UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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.
Incorporated in Florida I.R.S. Employer Identification No.
59-2705336
12901 Hutton Drive
Dallas, Texas 75234
(972) 241-4080
Indicate by check mark whether the company (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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 10, 2004, the number of shares outstanding of the registrant's class
of common stock, par value $0.001 per share, was 5,446,365.
NATURAL HEALTH TRENDS CORP.
Form 10-Q for the Three Months
Ended March 31, 2004
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Consolidated Statements of Cash Flows 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities; Use of Proceeds and Issuer Purchases
of Equity Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,266,262 $ 11,133,075
Restricted cash 2,347,024 1,363,188
Accounts receivable 432,973 238,487
Inventories, net 5,766,889 3,580,303
Prepaid expenses and other 3,513,663 3,363,941
------------ ------------
Total current assets 27,326,811 19,678,994
Property and equipment, net 869,637 882,648
Software 5,600,000 --
Goodwill 12,756,037 207,765
Database, net 593,058 509,391
Deposits and other assets 272,852 778,607
------------ ------------
Total assets $ 47,418,395 $ 22,057,405
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,830,414 $ 3,820,339
Accrued expenses 3,624,492 831,454
Accrued distributor commissions 4,930,758 2,285,182
Income taxes payable 1,831,887 1,442,655
Notes payable 238,760 287,703
Current portion of long-term debt 2,729,803 26,400
Deferred revenue 5,379,625 6,633,586
Other current liabilities 551,484 512,838
------------ ------------
Total current liabilities 22,117,223 15,840,157
Long term debt 525,031 30,665
------------ ------------
Total liabilities 22,642,254 15,870,822
Minority interest 626,681 710,957
Mezzanine common stock 960,000 --
Stockholders' equity:
Preferred stock ($1,000 par value; authorized 1,500,000 shares) -- --
Common stock ($0.001 par value; authorized 500,000,000 shares; issued
and outstanding 5,446,365 and 4,656,409 shares as of March 31, 2004 and
December 31, 2003, respectively) 5,446 4,656
Additional paid in capital 48,754,556 34,006,862
Accumulated deficit (25,278,505) (28,389,232)
Accumulated other comprehensive loss (292,037) (146,660)
------------ ------------
Total stockholders' equity 23,189,460 5,475,626
------------ ------------
Total liabilities and stockholders' equity $ 47,418,395 $ 22,057,405
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
Net Sales $ 38,435,209 $ 11,240,317
Cost of sales 7,928,128 2,096,707
------------ ------------
Gross profit 30,507,081 9,143,610
Operating expenses:
Distributor commissions 20,204,655 4,581,118
Selling, general and administrative expenses 6,473,164 2,822,956
------------ ------------
Total operating expenses 26,677,819 7,404,074
------------ ------------
Income from operations 3,829,262 1,739,536
Other income (expense):
Gain (loss) on foreign exchange (8,868) 52,800
Other income, net 168,583 64,514
Interest expense, net (913) (8,400)
------------ ------------
Total other income, net 158,802 108,914
------------ ------------
Income from operations before taxes and minority interest 3,988,064 1,848,450
Income tax provision (797,613) (370,000)
Minority interest expense (79,724) (105,648)
------------ ------------
Net income 3,110,727 1,372,802
Preferred stock dividends -- 402
------------ ------------
Net income available to common stockholders $ 3,110,727 $ 1,372,400
============ ============
Basic income per common share $ 0.67 $ 0.30
============ ============
Diluted income per common share $ 0.53 $ 0.28
============ ============
Weighted average shares outstanding:
Basic 4,667,288 4,511,391
============ ============
Diluted 5,909,383 4,907,791
============ ============
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,
----------------------------
2004 2003
------------ ------------
Net income $ 3,110,727 $ 1,372,802
Other comprehensive income, net of tax:
Foreign currency translation adjustment (145,377) 24,840
------------ ------------
Comprehensive income $ 2,965,350 $ 1,397,642
============ ============
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,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,110,727 $ 1,372,802
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 197,989 366,282
Stock issued for services 10,500 50,265
Minority interest of subsidiary 79,724 105,648
Imputed compensation 33,000 --
Changes in assets and liabilities, excluding acquisitions of businesses:
Accounts receivable (194,486) (36,112)
Inventories, net (2,186,586) (7,274)
Prepaid expenses (149,722) 182,236
Deposits and other assets 469,671 318,606
Accounts payable 825,274 (1,283,692)
Accrued expenses 1,366,954 (251,735)
Accrued distributor commissions 2,645,576 191,305
Income tax payable 389,232 370,000
Deferred revenue (1,253,961) (1,611,895)
Other current liabilities 38,646 (4,502)
------------ ------------
Total Adjustments 2,271,811 (1,610,868)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,382,538 (238,066)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (65,561) (280,664)
Database purchase -- (226,845)
Increase in restricted cash (983,836) (49,783)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,049,397) (557,292)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of notes payable and long-term debt (54,577) (83,941)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (54,577) (83,941)
------------ ------------
EFFECT OF TRANSLATION ADJUSTMENTS ON CASH AND CASH EQUIVALENTS (145,377) 24,840
NET INCREASE (DECREASE) IN CASH 4,133,187 (854,459)
CASH, BEGINNING OF PERIOD 11,133,075 3,863,946
------------ ------------
CASH, END OF PERIOD $ 15,266,262 $ 3,009,487
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
Interest paid $ 1,000 $ 5,000
Income taxes (net of refunds) paid $ 368,481 $ --
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, 2004
(Unaudited)
1. BASIS OF PRESENTATION
Natural Health Trends Corp. ("NHTC" or "the Company") is a Florida
corporation incorporated in 1988. NHTC is an international direct selling
company which operates through subsidiaries that distribute products to promote
health, wellness and vitality. Lexxus International, Inc., a wholly owned
subsidiary and other Lexxus subsidiaries (collectively "Lexxus"), sell certain
cosmetic products as well as "quality of life" products. eKaire.com, Inc.
("eKaire"), a wholly owned subsidiary, distributes nutritional supplements aimed
at general health and wellness. Other active wholly or majority owned
subsidiaries of NHTC and their countries of incorporation include:
o Lexxus International (SW Pacific) Pty. Ltd. (Australia)
o Kaire Nutraceuticals Australia Pty. Ltd. (Australia)
o Lexxus International (NZ) Ltd. (New Zealand)
o Kaire Nutraceuticals New Zealand Ltd. (New Zealand)
o Lexxus International Co., Ltd. (Taiwan)
o MyLexxus Europe AG (Switzerland)
o KGC Networks Pte. Ltd. (Singapore)
o Lexxus International Co., Ltd. (Hong Kong)
o MyLexxus Personal Care International (India) Pvt. Ltd. (India)
o Lexxus International Marketing, Pte. Ltd. (Singapore)
o Lexxus International Network Marketing, Inc. (the Philippines)
o Lexxus Korea Co., Ltd. (South Korea)
o I Luv My Pet, Inc. (U.S.)
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. As a result, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair statement of the Company's
financial information as of March 31, 2004, and for the three months ended March
31, 2004 and 2003. The results of operations of any interim period are not
necessarily indicative of the results of operations to be expected for the
fiscal year. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in our 2003 Annual Report on Form 10-KSB.
NHTC's common stock, par value, $.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 its outstanding shares
of Common Stock. In addition, the trading symbol for the shares of its Common
Stock changed from "NHTC" to "NHLC". All share references will give effect to
the reverse stock split.
5
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of NHTC and all of its wholly and majority-owned subsidiaries, after
the elimination of intercompany balances and transactions.
Reclassifications
Certain 2003 amounts in the consolidated statements of operations and
the consolidated statements of cash flows have been reclassified to
conform with the current year presentation.
Revenue Recognition
The Company's revenues are primarily derived from sales of products,
sales of starter and renewal administrative enrollment packs and
shipping fees. Product sales and direct expenses are recognized when
the products are shipped. The Company defers 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. As of
March 31, 2004, the Company had deferred revenue of approximately
$5,380,000, of which approximately $1,544,000 pertained to goods
shipped in the second quarter of 2004 and will be recognized as revenue
at that time. Deferred revenue also included refundable distributor
fees of approximately $3,836,000.
The Company also estimates and records a sales return allowance for
possible sales refunds based on its historical experience on a
country-by-country basis.
Shipping and Handling Cost
The Company records freight and shipping revenue collected from
distributors as revenue. The Company records shipping and handling
costs associated with customer shipments as cost of sales.
Commissions expense
Distributors are paid commissions based on their direct and indirect
commissionable net sales and downline growth. Commissions are earned
over 52 business periods and are paid two weeks in arrears. Commissions
are accrued when earned.
Accounting for Stock-Based Compensation
Currently, NHTC follows Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and its related
interpretations for stock options granted to employees and members of
its board of directors. Under the recognition and measurement
principles of APB 25, NHTC is not required to recognize any
compensation expense unless the market price of the stock exceeds the
exercise price on the date of grant, the terms of the grant are
subsequently modified or in the case of variable options. The Financial
Accounting Standards Board has recently issued a proposal to change the
recognition and measurement principles for equity-based compensation
granted to employees and board members. Under the proposed rules, NHTC
would be required to recognize compensation expense related to stock
options granted to employees and board members effective for the year
beginning after December 15, 2004. The compensation expense would be
calculated based on the expected number of options expected to vest and
would be recognized over the stock options' vesting period. If this
proposal is passed, NHTC would be required to recognize compensation
expense related to stock options granted to its employees or board
members, which could have a material effect on its consolidated
financial condition and results of operations.
6
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 period, respectively: annual dividends of $0
for both years; expected volatility of 100% and 200% for 2004 and 2003,
respectively; risk free interest rate of 4.25% and 7.00% for 2004 and
2003, respectively; and expected life of 3 years for 2004 and 2003,
respectively. There were no stock options granted during the three
months ended March 31, 2004 or 2003. If NHTC had recognized
compensation cost of stock options in accordance with SFAS 123, NHTC's
proforma income and net income per share would have been as follows:
Three Months Ended
March 31,
-------------------------------
2004 2003
-------------- --------------
Net income available to common stockholders $ 3,110,727 $ 1,372,400
Add: Stock-based employee compensation expense included in reported
net income, net of tax effect -- --
Deduct: Total stock-based employee compensation expense determined
under fair value based method, net of tax effect (5,542) (9,500)
-------------- --------------
Pro forma net income available to common stockholders $ 3,105,185 $ 1,362,900
============== ==============
Basic income per share:
As reported $ 0.67 $ 0.30
============== ==============
Pro forma $ 0.67 $ 0.30
============== ==============
Diluted income per share:
As reported $ 0.53 $ 0.28
============== ==============
Pro forma $ 0.53 $ 0.28
============== ==============
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.
Net income per share from operations for the three months ended March
31, 2004 and 2003 are as follows:
Three Months Ended
March 31,
----------------------------
2004 2003
------------ ------------
Basic Calculation:
Net income available to common stockholders $ 3,110,727 $ 1,372,400
Weighted average number of shares outstanding 4,667,288 4,511,391
------------ ------------
Basic net income per share from operations $ 0.67 $ 0.30
============ ============
7
Diluted Calculation:
Net income available to common stockholders $ 3,110,727 $ 1,372,400
Weighted average number of shares outstanding 6,000,788 5,834,891
Net effect of dilutive stock options and warrants based upon treasury stock
method (91,405) (927,100)
------------ ------------
Weighted average number of shares outstanding assuming full conversion
of all potentially dilutive securities 5,909,383 4,907,791
------------ ------------
Diluted net income per share from operations $ 0.53 $ 0.28
============ ============
Accounting for Software
As part of the Marketvision Communications Corp. acquisition (see
Business Combinations), the Company acquired approximately $5,600,000
of computer software and programs. The valuation of the software was
determined by a third party appraisal firm. The software is classified
as a non-current asset in the balance sheet and is being amortized over
a seven-year period beginning April 1, 2004.
Recently Issued Accounting Standards
FASB Interpretation No. 45. In November 2002, the FASB issued FASB
Interpretation No. 45, "Guarantor's accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of
a guarantee, a guarantor must recognize a liability for the fair value
of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with guarantees
issued. The recognition provisions of FIN 45 are effective for any
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of FIN 45
did not have a material effect on the Company's financial position,
results of operations, or cash flows.
FASB Interpretation No. 46 and 46R. In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities."
Interpretation 46 changes the criteria by which one company includes
another entity in its consolidated financial statements. Previously,
the criteria were based on control through voting interest.
Interpretation 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or
both. A company that consolidates a variable interest entity is called
the primary beneficiary of that entity. The consolidation requirements
of Interpretation 46 apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning
after December 31 2003. In December 2003, FASB issued a revision to
FASB Interpretation No. 46 to clarify some of the provisions and to
exempt certain entities from its requirements. Under the new guidance,
special effective date provisions apply to enterprises that have fully
or partially applied Interpretation 46 prior to issuance of the revised
interpretation. Otherwise, application of Interpretation 46R is
required in financial statements of public entities that have interests
in structures that are commonly referred to as special-purpose entities
("SPE's") for periods ending after December 15, 2003. Application by
public entities, other than business issuers, for all other types of
variable interest entities other than SPE's is required in financial
statements for periods ending after March 15, 2004. NHTC does not have
interest in structures commonly referred to as SPE's, therefore the
adoption of Interpretation 46R is not expected to have a material
impact on NHTC's consolidated financial position, results of operations
or cash flows.
SFAS 149. In April 2003, FASB issued Statements of Financial Accounting
Standards No. 149 ("SFAS 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS
8
133 "Accounting for Derivatives Instruments and Hedging Activities" and
the related implementation guidance and is effective for contracts
entered into or modified after June 30, 2003, except for hedging
relationships designated after June 30, 2003. SFAS 149 clarifies the
definition of a derivative and amends the financial accounting and
reporting required for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. In addition, SFAS 149 improves the financial reporting
requirements by requiring a more consistent reporting of contracts as
either derivatives or hybrid instruments. The adoption of this standard
did not have a significant impact on the Company's financial condition,
results of operations, or cash flows.
3. BUSINESS COMBINATIONS
The Company entered into the following business combinations during the
three months ended March 31, 2004:
Purchase of the Minority Interest of Lexxus International, Inc.
As of March 29, 2004, the Company purchased 4,900 shares of common
stock owned by the minority stockholders of Lexxus International, Inc., a
Delaware corporation ("Lexxus"), (representing the 49% interest in Lexxus not
owned by the Company) in exchange for 100,000 shares of restricted NHTC common
stock. The total purchase price, including acquisition related costs of
approximately $15,000, was approximately $1,977,000 based upon the average
closing price of NHTC common stock of $23.08 discounted by 15% due to the
restrictions contained in the purchase agreement. The average closing price of
$23.08 was calculated based on the closing price of NHTC Common Stock a few days
before and after the acquisition was announced. The entire purchase price was
allocated to goodwill.
Purchase of Marketvision Communications Corp.
Effective on March 31, 2004, the Company entered into a merger
agreement with Marketvision Communications Corp. ("Marketvision"), pursuant to
which the Company acquired all of the outstanding capital stock of Marketvision
in exchange for 690,000 shares of NHTC restricted common stock (the "Issued
Shares"), promissory notes in the aggregate principle amount of approximately
$3,203,403 and a cash payment of $1,336,875 in April 2004 for a total purchase
price of approximately $18,227,000, including acquisition costs of approximately
$150,000. The shares issued were valued at the average closing price of NHTC
Common Stock of $23.08 discounted by 15% due to certain restrictions contained
in the purchase agreement. The average closing price of $23.08 was calculated
based on the closing price of NHTC Common Stock a few days before and after the
acquisition was announced. Marketvision is the exclusive developer and service
provider of the direct selling software used by the Company since mid-2001.
Based upon the number of new distributors enrolled, Marketvision charged the
Company approximately $861,000 and $263,000 for services provided during the
three months ended March 31, 2004 and 2003, respectively.
Management believes that this transaction is in the best interests of
the Company because (i) the success of the Company's business is dependent upon
Marketvision's direct selling software and (ii) the Company projects enrolling a
significant number of new distributors in the future, which would be very
expensive under the former compensation agreement between the Company and
Marketvision. Since the former owners of Marketvision include Terry LaCore, a
member of the Company's Board of Directors and the Chief Executive Officer of
Lexxus International, Inc., a wholly owned subsidiary of NHTC, the Board of
Directors hired the independent appraisal firm of Bernstein, Conklin & Balcombe
to assess the fairness of the transaction with Marketvision from a financial
point of view. In March 2004, Bernstein, Conklin & Balcombe delivered its
opinion to the Company's Board of Directors that the Marketvision transaction is
fair to the Company from a financial point of view.
9
In addition, the Company entered into a Shareholder's Agreement with
the former shareholders of Marketvision. Such agreement contained customary
terms and conditions, including restrictions on transfers of the NHTC shares,
rights of first refusal and indemnification. Further, the Shareholder's
Agreement contains a one time put right related to 240,000 NHTC shares for the
benefit of the former shareholders of Marketvision (other than Mr. LaCore) that
requires NHTC, during the six month period commencing eighteen months following
the earlier of (i) the first anniversary of the closing date, or (ii) the date
on which the Issued Shares are registered with the Securities and Exchange
Commission (the "SEC") for resale to the public, to repurchase all or part of
the NHTC shares still owned by the such stockholders for $4.00 per share less
any amount previously received by such stockholders from the sale of their
shares of NHTC stock. The Company has recorded this obligation of $960,000 as
mezzanine common stock in the balance sheet at March 31, 2004. The agreement
also provided the former stockholders of Marketvision with piggyback
registration rights in the event we file a registration statement with the SEC,
other than on Forms S-4 or S-8, stock option grants for the former stockholders
(other than Mr. LaCore) as well as three-year employment agreements for the
former stockholders, other than Mr. LaCore. In the event that the Company
defaults on its payment obligations under the notes or the employment
agreements, an entity owned by the former shareholders of Marketvision (other
than Mr. LaCore) has certain rights to use, develop, modify, market, distribute
and sublicense the Marketvision software to third parties.
Operations of Marketvision subsequent to March 31, 2004 will be
included in the Company's consolidated financial statements. The transaction was
accounted for as a business combination and the purchase price was allocated
among the assets acquired based on their estimated fair market values. The
assets of Marketvision included certain computer equipment and developed
software.
The purchase price was calculated as follows:
690,000 shares of NHTC Common Stock valued at $23.08 per share less 15% $ 13,536,420
discount for restrictions associated with the stock issued
Cash paid in April 2004 1,336,875
Promissory notes issued at closing 3,203,403
Acquisition costs 150,302
-------------
Total purchase price $ 18,227,000
=============
The purchase price was allocated among assets acquired based on their
estimated fair market values as follows:
Trade receivables due from NHTC and affiliates $ 1,866,528
Property and equipment 25,000
Amortizable intangible assets 5,600,000
Goodwill 10,735,472
Deferred taxes (1,904,000)
Deferred tax asset recognized for the Company's loss carryforward
based upon offset against Marketvision's deferred tax liabilities 1,904,000
-------------
Total purchase price allocation $ 18,227,000
=============
Amortizable intangibles acquired will be amortized over their estimated
life of seven years. The purchase price allocation is based on preliminary
estimates, including estimates of federal tax contingencies, which are subject
to change once additional information becomes available. Changes to these
estimates could result in changes to the purchase price allocation.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis should be read in
conjunction with Management's Discussion and Analysis included in our Annual
Report on Form 10-KSB for the year ended December 31, 2003, filed with the
Securities and Exchange Commission ("SEC"), and our other filings, including
Current Reports on Form 8-K, filed with the SEC through the date of this Report.
Company Overview
NHTC is an international network marketing organization. NHTC controls
subsidiaries that distribute products through three separate direct selling
networks that promote health, wellness and vitality. Lexxus International, Inc.,
and other Lexxus subsidiaries (collectively, "Lexxus") sell certain cosmetic
products as well as "quality of life" products. eKaire.com, Inc., ("eKaire"), a
wholly-owned subsidiary, distributes nutritional supplements aimed at general
health and wellness. I Luv My Pet, Inc., ("ILMP"), a wholly-owned subsidiary,
distributes nutritional supplements for dogs and cats. NHTC operates its Lexxus,
eKaire and ILMP direct selling operations as a single segment and primarily
sells its products through a network of commissioned distributors. NHTC
aggregates the Lexxus and eKaire operating segments because it believes it
operates as a single reportable segment selling its products in similar
distribution channels in each of its operations. Operations of ILMP are not
material for the three months ended March 31, 2004 since it commenced in the
fourth quarter of 2003.
Net Sales. NHTC derives its revenue from sales of its products, sales
of its starter and renewal administrative enrollment packs, and from shipping
fees. Substantially all of its product sales are to independent distributors at
published wholesale prices. NHTC believes the vast majority of its product sales
are for personal consumption; however, NHTC cannot distinguish its personal
consumption sales from its other sales because it has no involvement in its
products after delivery other than usual and customary product returns.
Cost of sales consists of products purchased from third-party
manufacturers, costs of promotional materials sold to NHTC's distributors,
freight, provisions for slow moving or obsolete inventories and the cost of
NHTC's third party service provider.
Distributor commissions are dependent on the sales mix and typically
range between 43% to 53% of net sales. Commissions are paid to NHTC's
independent distributors in accordance with its global compensation plan based
on commissionable net sales, which consist of finished products.
Foreign exchange. NHTC is exposed to certain market risks, including
changes in currency exchange rates as measured against the United States dollar.
The value of the United States dollar may affect NHTC's financial results.
Changes in exchange rates could positively or negatively affect its financial
results, as expressed in United States dollars. The effect of the translation of
the Company's foreign operations are included in accumulated other comprehensive
income within stockholder's equity and such do not impact the statement of
operations.
Effect of inflation. NHTC believes inflation has not had a material
impact on its operations or profitability.
Critical Accounting Policies and Estimates
For a complete review of NHTC's critical accounting policies and new
accounting pronouncements that may impact NHTC's operations, refer to the Annual
Report on Form 10-KSB for the year ended December 31, 2003. In response to SEC
Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" and SEC Release Number 33-8056, "Commission Statement about
Management's Discussion and Analysis of Financial Condition and Results of
11
Operations," NHTC has identified certain policies that are important to the
portrayal of its consolidated financial condition and consolidated results of
operations. These policies require the application of significant judgment by
NHTC's management. NHTC periodically analyzes the need for certain estimates,
including the need for such items as reserves for inventory valuation,
impairment of long-lived assets, revenue recognition, sales returns, and
contingencies. NHTC bases any estimates needed on its historical experience,
industry standards, and various other assumptions that may be reasonable under
the circumstances. NHTC cautions its readers that actual results could differ
from its estimates under different assumptions or conditions. If circumstances
change relating to the various assumptions or conditions used in such estimates
NHTC could experience an adverse effect on its consolidated financial condition,
changes in financial condition, and results of operations. NHTC's critical
accounting policies at March 31, 2004 include the following:
Inventory Valuation
NHTC's inventory carrying value is reviewed and compared to the net
realizable value of its inventory and any inventory value in excess of net
realizable value is written down. In addition, NHTC reviews its inventory for
obsolescence and any inventory identified as obsolete is reserved or written
off. NHTC's determination of obsolescence is based on assumptions about the
demand for its products, product expiration dates, estimated future sales, and
management's future plans.
Asset Impairment
NHTC reviews the book value of its property and equipment and other
long-term assets whenever an event or change in circumstances indicates that the
net book value of an asset or group of assets may be unrecoverable. NHTC's
impairment review includes a comparison of future projected cash flows
(undiscounted and without interest charges) generated by the asset or group of
assets with its associated carrying value. NHTC believes its expected future
cash flows approximate or exceed its net book value. However, if circumstances
change and the net book value of the asset or group of assets exceeds expected
cash flows, NHTC would have to recognize an impairment loss to the extent the
net book value of an asset exceeds its fair value.
Allowance for Sales Returns
The Company maintains an allowance for sales returns and refunds based
on the return practices and policies by country and our historical experience.
The allowance for sales returns may need to be adjusted if actual sales returns
differ from estimates.
Revenue Recognition and Deferred Costs
Product sales are recognized when shipped. NHTC defers revenue received
from the sale of its starter and renewal administrative packs due to the
twelve-month term of the membership. Such fees actually received are recognized
as revenue on a straight-line basis over the twelve-month term of the
membership. In addition, NHTC defers and recognizes to cost of sales on a
straight line basis the actual cost paid to a third party associated with the
administrative enrollment fees received from distributors. Although NHTC has no
immediate plans to significantly change the terms or conditions of the starter
or renewal memberships, any changes in the future could result in additional
revenue deferrals or could cause NHTC to recognize its deferred revenue over a
longer period of time.
Tax Valuation Allowances
The Company evaluates the probability of realizing the future benefits
of any of its deferred tax assets and records a valuation allowance when it
believes a portion or all of its deferred tax assets may not be realized. If the
Company is unable to realize the expected future benefits of its deferred tax
assets, it would be required to provide an additional valuation allowance. As of
March 31, 2004, the Company had recorded a valuation allowance of approximately
$111,000 related to the net deferred tax assets of the Company at that date.
12
Results of Operations
Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31,
2003
The following table summarizes NHTC's consolidated operating results as
a percentage of net sales for each of the years indicated:
Three Months Ended
March 31,
-------------------------
2004 2003
---------- ----------
Net sales 100.0% 100.0%
Cost of sales 20.6% 18.7%
---------- ----------
Gross profit 79.4% 81.3%
Operating expenses:
Distributor commissions 52.6% 40.8%
Selling, general and administrative expenses 16.8% 25.1%
---------- ----------
Total operating expenses 69.4% 65.9%
---------- ----------
Income from operations 10.0% 15.4%
Other income .4% 1.0%
---------- ----------
Income from continuing operations before taxes and
minority interest expense 10.4% 16.4%
Income tax expense and minority interest (2.3%) (4.2%)
---------- ----------
Net income 8.1% 12.2%
========== ==========
Net Sales
Net sales were approximately $38,435,000 for the three months ended
March 31, 2004 compared to $11,240,000 for the three months ended March 31,
2003. This increase of approximately $27,195,000 or 242% was primarily
attributable to the increased number of active Lexxus distributors
(approximately $17.4 million or 64% of the increase), Lexxus's expansion into
new markets, including South Korea in the second quarter of 2003 (approximately
$1.1 million or 4% of the increase), sales of new products (approximately $4.7
million or 17% of the increase) and the shipment of Hong Kong orders in backlog
as of December 31, 2003 (approximately $4.0 million or 15% of the increase).
Cost of Sales
Cost of sales was approximately $7,928,000 or 20.6% of net sales for
the three months ended March 31, 2004 compared with approximately $2,097,000 or
18.7% of net sales for the three months ended March 31, 2003. This increase of
approximately $5,831,000 or 278% was primarily attributable to increased net
sales and the Lexxus product mix compared to eKaire product mix in 2004 compared
to 2003. Cost of sales as a percentage of net sales increased which is primarily
attributable to the change of product mix sold in 2004 and the costs of bulk
shipments to Asia due to higher sales volumes in that region.
Gross Profit
Gross profit was approximately $30,507,000 or 79.4% of net sales for
the three months ended March 31, 2004 compared with approximately $9,144,000 or
81.3% of net sales for the three months ended March 31, 2003. This increase of
approximately $21,363,000 or 234% was attributable to the increase in gross
13
sales of Lexxus products partially offset by the cost of sales as a percentage
of net sales increased due to the change of product mix sold in 2004 and the
costs of bulk shipment to Asia due to higher sales volumes in that region.
Distributor Commissions
Distributor commissions were approximately $20,205,000 or 52.6% of net
sales for the three months ended March 31, 2004 compared with approximately
$4,581,000 or 40.8% of net sales for the three months ended March 31, 2003. This
increase of approximately $15,624,000 or 341% was directly related to the
increase in net sales, the terms of the compensation plans and promotions held
during the first quarter of 2004.
Selling, General and Administrative Expenses
Selling, general and administrative costs were approximately $6,473,000
or 16.8% of net sales for the three months ended March 31, 2004 compared with
approximately $2,823,000 or 25.1 % of net sales for the three months ended March
31, 2003. This increase of approximately $3,650,000 or 129% was attributable to
the administrative expenses associated with the new office in Seoul, South
Korea, which was opened in the second quarter of 2003, and the balance of the
increase resulted from sales and marketing conventions, promotions and
trainings, especially in the Hong Kong and Korean operations. Selling, general
and administrative expenses decreased as a percentage of net sales to 16.8% in
2004 compared to 25.1% in 2003 due to operating efficiencies and economies of
scale gained with higher volumes of net sales.
Other Income (Expense)
Other income was approximately $159,000 for the three months ended
March 31, 2004 compared with income of approximately $109,000 for the three
months ended March 31, 2003. This increase of approximately $50,000 was due to
an increase in other income partially offset by a recognized loss on foreign
exchange in 2004.
Income Taxes
Income taxes were approximately $798,000 or 20.0% of income before
taxes and minority interest for the three months ended March 31, 2004 compared
with $370,000 or 20.0% of income before taxes and minority interest for the
three months ended March 31, 2003. The decrease in effective tax rate was
attributable to use of net operating losses in the U.S. and lower effective tax
rates on foreign earnings in 2004.
Minority Interest, Net of Taxes
Minority interest expense was approximately $80,000 for the three
months ended March 31, 2004, which is comparable with approximately $106,000 for
the three months ended March 31, 2003.
Net Income
Net income was approximately $3,111,000 or 8.1% of net sales for the
three months ended March 31, 2004 compared to net income of approximately
$1,373,000 or 12.2% of net sales for the three months ended March 31, 2003.
Compared to 2003, this increase in 2004 is due to significantly larger net
sales, smaller selling, general and administrative expenses as a percentage of
net sales partially offset by larger cost of sales and distributor commissions
as a percentage of net sales.
Liquidity and Capital Resources
NHTC has historically funded the working capital and capital
expenditure requirements primarily from cash provided through sales of products,
through borrowings from institutions and individuals and issuance of preferred
stock.
14
At March 31, 2004, the ratio of current assets to current liabilities
was 1.24 to 1.0 and NHTC had working capital of approximately $5,210,000.
Cash provided by operations for the three months ended March 31, 2004
was approximately $5,383,000. Cash used by investing activities during the
period was approximately $1,049,000, which primarily relates to the increase of
restricted cash related to the credit card reserve. Cash used in financing
activities during the period was approximately $55,000 utilized for the
repayment of notes payable and long-term debt. Total cash increased by
approximately $4,133,000 during the period.
NHTC has generated positive cash flows from its operations over the
past three years and believes that its existing liquidity and cash flows from
operations, including cash and cash equivalents totaling approximately
$17,613,000 should be adequate to fund normal business operations expected in
the future.
NHTC intends to continue to open additional operations in new foreign
markets in coming years. In 2004, NHTC plans to expand into Mexico and possibly
other countries in 2005. The estimated cost to expand into a new country is
approximately $2-3 million in the aggregate, of which approximately $500,000
will relate to capital asset purchases that will be depreciated over the life of
the assets or lease term.
On March 31, 2004, the Company entered into a merger agreement with
Marketvision Communications Corp. ("Marketvision"), pursuant to which the
Company acquired all of the outstanding capital stock of Marketvision in
exchange for the issuance of 690,000 shares of NHTC restricted common stock,
promissory notes in the aggregate principle amount of approximately $3,203,403
and a cash payment of $1,336,875 for a total purchase price of approximately
$18,227,000, including acquisition costs of approximately $150,000. Marketvision
is the exclusive developer and service provider of the direct selling software
used by the Company since mid-2001.
On April 12, 2004, an investigative television program was aired
nationwide in the People's Republic of China with respect to the operation of
the Company's Lexxus Hong Kong subsidiary and the Lexxus representative office
located in Beijing. The report alleged, among other things, that unlicensed
network-marketing activities were being conducted by Lexxus' independent
distributors in China and that many independent distributors were unsuccessful
in their efforts to generate profits. Lexxus currently conducts operations in 30
countries, including Hong Kong, and requires that its independent distributors
comply with all applicable local laws.
After a thorough internal investigation of the issues raised in the
television program, the Company has concluded that additional training and
development of the Lexxus independent distributors was warranted. Accordingly,
our Lexxus Hong Kong subsidiary has commenced intensive training of its
independent distributors with respect to (i) the Chinese legal requirements and
(ii) the need for descriptions of business opportunities available to potential
distributors to be accurate and balanced.
Due to the adverse publicity caused by the airing of the television
program, gross sales (before returns and refunds) for the Lexxus Hong Kong
operations have declined from an average of approximately $285,000 per day
during the quarter ended March 31, 2004 to an average of approximately $110,000
per day during the thirty (30) day period since April 12, 2004. It is difficult
to predict when, if ever, sales from the Lexxus Hong Kong operations will
increase to prior levels. In order to accommodate the concerns of many
independent distributors, Lexxus has extended its existing 14-day return policy
to allow returns for a six-month period for customers who purchased products
during the two-week period prior to the airing of the television program.
Consequently, this may adversely affect the Company's results of operations due
to an increase in sales returns and refunds for all or part of the remainder of
the current fiscal year.
15
Direct sales and foreign investment in the direct sales industry are
very tightly regulated in China. The Company believes that one or more
investigations of Lexxus' operations in China may have been initiated by the
Beijing Municipal Administration of Industry and Commerce and/or the Beijing
Municipal Public Security Bureau. The Company has been unable to determine
whether these investigations are ongoing or whether there are any other
investigations that have been initiated or are under consideration by the
Chinese government. Nevertheless, Lexxus has increased its efforts to obtain a
license to engage in business in China by engaging lobbyists and specialized
legal counsel. Expenses and fees incurred by the Company in connection with
these efforts may also adversely affect the Company's results of operations
during the remainder of the current fiscal year. The Company is currently unable
to predict whether it will be successful in obtaining a license to operate in
China, and if it is successful, when it will be permitted to commence operations
there. Further, even if the Company is successful in obtaining a license to do
business in China, it is uncertain as to whether the Company will generate
profits from such operations.
NHTC is considering various alternatives pertaining to raising
additional capital to fund the repayment of the promissory notes issued in
connection with the Marketvision transaction, to continue its expansion into new
markets, to fund its operations in the event that sales in the Lexxus Hong Kong
subsidiary do not increase materially and/or to make other acquisitions to
further expand its business. If NHTC's existing capital resources or cash flows
become insufficient to meet its current business plans and projections, and if
NHTC would be required to raise additional funds, there is no assurance that
funds could be raised on favorable terms, if at all.
Off-Balance Sheet Arrangements
NHTC does not utilize off-balance sheet financing arrangements other
than in the normal course of business. NHTC finances the use of certain
facilities, office and computer equipment, and automobiles under various
operating lease agreements.
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements included in this Quarterly Report, other
than statements of historical facts, regarding our strategy, future operations,
financial position, estimated revenues, projected costs, prospects, plans and
objectives are forward-looking statements. When used in this Quarterly Report,
the words "will," "believe," "anticipate," "intend," "estimate," "expect,"
"project" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. We cannot guarantee future results, levels of activity,
performance or achievements, and you should not place undue reliance on our
forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors. Our forward-looking statements do not reflect the potential impact of
any future acquisitions, mergers, dispositions, joint ventures or strategic
investments. In addition, any forward-looking statements represent our
expectation only as of the day this Quarterly Report was first filed with the
SEC and should not be relied on as representing our expectations as of any
subsequent date. While we may elect to update forward-looking statements at some
point in the future, we specifically disclaim any obligation to do so, even if
our expectations change.
Although we believe that the expectations reflected in any of our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and to inherent risks and
uncertainties, such as those disclosed in this Quarterly Report. Important
16
factors that could cause our actual results, performance and achievements, or
industry results to differ materially from estimates or projections contained in
forward-looking statements include, among others, the following:
o our relationship with our distributors;
o our need to continually recruit new distributors;
o our internal controls and accounting methods may require further
modification;
o regulatory matters governing our products and network marketing
system;
o adverse publicity associated with our products or network marketing
organizations;
o product liability claims;
o our reliance on outside manufacturers;
o risks associated with operating internationally, including foreign
exchange risks;
o product concentration;
o dependence on increased penetration of existing markets;
o the competitive nature of our business; and
o our ability to generate sufficient cash to operate and expand our
business.
Market data and other statistical information used throughout this
report is based on independent industry publications, government publications,
reports by market research firms or other published independent sources and on
our good faith estimates, which are derived from our review of internal surveys
and independent sources. Although we believe that these sources are reliable, we
have not independently verified the information and cannot guarantee its
accuracy or completeness.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NHTC does not engage in trading market risk sensitive instruments and
does not purchase investments as hedges or for purposes "other than trading"
that are likely to expose it to certain types of market risk, including interest
rate, commodity price or equity price risk. NHTC has not issued any debt
instruments, entered into any forward or future contracts, purchased any options
or entered into any swaps.
Currency Risk and Exchange Rate Information
Some of NHTC's revenue and some of their 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 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, the 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.
Seasonality
In addition to general economic factors, NHTC is 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 time off for
vacations.
Item 4. 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
17
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.
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;
(vi) income tax provisions; and
(vii) stock option based compensation.
Consequently, the Company amended and restated its financial statements
for each quarter in 2001, 2002 and 2003 as well as for the years ended December
31, 2001 and 2002 with respect to each of the foregoing items (collectively, the
"Restatement Items").
An evaluation of the Company's disclosure controls and procedures (as
defined in Section 13(a)-14(c) of the Exchange Act) as of March 31, 2004 was
carried out under the supervision and with the participation of the Company's
President and Chief Financial Officer and other members of the Company's senior
management. The Company's President and Chief Financial Officer concluded that
the Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is (i)
accumulated and communicated to the Company's management (including the
President and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. During the quarter ended
March 31, 2004, the Company made changes to improve its internal controls over
financial reporting with respect to (i) each of the Restatement Items, and (ii)
monthly financial reports provided to the Company by its subsidiaries. The
Company is in the process of hiring additional accounting staff to supplement
the existing personnel. In addition, the Company is developing policies and
procedures to strengthen its international reporting including revenue
recognition, sales and expense cut-off and sales returns. The Company plans to
implement additional controls and procedures sufficient to accurately report
their financial performance on a timely basis. There have been no other changes
in the Company's internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31,
2004, that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
The Company intends to continually review and evaluate the design and
effectiveness of its disclosure controls and procedures and to improve its
controls and procedures over time and to correct any deficiencies that it may
discover in the future. The goal is to ensure that senior management has timely
access to all material financial and non-financial information concerning the
Company's business. While the Company believes the present design of its
disclosure controls and procedures is effective to achieve its goal, future
events affecting its business may cause the Company to modify its disclosure
controls and procedures.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in, or additions to the legal
proceedings previously reported in NHTC's Annual Report on Form 10-KSB for the
year ended December 31, 2003 as filed with the SEC on April 13, 2004.
Item 2. Changes in Securities; Use of Proceeds and Issuer Purchases of Equity
Securities
As of March 29, 2004, the Company purchased 4,900 shares of common
stock owned by the minority shareholders of Lexxus International, Inc., a
Delaware corporation ("Lexxus"), (representing the 49% interest in Lexxus not
owned by the Company) in exchange for 100,000 shares of restricted NHTC common
stock. The total purchase price, including acquisition related costs, was
approximately $1,977,000 based upon the closing price of NHTC common stock. The
Company issued the shares of common stock pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
Effective on March 31, 2004, the Company entered into a merger
agreement with Marketvision Communications Corp. ("Marketvision"), pursuant to
which the Company acquired all of the outstanding capital stock of Marketvision
in exchange for the issuance of 690,000 shares of NHTC restricted common stock
(the "Issued Shares"), promissory notes in the aggregate principle amount of
approximately $3,203,403 and a cash payment of $1,336,875 for a total purchase
price of approximately $18,227,000, including acquisition costs. Marketvision is
the exclusive developer and service provider of the direct selling software used
by the Company since mid-2001. The Company issued the shares of common stock
pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
The Company and its legal counsel have reviewed the listing criteria of
The Nasdaq National Market and believe that the Company currently satisfies the
quantitative listing requirements; provided however, that the Company currently
has two (2) independent directors and Nasdaq listed companies must have at least
three (3) independent directors. Accordingly, the Company intends to file in the
near future a listing application with The Nasdaq Stock Market for the quotation
of its shares of common stock, and to appoint an additional independent director
to its Board of Directors and its Audit Committee. No assurance can be given
that the Company will submit a listing application to Nasdaq, that if it is
submitted, it will be approved by Nasdaq, or if it is approved, when the
Company's shares will be quoted thereon.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31. Certification of Chief Financial Officer required by Section 302 of
the Sarbanes-Oxley Act of 2002.
32. Certification of Chief Financial Officer required by Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 15, 2004, the Company filed a Form 8-K with the SEC in
connection with its announcement of the acquisition of Marketvision
Communications Corp.
20
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 and CFO
Date: May 24, 2004
21