UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-25238
NATURAL HEALTH TRENDS CORP.
(Exact Name of Small Business Issuer as Specified 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)
(972) 241-4080
(Issuer's telephone number including area code)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of issuer's Common Stock, $.001 par value,
outstanding as of May 9, 2003 were 4,627,939 shares.
NATURAL HEALTH TRENDS CORP.
Form 10-QSB/A
For Quarter Ended March 31, 2003
Explanatory Note:
----------------
The purpose of this amendment is to amend Part I, Item 2 - Management's
Discussion and Analysis and Part I, Item 1 -Financial Statements for the
restatements identified in note 2 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) accounts receivable reconciliation to supporting documents;
(iv) reserves established for product returns and refunds;
(v) the gain recorded in connection with the sale of a subsidiary
in 2001; and
(vi) income tax provisions.
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.
NATURAL HEALTH TRENDS CORP.
FORM 10-QSB/A
For Quarter Ended March 31, 2003
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2003 1
(unaudited)
Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2003 and 2002 2
Consolidated Statements of Comprehensive Income (unaudited)
for the three months ended March 31, 2003 and 2002 3
Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2003 and 2002 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operations 10
Item 3. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
Certifications 16
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31,
2003
As Restated
------------
ASSETS
Current Assets:
Cash $ 3,009,487
Restricted Cash 377,668
Accounts receivable 555,864
Inventories 3,160,898
Prepaid expenses and other current assets 977,710
------------
Total Current Assets 8,081,627
Property and equipment, net 691,884
Deposits and other assets 471,704
Goodwill 207,765
Database 856,845
Website 44,333
------------
Total Assets $ 10,354,158
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,965,726
Accrued expenses 1,223,904
Accrued associate commissions 868,714
Notes payable 369,529
Current portion of long term debt 191,102
Deferred Revenue 1,887,497
Income Tax Payable 880,000
Other current liabilities 648,541
------------
Total Current Liabilities 8,035,013
------------
Long term notes payable 39,039
------------
Total Liabilities 8,074,052
Minority interest 532,395
Stockholders' Equity:
Preferred stock ($1,000 par value; authorized
1,500,000 shares; issued 16 shares) 16,330
Common stock ($.001 par value; authorized
500,000,000 shares; issued and outstanding 4,627,939
shares) 4,628
Additional paid in capital 34,184,792
Accumulated deficit (32,394,562)
Deferred compensation (78,750)
Accumulated other comprehensive income 15,273
------------
Total Stockholders' Equity 1,747,711
------------
Total Liabilities and Stockholders' Equity $ 10,354,158
============
The accompanying notes are an integral part of these
consolidated financial statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2003 2002
As Restated As Restated
------------ ------------
Net Sales $ 11,240,317 $ 4,928,883
Cost of sales 2,096,707 903,291
------------ ------------
Gross profit 9,143,610 4,025,592
Associate commissions 4,581,118 3,211,736
Selling, general and administrative expenses 2,822,956 1,981,838
------------ ------------
Operating income (loss) 1,739,536 (1,167,982)
Minority interest in subsidiary (105,648) (11,837)
Gain (loss) on foreign exchange 52,800 (90)
Other income (expense), net 64,514 (30,638)
Interest expense, net (8,400) (17,629)
------------ ------------
Net income (loss) from continuing operations 1,742,802 (1,228,176)
Income Tax Expense 370,000 --
------------ ------------
Net income (loss) 1,372,802 (1,228,176)
Preferred stock dividends 402 22,285
------------ ------------
Net income (loss) to common shareholders $ 1,372,400 $ (1,250,461)
============ ============
Basic income (loss) per common share $ 0.30 $ (0.47)
============ ============
Basic weighted common shares used 4,511,391 2,665,248
============ ============
Diluted income (loss) per common share $ 0.28 $ (0.37)
============ ============
Diluted weighted common shares used 4,907,791 3,398,886
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2003 2002
As Restated As Restated
------------ ------------
Net income (loss) $ 1,372,802 $ (1,228,176)
Other comprehensive
income, net of tax:
Foreign currency
translation adjustment 24,840 5,842
------------ ------------
Comprehensive income (loss) $ 1,397,642 $ (1,222,334)
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
----------------------------
2003 2002
As Restated As Restated
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,372,802 $ (1,228,176)
------------ ------------
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation and amortization 366,282 154,875
Stock issued for services/ interest 50,265 3,600
Minority interest of subsidiary 105,648 11,837
Changes in assets and liabilities:
Accounts receivable (36,112) (504,090)
Inventories (7,274) (203,102)
Prepaid expenses 182,236 (124,027)
Deposits and other assets 318,606 260,585
Accounts payable and accrued expenses (1,344,122) 1,383,924
Income tax payable 370,000 --
Deferred revenue (1,611,895) 1,331,396
Other current liabilities (4,502) (14,946)
------------ ------------
Total Adjustments (1,610,868) 2,300,052
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (238,066) 1,071,876
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (280,664) (298,609)
Database purchase (226,845) --
(Increase) decrease in restricted cash (49,783) 82,759
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (557,292) (215,850)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt -- 75,000
Payments of notes payable and long-term debt (83,940) (42,901)
Investments by minority interest owner -- 135,714
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (83,940) 167,813
------------ ------------
Effect of exchange rate 24,839 5,842
NET (DECREASE)INCREASE IN CASH (854,459) 1,029,681
CASH, BEGINNING OF PERIOD 3,863,946 324,315
------------ ------------
CASH, END OF PERIOD $ 3,009,487 $ 1,353,996
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
1. Basis of Presentation
We are Natural Health Trends Corp. ("NHTC"), an international network
marketing organization. We operate through our subsidiaries that distribute
products to promote health, wellness and vitality. Lexxus International,
Inc., our majority-owned subsidiary and other Lexxus subsidiaries
(collectively, "Lexxus") sell certain cosmetic products as well as "quality
of life" products. eKaire.com, Inc. ("eKaire") distributes nutritional
supplements aimed at general health and wellness.
The accompanying unaudited financial statements of Natural Health Trends
Corp. and its subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and Article 10 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation (consisting of normal recurring
accruals) of financial position and results of operations for the interim
periods have been presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Operating results for the three month period ended March 31, 2003
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2002.
NHTC's common stock, par value $.001 per share (the "Common Stock"), is
listed on the OTC Bulletin Board (the "OTCBB"). In March 2003, we 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". The effect of the reverse is reflected
throughout this document.
2. 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) accounts receivable reconciliation to supporting documents;
(iv) reserves established for product returns and refunds;
(v) the gain recorded in connection with the sale of a subsidiary in 2001; and
(vi) income tax provisions.
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.
5
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 three month period ended March 31, 2002 being decreased by
approximately $1,138,000. The restatement resulted in net sales for the
three month period ended March 31, 2003 being increased by approximately
$604,000. 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 $170,000 for the three month period
ended March 31, 2002. Compared to amounts previously reported, the
restatement increased cost of sales by approximately $135,000 for the three
month period ended March 31, 2003.
In addition, the Company and its new independent accounting firm reviewed
revenue cut-off as 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 $1,008,000. 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
month period ended March 31, 2003 being increased by $459,000.
Also in connection with its review, the Company determined that its accounts
receivable as of March 31, 2003 did not reconcile in total to supporting
details for such transactions. The restatement resulted in net sales being
decreased by $140,000 as of March 31, 2003.
The Company had not recorded a reserve for distributor returns and refunds
as of September 30, 2003 and for prior periods. Based upon an analysis of
the Company's historical returns and refund trends by country, it was
determined that a reserve for returns and refunds for prior periods were
required and should be recorded. The restatement resulted in net sales for
the three months ended March 31, 2002 being decreased by approximately
$88,000, with corresponding adjustments to cost of sales for the estimated
cost of products returned. The restatement resulted in net sales for the
three months ended March 31, 2003 being increased by approximately $125,000,
with corresponding adjustments to cost of sales for the estimated cost of
products returned.
As previously disclosed in the Company's 2001 and 2002 Form 10-KSB, the
Company sold in 2001 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 of
approximately $3.1 million was previously deferred. The Company subsequently
recognized into income approximately $1.9 million from the transaction over
the period from Q4 2001 through Q2 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. The restatement resulted in
extraordinary gain due to forgiveness of debt for the three months ended
March 31, 2002 being decreased by $200,000. The impact of this restatement
for the three months ended March 31, 2003 is a reduction in other income of
$200,000.
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 either 2001 or 2002. Upon further review, it
has been determined that the available net operating loss is not expected to
be sufficient to offset all of the taxable income in 2002 and 2003. The
impact of this restatement resulted in an increase in income taxes for the
period ended March 31, 2003 of $370,000.
6
The following table presents amounts from operations as previously reported
and as restated (in thousands, except for per share data):
Three Months Ended
March 31, 2003
---------------------------
As As
Previously Restated
Reported
------------ ------------
Net sales $ 9,643 $ 11,240
Cost of sales 1,937 2,097
------------ ------------
Gross profit 7,706 9,143
Operating expenses 6,945 7,403
------------ ------------
Operating income 761 1,740
Interest expense, other income,
loss on foreign exchange and
gain on discontinued operations 203 3
------------ ------------
Net income from continuing operations 964 1,743
Income tax expense -- 370
Net income 964 1,373
Preferred stock dividends -- --
------------ ------------
Net income available to common
stockholders $ 964 $ 1,373
============ ============
Basic income per share $ 0.21 $ 0.30
============ ============
Basic weighted commons shares used 4,511 4,511
============ ============
Diluted income per share $ 0.18 $ 0.28
============ ============
Diluted weighted commons shares used 5,504 4,908
============ ============
Basic and Diluted Income per share:
The adjustments in net sales, cost of sales, operating expenses, other
income and income taxes resulted in a net increase in net income before
discontinued operations of approximately $409,000 from the amounts
previously reported for the three months ended March 31, 2003. Restated
basic income per share increased by $0.09 for the three months ended March
31, 2003. Restated diluted income per share increased by $0.10 for the three
months ended March 31, 2003. The weighted common shares have been
recalculated with the treasury stock method utilizing the average stock
price for the period versus the closing stock price.
7
Three Months Ended
March 31, 2002
----------------------------
As As
Previously Restated
Reported
------------ ------------
Net sales $ 6,154 $ 4,929
Cost of sales 1,090 903
------------ ------------
Gross profit 5,064 4,026
Operating expenses 5,194 5,194
------------ ------------
Operating income (130) (1,168)
Interest expense, other income,
loss on foreign exchange and
gain on discontinued operations (60) (60)
------------ ------------
Income before extraordinary items (190) (1,228)
Extraordinary gain-forgiveness of debt 200 --
------------ ------------
Net income 10 (1,228)
Preferred stock dividends 22 22
------------ ------------
Net income available to common
stockholders $ (12) $ (1,250)
============ ============
Basic income per share $ 0.00 $ (0.47)
============ ============
Basic weighted commons shares used 2,665 2,665
============ ============
Diluted income per share $ 0.00 $ (0.37)
============ ============
Diluted weighted commons shares used 3,399 3,399
============ ============
Basic and Diluted Income per share:
The adjustments in net sales, cost of sales, operating expenses, other
income and income taxes resulted in a net decrease in net income available
to stockholders of approximately $1,238,000 over the amounts previously
reported for the three months ended March 31, 2002. Restated basic and
diluted income per share decreased $0.47 and $0.37, respectively, for the
three months ended March 31, 2002.
3. Principles of Consolidation and Accounting Policies
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Reclassifications
Certain reclassifications were made to the prior year financial statements
to conform to the current year presentation.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the USA requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
8
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 $1,887,000 as of March 31, 2003.
The Company also estimates and records a sales return reserve for possible
sales refunds based on historical experience.
Shipping and Handling Costs
The Company records freight and shipping revenues collected from associates
as revenue. The Company records shipping and handling costs associated with
shipping products to its associates as cost of goods sold.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the periods presented. Diluted earnings per
share data gives effect to all potentially dilutive common shares that were
outstanding during the periods presented.
4. Equity Transactions
In January 2003, the Company issued 18,500 shares of Common Stock to a law
firm for legal services of approximately $34,000.
In January 2003, the Company issued 10,000 shares of Common Stock to a
consulting firm for consulting services of approximately $19,000.
On January 31, 2003, the Company 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. We believe that the NuEworld
database will allow us to recruit many new distributors for our Lexxus
business.
5. Recent Accounting Pronouncements
SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections was issued April 2002. This
Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.
This Statement also rescinds FASB Statement No. 44, Accounting for
Intangible Assets of Motor Carriers. This Statement amends FASB Statement
No. 13, Accounting for Leases, to eliminate an inconsistency between the
required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that
are similar to sale-leaseback transactions.
This Statement also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. The provisions of this Statement
related to the rescission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002. The provisions in paragraph 8 and 9(c) of this
Statement related to Statement 13 shall be effective for transactions
occurring after May 15, 2002. All other provisions of this Statement shall
be effective for financial statements issued on or after May 15, 2002. The
effects of implementation are not material.
9
SFAS No. 146 Accounting for Costs Associated with Exit or Disposal
Activities was issued June 2002. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The provisions of this Statement are effective for exit and
disposal activities that are initiated after December 31, 2002.
In September 2002, the FASB issued SFAS No. 147, Acquisition of Certain
Financial Institutions. SFAS No. 147 changed the special accounting for
unidentifiable intangible assets recognized under SFAS No. 72. Transition
provisions for previously recognized unidentifiable intangible assets were
effective on October 1, 2002. The effects of implementation had no impact on
the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which provides alternative methods
of transition for a voluntary change to fair value based method of
accounting for stock-based employee compensation as prescribed in SFAS No.
123, Accounting for Stock-Based Compensation. Additionally, SFAS No. 148
required more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The provisions of
this Statement are effective for fiscal years ending after December 15,
2002, with early application permitted in certain circumstances.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussions should be read in conjunction with the
consolidated financial statements and notes contained in Item 1 hereof.
Forward Looking Statements
When used in Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, the words "will likely result",
"the Company expects", "will continue", "is anticipated", "estimated",
"projected", "outlook" or similar expressions are intended to identify
"forward looking statements" within the meaning of the Private
Securities Litigation Act of 1995. The Company wishes to caution
readers not to place undue reliance on such forward-looking statements,
each of which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those
presently anticipated or projected. The Company has no obligation to
publicly release the results of any revisions, which may be made to any
forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
Overview
Natural Health Trends Corp. was incorporated on December 1, 1988 in the
state of Florida. NHTC is an international direct-selling company operating
in more than 29 markets throughout Asia, North America and Eastern Europe.
The Company markets premium quality personal care products under the Lexxus
brand and markets its nutritional supplement products under the Kaire brand.
NHTC's Common Stock, par value $0.001 per share (the "Common Stock"), is
listed on the OTC 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".
NHTC is a holding company that operates two businesses, Lexxus and eKaire,
which distribute products that promote health, wellness and vitality through
two distinct multi-level marketing ("MLM") channels. The following
paragraphs will outline the progression of NHTC as it is organized today.
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
distributor lists.
10
In January 2001, NHTC entered into a joint venture with Lexxus International
and formed a new majority-owned USA subsidiary, Lexxus International, Inc.,
a Delaware corporation. The original founders of Lexxus International
received an aggregate of 100,000 shares of our Common Stock and own 49% of
the total number of shares of capital stock of Lexxus International, Inc., a
Delaware corporation.
In the second quarter of 2001, we incorporated Lexxus International (SW
Pacific) Pty. Ltd., an Australian corporation and our majority-owned
subsidiary, which does business in Australia ("Lexxus Australia"). In
addition, we 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, we incorporated Lighthouse Marketing Corporation
("Lighthouse"), a Delaware Corporation and our wholly-owned subsidiary. As
of January 31, 2003, Lighthouse acquired certain assets from NuEworld. See
Footnote 5 for more detail.
In June 2001, we sold all of the outstanding Common Stock in Kaire
Nutraceuticals, Inc., a Delaware corporation, to a South African firm.
On November 16, 2001, we incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of the Republic of China and our
majority-owned subsidiary ("Lexxus Taiwan") which does business in Taiwan.
On January 28, 2002, we incorporated MyLexxus Europe AG, a corporation
organized under the laws of Switzerland and our majority-owned subsidiary
("MyLexxus Europe"). This company manages the sales of product into sixteen
eastern European countries, including Russia.
In March 2002, we incorporated Lexxus International Co., Ltd., a corporation
organized under the laws of Hong Kong and our wholly-owned subsidiary
("Lexxus Hong Kong") which does business in Hong Kong.
In April 2002, we incorporated Personal Care International India Pvt. Ltd.,
a corporation organized under the laws of India and our wholly-owned
subsidiary ("MyLexxus India") which does business in India.
In June 2002, we incorporated Lexxus International Marketing Ltd., a
corporation organized under the laws of Singapore and our majority-owned
subsidiary ("Lexxus Singapore") which does business in Singapore.
In November 2002, we incorporated Lexxus International (Philippines) Inc., a
corporation organized under the laws of the Philippines and our
majority-owned subsidiary ("Lexxus Philippines") which does business in the
Philippines.
Results of Operations - Three Months Ended March 31, 2003 Compared To The
Three Months Ended March 31, 2002.
As discussed in Note 2 to the consolidated financial statements, we have
amended and restated our results for the three month period ended March 31,
2003 and March 31, 2002. All of the following analyses apply the basis of
the restated amounts.
Net Sales. Revenues were approximately $11,240,000 and $4,929,000 for the
three months ended March 31, 2003 and March 31, 2002, respectively; an
increase of $6,311,000. The increased sales were primarily from additional
sales of Lexxus products and the expansion of Lexxus into new international
markets, offset by a slight decrease in the sales of eKaire products.
Cost of Sales. Cost of sales for the three months ended March 31, 2003 was
approximately $2,097,000 or 19% of net sales. Cost of sales for the three
months ended March 31, 2002 was approximately $903,000 or 18% of net sales.
The total cost of sales increased due to increased sales volume and
increased costs associated with the packaging of the Lexxus product line.
Gross Profit. Gross profit increased from approximately $4,026,000 in the
three months ended March 31, 2002 to approximately $9,144,000 in the three
months ended March 31, 2003. The increase in gross profit of approximately
$5,118,000 was attributable to higher sales volumes by Lexxus.
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Associate Commissions. Associate commissions were approximately $4,581,000
or 41% of sales in the three months ended March 31, 2003 compared to
approximately $3,212,000 or 65% of sales for the three months ended March
31, 2002. The increase of commission expense is directly related to the
increase in gross sales and the terms of the compensation plans. The
decrease in commission expense as a percentage of sales is due to the normal
fluctuations that occur in the compensation plan and also due to the amount
of revenues allocated to the compensation plan.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of net sales decreased from
approximately $1,982,000 or 40% of sales in the three months ended March 31,
2002 to approximately $2,823,000 or 25% of sales in the three months ended
March 31, 2003. These costs as a percentage of net sales decreased primarily
due to recent cost containment efforts and the leverage of Lexxus expansion
into new international markets.
Operating Income (loss). Operating (loss) income increased from an operating
loss of approximately $1,168,000 in the three months ended March 31, 2002 to
operating income of approximately $1,740,000 in the three months ended March
31, 2003. This is attributable to higher sales volume, increased selling,
general and administrative costs offset by decreased associate commissions.
Income Taxes. Income tax benefits were not reflected for the period ended
March 31, 2002. The anticipated benefits of utilizing net operating losses
against future profits were not recognized in the three months ended March
31, 2002 under the provisions of SFAS No. 109, Accounting for Income Taxes,
utilizing the Company's loss carry forward as a component of income tax
expense. A valuation allowance equal to the net deferred tax asset has been
recorded, 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. In
March 2003, the Company recorded income tax expense of $370,000, as the
utilization of the net operating loss was limited by Section 382 of the
Internal Revenue Code.
Net Income (loss). Net income was approximately $1,373,000 in the three
months ended March 31, 2003 as compared to a loss of approximately
$1,228,000 in the three months ended March 31, 2002. This increase is due to
increased sales and efficient cost containment efforts.
Liquidity and Capital Resources:
The Company has funded the working capital and capital expenditure
requirements primarily from cash provided through operations and through
limited borrowings from individuals.
At March 31, 2003, the ratio of current assets to current liabilities was
1.0 to 1.0 and the Company had working capital of approximately $47,000.
Cash used in operations for the three months ended March 31, 2003 was
approximately $238,000 primarily due to the payment of accounts payable and
accrued expenses. Cash used in investing activities during the period was
approximately $557,000 primarily due to the purchase of a database and
capital expenditures. Cash used by financing activities during the period
was approximately $84,000. Total cash decreased by approximately $854,000
during the period.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the
audited consolidated financial statements included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2002. Management
believes that the application of these policies on a consistent basis
enables the Company to provide useful and reliable financial information
about the Company's operating results and financial condition.
SEASONALITY
In addition to general economic factors, we are impacted by seasonal factors
and trends such as major cultural events and vacation patterns. For example,
most Asian markets celebrate their respective local New Year in the first
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quarter, which generally has a negative impact on that quarter. We believe
that direct selling in the United States and Europe is also generally
negatively impacted during the month of August, which is in our third
quarter, when many individuals, including our distributors, traditionally
take vacations.
CURRENCY RISK AND EXCHANGE RATE INFORMATION
Some of our revenue and some of our expenses are recognized outside of the
United States, except for inventory purchases which are primarily transacted
in U.S. dollars from vendors in the United States. The local currency of
each of our subsidiary's primary markets is considered the functional
currency. Revenue and expenses are translated at the weighted average
exchange rates for the periods reported. Therefore, our reported revenue and
earnings will be positively impacted by a weakening of the U.S. dollar and
will be negatively impacted by a strengthening of the U.S. dollar. Given the
uncertainty of exchange rate fluctuations, we cannot estimate the effect of
these fluctuations on our future business, product pricing, results of
operations or financial condition.
ITEM 3. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as defined in Exchange Act Rules
13a-14(c) and 15d-14(c).
Based upon that evaluation, the Company's President and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in enabling the Company to record, process, summarize and report
information required to be included in the Company's periodic SEC filings
within the required time period.
There have been no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
In the three months ended March 31, 2003, NHTC issued 360,000 shares of
our Common Stock to NuEworld.com Commerce, Inc. pursuant to a database
purchase agreement.
In January 2003, the Company issued 18,500 shares of Common Stock to a
law firm for legal services of approximately $34,000.
In January 2003, the Company issued 10,000 shares of Common Stock to a
consulting firm for consulting services of approximately $19,000.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On March 11, 2003, the Company held its Annual Meeting of Stockholders
where the stockholders of the Company approved the following proposals:
(a)Election of Directors. Mark D. Woodburn and Terry LaCore were
elected to the Board of Directors of the Company for a term of one (1)
year, receiving 415,838,786 votes and 416,038,786 votes respectively in
favor of his election (89.8% of the shares outstanding).
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(b)Reverse Stock Split. The reverse stock split of the Company's issued
common stock, par value $.001 per share, on the basis of one (1) new
share of common stock for each one hundred (100) shares of common stock
outstanding was approved by the stockholders of the Company
(409,797,841 votes for (88.5% of the shares outstanding); 4,177,119
shares against; and 3,418,759 shares abstained).
(c)2002 Stock Plan. The adoption of the Company's 2002 Stock Plan was
approved by the stockholders of the Company (412,733,533 votes for
(89.2% of the shares outstanding); 4,349,569 shares against; and
310,615 shares abstained).
(d)Ratification of the Appointment of Independent Accountants. The
ratification of the appointment of Sherb & Co., LLP as independent
accountants of the Company for fiscal year ending December 31, 2002 was
approved by the stockholders of the Company (416,097,978 votes for
(89.9% of the shares outstanding); 1,134,816 votes against; and 160,925
shares abstained).
(e)Ratification of the Amendment to the Company's Articles of
Incorporation. The ratification of the amendment to the Company's
Articles of Incorporation pursuant to which the Company increased the
number of authorized shares of common stock from 50,000,000 shares to
500,000,000 shares was approved by the stockholders of the Company
(414,491,065 votes for (89.5% of the shares outstanding); 2,531,104
votes against; and 371,550 shares abstained).
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of President and Chief Financial Officer.
(b) Reports on Form 8-K
Current Report on Form 8-K filed with the Commission on February
13, 2003 with respect to Item 5.
Current Report on Form 8-K filed with the Commission on March 19,
2003 with respect to Items 5, 7 and 9.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL HEALTH TRENDS CORP.
By: /s/ MARK D. WOODBURN
------------------------------
Mark D. Woodburn
President
Date: April 12, 2004
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