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 June 30, 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 August 8, 2003 were 4,656,408 shares.
NATURAL HEALTH TRENDS CORP.
Form 10-QSB/A
For Quarter Ended June 30, 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
For Quarter Ended June 30, 2003
(UNAUDITED)
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheet as of June 30, 2003 1
Consolidated Statements of Operations
for the three and six months ended June 30, 2003 and 2002 2
Consolidated Statements of Comprehensive Income
for the three and six months ended June 30, 2003 and 2002 3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 and 2002 4
Notes to 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)
June 30,
2003
As Restated
------------
ASSETS
Current Assets:
Cash $ 2,856,235
Accounts receivable 1,182,073
Restricted cash 955,926
Inventories 3,156,800
Prepaid expenses and other current assets 878,559
------------
Total Current Assets 9,029,593
Property and equipment, net 972,508
Deposits and other assets 763,584
Goodwill 207,765
Database 856,845
Website 33,250
------------
Total Assets $ 11,863,545
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,163,990
Accrued expenses 1,121,017
Accrued associate commissions 1,087,147
Notes payable 334,437
Current portion of long term debt 137,861
Deferred revenue 1,925,131
Income tax payable 1,210,322
Other current liabilities 667,645
------------
Total Current Liabilities 8,647,550
------------
Long term notes payable 13,198
------------
Total Liabilities 8,660,748
Minority interest 449,978
Stockholders' Equity:
Preferred stock ($1,000 par value; authorized
1,500,000 shares) --
Common stock ($.001 par value; authorized
500,000,000 shares; issued and outstanding 4,656,408
shares) 4,656
Additional paid in capital 34,201,502
Accumulated deficit (31,447,960)
Deferred compensation (11,250)
Accumulated other comprehensive income 5,871
------------
Total Stockholders' Equity 2,752,819
------------
Total Liabilities and Stockholders' Equity $ 11,863,545
============
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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
As Restated As Restated As Restated As Restated
------------ ------------ ------------ ------------
Net sales $ 11,984,085 $ 8,786,282 $ 23,224,402 $ 13,715,165
Cost of sales 1,681,983 1,516,204 3,778,690 2,419,495
------------ ------------ ------------ ------------
Gross profit 10,302,102 7,270,078 19,445,712 11,295,670
Associate commissions 4,928,928 4,535,501 9,510,046 7,747,237
Selling, general and
administrative expenses 4,026,873 2,355,613 6,849,829 4,337,451
------------ ------------ ------------ ------------
Operating income 1,346,301 378,964 3,085,837 (789,018)
Minority interest in
subsidiary 82,417 (48,540) (23,231) (60,377)
Loss on foreign exchange (64,292) (78,782) (11,492) (78,872)
Other income, net (75,318) (45,831) (10,804) (76,469)
Interest, net (11,776) (14,980) (20,176) (32,609)
------------ ------------ ------------ ------------
Net income before taxes 1,277,332 190,831 3,020,134 (1,037,345)
Income tax expense 330,322 -- 700,322 --
Net income 947,010 190,831 2,319,812 (1,037,345)
Preferred stock dividends 408 19,175 810 41,460
------------ ------------ ------------ ------------
Net income (loss) to
common stockholders $ 946,602 $ 171,656 $ 2,319,002 $ (1,078,805)
============ ============ ============ ============
Basic income (loss)
per common share $ 0.20 $ 0.06 $ 0.51 $ (0.38)
============ ============ ============ ============
Basic weighted common
shares used 4,627,941 2,972,713 4,569,988 2,819,830
============ ============ ============ ============
Diluted income (loss)
per common share $ 0.17 $ 0.05 $ 0.43 $ (0.31)
============ ============ ============ ============
Diluted weighted
common shares used 5,628,487 3,682,051 5,421,302 3,529,168
============ ============ ============ ============
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 Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2003 2002 2003 2002
As Restated As Restated As Restated As Restated
------------ ------------ ------------ ------------
Net income (loss) $ 947,010 $ 190,831 $ 2,319,812 $ (1,037,345)
Other comprehensive
income, net of tax:
Foreign currency
translation adjustments (9,403) 53,815 15,437 59,657
------------ ------------ ------------ ------------
Comprehensive income(loss) $ 937,607 $ 244,646 $ 2,335,249 $ (977,688)
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
----------------------------
2003 2002
As Restated As Restated
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 2,319,812 $ (1,037,345)
------------ ------------
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 444,866 224,218
Stock issued for compensation 50,265 5,350
Minority interest of subsidiary 23,231 60,377
Changes in operating assets and liabilities:
Accounts receivable (662,321) (239,846)
Inventories (3,176) (251,256)
Prepaid expenses 281,387 (34,232)
Deposits and other assets 26,726 152,495
Accounts payable (1,085,428) 131,739
Accrued expenses 55,116 2,759,487
Deferred revenue (1,574,261) 1,496,855
Income tax payable 700,322 --
Other current liabilities 14,602 225,071
------------ ------------
Total Adjustments (1,728,671) 4,530,258
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 591,141 3,492,913
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (561,289) (399,329)
Database purchase (226,845) --
Increase in restricted cash (628,041) (88,122)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,416,175) (487,451)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt -- 100,000
Minority interest contribution 135,714
Payments of notes payable and long-term debt (198,114) (156,920)
------------ ------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (198,114) 78,794
------------ ------------
Effect of exchange rate 15,437 59,657
NET (DECREASE)INCREASE IN CASH (1,007,711) 3,143,913
CASH, BEGINNING OF PERIOD 3,863,946 324,315
------------ ------------
CASH, END OF PERIOD $ 2,856,235 $ 3,468,228
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
1. Basis of Presentation
We are Natural Health Trends Corp. ("NHTC"), an international direct-selling
company. 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., our wholly-owned subsidiary ("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 six month period ended June 30, 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.
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
5
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 and six-month periods ended June 30, 2003 being
decreased by approximately $38,000 and increased by approximately $566,000,
respectively. The restatement resulted in net sales for the three and
six-month periods ended June 30, 2002 being decreased by approximately
$242,000 and $1,380,000, 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 of
cost of sales decreased by approximately $23,000 and increased by
approximately $112,000 for the three and six-month periods ended June 30,
2003, respectively. Compared to amounts previously reported, the restatement
decreased cost of sales by approximately $40,000 and $210,000 for the three
and six-month periods ended June 30, 2002, respectively.
In addition, the Company and its new independent accounting firm reviewed
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
quarter 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 quarter ended March 31, 2003 being increased by the same amount.
Also in connection with its review, the Company determined that its accounts
receivable as of March 31 and June 30, 2003 did not reconcile in total to
supporting details for such transactions. The restatement resulted in net
sales being decreased by $260,000 and $400,000 for the three and six month
period ended June 30, 2003, respectively.
The Company had not recorded reserves 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 and
six months ended June 30, 2003 being increased by approximately $125,000 and
$250,000 respectively, with corresponding adjustments to cost of sales for
the estimated cost of products returned. Compared to amounts previously
reported, the restatement decreased net sales for the three and six months
ended June 30, 2002 by approximately $88,000 and $175,000 with a
corresponding adjustment 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 impact of this restatement for
the three and six months ended June 30, 2002, is a reduction of
extraordinary item - forgiveness of debt of $200,000 and $400,000,
respectively. The impact of the restatement for the three and six months
ended June 30, 2003 is a reduction of other income of $200,000 and $400,000,
respectively.
The Company disclosed in it's 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 in 2002 or 2003. 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 six months ended
June 30, 2003 of $370,000, recognized in the quarter ended March 31, 2003.
6
The following tables present amounts from operations as previously reported
and as restated (in thousands, except for per share data):
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
--------------------------- ---------------------------
As As As As
Previously Restated Previously Restated
Reported Reported
------------ ------------ ------------ ------------
Net sales $ 12,157 $ 11,984 $ 21,800 $ 23,224
Cost of sales 1,680 1,682 3,617 3,779
------------ ------------ ------------ ------------
Gross profit 10,477 10,302 18,183 19,445
Operating expenses 8,956 8,956 15,901 16,359
------------ ------------ ------------ ------------
Operating income 1,521 1,346 2,282 3,086
Interest expense, other income,
loss on foreign exchange and gain
on discontinued operations 131 (69) 334 (66)
------------ ------------ ------------ ------------
Net income(loss) 1,652 1,277 2,616 3,020
Income tax expense 330 330 330 700
Net income 1,322 947 2,286 2,320
Preferred stock dividends -- -- 1 1
------------ ------------ ------------ ------------
Net income available to common
stockholders $ 1,322 $ 947 $ 2,285 $ 2,319
============ ============ ============ ============
Basic income per share $ 0.28 $ 0.20 $ 0.50 $ 0.51
============ ============ ============ ============
Basic weighted common shares used 4,656 4,628 4,570 4,570
============ ============ ============ ============
Diluted income per share $ 0.23 $ 0.17 $ 0.41 $ 0.43
============ ============ ============ ============
Diluted weighted common shares used 5,695 5,628 5,609 5,421
============ ============ ============ ============
Basic and Diluted Income per share:
The adjustments in net sales and cost of sales, operating expenses, other
income and income taxes resulted in a net decrease in net income available
to stockholders of approximately $375,000 and an increase of approximately
$34,000 over the amounts previously reported for the three and six months
ended June 30, 2003, respectively. Restated basic income per share decreased
$0.08 for the three months ended June 30, 2003. Restated basic income per
share increased by $0.01 for the six months ended June 30, 2003. Restated
diluted income per share decreased $0.06 for the three months ended June 30,
2003. Restated diluted income per share increased by $0.02 for the six
months ended June 30, 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.
The following tables present amounts from operations as previously reported
and as restated (in thousands, except for per share data):
7
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
---------------------------- ----------------------------
As As As As
Previously Restated Previously Restated
Reported Reported
------------ ------------ ------------ ------------
Net sales $ 9,116 $ 8,786 $ 15,270 $ 13,715
Cost of sales 1,574 1,516 2,664 2,419
------------ ------------ ------------ ------------
Gross profit 7,542 7,270 12,606 11,296
Operating expenses 6,891 6,891 12,085 12,085
------------ ------------ ------------ ------------
Operating income 651 379 521 (789)
Interest expense, other income,
loss on foreign exchange and gain
on discontinued operations (188) (188) (248) (248)
------------ ------------ ------------ ------------
Income before extraordinary items 463 191 273 (1,037)
Extraordinary gain - forgiveness of debt 200 -- 400 --
------------ ------------ ------------ ------------
Net income 663 191 673 (1,037)
Preferred stock dividends 19 19 41 41
------------ ------------ ------------ ------------
Net income available to common
stockholders $ 644 $ 172 $ 632 $ (1,078)
============ ============ ============ ============
Basic income per share $ 0.22 $ 0.06 $ 0.22 ($ 0.38)
============ ============ ============ ============
Basic weighted common share used 2,973 2,973 2,820 2,820
============ ============ ============ ============
Diluted income per share $ 0.17 $ 0.05 $ 0.18 ($ 0.31)
============ ============ ============ ============
Diluted weighted commons shares used 3,682 3,682 3,529 3,529
============ ============ ============ ============
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 $472,000 and $1,710,000 over the amounts
previously reported for the three and six months ended June 30, 2002,
respectively. Restated basic income per share decreased $0.16 and $0.60 for
the three and six months ended June 30, 2002, respectively. Restated diluted
income per share decreased $0.12 and $0.49 for the three and six months
ended June 30, 2002, respectively.
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.
8
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.
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 $1,925,000 as of June 30, 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. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"),
"Business Combinations." SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interest method. The adoption of SFAS No. 141 did
not have a significant impact on the financial statements.
In July 2001, FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets", ("SFAS No. 142"), which is
effective for fiscal years beginning after December 15, 2001. SFAS No. 142
requires, among other things, the discontinuance of goodwill amortization.
In addition, the standard includes provisions upon adoption for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill
and the testing for the impairment of existing goodwill and other
intangibles. Application of the non-amortization provisions of the Statement
did not have an effect on the Company's financial position or operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations", ("SFAS No. 143"),
which is effective for all fiscal years beginning after June 15, 2002;
however, early adoption is encouraged.
In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supercedes Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and certain
provisions of APB Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business and
9
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including discontinued operations, be measured at the lower of carrying
amount or fair value, less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 also broadens the
reporting requirements of discontinued operations to include all components
of an entity that have operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the
rest of the entity. The provisions of SFAS No. 144 are effective for fiscal
years beginning after December 15, 2001. The Company implemented SFAS No.
144 and SFAS No. 143 beginning January 1, 2002.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets
the characteristics of a derivative and when a derivative contains a
financing component. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003. The Company does not expect that the adoption
of SFAS No. 149 will have a significant effect on the Company's financial
statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that
an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. SFAS No. 150 is effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 is to be implemented by
reporting the cumulative effect of a change in accounting principle for
financial instruments created before the issuance date of SFAS No. 150 and
still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company does not expect that the adoption
of SFAS No. 150 will have a significant effect on the Company's financial
statement presentation or disclosures.
5. 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 associates 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.
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
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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. ("NHTC") was incorporated on December 1, 1988, in
the state of Florida. NHTC is an international direct-selling company operating
in more than 30 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 July 2003, we applied for listing of
our shares of common stock on The American Stock Exchange. We anticipate that
our shares of common stock will commence trading on The American Stock Exchange
during the third quarter of 2003. 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".
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 associate
lists.
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.
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.
In November 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.
In January 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.
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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.
In June 2003, we incorporated LXK Ltd. (South Korea), a corporation organized
under the laws of South Korea and our wholly-owned subsidiary ("Lexxus Korea")
which does business in South Korea.
Results of Operations - Six Months Ended June 30, 2003 Compared To
The Six Months Ended June 30, 2002.
As discussed in Note 2 to the consolidated financial statements, we have amended
and restated our results for the six month period ended June 30, 2003 and June
30, 2002. All of the following analyses apply the basis of the restated amounts.
Net Sales. Net sales were approximately $23,224,000 and $13,715,000 for the six
months ended June 30, 2003 and June 30, 2002, respectively; an increase of
$9,509,000 or 69%. The increased sales were primarily from additional sales of
Lexxus products and the expansion of Lexxus into new international markets,
including South Korea in June 2003, partially offset by a slight decrease in the
sales of eKaire products.
Cost of Sales. Cost of sales for the six months ended June 30, 2003 was
approximately $3,779,000 or 16% of net sales. Cost of sales for the six months
ended June 30, 2002 was approximately $2,419,000 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 $11,296,000 in the six
months ended June 30, 2002 to approximately $19,446,000 in the six months ended
June 30, 2003, or an increase of 72%. The increase in gross profit of
approximately $8,150,000 was attributable to higher sales volumes by Lexxus.
Associate Commissions. Associate commissions were approximately $9,510,000 or
41% of sales in the six months ended June 30, 2003 compared to approximately
$7,747,000 or 56% of sales for the six months ended June 30, 2002. The increase
of commission expense is directly related to the increase in gross sales and the
terms of the Company's 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 increased from
approximately $4,337,000 or 32% of sales in the six months ended June 30, 2002
to approximately $6,850,000 or 29% of sales in the six months ended June 30,
2003. These costs as a percentage of net sales increased primarily due to
general and administrative costs, such as hiring staff, preparing office space
and initial marketing efforts through the expansion into new international
markets.
Operating (Loss) Income. Operating income increased from an operating loss of
approximately $789,000 in the six months ended June 30, 2002 to operating income
of approximately $3,086,000 in the six months ended June 30, 2003. This is
attributable to higher sales volume, increased selling, general and
administrative costs and increased associate commissions.
Income Taxes. In the second quarter of 2003, the Company has provided income
taxes in the amount of approximately $700,000, due to the limitation of the
utilization of the Company's available net operating loss carryforwards pursuant
to Section 382 of the Internal Revenue Code.
Net Income. Net income was approximately $2,320,000 in the six months ended June
30, 2003 as compared to a loss of approximately $1,037,000 in the six months
ended June 30, 2002. The increase in net income of approximately $3,357,000 is
due to increased sales and efficient cost containment efforts partially offset
by an income tax expense.
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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 June 30, 2003, the ratio of current assets to current liabilities was 1.04 to
1.0 and the Company had working capital of approximately $382,000.
Cash provided by operations for the six months ended June 30, 2003 was
approximately $591,000 primarily due to increased sales, the launch of the
Company's South Korean operations which were partially offset by increased
accounts receivable and the reduction of accounts payable. Cash used in
investing activities during the period was approximately $1,416,000 due to the
purchase of an associate database, increased capital expenditures and an
increase in restricted cash. Cash used by financing activities during the period
was approximately $198,000. Total cash decreased by approximately $1,008,000
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 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
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our President and
Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our
President and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the quarter
covered by this report. Based on the foregoing, our President and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable assurance level.
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There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
In March 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 May 22, 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, Terry LaCore, Sir Brian
Wolfson and Randall A. Mason were elected to the Board of
Directors of the Company for a term of one (1) year, each
receiving 3,218,419, 3,218,299, 3,215,149 and 3,218,519 votes
respectively in favor of his election (69.5% of the shares
outstanding).
(b) Amendment to the 2002 Stock Option Plan. The amendment to the
Company's 2002 Stock Plan was approved by the stockholders of the
Company (3,215,333 votes for (69.46% of the shares outstanding);
4,891 shares against; and 1,230 shares abstained).
(c) 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, 2003 was approved by the stockholders of the Company
(3,221,055 votes for (69.59% of the shares outstanding); 284
votes against; and 115 shares abstained).
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the President and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Not applicable.
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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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