an exercise price of
$5.00 per share for three years. The 2,000 shares were issued in December 2002.
(ii) Note due to Michael and Linda Lightfoot, bears interest at prime plus
1.75%, monthly payments are being made.
(iii) The Company redeemed 180 shares of Series F Preferred Stock in exchange
for a $100,000 cash issuance and $120,000 promissory note. The Company is making
monthly payments of $10,000 until repaid in full.
F-17
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2002:
Debt Instrument Amount
----------------------------------------------------------------------
(i) Samantha Haimes, $325,000, 10% interest $161,942
(ii) State of Texas, $114,278, 7% interest $ 78,642
(iii) Robert L. Richards, interest-free $ 41,503
--------
Total Debt $282,087
Less: Current Portion of Long-term Debt $204,337
--------
Long-term Debt $ 77,750
========
(i) NHTC is making monthly payments of $15,000 until repaid in full with
interest.
(ii) NHTC is making monthly payments of $2,200 until repaid in full with
interest.
(iii) NHTC is making monthly payments of $1,333 until repaid in full with
interest.
The schedule of annual principal payments on debt for each of the five
years in the period ended December 31, 2007 is as follows:
Date Amount
-------------------------- ------------
2003 $204,337
2004 $ 42,396
2005 $ 35,354
2006 $ 0
2007 and thereafter $ 0
F-18
6. STOCKHOLDERS' EQUITY
Common Stock
NHTC is authorized to issue 500,000,000 shares of Common Stock, $.001 par
value.
Preferred Stock
NHTC is authorized to issue a maximum of 1,500,000 shares of $1,000 par
value 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 NHTC's board of directors may, from time to time, determine.
Series E Preferred Stock.
In August 1998, NHTC 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
NHTC'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.
Pursuant to the terms of the Series E Preferred Stock, if NHTC does not
have an effective registration statement 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.
During the year ended December 31, 2001, NHTC had converted 947 shares of
the Series E Preferred Stock into 355,230 shares of Common Stock.
As of December 31, 2002 there were no shares of Series E Preferred Stock
outstanding.
Series F Preferred Stock.
In February 1999, NHTC 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 KII. 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 NHTC
receives notice of conversion from a holder. NHTC 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.
During the year ended December 31, 2001, NHTC had converted 1,416 shares of
the Series F Preferred Stock into 515,592 shares of Common Stock.
F-19
During the year ended December 31, 2002, NHTC had converted 1,201 shares of
the Series F Preferred Stock into 610,995 shares of Common Stock.
As of December 31, 2002, there were no shares of Series F Preferred Stock
outstanding.
Series G Preferred Stock.
In February 1999, NHTC 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 NHTC'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 proceeding the date on which
the Company receives notice of conversion. NHTC 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.
During the year ended December 31, 2000, NHTC had converted 6 shares of the
Series G Preferred Stock into 2,799 shares of Common Stock.
During the year ended December 31, 2001, NHTC had converted 344 shares of
the Series G Preferred Stock into 157,322 shares of Common Stock.
As of December 31, 2002, there were no shares of Series G Preferred Stock
outstanding.
Series H Preferred Stock.
In October 2000, NHTC sold 50 shares of Series H Preferred Stock with a
stated value of $1,000 per share realizing net proceeds of $43,500. 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 NHTC'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 NHTC receives
notice of conversion from a holder. In April 2002, these 50 shares of Series H
Preferred Stock and $5,666 of accrued dividends were converted into 37,739
shares of Common Stock.
In April 2001, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. 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 conversion date or 75% of the market value
of the Common Stock on the conversion date. In November 2002, these 50 shares of
Series H Preferred Stock and $6,389 of accrued dividends were converted into
40,422 shares of Common Stock.
In May 2001, NHTC issued 50 shares of Series H Preferred Stock for $50,000
realizing net proceeds of $43,500. 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 conversion date or 75% of the market value of the
Common Stock on the conversion date. In September 2002, 25 shares of Series H
Preferred Stock were converted into 23,087 shares of Common Stock. In November
F-20
2002, 25 shares of Series H Preferred Stock and $5,440 of accrued dividends were
converted into 36,248 shares of Common Stock.
If NHTC 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, 2001 NHTC had recorded
a charge of $12,000 due to non-compliance with this clause.
During the year ended December 31, 2001, NHTC had converted 615 shares of
the Series H Preferred Stock into 276,994 shares of Common Stock.
As of December 31, 2002, there were no shares of Series H Preferred Stock
outstanding.
Series J Preferred Stock.
In March 2000, NHTC 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 NHTC'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 NHTC
receives notice of conversion from a holder.
Pursuant to the terms of the Series J Preferred, if NHTC does not have an
effective registration statement 120 days subsequent to the issuance of the
Series J Preferred Stock, a 2% penalty on the face amount of $1,000,000 accrues
for every 30 days without an effective registration statement.
In the year ended December 31, 2002, NHTC recorded an additional $4,626 in
accrued dividends was recorded for the period such stock was outstanding.
During the year ended December 31, 2001, NHTC had converted 206 shares of
the Series J Preferred Stock into 122,604 shares of Common Stock.
During the year ended December 31, 2002, NHTC had converted 778 shares of
Series J Preferred Stock into 1,025,397 shares of Common Stock.
As of December 31, 2002, there were 16 shares of Series J Preferred Stock
outstanding.
Convertible Debentures
During 2002, NHTC converted approximately $263,000 of its promissory notes,
plus accrued interest of $16,455 into 236,663 shares of Common Stock.
F-21
Common Stock for Services and Acquisitions
In April 2002, NHTC issued 17,500 shares of Common Stock to Surrey
Associates Ltd. for certain legal services.
In December 2002, NHTC issued 2,010 shares of Common Stock to an individual
as an incentive for lending NHTC money.
NHTC issued 5,000 shares of Common Stock to certain management employees in
April 2001 and recorded $30,500 of compensation expense.
NHTC issued 2,000 shares of Common Stock in a verbal agreement to Capital
Development S.A., a consulting firm in August 2001 and recorded $11,800 of
consulting expense.
In August 2001, NHTC issued 200,000 shares of Common Stock to Summit
Trading Ltd., a consulting firm, as part of a long-term consulting agreement.
This issuance was recorded as deferred compensation and will be amortized over
the life of the agreement.
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus International,
Inc., a Delaware corporation. The original founders of Lexxus International
received an aggregate of 100,000 shares of NHTC's Common Stock, par value of
$0.001.
7. INCOME TAXES
The Company's provision for income taxes consisted of the following:
Years ended December 31,
-------------------------------
2002 2001
------------ ------------
Current tax expense (benefit):
Federal $ 58,000 $ 156,000
State 8,000 36,000
Foreign 234,000 18,000
------------ ------------
$ 300,000 $ 210,000
============ ============
The Company accounts for income taxes under the provisions of SFAS 109.
SFAS 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, 2002, the Company had net
deferred assets of approximately $4.1 million which included deferred tax assets
of approximately $4.3 million comprised primarily of net operating loss carry
forwards and deferred liabilities of approximately $200,000 comprised primarily
of the difference between the financial statement and tax basis of fixed assets.
The Company has established a valuation allowance for the full amount of such
F-22
net deferred tax assets at December 31, 2002, 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 Company has a net operating loss carry forward at December 31, 2002 of
approximately $12 million, a portion of which begins to expire beginning in
2011. A portion of the net operating loss carry forward may be subject to an
annual limitation as defined by Section 382 of the Internal Revenue Code. The
Company has not provided for U.S. Federal and foreign withholding taxes on the
foreign subsidiaries undistributed earnings as of December 31, 2002. Such
earnings are intended to be reinvested indefinitely.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes as follows:
For the year ended
December 31,
-----------------------
2002 2001
--------- ---------
Income tax computed at the US Federal statutory rate $ 501,000 $ 29,000
Effect of permanent differences 6,000 101,000
Increase (decrease) in valuation allowance (118,000) 52,000
Foreign taxes different than Federal rate (94,000) 4,000
State income taxes, net of Federal benefit 5,000 24,000
--------- ---------
Provision for income taxes 300,000 $ 210,000
========= =========
8. COMMITMENTS AND CONTINGENCIES
A. Office Leases
NHTC utilizes approximately 1,000 square feet of office space in Irving,
Texas on an as needed basis, through an arrangement with Regus Business Centre,
which provides business solutions for companies. NHTC pays a minimum annual
rental fee of $2,100. Lexxus leases an aggregate of approximately 16,000 square
feet of office and warehouse space in Dallas, Texas. The lease term is 38
months, expiring on September 30, 2004, and the current rent is approximately
$151,500 per year. Additional warehousing for Lexxus is located in Hollister,
Missouri where Lexxus utilizes approximately 35,000 square feet of warehouse
space. The lease term is on a month-to-month basis at a rent of $18,000 per
year. The Canadian office and warehouse of Lexxus and eKaire leases office space
in Langley, British Columbia, totaling approximately 3,600 square feet. The
lease term is 36 months, expiring on December 1, 2004 and the current rent is
approximately $25,000 per year.
F-23
Kaire Australia, Kaire New Zealand, Lexxus Australia and Lexxus New Zealand
lease office space and warehouse facilities of approximately 2,475 square feet
in Queensland, Australia. The lease term is 60 months, expiring on January 1,
2007, and the current rent is approximately $20,000 per year.
In March 2002, Lexxus Taiwan entered into a 24-month agreement for 6,314
square feet of office space at a current rate of approximately $75,000 per year.
In April 2002, Lexxus India entered into a 60-month agreement for 2,665
square feet of office space at a current rate of approximately $12,000 per year.
In August 2002, Lexxus Hong Kong entered into a 36-month agreement for
approximately 5,400 square feet of office space at a current rate of
approximately $140,000 per year.
In July 2002, Lexxus Singapore entered into a 36-month agreement for 4,155
square feet of office space at a current rate of approximately $116,000 per
year.
In November 2002, MyLexxus Europe entered into a 12-month agreement for
1,841 square feet of office space in Russia at a current rate of approximately
$22,000 per year. In October 2002, MyLexxus Europe also entered into a 12-month
agreement for 1,582 square feet of office space in France at a current rate of
$22,000 per year.
In January 2003, Lexxus Philippines entered into a 24-month agreement for
6,641 square feet of office space at a current rate of approximately $50,000 per
year.
NHTC believes that such properties are suitable and adequate for the
current operating needs. The table below shows the future minimum lease payments
due under non-cancelable operating leases at December 31, 2002. Such payments
total approximately $1,325,000.
Year $
-------------------------- ----------------
2003 629,000
2004 489,000
2005 172,000
2006 32,000
2007 and thereafter 3,000
B. Litigation
From time to time, NHTC is involved in legal proceedings incidental to the
course of business. NHTC believes that pending actions, both individually and in
the aggregate, will not have a material adverse effect on the financial
condition, results of operations, cash flows or prospects. Management believes
that adequate provision has been made for the resolution of such actions and
proceedings.
F-24
C. Major Supplier
NHTC currently buys all of its Pycnogenol(R), an important component of its
products, from a single supplier, Natural Health Sciences, L.L.C.
NHTC currently buys all of its Enzogenol TM from a single supplier, Enzo
Nutraceuticals Ltd.
NHTC currently buys all its Alura(TM) from 40 J's, LLC.
Although there are a limited number of manufacturers of this component,
management believes that other suppliers could provide similar components on
comparable terms. NHTC does not maintain any contractual commitments or similar
arrangements with other suppliers.
NHTC purchases its products from manufacturers and suppliers on an as
needed basis. Should these relationships terminate, NHTC's supply and ability to
meet consumer demands would not be adversely affected.
9. STOCK OPTION PLANS AND WARRANTS
The following table summarizes the changes in options and warrants
outstanding, and the related exercise price for shares of NHTC's Common Stock:
Weighted Weighted
Average Average
Exercise Exercise
Price: Stock Price:
Shares Options Exercisable Shares Warrants Exercisable
---------- ------------ ----------- ---------- --------- -----------
Outstanding at December 31, 2000 441 $ 1,568.00 441 29,521 $ 674.00 29,521
---------- ------------ ---------- ---------- --------- ----------
Granted 65,500 1.22 63,000 -- -- --
Cancelled (441) -- (441) (29,521) -- (29,521)
---------- ------------ ---------- ---------- --------- ----------
Outstanding at December 31, 2001 63,500 $ 1.22 63,000 -- $ -- --
---------- ------------ ---------- ---------- --------- ----------
Granted 1,260,000 1.05 1,179,996 -- -- --
Cancelled -- -- -- -- -- --
---------- ------------ ---------- ---------- --------- ----------
Outstanding at December 31, 2002 1,323,500 $ 1.06 1,243,496 -- $ -- --
---------- ------------ ---------- ---------- --------- ----------
The following table summarizes information about exercisable stock options and
warrants at December 31, 2002:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------------------------------------------------------------------------------
Options: $1.00 - $5.00 1,323,500 2 -10 $1.06 1,243,496 $1.08
F-25
For disclosure purposes in according with Statement of Financial Accounting
Standards 123 ("SFAS 123"), 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, 2002 and 2001 respectively: annual dividends of $0; expected
volatility of 200% and 50% for 2002 and 2001, respectively; 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, 2002 and 2001 was $.81
and $.56, respectively. If NHTC had recognized compensation cost of stock
options in accordance with SFAS 123, NHTC's proforma income (loss) and net
income (loss) per share would have been as follows:
Year Ended December 31,
--------------------------
2002 2001
As Restated As Restated
------------ ------------
Net income available to common shareholders $ 2,068,622 $ (623,370)
Add: Stock-based employee compensation
expense included in reported net income,
net of tax effect 1,434,000 120,000
Deduct: Total stock-based employee compensation
expense determined under fair value based
method, net of tax effect (917,608) (35,280)
Pro forma net income available to common
stockholders 2,585,014 (538,650)
Basic income per share:
As reported $ 0.66 (0.46)
Pro forma $ 0.83 (0.46)
Diluted income per share:
As reported $ 0.66 (0.46
Pro forma $ 0.83 (0.46)
10. FOREIGN SALES
NHTC has substantially increased its international presence both in sales
and long-lived assets. NHTC's sales and long-lived assets by country for 2002
and 2001 are approximately as follows:
Sales to Sales to Long-lived Long-lived
unaffiliated unaffiliated assets at assets at
customers in customers in December 31, December 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
North America $13,452,000 $20,894,000 $ 481,000 $ 725,000
Taiwan 5,579,000 -- 341,000 --
Hong Kong 6,067,000 -- 181,000 --
Russia 8,999,000 -- 42,000 --
Other 2,871,000 2,094,000 249,000 55,000
----------- ----------- ----------- -----------
Consolidated $36,968,000 $22,988,000 $ 1,294,000 $ 780,000
----------- ----------- ----------- -----------
F-26
11. SUBSEQUENT EVENTS
In March 2003, in order to enhance the price of our Common Stock and to
enable us to better use our capital stock to compensate management and motivate
employees, as well as consideration for future acquisition transactions, our
stockholders approved and we effected a 1-for-100 reverse stock split with
respect to our outstanding shares of Common Stock. As a result, on March 19,
2003 the number of outstanding shares of Common Stock declined from 462,873,100
to 4,628,731 and the closing price per share increased from $0.01 on March 18,
2003 to $1.50 on March 19, 2003, as reported on the OTC Bulletin Board. In
addition, the trading symbol for the shares of our Common Stock changed from
"NHTC" to "NHLC".
As of January 31, 2003, we entered into a Database Purchase Agreement with
NuEworld.com Commerce, Inc., ("NuEworld") and Lighthouse Marketing Corporation,
our wholly-owned subsidiary ("Lighthouse"), pursuant to which Lighthouse
purchased a database of distributors from NuEworld in exchange for the issuance
of 360,000 shares of our Common Stock. NuEworld was in the business of marketing
and selling a variety of products and services through its multi-level marketing
distribution network.
F-27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, we have duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: Dallas, Texas
April 12, 2004
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D. WOODBURN
----------------------------------------------
Mark D. Woodburn
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MARK D. WOODBURN President, Chief Financial April 12, 2004
---------------------------------------- Officer and Director
Mark D. Woodburn
/s/ TERRY LACORE Director April 12, 2004
----------------------------------------
Terry LaCore
CERTIFICATION
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Mark Woodburn, certify that:
1. I have reviewed this amended annual report on Form 10-KSB/A of Natural
Health Trends Corp.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such internal controls to ensure that material information
relating to the registrant and its subsidiaries (collectively, the "Company") is
made known to me by others within the Company, particularly during the period in
which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's internal controls as of
a date within 90 days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report my conclusions about the effectiveness
of the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of the registrant's board of directors:
a) all significant deficiencies (if any) in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 12, 2004
/s/ MARK WOODBURN
-------------------------------------
Mark Woodburn
President and Chief Financial Officer