SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 10-KSB
(Mark one)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ________ to ________.
Commission file number 0-011228
NATURAL HEALTH TRENDS CORP.
(Name of Small Business Issuer in Its Charter)
Florida 59-2705336
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5605 N. MacArthur Boulevard, 11th Floor
Irving, Texas 75038
(Address of principal executive office)
(972) 819-2035
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange
On Which Registered
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.001
(Title of Class)
Class A Warrants
(Title of Class)
Class B Warrants
(Title of Class)
Units
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)has been
subject to such filing requirements for the past 90 days. Yes X No ____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB or any amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year: $24,794,036.
The number of shares of Common Stock held by nonaffiliates of the registrant
(as determined for the purpose of this Form 10-KSB only) as of April 1, 2002 was
290,633,450 with an approximate aggregate market value of $7,236,773, (based
upon the closing price of such shares as of such date). The number of shares of
the Common Stock of the issuer outstanding as of April 1, 2002 was 290,633,450.
Natural Health Trends Corp.
2001 Form 10-KSB Annual Report
Table of Contents Page
Part I
Item 1 Description of Business 1
Item 2 Description of Property 10
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a
Vote of Security Holders 11
Part II
Item 5 Market for Common Equity and
Related Stockholder Matters 11
Item 6 Management's Discussion and
Analysis or Plan of Operation 13
Item 7 Financial Statements and Supplementary Data 16
Item 8 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 16
Part III
Item 9 Directors, Executive Officers,
Promoters and Control Persons;
Compliance With Section 16(a) 16
Item 10 Executive Compensation 18
Item 11 Security Ownership of Certain
Beneficial Owners and Management 20
Item 12 Certain Relationships and Related
Transactions 21
Item 13 Exhibits, Lists
Schedules, and Reports on Form 8-K 22
Signatures 23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Corporate History
Natural Health Trends Corp. ("NHTC") is a Florida corporation. NHTC was
incorporated on December 1, 1988 as "Florida Institute of Massage Therapy, Inc."
and changed its name to "Natural Health Trends Corp." on June 24, 1993. NHTC's
common stock, par value $0.001 per share (the "Common Stock") is listed on the
Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "NHTC".
NHTC is a holding company that operates two businesses which distribute
products that promote health, wellness and sexual vitality through the
multi-level marketing ("MLM") channel. NHTC's largest operation is by Lexxus
International, Inc., ("Lexxus"), a Delaware corporation and a majority-owned
subsidiary of NHTC. Lexxus sells products that heighten mental and sexual
arousal, particularly in women. NHTC's other business, eKaire.com, Inc.
("eKaire"), distributes, nutritional supplements aimed at general health and
wellness through the internet and other channels. eKaire consists of companies
operating in the U.S., in Canada as Kaire International Canada Ltd. ("Kaire
Canada"), in Australia as Kaire Nutraceuticals Australia Pty. Ltd. ("Kaire
Australia"), in New Zealand as Kaire Nutraceuticals New Zealand Limited ("Kaire
New Zealand"), and in Trinidad as Kaire Trinidad, Ltd. ("Kaire Trinidad").
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus International,
Inc., a Delaware corporation. "(Lexxus"), the original founders of Lexxus
International received an aggregate of 10,000,000 shares of Common Stock.
In February 1999, through a wholly-owned subsidiary NHTC acquired certain
assets (the "Kaire Assets") of Kaire International, Inc., a Delaware corporation
("KII"). The assets included, but not limited to, the corporate name, all
variations and any other product name, registered and unregistered trademarks,
tradenames, servicemarks, patents, logos and copyrights of KII, and independent
associate lists. In exchange for the Kaire Assets, NHTC made the following
issuances:
o to 11 secured creditors of KII, $2,800,000 aggregate stated value of
Series F preferred stock, par value $1,000 per share, of NHTC (the
"Series F Preferred Stock");
o to two secured creditors of KII, $350,000 aggregate stated value of
Series G preferred stock, par value $1,000 per share, of NHTC (the
"Series G Preferred Stock");
o to Kaire International, Inc., five-year warrants to purchase 200,000
shares of NHTC's Common Stock exercisable at $4.06 per share.
In March 2001, Global Health Alternatives, Inc., a Delaware corporation and
wholly-owned subsidiary of NHTC ("GHA"), and Ellon, Inc., a Delaware corporation
and wholly-owned subsidiary of GHA ("Ellon"), filed for Chapter 7 bankruptcy
liquidation in the United States Bankruptcy Court of the Northern District of
Texas. Neither GHA nor Ellon had operations during the years 2000 or 2001. Both
GHA and Ellon were dissolved in June 2001.
In the second quarter of 2001, NHTC incorporated Lexxus International
(SW Pacific) Pty. Ltd., an Australian corporation and majority-owned subsidiary
of NHTC, which does business in Australia ("Lexxus Australia"). In addition,
NHTC incorporated Lexxus International (New Zealand) Limited, a New Zealand
corporation and majority-owned subsidiary of NHTC, which does business in New
Zealand ("Lexxus New Zealand").
In June 2001, NHTC incorporated Lighthouse Marketing Corporation ("LMC"),
a Delaware Corporation and a wholly-owned subsidiary of NHTC. As of December 31,
2001, LMC had not conducted any business, but intends to conduct business in the
future.
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In June 2001, NHTC sold 100% of the Common Stock in Kaire Nutraceuticals,
Inc., Delaware Corporation, to a South African firm for a purchase price of the
greater of (i) $50,000 per year for a period of five years, or (ii) for five
years, a percentage of net income based on a progressive scale of net sales
figures of the South African firm. As of December 31, 2001, no income has been
recognized on this transaction.
On November 16, 2001, NHTC incorporated Lexxus International Co.,
Ltd., a corporation organized under the laws of the Republic of China and a
majority-owned subsidiary of NHTC ("Lexxus Taiwan").
On January 28, 2002, NHTC incorporated MyLexxus Europe AG, a corporation
organized under the laws of Switzerland and is a majority-owned subsidiary of
NHTC ("Lexxus Europe"). This company manages the sales of product into sixteen
eastern European countries, including Russia.
In March 2002, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of Hong Kong and a majority-owned
subsidiary of NHTC ("Lexxus Hong Kong").
Industry Overview
Natural Health and "Quality of Life" Products
NHTC believes that there is a general desire in today's marketplace to be
fit, stay healthy, look younger, and lead a more satisfying life. Consumers are
finding that factors contributing to a longer life can be controlled by changes
in lifestyle, which include a regiment of vitamins and supplements, exercise and
relaxation and pampering. Consumers are looking for a healthier lifestyle in
this fast-paced society. They are also looking for the quick fix (eating out,
working out, quick luxuries). NHTC believes that this general mindset will
create a positive and profitable market for the products of Lexxus and eKaire.
The market for natural products and supplements is driven by the media
which continues to highlight problems with diet, including the fact that
consumers are becoming increasingly disenchanted with and skeptical about many
conventional medical approaches to disease treatment, growing consumer interest
in and acceptance of natural and alternative therapies and products, and recent
clarifications and changes of food and drug laws that have significantly eased
the regulatory burdens associated with the introduction and sale of dietary
supplements.
NHTC believes that public awareness of the positive effects of nutritional
supplements and natural remedies on health has been heightened by widely
publicized reports and medical research findings indicating a correlation
between the consumption and use of a wide variety of nutrients and natural
remedies and the reduced incidence of certain diseases.
NHTC believes that the aging of the United States population, together with
an increased focus on preventative and alternative health care measures, will
continue to fuel increased demand for certain nutritional supplement products
and natural remedies. Management also believes that the continuing shift to
managed healthcare delivery systems will place greater emphasis on disease
prevention and health maintenance, areas with which natural health products are
most identified.
While distribution of natural health products, through small to large sized
natural health food stores remains significant, the bulk of the growth is in the
mass merchandisers and health food chains, such as General Nutrition Centers,
which now represent the majority of sales and are the fastest growing channels
of distribution.
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Products
The following is a list of our principal products.
Lexxus
Viacreme TM is a topically applied creme designed to increase the sexual
satisfaction of women and accounted for approximately 70% of Lexxus' revenues in
2001. In the fall of 2001, Lexxus introduced two new "quality of life" products,
LexLips and La Vie. LexLips is a lip enhancing gloss for women designed to
create the effect of fuller lips and to reduce wrinkles around the mouth. La Vie
is a dietary supplement described as a non-alcoholic Bordeaux. In January 2002,
Lexxus launched a revolutionary "30-minute non-surgical facelift" product,
Skindulgence TM, that management expects will rival Viacreme TM in popularity
and sales volume.
eKaire
Energizing Products
The energizing product line consists primarily of natural stimulants
designed to enhance and increase vitality and endurance both mentally and
physically. Products in this category include Ginkgo Shield and Momentum.
o Ginkgo Shield assists in mental alertness and the circulatory system.
o Momentum helps increase and balance energy levels.
Enhancing Products
The enhancing product line is designed to support an individual's overall
health and includes such products as Immunol, Colloidal SilverKaire, Synerzyme,
Arthrokaire, Osteo Formula, Royal Hawaiian Noni and SlimKaire.
o Immunol is a shark liver oil based capsule which NHTC believes aids
in the human immune system. This product is imported exclusively by
eKaire into the United States.
o Colloidal Silverkaire is a solution of silver particles
electro-magnetically suspended in deionized water that provides
dietary support for the immune system.
o Synerzyme, a combination of naturally occurring enzymes and trace
minerals that enhance the efficacy of, enzymes that assists the body
with the breakdown and assimilation of various foods and fats.
o ArthroKaire is a dietary supplement containing glucosamine, which
helps to maintain the structural integrity of cartilage, tendons and
blood vessels.
o Osteo Formula is a dietary supplement that contains calcium which
aids in bone strength and overall skeletal system health.
o Noni is derived from a fruit grown only in the Central and South
Pacific, and contains high levels of naturally occurring vitamins,
minerals, trace elements, enzymes, and phytochemicals.
o Slimkaire is a time-release, thermogenic weight management program
with five herbal blends, including a thyroid support blend.
Slimkaire is designed to assist in safe weight loss while giving the
user a higher level of vitality and maintaining a healthy body. This
product contains Ma Huang, a natural ephedrine extract. NHTC
believes that its proprietary formula is superior to competitor
blends for the health conscious individual, because it has no
synthetic stimulant.
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Kaire also offers a thermogenic weight management program, SK II,
for individuals seeking a product without Ma Huang (ephedrine).
Optimizing Products
The optimizing product line provides many of the basic vitamins and
nutrients, which are missing in the typical adult diet, through products such as
MSM Complex, Bio10 and Celltonic Plus.
o MSM Complex supports an increased production of collagen and elastin
fibers and increases cell permeability.
o Bio10 is a live source of all 12 lactobacillus bacteria which helps
improve digestion, and the process and absorption of nutrients.
o Celltonic Plus is an organic mineral solution containing over 72
minerals and trace elements within an electrolyte drink.
Renewing Products
The renewing product line consists of moisturizing products designed to
soothe and refresh. These products include Aloe Gel and DermaKaire with
Pycnogenol(R).
o Aloe Gel is a topical creme that soothes and refreshes the skin.
o DermaKaire with Pycnogenol(R) is a moisturizing, whole-leaf Aloe
product combined with a powerful antioxidant to maintain healthy-
looking skin.
Reviving Products
The reviving product line consists primarily of nutritional supplements
based on antioxidants including Maritime Prime with Pycnogenol (R) and EnzoKaire
Complete.
o Maritime Prime with Pycnogenol (R) is a dietary supplement that
contains Pycnogenol (R) which helps maintain healthy circulation by
strengthening capillary walls, by protecting against free radical
damage caused by stress, pollution and chemical additives, and by
improving skin and collagen texture, elasticity and smoothness.
Pycnogenol (R) is a patented extract from the bark of the Maritime
Prime trees grown in southwestern France.
o EnzoKaire Complete is a dietary supplement containing Enzogenol TM
which is a natural antioxidant that provides protection for cells
against the effects of free radicals. It also increases energy and
endurance, and slows the aging process. Enzogenol TM is derived from
the bark of the New Zealand pine tree, Pinus radiata.
Most of the products in this product line are based on proprietary
formulations in several combinations containing natural products including
Pycnogenol (R) and Enzogenol TM. Products containing Pycnogenol (R) have not yet
been approved for direct importation into Australia.
Viacreme TM and Pycnogenol (R) and Enzogenol TM are trademarks of our
manufacturers.
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Marketing and Distribution
NHTC, through it subsidiaries Lexxus and eKaire, seeks to be a leader in
the personal health and wellness marketplace by driving its products into as
many venues and into as many markets as possible through its multi-level
marketing ("MLM") operations. NHTC's two-tiered mission is to enrich the lives
of the users of its products while enabling associates to take control of their
financial future and personal lives. In light of the wide variety of products
that NHTC and its subsidiaries offer, neither are dependent on any one specific
customer.
Each of NHTC's subsidiaries is set up as a MLM company using a network of
associates to sell products. Associates are independent contractors who purchase
products directly from the respective subsidiary for resale to retail consumers
or for personal consumption. Associates may elect to work on a full-time or a
part-time basis. The growth of an associate's business depends largely upon the
ability to recruit down-line associates and the strength of NHTC's products in
the marketplace.
To become a Lexxus associate, a person must sign an agreement to comply
with the policies and procedures of the applicable subsidiary and pay a nominal
$100 fee. To be considered "active", the associate must order a minimum of $100
of products from the appilcable Lexxussubsidiary during each year. Lexxus
currently has approximately 24,000 "active" associates.
To become an eKaire associate, a person must sign an agreement to comply
with the policies and procedures of the applicable subsidiary. To remain
"active", the associate must order a minimum of $50 of products from such
subsidiary during each year. Out of an approximately 60,000 accounts, eKaire
currently has approximately 6,000 "active" associates.
NHTC pays commissions to qualified associates based on sales volumes for
each commission period. NHTC offers one of the highest payouts in the MLM
sector, a 60% commission rate on Lexxus product orders and 40% commission rate
on eKaire product orders. NHTC believes that the uniqueness and efficacy of its
products, combined with the highest payout in the business, creates a highly
desirable business opportunity and work environment for its associates.
Additionally, Lexxus is implementing a new marketing plan by developing
vending machines for the distribution of Viacreme TM in such venues as
pharmacies, hotels and nightclubs. NHTC plans to debut the machines in the
marketplace during the third quarter of 2002. The machines will be closely
monitored to determine the venues where they are the most successful. This data
will be compiled and will provide NHTC with detailed data to assist in the
development of the rollout strategy for the machines.
NHTC sponsors opportunity meetings and participates in motivational
training events in key cities. These events are designed to inform prospective
and existing associates about both existing and new product lines and selling
techniques. Associates share their MLM experiences, their individual selling
styles, and their recruiting methods. Prospective associates are educated about
the structure, dynamics and benefits of the network marketing industry. NHTC
continues to develop marketing strategies and programs to motivate associates.
These programs are designed to increase associates' monthly product sales and
the recruiting of new associates.
To help maintain communication with the associate network, NHTC offers the
following support programs to its associates:
Touchtalk and Faxback
Touchtalk is an automated telephone system that associates can call 24
hours a day to receive reports on the sales activity of their organization and
listen to selected messages on special offers, marketing program updates, and
product information. Certain information is also available via facsimile to the
associate.
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Weekly Teleconference
Both Lexxus and eKaire hold a weekly teleconference with company management
and associate field leadership on various subjects such as technical product
discussions, associate organization building and management techniques.
Internet
NHTC maintains web-sites at www.nhtc.ws, www.kaire.com,
www.lexxusinternational.com and www.mylexxus.com. On each website, the user can
read company news, learn more about various products, place orders and sign up
to be an associate.
Product Literature
NHTC offers a variety of literature to its associates, including product
catalogs, informational brochures, pamphlets, and posters for individual
products.
Toll Free Access
Kaire offers a toll free number, to place orders and to sponsor new
associates. Both eKaire and Lexxus offer "live" consumer support.
Broadcast Fax/Broadcast E-mail
Announcements about Lexxus and eKaire and product specials are
automatically sent via facsimile and/or e-mail to associates.
Direct Selling
According to the Direct Selling Association, network marketing is one of
the fastest growing segments for the distribution of products. The Direct
Selling Association reports that, over 38.7 million individuals are now involved
in direct selling worldwide (of which network marketing is a major segment) and
that those involved in direct selling generate $82 billion in annual sales
around the world. Network marketing sales in the United States are estimated to
be approximately $25.6 billion annually.
Currently, NHTC has associates in all fifty states, the District of
Columbia, Puerto Rico, Guam, Canada, Australia, New Zealand, Trinidad and
Tobago, Taiwan, Hong Kong, and sixteen countries in eastern Europe, including
Russia, in order to maximize its direct selling efforts. NHTC believes that
significant market potential exists for its products in additional international
markets.
New Product Development
In January 2002, Lexxus introduced a "30-minute non-surgical facelift",
Skindulgence TM. The 30-Minute FaceLift process temporarily creates a more
youthful appearance by toning and firming facial muscles, diminishing fine lines
and wrinkles and by improving skin tone and color through a unique blend of
botanical extracts from both plants and trees. The masque is coupled with a
cleanser and moisturizer.
In early 2002, eKaire introduced a new Whey Protein product, a
pharmaceutical-grade milk serum protein isolate which enhances the immune
system.
Management believes that its ability to introduce new products increases
its associates' visibility and competitiveness in the marketplace. NHTC
maintains its own product review and evaluation staff and relies upon
independent research consultants and vendor research departments for product
research, development and formulation.
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Competition
NHTC competes with a significant number of other retailers that are engaged
in similar lines of business, including both sellers of health-related products
and MLMs. The two most well known and established of the MLMs are Avon Products,
Inc. and Amway Corp., each with over three million associates worldwide. Other
non-MLM retailers with which NHTC competes include retail pharmacies and health
stores such as GNC and Internet companies such as VitaminShoppe.com. The market
for nutritional supplements is rapidly growing and is highly competitive. The
MLM channel tends to sell products at a higher price compared to retailers,
which does pose a degree of competitive risk with respect to price points. In
the case of NHTC, however, several of NHTC's products are patented, or are
exclusive formulations. As a result, NHTC believes that it is significantly
insulated from this risk because duplication of the exact blends and proportions
of ingredients used by NHTC in its patented and exclusive formulations is
extremely difficult.
The market for Lexxus products shows tremendous potential, especially for
NHTC's flagship product, Viacreme TM. According to the Journal of the American
Medical Association, 46% of women have reportedly indicated to their physicians
that they have an interest in a product that would increase sexual desire and
satisfaction.
The eKaire products target consumers in the vitamin, mineral, and
nutritional supplement market, which generates nearly $50 billion per year.
eKaire offers a variety of nutraceutical products, some of which are proprietary
and exclusive to NHTC, making duplication very difficult.
Seasonality
NHTC believes that the recruitment of associates and the general sales
volume fluctuates on a pattern opposite of typical retail sales. Since NHTC is a
home-based business, the associates tend to take "typical" vacations such as
summer and winter holidays, thus, slowing down the sales volume during such
vacation periods.
Manufacturing
NHTC does not intend to develop its own manufacturing capabilities due to
the fact that NHTC believes the availability of manufacturing services from
third parties on a contract basis is adequate to meet its anticipated production
needs.
NHTC currently purchases all products from third parties that manufacture
such products to meet specific criteria and standards. All nutritional
supplements, raw materials and finished products are subject to sample testing,
weight testing and purity testing by independent laboratories.
Lexxus has a contractual arrangement with the manufacturer, 40 J's L.L.C.,
of Viacreme TM through the end of 2002. The arrangement grants worldwide MLM
rights to NHTC to sell the product, Viacreme TM. The arrangement calls for
perpetuity unless both parties agree to terminate the relationship.
For other products, NHTC places orders for finished goods and manufacturing
services to meet the demand of the market. These orders are based on price
quotations and other terms obtained from selected manufacturers.
Intellectual Property
In November 2001, Lexxus' product Viacreme TM was awarded a patent to its
formulator.
Most of the eKaire and Lexxus products are packaged under a "private
label." NHTC has registered trademarks for the names, logos and various product
names in the countries into eKaire and Lexxus currently operate. NHTC has
applied for trademark registration for names, logos and various product names in
several countries that into which eKaire and Lexxus are considering expanding.
NHTC currently has approximately 15 trademark registrations in the United States
and approximately two trademark applications pending with the United States
Patent and Trademark Office. NHTC's registered trademark expire or become
renewalble between the date ranges of March 2005 to October 2008. NHTC's policy
is to pursue registrations for all the
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trademarks associated with its key products and try to protect its legal rights
concerning its trademarks. NHTC relies on common law trademark rights to protect
its unregistered trademarks. These common law trademark rights do not provide
NHTC with the same level of protection as afforded by a United States federal
registration trademark. Common law trademark rights are limited to the
geographic area in which the trademark is actually utilized, while a United
States federal registration of a trademark enables the registrant to discontinue
the unauthorized use of the trademark by a third party anywhere in the United
States even if the registrant has never used the trademark in the geographic
area where the trademark is being used, provided however, that the unauthorized
third party user has not, prior to the registration date, perfected its common
law rights in the trademark in that geographic area.
Government Regulation
NHTC believes that all of our existing products are either cosmetics or
dietary supplements which do not require governmental approvals prior to
marketing in the United States though they are regulated by the Food & Drug
Administration ("FDA"). The processing, formulation, packaging, labeling and
advertising of such products, however, are subject to regulation by one or more
federal agencies including the FDA, the Federal Trade Commission, the Consumer
Products Safety Commission, the Department of Agriculture, the Department of
Alcohol, Tobacco and Firearms and the Environmental Protection Agency. NHTC's
activities are also subject to regulation by various agencies of the states and
localities in which its products are sold. In addition, the sale of NHTC's
products by associates in foreign markets are subject to regulation and
oversight by various federal, state and local agencies in those markets. At any
time, the FDA may increase the regulation of NHTC's products by deeming certain
ingredients used in the products to be drugs.
In January 2000, the FDA issued a final ruling, effective February 7, 2000,
related to structure/function statements that may be claimed on dietary
supplement product labels. The rule provides for clarification of when a
structure/function claim may be made without prior FDA approval and when a claim
constitutes disease related claims. The final rule provides for the adoption of
previously issued language by the Nutrition Labeling and Education Act ("NLEA")
for 'disease or health related conditions' and among other things allows for
express and implied disease claims to be made through the name of a product,
through a statement about the formulation of a product, or through the use of
pictures, vignettes, or symbols. The finalized rule now interprets DSHEA to
permit structure/function claims for the effects of "natural states" or common
conditions associated with natural states and may include such phrases as
"maintains a healthy circulatory system".
NHTC believes that the above finalized rule loosens the restrictions on its
labeling of products regarding dietary supplements and structure/function claims
provided that any such statements by NHTC do not suggest that the supplement is
intended to augment or replace a specific prescription drug or therapy for a
disease.
NHTC is unaware of any legal actions pending or threatened by the FDA or
any other governmental authority against NHTC or any of its products.
Certain ingredients utilized in our weight management products, primarily
ephedrine, are increasingly subject to regulations being promulgated by various
state agencies. These regulations generally limit the amount of the ingredient
or require a conspicuous warning label be affixed to each product. In addition,
certain states have prohibited the sale of ephedrine-based products to minors or
at all. There can be no assurances that NHTC will not be subject to additional
regulation on its weight management product line.
Direct selling activities are regulated by various governmental agencies.
These laws and regulations are generally intended to prevent fraudulent or
deceptive schemes, often referred to as "pyramid" or "chain sales" schemes, that
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promise quick rewards for little or no effort, require high entry costs, use
high pressure recruiting methods and/or do not involve legitimate products.
Based on research conducted in opening its existing markets the nature and
scope of inquiries from government regulatory authorities and our history of
operations in such markets to date, NHTC believes that its methods of
distribution are in compliance in all material respects with the laws and
regulations relating to direct selling activities of the countries in which it
currently operates. Even though NHTC believes that laws governing direct selling
are generally becoming more permissive, many countries currently have laws in
place that would prohibit NHTC from conducting business in such markets. There
can be no assurance that NHTC will be allowed to continue to conduct business in
each of its existing markets that it currently services or any new market it may
enter in the future.
NHTC believes that it is in material compliance with all regulations
applicable to our products and operations. Despite this belief, NHTC may be
found not to be in material compliance with existing regulations as a result of,
among other things, the considerable interpretative and enforcement discretion
given to regulators or misconduct by associates. There can be no assurances that
NHTC will not be subject to inquiries and regulatory investigations or disputes
and the effects of any adverse publicity resulting therefrom. Any assertion or
determination that NHTC or any of its associates are not in compliance with
existing laws or regulations could have a material adverse effect on the
business and results of operations. In addition, in any country or jurisdiction,
the adoption of new laws or regulations or changes in the interpretation of
existing laws or regulations could generate negative publicity and/or have a
material adverse effect on the business and results of operations. NHTC cannot
determine the effect, if any, that future governmental regulations or
administrative orders may have on the business and results of operations.
Moreover, governmental regulations in countries where NHTC may commence or
expand its operations may prevent, delay or limit market entry of certain
products or require the reformulation of such products. Regulatory action,
whether or not it results in a final determination adverse to NHTC, has the
potential to create negative publicity, with detrimental effects on the
motivation and recruitment of associates and consequently, on sales and
earnings.
Research and Development
NHTC has incurred minimal research and development costs in the years
ended December 31, 2001 and December 31, 2000. NHTC purchases finished goods
from manufacturers and sells directly to its associates for their resale or
personal consumption.
Environmental Matters
There are no environmental hazards that NHTC believes effects its
operations.
Employees
NHTC has its principle offices in Irving, Texas, and the subsidiary
companies have a total of eight offices in both the U.S. and abroad. NHTC has
offices and warehouses in Queensland, Australia, Auckland, New Zealand, British
Columbia, Canada, Kaohsiung, Taiwan, Moscow, Russia and Zurich, Switzerland. The
combined total of employees for Lexxus and eKaire is 43 at December 31, 2001,
including eight senior management, five administrative assistants, five
warehouse employees, and 25 "general operations" employees, which includes
employees in customer service and administrative roles. Forty employees are
full-time and five are part-time. NHTC has approximately 30,000 active
associates (combined Lexxus and eKaire), who act as independent contractors
selling NHTC's products and who are not employees of NHTC. None of the employees
are represented by a union, and NHTC believes that employee relations are good.
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Product Warranties and Returns
Lexxus
The Lexxus refund policies and procedures closely follow industry
standards. Associates may return unopened product in resalable condition for a
partial refund. All product purchased prior to October 1, 2001 had a 30-day
refund policy. All products purchased after October 1, 2001 must be returned
within twelve months of the original purchase date for refund eligibility.
Lexxus must be notified of the return in writing and such written requests will
be considered termination notice of the distributorship.
eKaire
eKaire product warranties and refund policies are similar to those of
other companies in the industry. If an associate is not satisfied with the
product then he/she can return to eKaire within 90 days of the first time the
product was purchased for a full refund. An associate may return or exchange
products that are unopened and in resalable condition for 30 days after the date
of purchase.
Management Information Systems
NHTC utilizes a third party to process associate orders and to calculate
the associate commission payments. The eKaire commission system provides each
associate with a detailed monthly accounting of all sales and recruiting
activity. These statements eliminate the need for substantial record keeping on
behalf of the associate. Lexxus maintains a web-based system to communicate
volume and commissions to its associates.
Insurance
NHTC currently carries general liability insurance in the amount of
$1,000,000 per occurrence and $1,000,000 in the aggregate. There can be no
assurance, however, that this insurance will be sufficient to cover potential
claims or that an adequate level of coverage will be available in the future at
a reasonable cost, if at all. A successful claim could have a material adverse
effect on NHTC.
-11-
ITEM 2. DESCRIPTION OF PROPERTY.
NHTC utilizes approximately 1,000 square feet of office space in Irving,
Texas on an as needed basis, through an arrangement with Regus Business Centre
which provides business solutions for companies. NHTC pays a minimum annual
rental fee of $2,100. Lexxus leases an aggregate of approximately 16,000 square
feet of office and warehouse space in Dallas, Texas. The lease term is 38
months, expiring on September 30, 2004, and the current rent is approximately
$151,500 per year. Additional warehousing for Lexxus is located in Branson,
Missouri where Lexxus utilizes approximately 35,000 square feet of warehouse
space. The lease term is on a month-to-month basis at a rent of $18,000 per
year. The Canadian office and warehouse of Lexxus and eKaire leases office space
in Langley, British Columbia, totaling approximately 3,600 square feet. The
lease term is 36 months, expiring on December 1, 2004 and the current rent is
approximately $25,000 per year.
Kaire Australia, Kaire New Zealand, Lexxus Australia and Lexxus New Zealand
lease office space and warehouse facilities of approximately 2,475 square feet
in Queensland, Australia. The lease term is 60 months, expiring on January 1,
2007, and the current rent is approximately $20,000 per year.
In March 2002, Lexxus Taiwan entered into a two-year lease for 6,314 square
feet of office space at a current rent of approximately $75,000 per year.
Kaire Trinidad leases approximately 1,100 square feet of office space in
downtown Port-of-Spain, Trinidad. The lease term is on a month-to-month basis.
NHTC is currently in the process of finding adequate office space for its
subsidiaries in Hong Kong and Russia.
NHTC believes that such properties are suitable and adequate for the
current operating needs.
ITEM 3. LEGAL PROCEEDINGS.
On August 4, 1997, Samantha Haimes brought an action in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against NHTC and National Health
Care Centers of America, Inc., a wholly-owned subsidiary of NHTC. NHTC asserted
counterclaims against Samantha Haimes and Leonard Haimes. The complaint arises
out of the defendants' alleged breach of contract in connection with NHTC's
natural health care center, which was located in Boca Raton, Florida. NHTC
agreed to settle such actions for shares of Common Stock with a fair market
value of $325,000, but not less than 125,000 shares of Common Stock and agreed
to register such shares. On October 10, 2000, due to noncompliance with the
settlement, a judgment was taken against NHTC in the amount of $325,000 plus
interest. On October 12, 2001, NHTC entered into a payment arrangement to settle
this obligation. NHTC has recorded a liability of $325,000 plus interest at ten
percent (10%) per annum, which is included in the financial statements for the
year ended December 31, 2001.
On July 10, 2000, the State of Texas obtained a judgment against NHTC in
the amount of $109,170 for unpaid sales taxes, penalties, interest, and attorney
fees. NHTC has entered into a voluntary payment arrangement and has recorded a
liability of $109,170 plus interest at seven percent (7%) per annum, which is
included in the financial statements for the year ended December 31, 2001.
On December 29, 2000, Merrill Corporation obtained a judgment against NHTC
in the amount of $145,497, plus interest at eight percent (8%) per annum, which
is included in the financial statements for the year ended December 31, 2001.
On October 30, 2001, Omni Group LLC filed an action in the State of
Vermont, Addison Superior Court against NHTC, alleging that NHTC tortuously
interfered with Omni Groups's existing contractual relationships and made
representations about Omni Group that were untrue. Omni Group is seeking $5
million in
-12-
compensatory damages and $5 million in punitive damages. NHTC is defending this
action. NHTC filed an answer on April 2, 2002 in which NHTC denied any
wrongdoing.
On November 22, 2001, Pfizer, Inc. filed an action in the United States
District Court, Southern District of New York, against Lexxus alleging that
Lexxus' distribution and marketing of Viancreme TM infringes on Pfizer's
federally registered trademark, Viagra (R). Pfizer's complaint alleges federal
false designation of origin and unfair competition, federal trademark dilution,
federal false advertising and unfair competition, common law trademark
infringement, trademark dilution and deceptive acts and practices. NHTC is
defending this action and is currently in settlement discussions with Pfizer.
On March 21, 2002, NFL Properties, Inc. brought an action in the Supreme
Court of the County of Onondaga in the State of New York against NHTC and
Natural Health Laboratories in the amount of approximately $126,000 for alleged
breach of contract. NHTC's management believes that the action naming NHTC as a
defendant was a case of mistaken identity, and is currently trying to have NHTC
removed as a defendant in this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the last quarter of 2001, NHTC did not submit any matter to the vote
of the shareholders.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
NHTC's Common Stock is currently quoted on the OTCBB under the symbol
"NHTC". NHTC's Common Stock was delisted from the NASDAQ Small Cap Market in
July 2000 for failure to meet the NASDAQ requirements for continued listing. The
following table sets forth the range of high and low closing sale prices as
reported by the NASDAQ Small Cap Market through June 2000 and the high and low
bid prices as reported by the OTCBB since June 2000.
NASDAQ SMALL CAP MARKET
Date High Closing Low Closing
2000
First Quarter 2.000 1.219
Second Quarter 1.219 0.281
OTCBB
Date High Bid Low Bid
2000
Third Quarter 0.438 0.031
Fourth Quarter 0.078 0.016
2001
First Quarter 0.047 0.016
Second Quarter 0.150 0.016
Third Quarter 0.070 0.030
Fourth Quarter 0.050 0.020
-13-
The OTCBB quotations reflect inter-dealer prices, without retail mark-ups,
mark-downs or commissions, and may not represent actual transactions.
In January 2001, NHTC increased the number of authorized shares of its
Common Stock to 500,000,000 by a majority vote of its Board of Directors.
Holders
As of March 4, 2002, NHTC had approximately 263 record holders of Common
Stock and approximately 1,200 beneficial holders of Common Stock.
Dividends
NHTC has not paid any cash dividends on Common Stock to date and does not
anticipate declaring or paying any cash dividends in the foreseeable future. In
addition, future financing arrangements, if any, may preclude or otherwise
restrict the payment of dividends.
Recent Sales of Unregistered Securities
In April 2001, NHTC issued 50 shares of Series H Preferred Stock with a
face value of $1,000 per share to an accredited investor, pursuant to Section
4(2) of the Securities Act of 1933, as amended (the "Act") and/or Rule 506 of
Regulation D, as promulgated by the Act.
In April 2001, NHTC issued 500,000 shares of Common Stock to certain
management employees, pursuant to Section 4(2) of the Act.
In May 2001, NHTC issued 50 shares of Series H preferred stock with a face
value of $1,000 per share, to an accredited investor, pursuant to Section 4(2)
of the Act and/or Rule 506 of Regulation D, as promulgated by the Act.
During 2001, NHTC issued 35,523,045 shares of Common Stock to accredited
investors upon conversion of $946,768, face amount of Series E Preferred Stock
pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D, as
promulgated by the Act.
During 2001, 51,559,177 shares of Common Stock to accredited investors upon
conversion of $1,416,408, face amount of Series F Preferred Stock pursuant to
Section 4(2) of the Act and/or Rule 506 of Regulation D, as
promulgated by the Act.
During 2001, NHTC issued 15,732,164 shares of Common Stock to accredited
investors upon conversion of $344,200, face amount of Series G Preferred Stock
pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D, as
promulgated by the Act.
During 2001, NHTC issued 27,699,368 shares of Common Stock to accredited
investors upon conversion of $614,542, face amount of Series H Preferred Stock
pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D, as
promulgated by the Act.
During 2001, NHTC issued 12,260,376 shares of Common Stock to an accredited
investor upon conversion of $206,194, face amount of Series J Preferred Stock
pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D, as
promulgated by the Act.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
BACKGROUND
Prior to August 1997, the operations of NHTC consisted of the operation of
natural health care centers and vocational schools. Upon the acquisition of GHA
on July 23, 1997, NHTC commenced the marketing and distribution of a line of
natural, over-the-counter homeopathic pharmaceutical products. Upon the
acquisition of certain Kaire assets in 1999, NHTC started the marketing and
distribution of a line of natural, herbal-based dietary supplements and personal
care products through a network marketing distribution system. NHTC discontinued
the operations of GHA during the fourth quarter of 1999 and filed for Chapter 7
bankruptcy in March 2001 on behalf of GHA and Ellon. In January 2001, NHTC
acquired Lexxus, which primarily sells "quality-of-life" products.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Revenues
Revenues for the year ended December 31, 2001 were approximately
$24,794,000 as compared to revenues for the year ended December 31, 2000 of
approximately $8,320,000, an increase of approximately $16,474,000 or
approximately 298%. The increased sales for the year ended December 31, 2001
were primarily from the sale of Lexxus products with eKaire showing a slight
rise in sales from the year ended December 31, 2000.
Cost of Sales
Cost of sales for the year ended December 31, 2001 was approximately
$5,876,000 or 24% of revenues. Cost of sales for the year ended December 31,
2000 was $2,410,000 or 29% of revenues. The total cost of sales increased by
approximately $3,466,000 or 244% most of which was attributable to Lexxus
product mix and sales volume compared to 2000 sales of only eKaire products. The
decrease in the cost of sales as a percentage of revenues is attributable to
lower manufactured cost of Lexxus products in conjunction with the higher sales
volume of Lexxus products are eKaire products.
Gross Profit
Gross profit increased from approximately $5,910,000 in the year ended
December 31, 2000 to approximately $18,918,000 in the year ended December 31,
2001. The increase was approximately $13,008,000 or 320%. The increase was
attributable to the increase in gross sales by both Lexxus and eKaire.
Commissions
Associate commissions were approximately $12,449,000 or 50% of revenues in
the year ended December 31, 2001 compared with approximately $3,682,000 or 44%
of revenues for the year ended December 31, 2000. The increase of commission
expense is directly related to the increase in gross sales and the terms of the
compensation plans. Lexxus carries an average payout of 60% of product sales
whereas eKaire has an average payout of 40% of product sales.
Selling, General and Administrative Expenses
Selling, general and administrative costs decreased from approximately
$5,777,000 or 69% of revenues in the year ended December 31, 2000 to
approximately $5,187,000 or 21% of revenues in the year ended December 31, 2001,
a decrease of approximately $590,000 or 11% which is attributable to the
downsizing of eKaire operations and shared overhead costs between Lexxus and
eKaire.
15
Interest Expense
Interest expense was approximately $260,000 or 3% of revenues in the year
ended December 31, 2000 compared with approximately $157,000 or 1% of revenues
in the year ended December 31, 2001, a decrease of approximately $103,000 due to
a decrease in debt borrowings, a decrease in the beneficial conversion feature
of certain debt instruments, and conversion of convertible debt into Common
Stock in 2001.
Income Taxes
Income tax benefits were not reflected in either period. The anticipated
benefits of utilizing net operating losses against future profits was not
recognized in the years ended December 31, 2001 or 2000 under the provisions of
Financial Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", utilizing its loss carry forwards as a component
of income tax expense. A valuation allowance equal to the net deferred tax asset
has been recorded as management has not been able to determine that it is more
likely than not that the deferred tax assets will be realized.
Income (Loss) from Continuing Operations
Net income from continuing operations was approximately $1,202,000 in the
year ended December 31, 2001 or approximately 5% of revenues as compared to the
net loss from continuing operations of approximately $12,803,000 or
approximately (154) % of revenues in the year ended December 31, 2000.
Discontinued Operations
NHTC discontinued the operations of its wholly-owned subsidiary in the
United Kingdom in February 2000 and recognized a loss of $15,000 on the
liquidation of this asset for the year ended December 31, 2000.
Gain on Forgiveness of Debt
During the year ended December 31, 2001, NHTC realized a gain of
approximately $820,000 on the various debt and payables related to the sale of
Kaire Nutraceuticals, Inc. During the year ended December 31, 2000, NHTC
realized a gain of approximately $2,148,000 on the various debt and payables of
GHA due to the filing of a Chapter 7 bankruptcy.
Liquidity and Capital Resources
NHTC has funded the working capital and capital expenditure requirements
primarily from cash provided through sales of products, borrowings from
institutions and individuals, and from the sale of securities in private
placements.
In March 2000, NHTC sold 1,000 shares of Series J Preferred Stock, par
value $1,000 per share, (the "Series J Preferred Stock") realizing net proceeds
of $1,000,000. Series J Preferred Stock pays a dividend at the rate of 10% per
annum. Series J Preferred Stock and the accrued dividends thereon are
convertible into shares of Common Stock at a conversion price equal to the lower
of the closing bid price on the conversion date or 70% of the average closing
bid price of the Common Stock for the lowest three trading days during the
twenty day period immediately preceding the date on which NHTC receives notice
of conversion from a holder thereof. In connection with the offering of the
Series J Preferred Stock, NHTC issued warrants to purchase 141,907 shares of
Common Stock at an exercise price of $1.41 per share. During 2001, $206,194,
face amount of Series J Preferred Stock was converted into 12,260,376 shares of
Common Stock.
In May 2000, NHTC borrowed $20,700 from Tyler Pipeline, Inc. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of Common Stock at a discount equal to 60% of the
average closing bid price of the Common Stock on the three days preceding notice
of conversion of the note. In April 2001, this note was fully satisfied through
conversion into an aggregate of 2,163,710 shares of Common Stock.
16
In October 2000, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. The Series H Preferred Stock pays
dividends of 10% per annum and is convertible into shares of Common Stock at the
lower of the closing bid price on the conversion date or 75% of the market value
of the Common Stock on the conversion date.
In October 2000, NHTC borrowed $10,000 from Meridian Investments, Inc. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of Common Stock at a discount equal to 60% of the
average closing bid price of the Common Stock on the three days preceding notice
of conversion. The note was repaid in November 2001.
In November 2000, NHTC borrowed $25,000 from Filin Corp. This indebtedness
was evidenced by NHTC's issuance of a convertible promissory note. The note
bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of Common Stock at a discount equal to 60% of the
average closing bid price of the Common Stock on the three days preceding notice
of conversion. The note was converted into an aggregate of 1,452,805 shares of
Common Stock in August 2001.
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus. The original
founders of Lexxus International received an aggregate of 10,000,000 shares of
Common Stock.
In April 2001, NHTC borrowed $100,000 from Augusta Street LLC. This
indebtedness was evidenced by NHTC's issuance of a convertible promissory note.
The note bears interest at 10% per annum and is payable on demand. The note is
convertible into shares of Common Stock at a discount equal to 75% of the
average closing bid price of the Common Stock on the five days preceding notice
of conversion.
In April 2001, NHTC issued an aggregate of 200,000 shares of Common Stock
to an individual in exchange for a loan of $50,000.
In April 2001, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. The Series H Preferred Stock pays
dividends of 10% per annum and is convertible into shares of Common Stock at the
lower of the closing bid price on the conversion date or 75% of the market value
of the Common Stock on the conversion date.
In May 2001, NHTC issued 50 shares of Series H Preferred Stock for $50,000
realizing net proceeds of $43,500. The Series H Preferred Stock pays dividends
of 10% per annum and is convertible into shares of Common Stock at the lower of
the closing bid price on the conversion date or 75% of the market value of the
Common Stock on the conversion date
At December 31, 2001, the ratio of current assets to current liabilities
was .31 to 1.0 and NHTC had a working capital deficit of approximately
$3,522,000.
Cash provided by operations for the period ended December 31, 2001 was
approximately $35,000. Cash used by investing activities during the period was
approximately $302,000, which primarily relates to the acquisition of fixed
assets of approximately $141,000 and websites of $133,000. Cash provided by
financing activities during the period was approximately $449,000, primarily
from the issuance of preferred stock of $100,000 and notes payable of $382,000.
Total cash increased by approximately $216,000 during the year.
17
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NHTC's consolidated financial statements, including the notes thereto,
together with the report of independent certified public accountants thereon,
are presented beginning at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a).
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information concerning the directors
and executive officers.
Name Age Position
Mark D. Woodburn 31 President, Chief Financial Officer,
Secretary and sole director
The following is a brief summary of NHTC's sole executive officer and director:
Mark D. Woodburn became Secretary of NHTC in April 1999. In August 2000, Mr.
Woodburn also became a director of NHTC. Mr. Woodburn became the President of
NHTC in September 2000. Between April 1999 and September 2000, Mr. Woodburn
served as NHTC's Chief Financial Officer. Since 1992, Mr. Woodburn served as
a director and the Secretary of Kaire International, Inc. Currently, Mr.
Woodburn serves as Chief Financial Officer of Lexxus International, Inc. and
eKaire.com, Inc.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto furnished
to the Company pursuant to Rule 16a-3(e), promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"), during the Company's fiscal year
ended December 31, 2001, and (ii) Forms 5 and amendments thereto and/or written
representations furnished to NHTC by any director, officer or ten percent
security holder of NHTC (collectively "Reporting Persons") stating that he or
she was not required to file a Form 5 during the fiscal year ended December 31,
2001, it has been determined that no Reporting Person is delinquent with respect
to his or her reporting obligations set forth in Section 16(a) of the Exchange
Act.
ITEM 10. EXECUTIVE COMPENSATION.
NHTC does not have a bonus, profit sharing, or deferred compensation plan for
the benefit of employees, officers or directors.
18
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended December 31, 2001,
2000 and 1999 with respect to the following officers.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
Name and Other Principal Position Year Salary ($) Bonus Other Annual Restricted Securities
($) Compensation Stock Underlying
($)(1) Award(s) ($) Options/SARs
(#)
Mark D. Woodburn (2) 2001 17,000 - - - -
President 2000 34,000 - - - -
1999 55,750 - - - -
Terry LaCore (3) 2001 115,000 - - - 3,000,000
CEO of Lexxus International, Inc. 2000 100,000 - 16,016 - -
1999 80,769 - - - -
Robert L. Richards, (4) 2001 - - - - -
Former President & CEO 2000 68,692 - - - -
1999 96,923 - - - -
Joseph P. Grace (5) 1999 133,333 - - - -
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Mr. Woodburn became NHTC's President in September 2000. He became
NHTC's Secretary in April 1999. Between April 1999 and September 2000, he
served as NHTC's Chief Financial Officer.
(3) Mr. LaCore is the CEO of Lexxus.
(4) Mr. Richards became NHTC's President in September 1999 and resigned in
August 2000.
(5) Mr. Grace resigned in September 1999.
19
Stock Options
In January 2001, NHTC granted the following options to purchase Common
Stock to the executive officers named above.
Name Number of Percent of total Exercise base price Expiration Date
securities options/SARs ($/share)
underlying granted to
options/SARs granted employees in
fiscal year
Mark Woodburn - - - -
Terry LaCore 3,000,000 100% $.011/share January 2011
(1) Does not include the 3,000,000 options issued to Benchmark Consulting Group.
During the fiscal year ended December 31, 2001, Mr. LaCore had not
exercised any of these options. The shares issued to Mr. LaCore have certain
anti-dilutive features. The anti-dilutive provision provides for additional
options to be granted in the event NHTC issues additional Common Stock.
Consulting Agreement
In January 2001, NHTC entered into a consulting contract with Benchmark
Consulting Group, pursuant to which Benchmark agreed to advise NHTC in
connection with the acquisition of, startup of, and/or merger with other
companies introduced to NHTC by Benchmark, and any divesture of NHTC's assets,
subsidiaries, or the sale of NHTC itself. NHTC issued to Benchmark options to
purchase an aggregate of 3,000,000 shares of Common Stock at an exercise price
of $.011 per share. These shares have certain anti-dilutive features. The
anti-dilutive provision provides for additional options to be granted in the
event NHTC issues additional Common Stock.
Directors' Compensation
Neither the director of NHTC nor those of any of its subsidiaries
receive any fixed compensation for their services as directors. Directors are
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with performance of their duties. Neither NHTC nor any of its subsidiaries paid
its directors any cash or other form of compensation for acting in such
capacity, although directors who were also executive officers received cash
compensation for acting in the capacity of executive officers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information as to the Common Stock
ownership of each of the directors, executive officers, all executive officers
and directors as a group, and all persons known to us to be the beneficial
owners of more than five percent of NHTC's Common Stock as of January 31, 2002.
Name and address of Amount and nature of % of Class
Beneficial Owner Beneficial Owner
Mark D. Woodburn - *
c/o NHTC
5605 N. MacArthur Blvd.
11th Floor
Irving, TX 75038
20
The Endeavour Capital 25,349,643 9.9%
Investment Fund SA
Cumberland House
#27 Cumberland Street
Nassau, New Providence,
The Bahamas
All Executive Officers and - *
Directors as a Group (1 person)
* Owns less than one (1%) percent.
Unless otherwise noted, all persons named in the table have sole voting and
dispositive power with respect to all shares of Common Stock beneficially
owned by them.
The table does not include shares of Common Stock issuable upon the
conversion of the Series F, H, and J preferred stock, which are the only
classes of Preferred Stock that have not been entirely converted into
shares of Common Stock. Pursuant to the terms of the Series F, H, and J
preferred stock, the holders thereof generally are not entitled to convert
such instruments to the extent that such conversion would increase the
holders' beneficial ownership of Common Stock to an amount in excess of
4.9%, except in the event of mandatory conversion. On the date of a
mandatory conversion of the Series F, H, and J preferred stock, a change in
control may occur, based upon the number of shares of Common Stock issuable
to such holders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 2001, NHTC owed approximately $70,000 to Robert L.
Richards, its former president and a former director, in connection with
liabilities assumed in connection with the KII acquisition.
NHTC believes that the transactions between NHTC and any of the officers,
directors and/or five percent (5%) stockholders have been on terms no less
favorable to NHTC than could have been obtained from independent third parties.
Future transactions, if any, between NHTC and any of its officers, directors,
and/or five percent (5%) stockholders will be on terms no less favorable to NHTC
than could be obtained from independent third parties and will be approved by a
majority of the independent, disinterested directors. In addition, any
forgiveness of indebtedness of officers, directors or five percent (5%)
stockholders will be approved by a majority of disinterested directors who do
not have an interest in the transactions and who have access, at NHTC's expense,
to counsel.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
(a) Exhibits
Index to Exhibits
NUMBER DESCRIPTION OF EXHIBIT
2.2 Acquisition Agreement among NHTC, NHTC Acquisition
Corp. and Kaire International, Inc. (the "Acquisition
Agreement").(3)
21
2.3 Acquisition Agreement among NHTC and Lexxus International *
3.1 Amended and Restated Certificate of Incorporation of the
Company.(4)
3.2 Amended and Restated By-Laws of NHTC.(4)
4.1 Specimen Certificate of NHTC's Common Stock.(4)
4.2 Form of Class A Warrant.(4)
4.3 Form of Class B Warrant.(4)
4.4 Form of Warrant Agreement between NHTC and
Continental Stock Transfer & Trust Company for Class A and B
Warrants.(4)
4.5 1994 Stock Option Plan.(4)
4.6 1997 Stock Option Plan.(11)
4.7 1998 Stock Option Plan.(11)
4.8 Articles of Amendment of Articles of Incorporation of the
Company.(6)
4.9 Articles of Amendment of Articles of Incorporation- Series C
Preferred Stock.(7)
4.10 Articles of Amendment of Articles of Incorporation- Series E
Preferred Stock.(3)
4.11 Articles of Amendment of Articles of Incorporation- Series F
Preferred Stock.(3)
4.12 Articles of Amendment of Articles of Incorporation- Series G
Preferred Stock.(3)
4.13 Articles of Amendment of Articles of Incorporation- Series H
Preferred Stock.(3)
4.14 Form of Warrant in connection with the Acquisition
Agreement.(3)
4.15 Articles of Amendment of Articles of Incorporation - Series J Preferred
Stock (13)
4.16 Stock Option Agreement among NHTC and Terry LaCore *
4.17 Stock Option Agreement among NHTC and Benchmark Consulting Group *
10.17 Convertible Promissory Note among NHTC and Augusta Street LLC *
10.18 Convertible Promissory Note among NHTC and Augusta Street LLC *
10.19 Consulting Agreement between NHTC and Summit Trading Limited *
10.20 Lease for Registrant's Irving, Texas facility *
10.21 Distributor Agreement-40J's *
21.1 List of Subsidiaries.*
--------------
(*) Filed herewith.
(3) Previously filed with NHTC's Proxy Statement on Schedule 14A,
dated January 25, 1999.
(4) Previously filed with Registration Statement No. 33-91184.
(5) Previously filed with NHTC's Form 8-K dated August 7, 1997.
(6) Previously filed with NHTC's Form 10-QSB dated June 30, 1997.
(7) Previously filed with the Company's Form 10-QSB dated September 30,
1998.
(8) Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1996.
(9) Previously filed with NHTC's Form 10-KSB for the year ended
December 31, 1998.
(11) Previously filed with NHTC's Registration Statement, File
No. 333-80465.
(13) Previously filed with NHTC's Form 8-K dated March 17, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2001.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, we have duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Natural Health Trends Corp.
Signature Title Date
/s/ Mark D. Woodburn President and Chief Financial
-------------------------- Officer April 16, 2002
Mark D. Woodburn (Principal Financial and Accounting
Officer)
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Mark D. Woodburn Sole Director April 16, 2002
-------------------------
Mark D. Woodburn
23
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements of Natural Health Trends Corp.
are included in response to Item 7:
PAGE
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheet................................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Stockholders' Deficit..........................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
Irving, Texas
We have audited the accompanying consolidated balance sheet of Natural
Health Trends Corp. and Subsidiaries as of December 31, 2001 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended December 31, 2001 and 2000. These financial statements are the
responsibility of NHTC's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, the financial position of Natural Health Trends Corp. and Subsidiaries
as of December 31, 2001 and the results of its operations and its cash flows for
the years ended December 31, 2001 and 2000, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
NHTC will continue as a going concern. The Company had incurred a loss in year
ended December 31, 2000 and as more fully described in Note 2, the Company
anticipates that additional funding will be necessary to sustain the Company's
operations through the fiscal year ending December 31, 2001. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Feldman Sherb & Co., P.C.
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
April 5, 2001
F-2
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2001
Current Assets
Cash $324,315
Account receivables 119,817
Inventories 924,761
Prepaid expenses and other current assets 247,191
-----------------
Total Current Assets 1,616,084
Restricted cash 100,809
Property and Equipment, net 147,919
Goodwill 207,765
Website 99,750
Deposits and Other Assets 324,685
-----------------
Total Assets $2,497,012
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable $4,035,674
Accrued expenses 146,048
Accrued bonus payable 119,852
Notes Payable 558,088
Current portion of long term debt 171,070
Other current liabilities 107,223
-----------------
Total Current Liabilities 5,137,955
Long Term Notes Payable 292,313
-----------------
Total Liabilities 5,430,268
-----------------
Stockholders' Deficit:
Preferred stock 2,324,298
Common stock 220,938
Additional paid in capital 29,218,823
Accumulated deficit (34,278,824)
Deferred compensation (416,250)
Cumulative currency translation adjustment (2,241)
-----------------
Total Stockholders' Deficit (2,933,256)
-----------------
Total Liabilities and Stockholders' Deficit $2,497,012
=================
See Notes to Consolidated Financial Statements
F-3
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
2001 2000
------------------ -------------------
Revenues $ 24,794,036 $ 8,320,105
Cost of Sales 5,875,970 2,410,096
------------------ -------------------
Gross Profit 18,918,066 5,910,009
Associate commissions 12,449,357 3,681,646
Write-down of patents and goodwill - 9,002,582
Selling, general and administrative expenses 5,186,633 5,777,474
------------------ -------------------
Operating income (loss) 1,282,076 (12,551,693)
Minority Interest in Loss of Subsidiary 105,686 -
Gain (loss) on foreign exchange (5,861) 9,076
Other income (expense) (23,229) -
Interest (net) (156,549) (260,160)
------------------ -------------------
Income (loss) from continuing operations 1,202,123 (12,802,777)
Discontinued Operations:
Loss on disposal - (15,000)
------------------ -------------------
Income (loss) before extraordinary gain 1,202,123 (12,817,777)
Extraordinary gain - forgiveness of debt 820,498 2,148,478
------------------ -------------------
Net income (loss) 2,022,621 (10,669,299)
Preferred stock dividends 1,089,231 1,277,251
------------------ -------------------
Net income (loss) to common shareholders $ 933,390 $ (11,946,550)
================== ===================
Basic income (loss) per common share:
Continuing Operations $ 0.01 $ (1.47)
Discontinued Operations 0.00 0.00
Extraordinary gain 0.00 0.22
------------------ -------------------
Net income (loss) to common shareholders $ 0.01 $ (1.25)
================== ===================
Basic weighted common shares used 134,206,832 9,588,718
================== ===================
Diluted income (loss) per common share:
Continuing Operations $ 0.00 $ (1.47)
Discontinued Operations 0.00 0.00
Extraordinary gain 0.00 0.22
------------------ -------------------
Net income (loss) to common shareholders $ 0.00 $ (1.25)
================== ===================
Diluted weighted common shares used 239,317,475 9,588,718
================== ===================
See Notes to Consolidated Financial Statements.
F-4
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Common Stock Preferred Stock Accumulated Foreign Deferred
Shares Amount Shares Amount APIC Deficit Currency Comp Total
BALANCE 7,989,846 $7,990 5,164 $5,163,696 $21,443,914 $(23,165,664) - $(666,000) $2,783,936
-December 31,
1999
Issuance of - - 1,000 1,000,000 (62,530) - - - 937,470
Convertible
Series J
Preferred stock
Issuance of - - - - 100,000 (100,000) - - -
Common Stock
warrants
Conversion of 434,660 435 (359) (359,154) 385,068 (26,349) - - -
Series H
Preferred stock
Conversion of 3,935,171 3,934 - - 1,216,053 - - - 1,219,987
Notes Payable to
Common Stock
Conversion of 2,984,122 2,984 (94) (93,232) 90,248 - - - -
Series E
Preferred Stock
Conversion of 279,852 280 (6) (5,800) 5,520 - - - -
Series G
Preferred Stock
Issuance of - - 50 50,000 - - - - 50,000
Convertible
Series H
Preferred stock
Conversion of 138,318 138 (3) (3,100) 2,962 - - - -
Series F
Preferred stock
Write down - - - - (555,000) - - 555,000 -
deferred
compensation
Amortize - - - - - - - 111,000 111,000
Deferred
Compensation
Foreign currency - - - - - - (37,203) - (37,203)
translation
Preferred Stock - - - - 1,250,902 (1,250,902) - - -
Dividend
Adjust Note - - - - (133,333) - - - (133,333)
Payable due in
Common Stock
Net Loss - - - - - (10,669,299) - - (10,669,299)
BALANCE -December
31, 2000 15,761,970 15,761 5,752 5,752,410 23,743,804 (35,212,214) (37,203) - (5,737,442)
Conversion of 35,523,045 35,523 (947) (946,768) 911,245 - - - -
Convertible
Series E
Preferred stock
Conversion of 51,559,177 51,559 (1,416) (1,416,408) 1,364,849 - - - -
Convertible
Series F
Preferred Stock
Conversion of 15,732,164 15,732 (344) (344,200) 328,468 - - - -
Convertible
Series G
Preferred Stock
Conversion of 27,699,368 27,700 (615) (614,542) 586,842 - - - -
Convertible
Series H
Preferred Stock
Issuance of - - 100 100,000 - - - - 100,000
Convertible
Series H
Preferred stock
Series J 12,260,376 12,261 (206) (206,194) 193,933 - - - -
Conversion of
Note Payable to 22,887,006 22,887 - - 400,126 - - - 423,013
Common Stock
Shares Issued for 21,224,601 21,225 - - 500,325 - - (416,250) 105,300
Services
Penalties 8,290,013 8,290 - - - - - - 8,290
Preferred Stock - - - - 1,089,231 (1,089,231) - - -
Dividends
Foreign currency - - - - - - 34,962 - 34,962
translation
Acquisition 10,000,000 10,000 - - 100,000 - - - 110,000
Net Income - - - - - 2,022,621 - - 2,022,621
-----------------------------------------------------------------------------------------------------------
BALANCE-December 220,937,720 $220,938 2,324 $2,324,298 $29,218,823 $(34,278,824) $(2,241) $(416,250) $(2,933,256)
31, 2001 ===========================================================================================================
See Notes to Consolidated Financial Statements.
F-5
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------
2001 2000
--------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,022,621 $(10,669,299)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Loss on dissolution - 15,000
Depreciation and amortization 90,578 364,400
Loss on disposal of fixed asset - (666,856)
Write down of patents and goodwill - 9,002,582
Gain on forgiveness of debt (820,498) (2,148,478)
Issuance of common stock in
settlement of interest - 6,059
Minority interest in loss of subsidiary (105,686) -
Common stock issued for
services and penalties 529,840 -
Changes in assets and liabilities:
Accounts receivable (68,049) 355,722
Inventories (727,692) 863,065
Prepaid expenses (229,599) 157,117
Deposits and other assets (237,646) (11,432)
Accounts payable and cash overdraft 1,209,237 683,473
Accrued expenses (1,332,182) 52,731
Accrued consulting contract - 666,000
Deferred revenue (119,413) (408,418)
Other current liabilities (177,432) 7,545
----------------- -------------------
Total Adjustments (1,988,542) 8,938,510
------------------ -------------------
NET PROVIDED BY (USED IN)
OPERATING ACTIVITIES 34,079 (1,730,789)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (141,199) (7,421)
Proceeds from the sale of
fixed assets - 10,533
Business acquisitions,
net of cash acquired - (27,587)
Purchase of websites (133,000) -
Increase in restricted cash (27,975) -
------------------ -------------------
NET CASH USED IN INVESTING
ACTIVITIES (302,174) (24,475)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase from cash overdraft - (43,284)
Decrease in restricted cash - 79,671
Proceeds from preferred stock 100,000 1,050,000
Proceeds from notes payable
and long-term debt 382,216 512,976
Payments of notes payable
and long-term debt (33,187) (169,743)
Redemption of preferred stock - -
------------------ -------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 449,029 1,429,620
------------------ -------------------
Effect of Exchange rates 34,962 -
NET INCREASE IN CASH 215,896 (325,644)
CASH, BEGINNING OF YEAR 108,419 434,063
------------------- -------------------
CASH, END OF YEAR $ 324,315 $ 108,419
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Conversion of preferred stock to common
stock $3,528,112 $ 461,286
============== ================
Conversion of debentures, notes payable
and related accrued interest
to common stock $ 521,550 $ 1,219,987
============== ================
Preferred stock dividends $1,089,231 $ 1,277,251
============== ================
Common stock issued for acquisition $ 110,000 $ -
============== ================
See Notes to Consolidated Financial Statements.
F-6
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 and 2000.
1. ORGANIZATION
Natural Health Trends Corp. ("NHTC") is a Florida corporation. NHTC was
incorporated on December 1, 1988 as "Florida Institute of Massage Therapy, Inc."
and changed its name to "Natural Health Trends Corp." on June 24, 1993. NHTC's
common stock, par value $0.001 per share (the "Common Stock") is listed on the
Over-the-Counter Bulletin Board (the "OTCBB") under the symbol "NHTC".
NHTC is a holding company that operates two businesses which distribute
products that promote health, wellness and sexual vitality through the
multi-level marketing ("MLM") channel. NHTC's largest operation is Lexxus
International, Inc. ("Lexxus"), a Delaware corporation and a majority-owned
subsidiary of NHTC. Lexxus sells products that heighten mental and sexual
arousal, particularly in women. NHTC's other business, eKaire.com, Inc.
("eKaire"), distributes nutritional supplements aimed at general health and
wellness through the Internet and other channels. eKaire consists of companies
operating in the U.S., in Canada as Kaire International Canada Ltd. ("Kaire
Canada"), in Australia as Kaire Nutraceuticals Australia Pty. Ltd. ("Kaire
Australia"), in New Zealand as Kaire Nutraceuticals New Zealand Limited ("Kaire
New Zealand"), and in Trinidad as Kaire Trinidad, Ltd. ("Kaire Trinidad").
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus International,
Inc. ("Lexxus"), a Delaware corporation. The original founders of Lexxus
International received an aggregate of 10,000,000 shares of Common Stock.
In February 1999, NHTC, through a wholly-owned subsidiary, 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,
trade names, servicemarks, patents, logos and copyrights of KII, and independent
associate lists. In exchange for the Kaire Assets, NHTC made the following
issuances:
o to 11 secured creditors of KII, $2,800,000 aggregate stated value of
Series F preferred stock, par value $1,000 per share, of NHTC (the
"Series F Preferred Stock");
o to two secured creditors of KII, $350,000 aggregate stated value of
Series G preferred stock, par value $1,000 per share, of NHTC (the
"Series G Preferred Stock");
o to Kaire International, Inc., 5 year warrants to purchase 200,000
shares of NHTC's Common Stock exercisable at $4.06 per share.
In March 2001, Global Health Alternatives, Inc., a Delaware corporation and
wholly-owned subsidiary of NHTC ("GHA"), and Ellon, Inc., a Delaware corporation
and wholly-owned subsidiary of GHA ("Ellon"), filed for Chapter 7 bankruptcy
liquidation in the United States Bankruptcy Court of the Northern District of
Texas. Neither GHA nor Ellon had operations during the years 2000 or 2001. Both
GHA and Ellon were dissolved in June 2001.
In the second quarter of 2001, NHTC incorporated Lexxus International (SW
Pacific) Pty. Ltd., an Australian corporation and majority-owned subsidiary of
NHTC, which does business in Australia ("Lexxus Australia"). In addition, NHTC
incorporated Lexxus International (New Zealand) Limited, a New Zealand
corporation and majority-owned subsidiary of NHTC, which does business in New
Zealand ("Lexxus New Zealand").
In June 2001, NHTC incorporated Lighthouse Marketing Corporation ("LMC"), a
Delaware Corporation and a wholly-owned subsidiary of NHTC. As of December 31,
2001, LMC had not conducted any business, but intends to conduct business in the
future.
F-7
In June 2001, NHTC sold 100% of the Common Stock in Kaire Nutraceuticals,
Inc., Delaware Corporation, to a South African firm for a purchase price of the
greater of (i) $50,000 per year for a period of five years, or (ii) for five
years, a percentage of net income based on a progressive scale of net sales
figures of the South African firm. As of December 31, 2001, no income has been
recognized on this transaction.
On November 16, 2001, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of the Republic of China and a
majority-owned subsidiary of NHTC ("Lexxus Taiwan").
On January 28, 2002, NHTC incorporated MyLexxus Europe AG, a corporation
organized under the laws of Switzerland and a majority-owned subsidiary of NHTC
("Lexxus Europe"). This company manages the sales of product into sixteen
eastern European countries, including Russia.
In March 2002, NHTC incorporated Lexxus International Co., Ltd., a
corporation organized under the laws of Hong Kong and a majority-owned
subsidiary of NHTC ("Lexxus Hong Kong").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of Natural Health Trends
Corp. and its subsidiaries. All material inter-company transactions
have been eliminated in consolidation.
B. Accounts Receivable - Accounts receivable are stated net of
allowance for doubtful accounts of approximately $0.
C. Inventories - Inventories consisting primarily of nutritional
supplements and "quality of life" products are stated at the lower of
cost or market. Cost is determined using the first-in, first-out
method.
D. Property and Equipment - Property and equipment are carried at
cost. Depreciation is computed using the straight-line method over the
useful lives of the various assets.
E. Cash Equivalents - Cash equivalents consist of money market
accounts and commercial paper with an initial term of fewer than three
months. For purposes of the statement of cash flows, NHTC considers
highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
F. Earnings (Loss) Per Share-Accounting Standards No. 128, "Earnings
Per Share" SFAS 128 requires a presentation of "Basic" and (where
applicable) "Diluted" earnings per share. Generally, Basic earnings
per share is computed on only the weighted average number of common
shares actually outstanding during the period, and the Diluted
computation considers potential shares issuable upon exercise or
conversion of other outstanding instruments where dilution would
result. Diluted earnings per share is not being shown in the year
ended December 31, 2000 due to the fact that this year has a net loss
and the conversion of the preferred stock and Common Stock outstanding
during that year would be anti-dilutive.
G. Accounting Estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
H. Income Taxes-Pursuant to Statement of Financial Accounting
Standards No. 109 ("SFAS 109") "Accounting for Income Taxes", NHTC
accounts for income taxes under the liability method. Under the
liability method, a deferred tax asset or liability is determined
based upon the tax effect of the differences between the financial
statement and tax basis of assets and liabilities as measured by the
enacted rates which will be in effect when these differences reverse.
F-8
I. Fair Value of Financial Instruments-The carrying amounts reported
in the balance sheet for cash, receivables, accounts payable, accrued
expenses, and notes payable approximate fair value based on the
short-term maturity of these instruments.
J. Stock Based Compensation-NHTC accounts for stock transactions in
accordance with APB Opinion No. 25, "Accounting For Stock Issued To
Employees." In accordance with Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting For Stock-Based
Compensation," NHTC adopted the pro forma disclosure requirements of
SFAS 123.
K. Impairment of Long-Lived Assets-NHTC reviews long-lived assets,
certain identifiable assets and goodwill related to those assets on a
quarterly basis for impairment whenever circumstances and situations
change such that there is an indication that the carrying amounts may
not be recovered. At December 31, 2000, NHTC recorded a charge against
patents, customer lists and goodwill upon such review.
L. Basis of Presentation - NHTC had a working capital deficiency of
approximately $3,522,000 and $5,864,000 as of December 31, 2001 and
2000, respectively, and had recorded net losses of approximately
$10,669,000 for the year ended December 31, 2000, that raise
substantial doubt about NHTC's ability to continue as a going concern.
NHTC's continued existence is dependent on its ability to obtain
additional debt or equity financing and to generate profits from
operations.
M. Royalty Expense-Royalties that are incurred on a per unit sold
basis are included in Cost of Sales. Additional royalty amounts
incurred to meet contractual minimum levels are classified as Selling,
General and Administrative Expenses.
N. Reclassifications-NHTC has reclassified certain expenses in its
consolidated statements of operations for the years ended December 31,
2001 and 2000 as a result of the closure of Kaire Europe and related
facilities. These changes had no significant impact on previously
reported results of operations or stockholders' equity.
O. Foreign Currency Translations-Assets and liabilities of
subsidiaries are translated at the rate of exchange in effect on the
balance sheet date; income and expenses of subsidiaries are translated
at the average rates of exchange prevailing during the year or period
then ended. The related translation adjustments are reflected as a
cumulative translation adjustment in consolidated stockholders'
equity. Foreign currency gains and losses resulting from transactions
are included in results of operations in the period in which the
transaction occurred.
P. Revenue Recognition - The subsidiaries of NHTC sell products
directly to independent distributors. Sales are recorded when the
products are shipped.
Q. Concentration of Risk-NHTC maintains its cash accounts in several
bank accounts. Accounts in the United States are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $100,000. NHTC's
cash balance in some of its bank accounts generally exceeds the
insured limits.
Lexxus and eKaire sell products through network marketers throughout
the United States, Canada, New Zealand, Australia, and Trinidad and
Tobago. Credit is extended for returned checks and/or until credit
card purchases have cleared the bank.
Credit losses, if any, have been provided for in the financial
statements and are based on management's expectations. NHTC's accounts
receivable are subject to potential concentrations of credit risk.
NHTC does not believe that it is subject to any unusual or significant
risk, in the normal course of business.
F-9
R. Restricted Cash - NHTC is required to maintain three (3) restricted
cash accounts (i) two with credit card processing companies, one for
each subsidiary. The primary purpose of these accounts is to provide a
reserve for potential uncollectible amounts and chargebacks by Lexxus
and eKaire credit card customers. The credit card processing companies
may periodically increase the restricted cash account. The amount on
deposit is calculated at 2% of net sales over a rolling six month
average and (ii) a third account is maintained with a Canadian bank as
security for a bank drafting process utilized by eKaire in the
ordinary course of business.
S. Recently Issued Accounting Standards-In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement on Financial
Accounting Standards No. 141 ("SFAS 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. NHTC believes that the adoption of SFAS
No. 141 will not have a significant impact on the financial
statements.
In July 2001, FASB issued Statement of Financial Accounting standards
Board No. 142, "Goodwill and Other Intangible Assets", ("SFAS No.
142"), which is effective for fiscal years beginning after December
15, 2001. SFAS 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. NHTC is currently assessing
but has not yet determined the impact of SFAS No. 142 on the financial
position and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting
standards Board 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 August 2001, the FASB issued Statement of Financial Accounting
Standards Board No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", ("SFAS 144"). This statement is effective for
fiscal years beginning after December 15, 2001 and supercedes SFAS 121
while retaining many of its requirements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supercedes Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and certain provisions of APB Opinion No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 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 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 144 are effective for fiscal years
beginning after December 15, 2001. Management believes that the
implementation of this standard will have no impact on NHTC's results
of operations and financial position.
F-10
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following:
Estimated Useful
Type of Property or Equipment Lives Amount
------------------------------- ------------------ -----------------
Equipment, furniture and
fixtures 5 to 7 $ 113,514
Computers and peripherals 3 105,694
Software 3 to 5 4,307
Leasehold improvements 3 to 5 3,489
----------------
Property and Equipment $ 227,004
Less: Accumulated depreciation (79,085)
----------------
Property and Equipment, net $ 147,919
================
4. NOTES PAYABLE
Notes Payable consisted of the following at December 31, 2001:
Note Payable Amount
(i) Augusta Street LLC $100,000 note payable, 10% interest $ 100,000
(ii) Augusta Street LLC $138,000 note payable, 4.75% interest $ 138,000
(iii) Naline Thompson $50,000 note payable, 12% interest $50,000
Merrill Corporation $145,496 note payable, 8% interest, due upon $ 145,496
demand
Aloe Commodities International, Inc.,
non-interest bearing, due upon demand $ 52,500
(iv) Lightfoot $ 40,967
Life Dynamics, Inc. note payable, interest-free $31,125
---------
Notes Payable $ 558,088
=========
(i)Payee of the note is entitled, at its option, to convert at any time, the
principal amount of this note at a conversion price equal to 75% of the five-day
average closing bid price of the Common Stock for the five trading days
immediately preceding the applicable conversion date. The beneficial conversion
feature of $ 33,333 was recorded in the financial statements. This note is due
upon demand.
F-11
(ii)Payee of the note is entitled, at its option, to convert at any time, the
principal amount of this note at a conversion price equal to 75% of the five-day
average closing bid price of the Common Stock for the five trading days
immediately preceding the applicable conversion date. The beneficial conversion
feature of $ 46,000 was recorded in the financial statements. This note is due
December 31, 2002.
(iii) The investor received 200,000 shares of NHTC Common Stock as well as a
warrant to purchase 200,000 shares of the Common Stock of NHTC at an exercise
price of $0.05 per share for three years.
(iv) Note due to Michael and Linda Lightfoot, bears interest at prime plus
1.75%, monthly payments are being made.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2001:
Debt Instrument Amount
------------------------------------- -------------
(i) Samantha Haimes, $325,000, 10% interest $ 296,892
(ii) State of Texas, $114,278, 7% interest $96,738
(iii) Robert L. Richards, interest-free $69,753
-------------
Total Debt $ 463,383
Less: current portion of Long-term Debt $ 171,070
-------------
Long-term Debt $ 292,313
=============
(i) NHTC is making monthly payments of $12,000 through July 2002 and thereafter
$15,000 per month until repaid in full with interest. (ii) NHTC is making
monthly payments of $2,200 until repaid in full with interest. (iii) NHTC is
making monthly payments of $1,333 until repaid in full with interest.
Date Amount
----- -------------
2002 $ 171,070
2003 $ 199,517
2004 $39,134
2005 $40,807
2006 and thereafter $12,855
As of December 31, 2001, NHTC owed approximately $70,000 to Robert L. Richards,
a former president and a director, in connection with liabilities assumed in
connection with the KII acquisition.
F-12
6. PAYROLL TAX LIABILITIES
During 2000 and 1999, Kaire Nutraceuticals, Inc. did not make payroll
tax deposits with the Internal Revenue Service ("IRS") and the various state
taxing authorities on a timely basis. Kaire Nutraceuticals, Inc. did file all
required payroll tax returns. This liability of approximately $630,000 is fully
reserved for in the financial statements.
7. STOCKHOLDERS' EQUITY
A. Common Stock - NHTC is authorized to issue 500,000,000 shares of Common
Stock, $.001 par value.
B. Preferred Stock - NHTC is authorized to issue a maximum of 1,500,000
shares of $1,000 par value preferred stock, in one or more series and
containing such rights, privileges and limitations, including voting
rights, dividend rates, conversion privileges, redemption rights and terms,
redemption prices and liquidation preferences, as NHTC's board of directors
may, from time to time, determine.
Series E Preferred Stock.
In August 1998, NHTC issued 1,650 shares of Series E Preferred Stock
with a stated value of $1,000 per share realizing net proceeds of
$1,439,500. The preferred stock and the accrued dividends thereon are
convertible into shares of NHTC's Common Stock at a conversion price equal
to the lower of 75% of the average closing bid price of the Common Stock
for the five trading days immediately preceding the conversion date or 100%
of the closing bid price on the day of funding. This series of stock is
convertible commencing 60 days after issuance. Due to the beneficial
conversion features in the issuance of this series of preferred stock, an
imputed dividend of $550,000 has been recorded.
Pursuant to the terms of the Series E Preferred Stock, if NHTC does
not have an effective registration statement within 120 days subsequent to
the issuance of Series E Preferred Stock, a 2% penalty on the face amount
of $1,650,000 accrues for every 30 days without an effective registration
statement. As of the year ended December 31, 2000, NHTC had recorded a
charge of $635,471 due to non-compliance with this clause.
In the year ended December 31, 2000, $103,715 in accrued dividends was
recorded for the period such stock was outstanding.
During the year ended December 31, 2000, NHTC had converted 93 shares
of the Series E Preferred Stock into 2,984,122 shares of Common Stock.
In the year ended December 31, 2001, $33,780 in accrued dividends was
recorded for the period such stock was outstanding.
During the year ended December 31, 2001, NHTC had converted 947 shares
of the Series E Preferred Stock into 35,523,045 shares of Common Stock.
Series F Preferred Stock.
In February 1999, NHTC issued 2,800 shares of Series F Preferred Stock
with a stated value of $1,000 per share realizing a net value of
$2,800,000. This issuance is in accordance with the asset purchase
agreement of KII. The preferred stock pays a dividend at 6% per annum and
is payable upon conversion into either cash or common stock. The preferred
stock and the accrued dividends thereon are convertible into shares of the
Company's Common Stock at a conversion price equal to 95% of the average
closing bid price of the Common stock for the three trading days
immediately preceding the date on which NHTC receives notice of conversion
from a holder. NHTC is permitted at any time, on five days prior to written
notice, to redeem the outstanding preferred stock at a redemption price
equal to the stated value and the accrued dividends thereon.
F-13
In the year ended December 31, 2000, NHTC had converted 3 shares of
the Series F Preferred Stock into 138,318 shares of Common Stock.
In the year ended December 31, 2001, $32,732 in accrued dividends was
recorded for the period such stock was outstanding.
During the year ended December 31, 2001, NHTC had converted 1,416
shares of the Series F Preferred Stock into 51,559,177 shares of Common
Stock.
Series G Preferred Stock.
In February 1999, NHTC issued 350 shares of Series G Preferred Stock
with a stated value of $1,000 per share realizing a net value of $350,000.
The preferred stock pays a dividend at the rate of 6% per annum. The
preferred stock and the accrued dividends thereon are convertible into
shares of NHTC's Common Stock at a conversion price equal to 95% of the
average closing bid price of the common stock for the three trading days
immediately preceding the date on which the Company receives notice of
conversion. NHTC is permitted at any time, on five days prior written
notice, to redeem the outstanding preferred stock at a redemption price
equal to the stated value and the accrued dividends thereon.
During the year ended December 31, 2000, NHTC had converted 6 shares
of the Series G Preferred Stock and accrued dividends of $20,942 into
279,852 shares of Common Stock.
In the year ended December 31, 2001, $7,198 in accrued dividends was
recorded for the period such stock was outstanding.
During the year ended December 31, 2001, NHTC had converted 344 shares
of the Series G Preferred Stock into 15,732,164 shares of Common Stock.
Series H Preferred Stock.
In March and April 1999, the Company sold 1,400 shares of Series H
Preferred Stock with a stated value of $1,000 per share realizing net
proceeds of $1,201,015. In October 2000, the Company sold an additional 50
shares of Series H Preferred Stock with a stated value of $1,000 per share
realizing net proceeds of $43,500.The preferred stock pays a dividend at
the rate of 8% per annum. The preferred stock and the accrued dividends
thereon are convertible into shares of the Company's common stock at a
conversion price equal to the lower of the closing bid price on the date of
issuance or 75% of the average closing bid price of the common stock for
the three trading days immediately preceding the date on which the Company
receives notice of conversion from a holder.
In April 2001, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. The Series H Preferred Stock
pays dividends of 10% per annum and is convertible into shares of Common
Stock at the lower of the closing bid price on the conversion date or 75%
of the market value of the Common Stock on the conversion date.
In May 2001, NHTC issued 50 shares of Series H Preferred Stock for
$50,000 realizing net proceeds of $43,500. The Series H Preferred Stock
pays dividends of 10% per annum and is convertible into shares of Common
Stock at the lower of the closing bid price on the conversion date or 75%
of the market value of the Common Stock on the conversion date
Pursuant to the terms of the Series H Preferred Stock, if NHTC does
not have an effective registration statement within 120 days subsequent to
the issuance of Series H Preferred Stock, a 2% penalty on the face amount
of $1,400,000 accrues for every 30 days without an effective registration
statement. As of the year ended December 31, 2001, NHTC had recorded a
charge of $12,000 due to non-compliance with this clause.
F-14
In the year ended December 31, 2000, NHTC recorded an imputed dividend
of $16,667 due to the beneficial conversion features in the Series H
Preferred Stock. An additional $49,686 in accrued dividends was recorded
for the period such stock was outstanding.
During the year ended December 31, 2000, NHTC had converted 359 shares
of the Series H Preferred Stock into 434,660 shares of Common Stock.
In the year ended December 31, 2001, NHTC recorded an additional
$19,611 in accrued dividends was recorded for the period such stock was
outstanding.
During the year ended December 31, 2001, NHTC had converted 615 shares
of the Series H Preferred Stock into 27,699,368 shares of Common Stock.
Series J Preferred Stock.
In March 2000, NHTC sold 1,000 shares of Series J Preferred Stock with
a stated value of $1,000 per share realizing net proceeds of $936,000. The
preferred stock pays a dividend at the rate of 10% per annum, payable in
cash or stock at NHTC's option. The preferred stock and the accrued
dividends thereon are convertible into shares of the Company's common stock
at a conversion price equal to the lower of the closing bid price on the
date of issuance or 70% of the average closing bid price of the common
stock for the lowest three trading days during the twenty day period
immediately preceding the date on which NHTC receives notice of conversion
from a holder.
Pursuant to the terms of the Series J Preferred Stock, if NHTC does
not have an effective registration statement within 120 days subsequent to
the issuance of Series J Preferred Stock, a 2% penalty on the face amount
of $1,000,000 accrues for every 30 days without an effective registration
statement. As of the year ended December 31, 2001, NHTC had recorded a
charge of $411,890 due to non-compliance with this clause.
In the year ended December 31, 2001, NHTC recorded an additional
$17,051 in accrued dividends was recorded for the period such stock was
outstanding.
During the year ended December 31, 2001, NHTC had converted 206 shares
of the Series J Preferred Stock into 12,260,376 shares of Common Stock.
C. Convertible Debentures - During 2001, NHTC converted approximately
$385,409 of its promissory notes, plus accrued interest of $37,604 into
22,887,006 shares of Common Stock.
NHTC issued 500,000 shares of Common Stock to certain management
employees in April 2001 and recorded $30,500 of compensation expense.
NHTC issued 200,000 shares of Common Stock in a verbal agreement to
Capital Development S.A., a consulting firm in August 2001 and recorded
$11,800 of consulting expense.
In August 2001, NHTC issued 20,000,000 shares of Common Stock to
Summit Trading Ltd., a consulting firm, as part of a long-term consulting
agreement. This issuance was recorded as deferred compensation and will be
amortized over the life of the agreement.
In January 2001, NHTC entered into a joint venture with Lexxus
International and formed a new majority-owned subsidiary, Lexxus
International, Inc., a Delaware corporation. The original founders of
Lexxus International received an aggregate of 10,000,000 shares of NHTC's
Common Stock, par value of $0.001.
F-15
8. INCOME TAXES
NHTC accounts for income taxes under the provisions of SFAS 109. SFAS No.
109 requires the recognition of deferred tax assets and liabilities for
both the expected impact of differences between the financial statement and
tax basis of assets and liabilities, and for the expected future tax
benefit to be derived from tax loss and tax credit carryforwards. SFAS 109
additionally requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. At December 31, 2001,
NHTC had net deferred tax assets of approximately $4,400,000. NHTC has
established a valuation allowance for the full amount of such deferred tax
assets at December 31, 2001, as management of the Company has not been able
to determine that it is more likely than not that the deferred tax assets
will be realized.
The following table reflects NHTC's deferred tax assets and (liabilities)
at December 31, 2001:
December 31, 2001
-----------------
Net operating loss deduction $ 4,400,000
Valuation allowance (4,400,000)
-----------------
$ --
=================
The provision for income taxes (benefits) differs from the amount computed
by applying the statutory federal income tax rate to income loss before
income taxes as follows:
For the year Ended
December 31,
---------------------------------------------------
2001 2000
------------------------ --------------------
Income tax (benefit) computed at statutory $ (1,500,000) $ (3,500,000)
rate
Effect of permanent differences 1,500,000 3,500,000
------------------------ --------------------
Provision for income taxes (benefit) $ - $ -
======================== ====================
The net operating loss carryforward at December 31, 2001 was approximately
$12,000,000 and expires in the years 2012 to 2020.
9. COMMITMENTS AND CONTINGENCIES
A. Leases
NHTC utilizes approximately 1,000 square feet of office space in
Irving, Texas on an as needed basis, through an arrangement with Regus
Business Centre which provides business solutions for companies. NHTC pays
a minimum annual rental fee of $2,100. Lexxus leases an aggregate of
approximately 16,000 square feet of office and warehouse space in Dallas,
Texas. The lease term is 38 months, expiring on September 30, 2004, and the
current rent is approximately $151,500 per year. Additional warehousing for
Lexxus is located in Branson, Missouri where Lexxus utilizes approximately
35,000 square feet of warehouse space. The lease term is on a
month-to-month basis at a rent of $18,000 per year. The Canadian office and
warehouse of Lexxus and eKaire leases office space in Langley, British
Columbia, totaling approximately 3,600 square feet. The lease term is 36
months, expiring on December 1, 2004 and the current rent is approximately
$25,000 per year.
F-16
Kaire Australia, Kaire New Zealand, Lexxus Australia and Lexxus New
Zealand lease office space and warehouse facilities of approximately 2,475
square feet in Queensland, Australia. The lease term is 60 months, expiring
on January 1, 2007, and the current rent is approximately $20,000 per year.
In March 2002, Lexxus Taiwan entered into a two-year lease for 6,314
square feet of office space at a current rent of approximately $75,000 per
year.
Kaire Trinidad leases approximately 1,100 square feet of office space
in downtown Port-of-Spain, Trinidad. The lease term is on a month-to-month
basis.
NHTC is currently in the process of finding adequate office space for
its subsidiaries in Hong Kong and Russia.
NHTC believes that such properties are suitable and adequate for the
current operating needs.
B. Litigation
On August 4, 1997, Samantha Haimes brought an action in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against NHTC and National
Health Care Centers of America, Inc., a wholly-owned subsidiary of NHTC.
NHTC asserted counterclaims against Samantha Haimes and Leonard Haimes. The
complaint arises out of the defendants' alleged breach of contract in
connection with NHTC's natural health care center, which was located in
Boca Raton, Florida. NHTC agreed to settle such actions for shares of
Common Stock with a fair market value of $325,000, but not less than
125,000 shares of Common Stock and agreed to register such shares. On
October 10, 2000, due to noncompliance with the settlement, a judgment was
taken against NHTC in the amount of $325,000 plus interest. On October 12,
2001, NHTC entered into a payment arrangement to settle this obligation.
NHTC has recorded a liability of $325,000 plus interest at ten percent
(10%) per annum, which is included in the financial statements for the year
ended December 31, 2001.
On July 10, 2000, the State of Texas obtained a judgment against NHTC
in the amount of $109,170 for unpaid sales taxes, penalties, interest, and
attorney fees. NHTC has entered into a voluntary payment arrangement and
has recorded a liability of $109,170 plus interest at seven percent (7%)
per annum, which is included in the financial statements for the year ended
December 31, 2001.
On December 29, 2000, Merrill Corporation obtained a judgment against
NHTC in the amount of $145,497, plus interest at eight percent (8%) per
annum, which is included in the financial statements for the year ended
December 31, 2001.
On October 30, 2001, Omni Group LLC filed an action in the State of
Vermont, Addison Superior Court, against NHTC alleging that NHTC tortuously
interfered with existing contractual relationships and made representations
about Omni Group that are untrue. Omni Group is seeking $5 million in
compensatory damages and $5 million in punitive damages. NHTC is defending
this action. NHTC filed an answer on April 2, 2002 in which NHTC denied any
wrongdoing.
On November 22, 2001, Pfizer, Inc. filed an action in the United
States District Court, Southern District of New York against Lexxus
alleging that Lexxus' distribution and marketing of Viacreme TM infringes
on Pfizer's federally registered trademark, Viagra (R). Pfizer's complaint
alleges federal false designation of origin and unfair competition, federal
trademark dilution, federal false advertising and unfair competition,
common law trademark infringement, trademark dilution and deceptive acts
and practices. NHTC is defending this action and is currently in settlement
discussions with Pfizer.
On March 21, 2002, NFL Properties, Inc. brought an action in the
Supreme Court of the County of Onondaga in the State of New York against
NHTC and Natural Health Laboratories in the amount of approximately
$126,000 for alleged breach of contract. NHTC's management believes that
the action naming NHTC as a defendant was a case of mistaken identity, and
is currently trying to have NHTC removed as a defendant in the action.
F-17
C. Major Supplier
NHTC currently buys all of its Pycnogenol(R), an important component
of its products, from a single supplier, Natural Health Sciences, L.L.C.
Although there are a limited number of manufacturers of this
component, management believes that other suppliers could provide similar
components on comparable terms. NHTC does not maintain any contractual
commitments or similar arrangements with other suppliers.
NHTC purchases its products from manufacturers and suppliers on an as
needed basis. Should these relationships terminate, NHTC's supply and
ability to meet consumer demands would not be adversely affected.
10. STOCK OPTION PLANS AND WARRANTS
The following table summarizes the changes in options and warrants
outstanding, and the related exercise price for shares of NHTC's Common
Stock:
Weighted Weighted
Average Exercisable
Exercise Average
Price Stock Exercise
Shares Options Exercisable Shares Price Warrants
------------- -------------- -------------- ------------ ------------- --------------
Outstanding at
December 31, 1999 339,100 $ 6.01 339,100 2,813,257 $ 7.00 2,813,257
Granted - - - 138,889 1.44 138,889
Cancelled (295,000) 3.50 (295,000) - - -
------------- -------------- -------------- ------------ ------------- --------------
Outstanding at
December 31, 2000 44,100 $ 15.68 44,100 2,952,146 $ 6.74 2,952,146
Granted 6,200,000 .01 6,200,000 - - -
Cancelled - - - - - -
------------- -------------- -------------- ------------ ------------- --------------
Outstanding at
December 31, 2001 6,244,100 $ .12 6,244,100 2,952,146 $ 6.74 2,952,146
The following table summarizes information about exercisable stock options
and warrants at December 31, 2001:
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
----------------------------------------------------------------------------------------
Options: $ .01 - 101.20 6,244,100 1- 10 $ .12 6,244,100 $ .12
Warrants: $1.00 - 113.75 2,952,146 0 - 5 $6.74 2,952,146 $6.74
F-18
For disclosure purposes in according with Statement of Financial
Accounting Standards 123 ("SFAS 123"), the fair value of options is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted average assumptions used for stock options
granted during the years ended December 31, 2001 and 2000 respectively:
annual dividends of $0; expected volatility of 50%; risk free interest rate
of 7% and expected life of 10 years. The weighted average fair value of
stock options granted during the years ended December 31, 2001 and 2000 was
$0.12 and $0,respectively. If NHTC had recognized compensation cost of
stock options in accordance with SFAS 123, NHTC's proforma income (loss)
and net income (loss) per share would have been as follows:
Year Ended December 31,
--------------------------------
2001 2000
----------- ------------
Net income (loss) to Common Stockholders
As reported $ 2,022,621 $(10,396,557)
Pro forma $ 1,947,621 $(10,525,683)
Net income (loss) from continuing operations:
As reported $ 1,202,123 $(12,140,043)
Pro forma $ 1,127,123 $(12,269,169)
Net income (loss) per share to common
stockholders
Basic
As reported $0.01 $(1.04)
Pro forma $0.01 $(1.10)
Diluted
As reported $0.00 $(1.26)
Pro forma $0.00 $(1.72)
Net income (loss) per share to common
stockholders continuing operations:
Basic
As reported $0.01 $(1.26)
Pro forma $0.01 $(1.72)
Diluted
As reported $0.00 $(1.26)
Pro forma $0.00 $(1.72)
11. FORGIVENESS OF DEBT
During the year ended December 31, 2001 NHTC realized a gain of
approximately $820,000 due to the sale of Kaire Nutraceuticals, Inc.
During the year ended December 31, 2000 NHTC realized a gain of
approximately $2,148,000 due to the filing of Chapter 7 bankruptcy by GHA
and its various wholly-owned subsidiaries.
12. FOREIGN SALES
NHTC has substantially increased its international presence both in
sales and long-lived assets. NHTC's sales and long-lived assets by country
as of December 31, 2001 are as follows:
United Australia and Other
States New Zealand Subsidiaries Consolidated
Sales to unaffiliated customers $22,535,109 $2,258,927 $-0- $24,794,036
Long-lived assets at December 31,
2001 $825,904 $55,026 $-0- $880,930
13. FOURTH QUARTER ADJUSTMENTS
Fourth quarter adjustments include the following:
Penalties on Preferred Stock $ 1,586,000
F-19