DESERT HEALTH PRODUCTS INC - 10KSB - 20040330 - MARKET
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our Common Stock is traded in the over-the-counter securities market
through the National Association of Securities Dealers Automated
Quotation Bulletin Board System, under the symbol "DHPI". The
following table sets forth the quarterly high and low bid prices for
our Common Stock as reported by the OTC:BB for the last eight
quarters. The quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent
actual transactions.
High Low
---- ---
2002
----
Quarter ended March 31 0.51 0.17
Quarter ended June 30 0.31 0.16
Quarter Ended September 30 0.31 0.18
Quarter Ended December 31 0.54 0.08
2003
----
Quarter Ended March 31 0.55 0.25
Quarter Ended June 30 0.62 0.15
Quarter Ended September 30 0.65 0.40
Quarter Ended December 31 0.65 0.35
As of December 31, 2003, we had 13,163,821 shares outstanding held by
approximately 364 stockholders of record.
Refer to Item 11 below with regard to information regarding our equity
compensation plans.
We have never declared or paid dividends on our Common Stock. We intend to
follow a policy of retaining earnings, if any, to finance the growth of the
business and do not anticipate paying any cash dividends in the foreseeable
future. The declaration and payment of future dividends on our Common Stock will
be at the sole discretion of the Board of Directors and will depend on our
profitability and financial condition, capital requirements, statutory and
contractual restrictions, future prospects and other factors deemed relevant.
Sales of unregistered securities in 2003 are as follows:
545,000 shares Rule 144 common stock were authorized to be issued to nine
employees and/or directors of the company January 27, 2003, with a value of
Fifty-one cents per share.
May 29, 2003, 50,000 shares Rule 144 common stock, valued at Twenty-one
cents per share, were issued to an individual as a retainer. However, we are
disputing this issuance.
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May 29, 2003, pursuant to agreements, an aggregate number of 80,000 shares
of Rule 144 common stock, valued at Twenty-one cents per share, were issued to
three individuals, who are all sophisticated investors with prior relationships
with the Company.
July 8, 2003, 1,100,000 shares Preferred Stock, valued at $1.00 per share,
based on a Put option included in the agreement, were issued to an institutional
investor based on an agreement dated June 16, 2003, to convert $967,339 of debt.
See Note O "Shares Subject to Mandatory Redemption".
July 8, 2003, 350,000 shares Rule 144 common stock, valued at Fifty-four
cents per share, were authorized to be issued to an institutional investor with
a prior relationship with us, in satisfaction of loan repayment agreements.
July 18, 2003, 25,000 shares Rule 144 common stock valued at Fifty-five
cents per share were authorized to be issued as a loan inducement to a
sophisticated investor with a prior relationship with us.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our Financial Statements and the notes thereto appearing elsewhere in this
document.
RISK FACTORS AND CAUTIONARY STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results and events could differ materially from
those projected, anticipated, or implicit, in the forward-looking statements as
a result of the risk factors set forth below and elsewhere in this report.
With the exception of historical matters, the matters discussed herein are
forward looking statements that involve risks and uncertainties. Forward looking
statements include, but are not limited to, statements concerning anticipated
trends in revenues and net income, the date of introduction or completion of our
products, projections concerning operations and available cash flow. Our actual
results could differ materially from the results discussed in such
forward-looking statements. The following discussion of our financial condition
and results of operations should be read in conjunction with our financial
statements and the related notes thereto appearing elsewhere herein.
This report may include forward-looking statements which reflect our
current views with respect to future events and financial performance. The words
"believe", "expect", "anticipate", "intends", "estimate", "forecast", "project"
and similar expressions identify forward-looking statements.
We wish to caution investors that any forward-looking statements made by
or on behalf of the Company are subject to uncertainties and other factors that
could cause actual results to differ materially from such statements. These
uncertainties and other factors include, but are not limited to the Risk Factors
listed below (many of which have been discussed in our prior SEC filings.).
Though we have attempted to list comprehensively these important factors, we
wish to caution investors that other factors could in the future prove to be
important in affecting our results of operations. New factors emerge from time
to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of our views as of the date the
statement was made. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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Critical Accounting Policies Used in Financial Statements
We prepare our financial statements in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management's estimates and judgments are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. These policies include the carrying value of
inventory, intangibles and goodwill, allowance for doubtful accounts,
depreciable lives and revenue recognition.
Overview
Our auditors' report reflects the fact that without realization of
additional capital, it would be unlikely for us to continue as a going concern.
As a result of our deficiency in working capital at December 31, 2003, and other
factors, our auditors have included a paragraph in their report stating those
factors create an uncertainty regarding our ability to continue as a going
concern.
Results of Operations
Comparison of years ended December 31, 2003 and 2002
Revenues. Revenues for the year ended December 31, 2003 were $193,090, an
increase of $60,015 or 45% increase from $133,075 for the year ended December
31, 2002. This increase was principally attributable to an increase in our
domestic sales.
General and Administrative. General and administrative, legal and
consulting expenses for the year ended December 31, 2003, were $1,989,111 which
was a decrease of $22,718 from the $2,011,829 for the year ended December 31,
2002. This decrease was primarily the result of lower employee compensation. For
the year ended December 31, 2003 and December 31, 2002, impairment losses
related to goodwill were $0 and $386,111, respectively. Additionally, impairment
losses related to intangibles for the years ended December 31, 2003 and December
31, 2002 was $530,000 and $95,230, respectively. These amounts are reported as
operating expenses on the consolidated statements of operations and accumulated
deficit. See Note A- "Summary of Significant Accounting Policies".
Our net loss was $2,369,546 for the year ended December 31, 2003 as
compared to net loss of $2,211,703 for the year ended December 31, 2002. This
increase was the result of increasing financing costs and a reduction of
inventory to market in the amount of $43,682 as well as increasing activity and
related additional expenses discussed above.
Liquidity and Capital Resources
As indicated in our financial statements attached, our net revenue was not
sufficient to meet our operating expenses for the year ended December 31, 2003.
In addition, as of December 31, 2003, our current liabilities exceeded our
current assets by $2,041,845. These factors create an uncertainty regarding our
ability to continue as a going concern.
Since inception, we have financed our cash flow requirements through debt
financing, issuance of common stock for cash and services, and minimal cash
balances. As we continue our marketing activities in Europe, Asia and North
America, we may continue to experience net negative cash flows from operations,
pending receipt of sales revenues, and will be required to obtain additional
financing to fund operations through common stock offerings and bank borrowings
to the extent necessary to provide our working capital.
15
We are continuing our goal of supplementing anticipated international
business by means of development of a network marketing organization in the
United States. Our wholly owned subsidiary, Royal Products, Inc., has selected
management towards this goal. This management is under the leadership of Dr.
Cliff Baird and Dr. Leonard Makowka. Dr. Cliff Baird holds an MBA and a PhD. and
has for the last thirty years, trained well over 200,000 network marketing
distributors and other sales agents in the concepts of sudden success.
Leonard Makowka, M.D., PhD., head of Desert Health's Medical Advisory
Board, in cooperation with Dr. Baird is developing a media network and a
complete product presentation that will be used by all distributors. Dr. Makowka
has agreed to allow Royal Products, Inc., to use his name and endorsement,
"DrMak" on all its labels, brochures, sales literature, audios and CD's. It is
their goal that "Dr.Mak /Royal Products becomes a recognized household name in
the nutrition and health industry.
Furthermore, we are continuing to position ourselves in the lucrative
North American market. We believe that trademark and logo registrations under
Class 5 filed in Mexico and Canada will contribute to the presence of our
products in the network marketing, private label and branded label markets.
Many of our international development agreements and registrations are in
the final phases with companies located in the Czech Republic, Sweden, Turkey,
China and Korea.
Over the next 12 months, we intend to increase our revenues through the
strong support from our international and domestic clients and registrations
from various countries around the world are continuing to be approved.
Sales of private labeled products for Wright Sports and Nutrition began in
2003. Rayfield Wright, President of Wright Sports and Nutrition, was a star
football player with the Dallas Cowboys, making five Super Bowl and six Pro Bowl
appearances. He was a candidate for the National Professional Football Hall of
fame as well as the Ring of Honor. This product line focuses primarily on
professional athletes and aging baby boomers that associate themselves with
professional athletes and have similar needs for supplements. Currently, these
products are being sold to Brookshire Brothers supermarket chain, United Foods,
and Apollo Men's spas. Mr. Wright is in final negotiations with Wal-Mart, and is
currently talking to Walgreen's, Sam's Clubs, Costco, B.J.'s, the US Military PX
and other smaller chains.
We have entered into a 10 year agreement with a Scottsdale, Arizona based
company, EIC, for private labeling of our Desert Health's Foot Care - a skin
care system, in Mexico and all Indian Nations within the United States. Initial
shipments have commenced to the Osage Nation. R.C. "Dick" Eisenach, President of
EIC, has international and domestic management, sales and marketing experience.
His initial contract with the Osage Nation is expected to exceed $155,000 and he
has additional contracts pending.
Management believes the events as described above will bring liquidity and
profitability to the Company in the coming year. We believe exclusive marketing
rights to the new health products, and other products being negotiated for, will
bring significant volume and profitability.
We will continue to increase the number of our employees, and expand our
facilities where necessary to meet product development and completion deadlines.
We believe that existing capital and anticipated funds from operations will not
be sufficient to sustain operations and planned expansion in the next 12 months.
Consequently, we will be required to seek additional capital in the future to
fund growth and expansion through additional equity or debt financing or credit
facilities. Considering the state of market conditions, no assurance can be made
that such financing would be available, and if available it may take either the
form of debt, equity, or a combination thereof. The down turn in the capital
market will substantially impact our ability to sell securities in planned
amounts and in turn our ability to meet our capital requirements. In either
case, the financing could have a negative impact on our financial condition and
that of our shareholders.
There are no off-balance sheet arrangements.
16
Risk Factors
Our operating results are difficult to predict in advance and may
fluctuate significantly, and a failure to meet the expectations of analysts or
our stockholders would likely result in a substantial decline in our stock
price.
Factors that are likely to cause our results to fluctuate include the
following:
o The gain or loss of significant customers or significant changes in
purchasing volume;
o The amount and timing of our operating expenses and capital expenditures;
o Changes in the volume of our product sales and pricing concessions on
volume sales;
o The timing, rescheduling or cancellation of customer orders;
o The varying length of our sales cycles;
o Our ability to specify, develop, complete, introduce and market new
products and bring them to volume production in a timely manner;
o The rate of adoption and acceptance of new industry standards in our
target markets;
o The effectiveness of our product cost reduction efforts and those of our
suppliers;
o Changes in the mix of products we sell; and
o Changes in the average selling prices of our products.
There is a limited public market for our common stock. Although our common
stock is listed on the OTC Bulletin Board, there is a limited volume of sales,
thus providing a limited liquidity into the market for our shares. As a result
of the foregoing, stockholders may be unable to liquidate their shares for any
reason.
Our success depends heavily upon the continued contributions of Johnny
Shannon, our President, whose knowledge, leadership and technical expertise
would be difficult to replace. We have an Employment Agreement with Mr. Shannon
that expires January 1, 2005. Additionally, we have key man insurance in the
amount of $500,000 on Mr. Shannon.
To grow our business successfully and maintain a high level of quality, we
will need to recruit, retain and motivate additional highly skilled sales,
marketing, and finance personnel. If we are not able to hire, train and retain a
sufficient number of qualified employees, our growth will be impaired. In
particular, we will need to expand our sales and marketing organizations in
order to increase market awareness of our products and to increase revenue.
In addition, as a company focused on the development of complex products,
we will need to hire additional staff of various experience levels in order to
meet our product roadmap.
We are subject to various risks associated with technological change and
if we do not adapt our products to the changes our business will be adversely
affected.
Our performance will partially depend on our ability to enhance our
existing services, and respond to technological advances and emerging industry
standards and practices on a timely and cost-effective basis. We cannot predict
if we will use new methodologies effectively or adapt our products to consumer,
vendor, advertising or emerging industry standards. If we were unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, our business,
results of operations and financial condition could be materially adversely
affected.
If we need additional financing, we may not be able to raise further
financing or it may only be available on terms unfavorable to our stockholders
or us.
We believe that our available cash resources will not be sufficient to
meet our anticipated working capital and capital expenditure requirements for
the next twelve months. We will need to raise additional funds to respond to
business contingencies, which could include the need to:
17
o Fund more rapid expansion;
o Fund additional marketing expenditures;
o Develop new products or enhance existing products;
o Enhance our operating infrastructure;
o Hire additional personnel;
o Respond to competitive pressures; or
o Acquire complementary businesses or technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders would be reduced,
and these newly issued securities might have rights, preferences or privileges
senior to those of existing stockholders. Additional financing might not be
available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our
operations, take advantage of unanticipated opportunities, develop or enhance
our products or otherwise respond to competitive pressures would be
significantly limited.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" and Consolidated
Financial Statement schedules appearing on Page 22 of this Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have changed our auditors from James E. Raftery, CPA, PC, to Semple &
Cooper, L.L.P. James E. Raftery, CPA, PC, did not resign or decline to stand for
reelection. Rather, James E. Raftery, CPA, PC, is not certified under the PCAOB.
The change in accountants was approved by the Board of Directors. There are no
disagreements with James E. Raftery, CPA, PC. The new firm, Semple & Cooper,
L.L.P., commenced its engagement as of March 16, 2004.
Item 8A. Controls and Procedures
As of December 31, 2003, an evaluation was carried out under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by us
in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to December 31, 2003, our Chief
Executive Officer and Chief Financial Officer have concluded that there were no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth the names, positions with us and ages of
our executive officers and our directors. Directors shall be elected at our
annual meeting of shareholders and each director shall hold office for a term of
one year and until their successors shall have been duly chosen and shall have
qualified. The board elects officers and their terms of office are, except to
the extent governed by employment contract, at the discretion of the Board.
18
Name Age Title
Johnny Shannon 67 Chief Executive Officer, Chairman,
President, Director and Chief Financial
Officer
Georgia Aadland 66 Secretary/Treasurer and Director
Thor Lindvaag 56 Director, Sr. Vice President of
International Marketing
Lawrence G. Olson 62 Director
William T. Walker, Jr. 71 Director
Duties, Responsibilities and Experience
Johnny Shannon has been President, Director and Chief Financial Officer of the
Company since 1996. From 1984 - 1996 Mr. Shannon served as an officer, director
and shareholder with several nutritional supplement companies.
Georgia Aadland has been Secretary/Treasurer of the Company since 1997 and a
Director of the Company from 1991 to 1996 and from 1998 to present.
Thor Lindvaag has been Director and Senior Vice President of International
Marketing of the Company since 1996 through January 26, 2004. From 1991 - 1996,
Mr. Lindvaag was President of Trim and Fit International. From 1988 - 1991, and
he was the managing Director of Arizona Health Holding. Mr. Lindvaag resigned
from the Board of Directors effective January 26, 2004.
Lawrence G. Olson, Director of the Company since January 1998, is currently an
officer and director of Olson Precast of Arizona, Inc. Mr. Olson has been a
director of several public companies, including the Phoenix National Bank, and
is currently a member of the board of directors and chairman of the board of
AZCO Mining, Inc. Mr. Olson graduated from the School of Engineering at the
University of Southern California in 1959.
William T. Walker, Jr., Director of the Company since March 2000, has over 40
years experience in the capital markets industry. Mr. Walker has been a member
of the board of the Securities Industry Association, Chairman of the California
District Securities Industry Association, Governor of the Pacific Stock
Exchange, President of the Bond Club of Los Angeles, and a member of the
American Stock Exchange Advisory Committee. Mr. Walker graduated from Culver
Military Academy, and attended Stanford University and served in the United
States Air Force. Mr. Walker is currently serving as a member of the Board of
Directors for the following public companies: Health Sciences Group, Inc.,
King-Thomason Group, Inc., and Supralife International, Inc.
LIMITATION OF LIABILITY OF DIRECTORS
Our by-laws provide as follows: " Except as hereinafter stated otherwise,
the Corporation shall indemnify all of its officers and directors, past, present
and future, against any and all expenses incurred by them, and each of them
including but not limited to legal fees, judgments and penalties which may be
incurred, rendered or levied in any legal action brought against any or all of
them for or on account of any act or omission alleged to have been committed
while acting within the scope of their duties as Officers or Directors of this
Corporation."
However, insofar as indemnification for liabilities arising under the
Securities Act of 1933 as amended may be permitted to directors and officers of
the Company pursuant to the foregoing provisions, or otherwise, it is the
opinion of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
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BOARD OF DIRECTORS COMMITTEES AND COMPENSATION
The Board of Directors acts as our audit committee. Due to our size we cannot at
this time appoint a director who meets all of the requirements and
qualifications of a financial expert pursuant to the regulations promulgated
under the Securities Exchange Act of 1934, as amended.
We have formally adopted a Code of Ethics which is publicly available on our
website at www.deserthealth.com
Compensation Committee Interlocks and Insider Participation
The Board of Directors does not have a Compensation Committee. The Board
of Directors oversaw the compensation of our executive officers.
Board of Director's Report on Executive Compensation
General. As noted above, our Board of Directors does not have a
Compensation Committee and, accordingly, during the fiscal year ended December
31, 2003, the Board of Directors reviewed and approved the compensation of our
executive officers.
Loans. In fiscal 2003, our Board of Directors granted no loans to any
officers or directors of the Company.
Overall Policy; Significant Factors. During fiscal 2003, our continued
entrance into the international market, which brings with it all the normal
capital requirements to sustain growth, influenced the compensation decisions
made by the Board of Directors in respect to our executive officers. Therefore,
certain stock compensation may be granted at times in lieu of salaries,
commissions and for services rendered. This practice may be extended into the
future on a case-by-case basis and accordingly filed with the Securities and
Exchange Commission. Finally, as we continue to mature, certain additions to the
executive staff will be required. As we are required to seek talent in outside
market, we will be required to provide a competitive compensation package.
As overall policy, however, the Board continues to believe that long-term
compensation tied to the creation of stockholder value should constitute a
significant component of the compensation to be earned by our executive
officers. In this respect, it will be the Board's policy to attempt to restrain
base cash compensation (subject to competitive pressures), while providing the
incentive for Management to increase stockholder value by providing such
officers with significant numbers of market-price stock that will not confer
value upon the officers unless and until our share price rises. The Board of
Directors expects that stock options will constitute a significant component of
the compensation package provided to executive officers.
The Board believes that cash bonuses are, at times, appropriate based upon
the performance of our business compared to our internal expectations and
general business conditions.
Section 16 (a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Desert Health executive officers and directors, and
persons who beneficially own more than ten percent of Desert Health's common
stock, to file initial reports of ownership and reports of changes in ownership
with the SEC. Executive officers, directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish Desert Health with
copies of all Section 16 (a) forms they file. Based upon a review of such copies
of such forms furnished to Desert Health and written representations from Desert
Health executive officers and directors, Desert Health believes that during
fiscal 2003 all forms 3 and 4 were filed on a timely basis for Desert Health
executive officers and directors. Forms 5 for Mr. Shannon and Ms. Aadland were
not timely filed.
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ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of our executive officers
and directors during each of the fiscal years since inception of the Company.
The remuneration described in the table does not include the cost to the Company
of benefits furnished to the named executive officers, including premiums for
health insurance and other benefits provided to such individual that are
extended in connection with the conduct of our business. The value of such
benefits cannot be precisely determined, but the executive officers named below
did not receive other compensation in excess of the lesser of $50,000 or 10% of
such officer's cash compensation exclusive of loans footnoted herein.
We have Employment Agreements with Johnny Shannon and Georgia Aadland,
both of which were extended to January 31, 2005, by approval of the Board of
Directors. The Employment Agreements were filed in a Form10-KSB March 29, 2002.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted Securities
Name Other Annual Stock Underlying LTIP All other
and Principal Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
Johnny Shannon (1) 2003 0 0 $125,736 200,000 shares 0 0 0
CEO, Chairman 2002 0 0 $258,509 0 0 0 0
President, and 2001 0 0 $143,863 75,000 shares 0 0 0
Director
Georgia Aadland 2003 0 0 $ 21,736 100,000 shares
Secretary/ 2002 0 0 $ 44,300 0 0 0 0
Treasurer 2001 0 0 $ 38,400 75,000 shares 0 0 0
And Director
Thor Lindvaag 2003 0 0 $ 68,202 50,000 shares 0 0 0
2002 0 0 $ 95,762 0 0 0 0
Director, Vice 2001 0 0 $ 49,675 75,000 shares 0 0 0
President of
Intn'l Marketing
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(1) On February 7, 2003, Mr. Shannon returned 425,000 shares of our
stock to be held as treasury stock as repayment for a note
receivable and accrued interest. See Note L "Related Party
Transactions:.
Compensation of Directors
All directors will be reimbursed for expenses incurred in attending Board
or committee meetings. Mr. Walker received $10,000 in each of 2003, 2002, and
2001 for consulting services.
Options, Grants and Exercises in 2003
No executive officers were granted stock options or exercised options in
2003.
Aggregate Options/SAR Exercises in Last Fiscal Year and FY-End Options/SAR
Values
-------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
-------------------------------------------------------------------------------------------------------------------------
Name Shares Value Realized Number of Securities Underlying Value of Unexercised in the
Acquired Unexercised Options/SARs at FY-End Money Options/SARs at FY-End
On (#) ($)
Exercise
($) ($) Exercisable/Unexercisable Exercisable/Unexercisable
-------------------------------------------------------------------------------------------------------------------------
Johnny Shannon 0 -- 1,000,000(1) $1,000,000(2)
-------------------------------------------------------------------------------------------------------------------------
Georgia Aadland 0 -- 500,000(1) $500,000(2)
-------------------------------------------------------------------------------------------------------------------------
Thor Lindvaag 0 -- 500,000(3) $500,000(2)
-------------------------------------------------------------------------------------------------------------------------
1. All options are currently exercisable.
2. Amounts based on closing price of $1.00 per share as of March 19,
2004.
3. Options expired January 31, 2004
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners.
The following table sets forth certain information as of December 31,
2003, with respect to the beneficial ownership of common stock by (i) each
person who to our knowledge beneficially owned or had the right to acquire more
than 10% of the outstanding common stock, (ii) each of our directors and (iii)
all our executive officers and directors as a group. Unless otherwise indicted,
the address of each individual is C/O Desert Health Products, Inc., 8221 East
Evans Road, Scottsdale Arizona 85260
Name of Beneficial Owner (1) Number Percent
Of Shares Of Class (2)
Johnny Shannon (3) 5,108,950 40
Georgia Aadland 505,400 4
Thor Lindvaag 305,000 2
Lawrence G. Olson 466,000 4
William T. Walker, Jr. 150,000 1
All Directors & Officers as a Group 6,535,350 51
(5 individuals)
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(1) As used in this table, "beneficial ownership" means the sole or
shared power to vote, or to direct the voting of, a security, or the
sole or shared investment power with respect to a security (i.e.,
the power to dispose of, or to direct the disposition of, a
security). In addition for purposes of this table, a person is
deemed, as of any date, to have "beneficial ownership" of any
security that such person has the right to acquire within 60 days
after such date.
(2) Figures are rounded to the nearest percentage. Less than 1% is
reflected as 0%.
(3) Johnny Shannon holds 1,000,000 shares of Preferred stock with 10:1
preferential voting rights.
Equity Compensation Plan Information
--------------------------------------------------------------------------------------------------------
Number of securities to Weighted average Number of securities
Plan Category be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance
warrants and rights warrants and rights
--------------------------------------------------------------------------------------------------------
(a) (b) (c)
--------------------------------------------------------------------------------------------------------
Equity compensation plans None N/A N/A
approved by security
holders
--------------------------------------------------------------------------------------------------------
Equity compensations not 2,000,000 $0.25 N/A
approved by security
holders
--------------------------------------------------------------------------------------------------------
Total $0.25 N/A
--------------------------------------------------------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Insider Relationships: Jonathan Gotcher, website development, is the
grandson of the Chairman and President, Johnny Shannon.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
1. Financial Statements:
A. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. Independent Auditors' Report
2. Financial Statements:
Balance Sheet 2
Statements of Operation and
Accumulated Deficit 3
Statements of Changes in
Stockholders Equity 4
Statements of Cash Flows 5 - 6
3. Notes to Consolidated Financial
Statements 7 - 18
All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
1. During the fiscal year 2003, we filed the following Form
8-K's: Form 8-K filed January 10, 2003
2. Subsequent to the end of the fiscal year we filed the
following reports on Form 8-K: Form 8-K filed March 22, 2004
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3. Exhibits
Exhibit Number Description
(1) N/A
(2)(1) Acquisition Agreement and Plan of Merger with
Intercontinental Capital Fund, Inc., (Incorporated by
Reference)
(3)(i)(2) Articles of Incorporation
A. Articles of Incorporation for Desert
Health Products, Inc., (Incorporated by
Reference)
B. Amended Articles of Incorporation for
Desert Health Products, Inc.,
(Incorporated by Reference)
(3)(ii)(2) Bylaws
Bylaws of Desert Health Products, Inc.
(Incorporated by Reference)
(4)(2) Instruments defining the rights of security holders:
(4)(i) (a) Articles of Incorporation for Desert Health
Products, Inc. (Incorporated by Reference.)
(b) Amended Articles of Incorporation for
Desert Health Products, Inc.,
(Incorporated by Reference)
(c) Bylaws of Desert Health Products, Inc.
(Incorporated by Reference)
(5) N/A
(8) N/A
(9) N/A
(10) Material Contracts
1. (3) Separation and Distribution
Agreement between Desert Health
Products, Inc., and Royal Phoenix
(Incorporated by Reference)
2. (2) Product Marketing and Distribution
Agreement between Desert Health
products, Inc., and GH Associates,
Inc. (Incorporated by Reference)
3. (2) Agreement regarding Dr. Harris's
Original Perfect Feet Formula
(Incorporated by Reference)
4. (2) Exclusive Distribution Agreement
between Desert Health Products, Inc.,
and Silmarc Pharma s.r.l. in Italy.
(Incorporated by Reference)
5. (2) Exclusive Distribution Agreement
between Desert Health Products, Inc.
and Snore Formula Inc. (Incorporated
by Reference)
6. (2) Modification of Contract between
Desert Health Products, Inc. and Snore
Formula Inc. (Incorporated by
Reference)
7. (4) Agreement regarding Dr. Harris's
Original Diabetic Feet Formula
(Incorporated by Reference)
8. (4) Employment Agreement between
Desert Health Products, Inc. and
Johnny Shannon (Incorporated by
Reference)
9. (4) Employment Agreement between
Desert Health Products, Inc. and
Georgia Aadland (Incorporated by
Reference)
10. (4) Employment Agreement between
Desert Health Products, Inc. and Thor
Lindvaag (Incorporated by Reference)
(11) N/A
(13) N/A
(15) N/A
(16) N/A
(17) N/A
(18) N/A
(19) N/A
(20) N/A
(21) List of Subsidiaries
(22) N/A
24
(23) Consent of Desert Health's Auditor
(24) N/A
(25) N/A
(26) N/A
(31.1) Certification of Chief Executive Officer pursuant to
Item 601(b)(31) of Regulation S-B, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
(31.2 Certification of Chief Financial Officer pursuant to
Item 601(b)31) of Regulation S-B, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.D. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.D. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(1) Filed in a Form 8-K on March 15, 2000.
(2) Filed in a Form 10-KSB on April 3, 2001.
(3) Filed in a Form 8-K on October 31, 2000.
(4) Filed in a Form 10-KSB March 29, 2002.
Item 14. PRINCIPAL ACCOUNTING FIRM FEES AND SERVICES
The following table sets forth information regarding fees paid to our
independent accountant during the last two fiscal years:
2003 2002
------------------------------------------
Audit Fees $31,816 $22,859
Audit Related Fees $12,156 $ 4,769
All Other Fees -0- -0-
The Board of Directors pre-approved all fees paid to our independent auditor.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
our behalf by the undersigned, thereunto duly authorized.
DESERT HEALTH PRODUCTS, INC. DATED: March 30, 2004
By: /S/ Johnny Shannon
------------------
Johnny Shannon
President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESERT HEALTH PRODUCTS, INC.
(Registrant)
Signature Title Date
/S/ Johnny Shannon Chief Executive Officer, March 30, 2004
--------------------------- Chief Financial Officer and
Johnny Shannon President
/S/ Georgia Aadland Secretary/Treasurer March 30, 2004
---------------------------
Georgia Aadland
/S/ Lawrence Olson Director March 30, 2004
---------------------------
Lawrence Olson
/S/ William T. Walker, Jr. Director March 30, 2004
---------------------------
William T. Walker, Jr.
26
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended
December 31, 2003 and 2002
TABLE OF CONTENTS
INDEPENDENT AUDITORS' REPORT F-1-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Deficit F-5
Consolidated Statements of Cash Flows F-6-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8-19
F-1
Report of Independent Certified Public Accountants
To The Board of Directors and Stockholders of
Desert Health Products, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Desert Health
Products, Inc. and Subsidiary as of December 31, 2003 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company'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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Desert Health
Products, Inc. and Subsidiary at December 31, 2003 and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note C to the financial
statements, the Company has suffered substantial recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note C. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Semple & Cooper, LLP
Phoenix, Arizona
March 19, 2004
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Desert Health Products, Inc.
I have audited the accompanying consolidated balance sheets of Desert Health
Products, Inc. as of December 31, 2002, and the related consolidated statements
of operations, changes in stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that I 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. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Desert Health Products, Inc. as of
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company has suffered substantial recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note C. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ James E. Raftery CPA, PC
February 10, 2003
Mesa, Arizona
F-2
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
2003 2002
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 11,420 $ 55,515
Accounts receivable, net 25,793 16,961
Notes receivable -- 208,917
Interest receivable -- 76,946
Inventory 99,770 179,040
Advances 1,010 2,500
Prepaid expenses -- 25,000
----------- -----------
Total Current Assets 137,993 564,879
----------- -----------
Property and Equipment, net 79,779 105,579
Other Assets
Deferred financing costs, net 100,996 --
Intangibles, net 756,822 1,285,322
Goodwill, net 233,645 233,645
Deposits 21,326 15,846
----------- -----------
1,112,789 1,534,813
----------- -----------
$ 1,330,561 $ 2,205,271
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 314,920 $ 227,063
Loan inducement fees payable 11,340 13,300
Deferred revenue 60,750 56,000
Interest payable 212,718 309,633
Dividends payable 157,604 32,206
Current portion of long term notes payable 1,282,256 1,236,718
----------- -----------
Total Current Liabilities 2,039,588 1,874,920
Long Term Liabilities
Shares subject to mandatory redemption 1,100,000 --
Long term note payable, net of current portion 7,000 328,183
----------- -----------
Total Liabilities Commitments and Contingencies 3,146,588 2,203,103
----------- -----------
Commitments and Contingencies -- --
Stockholders' Deficit
Preferred stock, convertible, $.001 par value, 10,000,000 shares
authorized and 1,708,500 shares issued and outstanding
as of December 31, 2003 and 2002 1,708 1,708
Common stock, $.001 par value, 25,000,000 shares
authorized and 13,163,821 and 12,113,821 shares issued and
outstanding as of December 31, 2003 and 2002, respectively 13,164 12,114
Treasury stock, 425,000 shares, stated at cost (191,250) --
Stock subscribed 1,744,000 1,466,000
Additional paid-in capital 5,390,025 4,801,076
Accumulated deficit (8,773,674) (6,278,730)
----------- -----------
(1,816,027) 2,168
----------- -----------
$ 1,330,561 $ 2,205,271
=========== ===========
See accompanying notes to the consoldiated financial statements
F-3
DESERT HEALTH PRODUCTS, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
2003 2002
------------ ------------
Revenue, net $ 193,090 $ 133,075
------------ ------------
Cost of Sales
Merchandise 163,531 70,062
Impairment of inventory 43,682 --
------------ ------------
207,213 70,062
------------ ------------
Gross Profit (14,123) 63,013
Operating Expenses 1,989,111 2,011,829
------------ ------------
Net Loss From Operations (2,003,234) (1,948,816)
------------ ------------
Other Income (Expense)
Interest expense (353,344) (302,355)
Miscellaneous expense (13,129) (19,595)
Miscellaneous income -- 32,500
Loss on disposal of assets -- (1,540)
Interest income 161 28,103
------------ ------------
(366,312) (262,887)
------------ ------------
Net Loss (2,369,546) (2,211,703)
Preferred Stock Dividends 125,398 32,206
------------ ------------
Net Loss Available to Common Shareholders $ (2,494,944) $ (2,243,909)
============ ============
Basic and Diluted Earnings Per Share $ (0.20) $ (0.23)
============ ============
Weighted Average Common Shares Outstanding 12,494,820 9,611,225
============ ============
See accompanying notes to the consolidated financial statements
F-4
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Years ended December 31, 2003 and 2002
Convertible
Preferred Stock Common Stock Treasury Stock
---------------------- --------------------- ----------------------
Par Value Par Value
Shares $.001 sh Shares $.001 sh Shares Cost
---------------------- --------------------- ----------------------
Balances, December 31, 2001 1,338,500 $ 1,338 9,010,321 $ 9,010 -- $ --
Shares issued in 2002 for:
Services and fees 350,000 350 3,047,500 3,048 -- --
Cash 40,000 40 -- -- -- --
Conversions (20,000) (20) 20,000 20 -- --
Stock subscribed -- -- 36,000 36 -- --
Dividends -- -- -- -- -- --
Prior period adjustment -- -- -- -- -- --
Net loss for the year ended
December 31, 2002 -- -- -- -- -- --
---------------------- --------------------- ----------------------
Balances, December 31, 2002 1,708,500 1,708 12,113,821 12,114 -- --
Shares issued in 2003 for:
Services and fees -- -- 700,000 700 -- --
Debt conversions -- -- 350,000 350 -- --
Repayment of note recievable -- -- -- -- 425,000 (191,250)
Stock subscribed -- -- -- -- -- --
Dividends -- -- -- -- -- --
Net loss for the year ended
December 31, 2003 -- -- -- -- -- --
---------------------- --------------------- ----------------------
Balances, December 31, 2003 1,708,500 $ 1,708 13,163,821 $13,164 425,000 $(191,250)
====================== ===================== ======================
Additional Stock
Paid-in Subscriptions Accumulated
Capital Receivable Deficit Total
------------ ------------- ------------ ------------
Balances, December 31, 2001 $4,176,094 $ 474,000 $(4,011,741) $ 648,701
Shares issued in 2002 for:
Services and fees 587,058 -- -- 590,456
Cash 19,960 -- -- 20,000
Conversions -- -- -- --
Stock subscribed 17,964 992,000 -- 1,010,000
Dividends -- -- (32,206) (32,206)
Prior period adjustment -- -- (23,080) (23,080)
Net loss for the year ended
December 31, 2002 -- -- (2,211,703) (2,211,703)
------------ ------------- ------------ ------------
Balances, December 31, 2002 4,801,076 1,466,000 (6,278,730) 2,168
Shares issued in 2003 for:
Services and fees 318,300 -- -- 319,000
Debt conversions 270,649 -- -- 270,999
Repayment of note recievable -- -- -- (191,250)
Stock subscribed -- 278,000 -- 278,000
Dividends -- -- (125,398) (125,398)
Net loss for the year ended
December 31, 2003 -- -- (2,369,546) (2,369,546)
------------ ------------- ------------ ------------
Balances, December 31, 2003 $5,390,025 $1,744,000 $(8,773,674) $(1,816,027)
============ ============= ============ ============
See accompanying notes to the consolidated financial statements
F-5
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2003 2002
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities
Cash received from customers $ 173,769 $ 118,407
Cash paid to suppliers and employees (1,282,129) (1,381,311)
Interest received 161 192
Interest paid (66,386) (95,362)
----------- -----------
Net Cash Used in Operating Activities (1,174,585) (1,358,074)
----------- -----------
Cash Flows from Investing Activities
Purchase of furniture and equipment (11,010) (7,990)
Purchase of intangibles (1,500) (12,080)
Payments on notes receivable -- (16,431)
----------- -----------
Net Cash Used in Investing Activities (12,510) (36,501)
----------- -----------
Cash Flows from Financing Activities
Proceeds from sale of common and preferred stock -- 12,000
Proceeds from stock subscribed 609,000 1,010,000
Payments on notes payable (102,000) (71,500)
Proceeds from notes payable 636,000 447,500
----------- -----------
Net Cash Provided by Financing Activities 1,143,000 1,398,000
----------- -----------
Net Increase (decrease) in Cash and
Cash Equivalents (44,095) 3,425
Beginning Cash and Cash Equivalents 55,515 52,090
----------- -----------
Ending Cash and Cash Equivalents $ 11,420 $ 55,515
=========== ===========
See accompanying notes to the consolidated financial statements
F-6
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2003 2002
Reconciliation of Changes in Net Operations to Net Cash Used
by Operating Activities:
Loss from operations $(2,369,546) $(2,211,703)
Adjustments to reconcile change in loss from operations to
net cash used by operating activities:
Depreciation 18,912 20,842
Loss on disposal of assets -- 1,540
Impairment of intangibles and goodwill 300,000 481,341
Impairment of inventory 43,682 6,733
Miscellaneous expense -- 2,604
Compensation 94,613
Loan inducement fees and financing costs 118,667 49,695
Stock issued for compensation 294,750 121,404
Stock issued for services 24,250 197,761
Bad debt expense 10,488 24,506
Settlement fees -- 20,000
Relinquishment of debt (44,729) (111,719)
(Increase) decrease in operating assets:
Accounts receivable (19,321) (49,772)
Inventory 35,591 (54,685)
Advance 1,490 (829)
Interest receivable -- (27,911)
Prepaid expense 25,000 29,905
Deposits (5,480) (5,846)
Increase (decrease) in operating liabilities:
Accounts payable 152,057 (30,238)
Deferred revenue 4,750 21,000
Interest payable 140,241 157,298
----------- -----------
Net Cash Used by Operating Activities $(1,174,585) $(1,358,074)
=========== ===========
Non-cash financing and investing transactions
Issuance of stock for acquisition of subsidiary $ -- $ 221,000
Decrease in note receivables and
interest receivable for compensation $ -- $ 121,404
Conversion of notes receivable to treasury stock $ 208,917 $ --
Impairment of intangibles and goodwill $ 230,000 $ 481,341
Deferred financing costs $ 280,764 $ --
Conversion of notes payable to preferred stock,
accrued interest and stock subscribed $ 965,339 $ --
Stock issued for compensation and services $ 319,000 $ --
Debt Relinquishment $ 17,898 $ --
See accompanying notes to the consolidated financial statements
F-7
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Desert Health Products, Inc.
and the Subsidiary (collectively "the Company") is presented to assist in
understanding the Company's financial statements. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
Nature of Operations
Desert Health Products, Inc was incorporated in the state of Arizona on July 21,
1991 to provide innovative supplements and health solutions to the global
marketplace. The Company has grown from its humble beginnings to a company with
a global vision to educate, assess and deliver nutritional products to a global
market place. The Company has a commitment to purity, quality, research,
information and support. Desert Health Products, Inc. has global distribution
capabilities and offers a choice of turnkey or customized private label options.
This, combined with professionally derived formulations, enables the Company to
offer products to fill any market niche. On October 31, 2002 the Company
acquired all of the outstanding capital stock of Royal Products, Inc (f.k.a.
JonDar Corp.), a Nevada corporation incorporated in 1991. Royal Product Inc.'s
principal business activity is to provide network marketing. They purchase all
of their products from Desert Health Products, Inc.
Basis of Consolidation
The consolidated financial statements include the accounts of Royal Products,
Inc., a wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Reclassifications
Certain balances as of and for the year ended December 31, 2002 have been
reclassified in the accompanying financial statements to conform to the current
year presentation. These classifications had no effect on previously reported
net income or stockholders' equity.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with an initial maturity of three months or
less to be cash equivalents.
Inventory
Inventory consists primarily of health food supplements and vitamin products and
are stated at the lower of cost (first-in, first-out) or market value. At
December 31, 2003 and 2002, the Company had no allowance for potentially
obsolete inventory, as all items are deemed to be saleable within their
remaining shelf lives.
The Company's inventory was written down to estimated net realizable value at
December 31, 2003. The cost of revenues for the year ended December 31, 2003
includes a charge of $43,682 which represents the cost over net realizable
value.
Deferred Revenue
Payments received from product sales that have not been shipped to the customer
are recorded as deferred revenue.
F-8
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Shipping and Handling Costs
Operating expenses include $26,253 and $18,902 in shipping costs, which are
expensed as incurred for the years ended December 31, 2003 and 2002,
respectively.
Property & Equipment
Property and equipment consists of office equipment and leasehold improvements
and are recorded at cost. Depreciation is provided for on the straight-line
method with estimated useful lives of 3 to 7 years for financial reporting
purposes and the accelerated cost recovery method for federal income tax
purposes. Maintenance and repairs that neither materially add to the value of
the property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred. Leasehold
improvements are recorded at cost and are amortized over their useful lives or
the lease term, whichever is shorter. The Company reviews property and equipment
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Income Taxes
The Company accounts for income taxes in accordance with Financial Accounting
Standard No. 109 "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the Company to recognize deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements carrying amounts and tax basis of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.
Intangible Assets
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Intangible
Assets, which supersedes APB Opinion No. 17, Intangible Assets. SFAS 142
eliminates the requirement to amortize goodwill and indefinite-lived intangible
assets, addresses the amortization of intangible assets with a defined life and
addresses the impairment testing and recognition for goodwill and intangible
assets. SFAS 142 will apply to goodwill and intangible assets arising from
transactions completed before and after the Statement's effective date. SFAS 142
is effective for fiscal years 2003 and 2002.
Other intangible assets consist primarily of marketing rights, trademarks, and
registrations. The Company will periodically review the carrying values of the
other intangibles and record an impairment loss, if anticipated future cash
flows do not equal or exceed the carrying value. No amortization expense was
recorded during the years ended December 31, 2003 and 2002 as the other
intangible assets were deemed to have indefinite lives. The Company has
performed the annual impairment test required under SFAS 142 for fiscal year
2003 and 2002 and recorded impairment losses related to the other intangible
assets of $530,000 and $481,341, respectively. During the year ended December
31, 2003, $300,000 of the $530,000 impairment is reported as operating expenses
on the consolidated statements of operations and the balance of $230,000 was
written off against stock subscribed.
The Company's impairment loss for the year ended December 31, 2003 in the amount
of $530,000 was solely to record impairment on an exclusive marketing rights
agreement with a Canadian based entity to market the Company's Dr. Harris's
Original Diabetic Feet product. This intangible was deemed to have no value as
the Canadian entity breached the contract and the Company is currently in
litigation to recover their losses.
F-9
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and the related
interpretation in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provision of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation".
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclose contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates are used when accounting for the allowance for doubtful
accounts, depreciation, carrying value of goodwill and intangibles, accruals,
taxes, and contingencies, which are discussed in the respective notes to the
financial statements.
Revenue and Cost Recognition
Revenues are recognized when earned, and expenses are recognized when incurred.
The Company generally recognizes revenue upon shipment of its products in
accordance with the terms and conditions of orders placed with the Company by
its customers. The application of Staff Accounting Bulletin 101 did not have a
material affect on the Company's financial position or results of operations.
Advertising Costs
The Company expenses advertising costs as they are incurred. Advertising costs
for the years ended December 31, 2003 and 2002 were $6,595 and $14,951,
respectively.
Accounts Receivable, net
The Company follows the allowance method of recognizing uncollectible accounts
receivable. The allowance method recognizes bad debt expense based on a review
of the individual accounts outstanding and the Company's prior history of
uncollectible accounts receivable. The Company records delinquent finance
charges on outstanding accounts receivable only if they are collected. As of
December 31, 2003 and 2002, an allowance of $25,403 and $14,915, respectively,
was established for potentially uncollectible accounts receivable. During the
years ended December 31, 2003 and 2002, the Company incurred $10,488 and
$24,506, respectively, in bad debt expense.
Fair Value of Financial Instruments
The Company has cash and cash equivalents, accrued liabilities and short-term
borrowings for which the carrying value approximates fair value due to the
short-term nature of these instruments.
The fair value of the Company's long-term debt is estimated based on the market
values of financial instruments with similar terms. Management believes that the
fair value of the long-term debt approximates its carrying value.
F-10
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
Concentration of Credit Risk
The Company's business activities and accounts receivable are with customers in
the nutritional industry located throughout the United States of America and in
foreign countries. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses, returns and
potential cash and other discounts taken.
NOTE B - NEW PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations." The Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Statement is effective for the fiscal year beginning after June 15,
2002. Specifically, the Statement requires that retirement obligations be
recognized when they are incurred and displayed as liabilities with the initial
measurement being at the present value of estimated third party costs. In
addition, the asset retirement cost will be capitalized as part of the asset's
carrying value and subsequently allocated to expense over the assets useful
life. The adoption of SFAS No. 143 did not have a significant impact on the
Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 replaces certain previously issued
accounting guidance, develops a single accounting model for long-lived assets
other than goodwill and indefinite-lived intangibles, and broadens the framework
previously established for assets to be disposed of by sale (whether previously
held or newly acquired). This Statement is effective for years after December
15, 2001. The adoption of SFAS No. 143 did not have a significant impact on the
Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections."
This Statement rescinds SFAS No. 4; SFAS No. 64 and further clarifies debt
extinguishments, which classify as extraordinary. Additionally, SFAS No. 145
amends SFAS No, 13 in order to clarify the accounting for the treatment of lease
modifications. Provisions of this Statement relating to the rescission of SFAS
No. 113 are effective for transactions occurring after May 15, 2002. The
pronouncement did not have a material impact on the financial position, results
of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 replaces Emerging Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit and Activity (including Certain Costs Incurred in a
Restructuring)". The primary difference from existing guidance is that SFAS No.
146 requires the recognition cost at fair value when a liability is incurred,
versus at the date of the exit plan approval. This Statement is effective for
exit and disposal activities of the Company that are initiated after December
31, 2002. The Company has not historically had significant exit or disposal
activities.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123". SFAS No.
148 provides alternative methods for transition for voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, the Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both interim and annual financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The statement was effective for
fiscal years ending after December 15, 2002. The Company adopted this Statement
in regards to disclosure provisions for the year ended December 31, 2003.
F-11
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - NEW PRONOUNCEMENTS (CONT'D)
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
FIN 46 provides guidance in determining (1) whether consolidation is required
under the "controlling financial interest" model of Accounting Research Bulletin
No. 51 (ARB 51), Consolidated Financial Statements, or other existing
authoritative guidance, or, alternatively, (2) whether the variable interest
model under FIN 46 should be used to account for existing and new entities. The
Company has considered the guidance in FIN 46 and has determined that it did not
have a material effect on its financial position, results of operations, cash
flows or note disclosures.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
accounting for derivative instruments including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133 in
particular, this Statement clarifies under what circumstances a contract with an
initial net investment meets the characteristics of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. This statement is generally effective for contracts
entered into or modified after June 30, 2003. The Company is currently analyzing
the impact of adoption of SFAS No. 149 on our financial reporting and
disclosures.
In August 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability. Many of those instruments were previously classified as equity.
This Statement requires an issuer to classify the following instruments as
liabilities:
o A financial instrument issued in the form of shares that is
mandatorily redeemable - that embodies an unconditional obligation
requiring the issuer to redeem it by transferring its assets at a
specified or determinable date (or dates) or upon an event that is
certain to occur.
o A Financial instrument that embodies an unconditional obligation, or
a financial instrument other than an outstanding share that embodies
a conditional obligation, that the issuer must or may settle by
issuing a variable number of its equity shares, if, at inception,
the monetary value of the obligation is based solely or
predominantly on any of the following.
1. A fixed monetary amount known at inception, for example,
a payable settle-able with a variable number of the
issuer's equity shares
2. Variations in something other than the fair value of the
issuer's equity shares, for example, a financial
instrument indexed to the S&P 500 and settle-able with a
variable number of the issuer's equity shares
3. Variations inversely related to changes in the fair
value of the issuer's equity shares, for example, a
written put option that could be net share settled.
This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The Company adopted this statement
in regards to reporting and disclosure provisions for the year ended December
31, 2003.
F-12
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - GOING CONCERN AND MANAGEMENT'S PLAN
As indicated in the accompanying consolidated financial statements, the
Company's gross revenue is not sufficient to meet its operating expenses for the
year ended December 31, 2003. Additionally, as of that date the Company's
current liabilities exceeded its current assets by $1,901595. Those factors
create an uncertainty regarding the Company's ability to continue as a going
concern. Management of the Company has developed the following plan to reduce
its liabilities and increase its gross revenues.
Management believes they have strong support from their international and
domestic clients and continues to process registrations to sell product to
various other countries around the world. This, coupled with the exclusive
marketing rights for a newly formulated product geared to helping diabetic foot
problems and a new burn and scald relief product, is expected to increase
profitability. The Company has also finalized its formulation of an anti-aging
product and has commenced marketing activities. The Company is positioning
itself in the North American market, with registrations filed in Mexico and
Canada that will contribute to the presence of the Company's products in the
network marketing, private label and branded label markets. The Company has
entered into a contract with a representative to market Desert Health Products,
Inc's. signature foot care products to Native Americans as well as "at risk"
groups in Mexico, where people with Type I or Type II diabetes who have poor
circulation in their feet may benefit from the use of the Company's foot care
product.
Royal Products, Inc., a wholly owned subsidiary of the Company, is a network
marketing company that is working to develop markets in North America. Network
marketing is believed by management to be the quickest way to penetrate a market
with the least amount of investment. The Company believes its subsidiary will be
a major source of revenue as it works to penetrate the domestic markets.
The Company recently began dedicating resources to developing and cultivating
the domestic market in the United States. Desert Health Products, Inc. entered
into a contract in early 2004 with another party to private label certain
products. This party is in negotiations with major retailers to carry their
products. The contract states that the Company will receive $2,700,000 as
initial "seed money" of which, $400,000 is earmarked to cover overhead,
development expenses, travel, labels, packaging, and marketing materials.
$1,200,000 is for the exclusive rights to sell certain products in the domestic
markets and the remaining $1,100,000 is for initial start-up product inventory,
display cases, and marketing and sales materials. The Company anticipates
receiving $1,000,000 of the above contract by the end of April 2004.
Additionally, two international offices have been formed in Trondheim, Norway
and Beijing, China, and we hope to open a new office in Ecuador in 2004 to
service the Central and South American markets. The Beijing office has developed
a source of raw materials (herbs) and unique Chinese goods for use in our
products. An example of this is our Burn & Scald Relief Spray purchased from a
Chinese manufacturer, which the Company has exclusive rights to in 33 countries.
In addition, management believes that the Company has technical knowledge of
potential interest to companies in China. This knowledge includes the growing,
processing, and formulating of Aloe Vera, which it hopes to make into a viable,
economic venture.
Lastly, in February of 2004 the Company's shares began trading on the Frankfurt
Stock Exchange. Management is contemplating a potential offering through this
Exchange to generate additional equity capital.
Management believes the agreements entered into and actions taken as described
above will bring liquidity and profitability to the Company in the coming year.
However, there can be no assurance that anticipated sales will occur, or if they
do occur, they will generate anticipated profits, or that additional equity
financing will be found, or found on terms acceptable to the Company.
The ability of the Company to continue as a going concern is dependent upon the
aforementioned ability to raise additional outside capital and/or significantly
increase its market share to achieve profitability. The financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
F-13
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31,
For the years ended December 31, 2003 and 2002, a significant volume of sales
were concentrated with four customers. Of the total revenue for the years ended
December 31, 2003 and 2002, 60% and 63% or $118,845 and $80,540 were received
from those customers, respectively. At December 31, 2003 accounts receivable
related to these customers totaled $6,429 and $13,128, respectively.
F-14
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S.
Federal statutory income tax rate of 34% and a State statutory income tax rate
of 7% to the net loss before income taxes, as shown:
2003 2002
----------- -----------
Tax benefit at the federal statutory rate $ 2,686,050 $ 1,814,409
Tax benefit at the State statutory rate 543,519 367,282
Valuation allowance (3,229,569) (2,181,691)
----------- -----------
Tax benefit $ -- $ --
=========== ===========
The net change in the valuation allowance was $1,047,878 for the year ended
December 31, 2003, which represents the current year's income tax benefit of the
net operating loss.
The Company has federal and state net operating loss carry forwards at December
31, 2003 of $7,900,147 and $7,764,562. The net operating loss carry-forwards may
offset against future taxable income. The net operating losses expire as
follows:
Miscellaneous income consists of $30,000 for the sale of marketing rights, both
domestic and foreign for certain Company products, and $2,500 in legal
settlement fees for the year ended December 31, 2002.
NOTE J - NOTE SUBSCRIBED
On December 31, 2003, note subscribed consisted of $100,000 for 100,000
shares of un-issued common stock, $200,000 for 400,000 shares of un-issued
preferred stock and $1,444,000 for 1,444,000 shares of un-issued and
unauthorized class of preferred stock. The Company is currently in the process
of filing all the required documents in order to issue this new class of
preferred stock, which will have a specified dividend rate of 12%. As of
December 31, 2003 and 2002 accrued dividends payable on this new class of
preferred stock was $157,604 and $32,206, respectively. Subsequent to December
31, 2003, 1,430,000 of the unauthorized class of preferred stock was authorized
and issued.
F-15
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -LONG TERM DEBT
Long-term notes payable consists of the following at December 31,
2003 2002
----------- -----------
Unsecured notes payable to various individuals,
payable in quarterly interest only installments
totaling $20,144, bearing interest at rates of
8% to 30% per annum. Maturity dates range from
May 8, 2002 to August 17, 2004 $ 710,500 $ 1,145,683
Notes payable to an individual, payable in
quarterly interest only installments of $750,
bearing interest at a rate of 12% per annum
Secured by 25,000 shares of Desert Health
Products, Inc. Preferred Stock with a maturity
date of September 29, 2002 25,000 125,000
Note payable to an individual, payable in
semi-annual interest only installments of
$2,322, bearing interest at a rate of 15% per
annum, with a maturity date of January 23,
1998. The note is personally guaranteed by an
officer of the Corporation 18,700 18,700
Unsecured, non-interest bearing demand notes
payable to individuals 30,018 28,018
Unsecured notes payable to various individuals,
payable in monthly interest only installments
totaling $1,866, bearing interest at rates of
4.75% to 30% per annum. Maturity dates range
from July 12, 2002 to June 12, 2004 140,000 90,000
Unsecured, demand note payable, with a single
$1,000 interest installment due at maturity of
June 20, 2001 15,000 15,000
Note payable to an individual, payable in
monthly interest only installments of $500,
bearing interest at a rate of 12% per annum,
with a maturity date of June 28, 2000.
Personally guaranteed by an officer of the
Corporation 50,000 50,000
Unsecured, note payable to an entity, payable
in semi-annual interest only installments of
$11,250, bearing interest at a rate of 15% per
annum, with a maturity date of June 27, 2002 75,000 75,000
Demand note payable to an individual, note was
payable on May 10, 2001, note is accruing
interest at a rate of $50 per day until
principal balance is paid 12,500 12,500
Unsecured, non-interest bearing notes payables
to various individuals, with maturity dates
ranging from November 9, 2002 to July 11, 2005 24,000 5,000
Unsecured note payable to an individual, net of
discount of $181,462 Payable in annual interest
only installments of $35,622, bearing interest
at a rate of 10% per annum, with a maturity
date of June 25, 2004 158,538 --
Unsecured demand notes payable to various
individuals, payable in annual interest only
installments of $3,000, bearing interest at a
rate of 30% per annum 30,000 --
----------- -----------
Total notes payable 1,289,256 1,564,901
Less: current maturities (1,282,256) (1,236,718)
----------- -----------
$ 7,000 $ 328,183
=========== ===========
F-16
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -LONG TERM DEBT (CONT'D)
Of the Company's $1,470,718 in debt obligations, $546,718 is in default,
$975,500 of notes payable have an option to convert to shares of common stock at
80% of the bid price, and $50,000 of notes payable have an option to convert to
shares of common stock at $1.00 per share
During the year ended December 31, 2003, the Company entered into a $340,000
note payable with an individual. This note contains a stated interest rate of
10% and is due on June 25, 2004. The note payable contains a beneficial
conversion feature, whereby, after one year the lender may convert the balance
of the note plus any accrued interest into shares of common stock at an exercise
price of 80% of the average bid price for the previous thirty days. This
beneficial conversion feature resulted in a discount to the note of $82,424,
which has been recorded to additional paid-in capital at the time the note was
issued and a discount to the related note. The discount is being amortized over
the life of the note.
As of December 31, 2003, the principal balance and unamortized discount relating
to the above note was $41,212. During the year ended December 31, 2003, the
Company recorded interest expense of $41,212, resulting from the amortization of
the discounts on the note.
NOTE L - RELATED PARTY TRANSACTIONS
For the years ended December 31, 2003 and 2002 the Company paid $803,177 and
$638,167, respectively, as independent contractor fees to officers, directors,
and relatives of officers of the Corporation.
During the year ended December 31, 2002 the Company purchased Royal Products,
Inc. a wholly owned subsidiary from an individual who is a majority shareholder,
director, and officer of the Company for 2,000,000 shares of Desert Health
Products, Inc. stock, valued at $221,000.
At December 31, 2003 and 2002 accrued wages to an officer of the Company totaled
$33,750 and $20,700, respectively.
During the year ended December 31, 2003, a majority shareholder, director, and
officer of the Company paid $89,000 on behalf of Desert Health Products Inc., to
settle claims against the Company.
On February 7, 2003 an officer of the Company returned 425,000 shares of the
Company's common stock to be held as treasury stock as repayment for the note
receivable and accrued interest. The stock received in the aforementioned
transaction was valued at a premium of $0.22 per share over the trading price at
the time of the exchange. As there was no additional stated or unstated
consideration issued for the stock, compensation expense was recorded as an
operating expense in the consolidated statement of operations in the approximate
amount of $94,000.
2003 2002
--------- --------
Notes receivable to an officer and director of
the Company Interest was imputed at the rate of 8.5% $ -- $208,917
========= ========
NOTE M - COMPENSATED ABSENCES
The Company has not accrued for compensated absences as of December 31, 2003 and
2002. Management believes that any potential liability would be immaterial to
the consolidated financial statements.
NOTE N- COMMITMENTS AND CONTINGENCIES
As of December 31, 2003 and 2002 the Company is under written obligation to
issue 21,000 and 15,000 shares of Desert Health Products, Inc.'s common stock,
valued at $11,340 and $13,300 as loan inducement fees to various individuals,
respectively.
F-17
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES (CONT'D)
The Company has written agreements with several individuals to pay royalties
between $.02 and $.50 per unit of Dr. Harris's Original Diabetic Feet and Burn &
Scald Relief Spray sold. These royalties are to be paid quarterly for twelve
months. No royalties were paid during the year ended December 31, 2003 as the
sales of Burn & Scald Relief Spray or Dr. Harris's Original Diabetic Feet have
not commenced due to delays in the product's formulation and discontinuance of
sales of Dr. Harris's Original Diabetic Feet.
During the year ended December 31, 2003, the Company entered into a written
agreement, whereby the Company has committed to pay minimum royalties on sales
of foot care product in the amount of $2,000 per month from December 2003 to
June 2004 and $1,500 per month from July 2004 to December 2004.
The Company conducts its operations from facilities under a three-year
non-cancelable operating lease expiring January 31, 2005, with monthly rent
expense of $9,403. Additionally, the Company leases office space at its Beijing,
China branch under a month-to-month lease, with monthly rental expense of $954.
The following is the future minimum rental payments for the years ended:
Total rent expense for the years ended December 31, 2003 and 2002 was $135,113
and $134,823 respectively.
The Company is a defendant in a lawsuit filed by an individual lender for
default on certain terms of agreements and disputes as to the amount of those
agreements. The suit asks for damages totaling $50,000. The Company intends to
vigorously defend its position and has not accrued a contingent liability.
The Company is a defendant in a lawsuit filed by a Canadian based entity for
default on certain terms of agreements and disputes as to the amounts of those
agreements. The suit asks for damages totaling $40,385. The Company intends to
vigorously defend its position and has not accrued a contingent liability.
The Company, in the ordinary course of business, may become a party in legal
proceedings over disputes relating to its contracts and agreements.
The Company currently has employment contracts with two officers of the Company
which are renewable on a yearly basis. Executive annual compensation for these
employment contracts total $198,000 payable in bi-monthly installments.
NOTE O - SHARES SUBJECT TO MANDATORY REDEMPTION
On June 16, 2003 the Company entered into an agreement with one of its lenders
to convert $967,339 of debt, accrued interest and subscribed stock to 1,100,000
shares of preferred stock. The agreement contains a call option, whereby, the
Company can repurchase up to 1,100,000 of the preferred stock at a strike price
of $1.00 in one or more transactions for a period of 24 months after the date of
the agreement. In addition, the agreement contains a put option, whereby, the
lender shall have the right to require the Company to repurchase up to 1,100,000
of preferred stock at $1.00 per share, for a period of 180 days following the
period of 24 months from the date of the agreement. The Company has recorded a
deferred financing cost in relation to this conversion of $134,661. The deferred
financing costs are being amortized over a term of 24 months. Amortization
expense for deferred financing costs for the year ended December 31, 2003 was
$33,665, and is reported in interest expense on the financial statements.
F-18
DESERT HEALTH PRODUCTS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - SHARES SUBJECT TO MANDATORY REDEMPTION (CONT'D)
In addition, as incentive for the lender to convert the note payable to
preferred stock, the Company issued to the lender 350,000 shares of common
stock. The relative fair value of the common stock at the time of issuance was
$187,000 and was reflected as additional paid-in capital and a discount to the
related note. At December 31, 2003, the discount amounted to $140,250. The
discount is being amortized over 24 months and amortization expense amounted to
$46,750. The amortization expense is reflected in interest expense on the
financial statements.
NOTE P - STOCKHOLDERS' EQUITY
During the year ended December 31, 2003, the Company's Board of Directors
adopted the "2003 Stock Option, Deferred Stock and Restricted Stock Plan" ("the
Plan"). The Plan authorizes the Company's Board of Directors to grant both
qualified incentive and non-qualified stock options, deferred stock options and
restricted stock awards to selected officers and other employees, directors,
consultants and advisors of the Company for an aggregate of 1,000,000 shares of
the Company's common stock. The granted stock options vest over five years at
20% of the options per year. The maximum term of options granted is 10 years. As
of December 31, 2003, no stock options had been awarded under the Plan.
During the year ended December 31, 1999, the Company awarded stock options in
relation to various employment contracts. A status of these employee stock
options for the years ended December 31, 2003 and 2002 is as follows:
Weighted
Average
Shares Exercise Price
--------- --------------
Outstanding at January 1, 2002 2,000,000 $ .25
Granted -- --
Exercised -- --
Forfeited -- --
--------- ---------
Outstanding and exercisable at December 31, 2002 2,000,000 .25
Granted -- --
Exercised -- --
Forfeited -- --
--------- ---------
Outstanding and exercisable at December 31, 2003 2,000,000 $ .25
========= =========
On January 1, 2004, 500,000 of stock options expired and the balance of
1,500,000 is due to expire on January 1, 2005.
Stock options exercisable at December 31, 2003 include the following:
Outstanding Options Exercisable Options
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Exercise Remaining Average Average
Price Contractual Exercise Exercise
Range Number Life Price Number Price
---------- --------- ----------- ---------- --------- ----------
$ .25 2,000,000 1 Year $ .25 2,000,000 $ .25
The Company is currently in the process of filing all the required paperwork to
differentiate the different classes of preferred stock. Of the 1,708,500 shares
issued and outstanding, 1,000,000 shares are convertible preferred stock with
10:1 preferential voting rights, 708,500 shares are convertible preferred stock
with no voting rights, 1,100,000 shares listed under shares subject to mandatory
redemption are non-convertible and 1,444,000 shares of subscribed but unissued
non-convertible preferred stock with a specified dividend rate of 12%.
F-19
LIST OF SUBSIDIARIES
Exhibit 21.1
1. Royal Products, Inc. a Nevada corporation
Exhibit 21.1 - List of Subsidiaries
Desert Health Products, Inc.
Exhibit 23
Report of Independent Certified Public Accountants
To The Board of Directors and Stockholders of
Desert Health Products, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Desert Health
Products, Inc. and Subsidiary as of December 31, 2003 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company'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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Desert Health
Products, Inc. and Subsidiary at December 31, 2003 and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note C to the financial
statements, the Company has suffered substantial recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note C. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Semple & Cooper, LLP
Phoenix, Arizona
March 19, 2004
CERTIFICATIONS
I, Johnny Shannon, certify that:
1. I have reviewed this annual report of Desert Health Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the small business issuer as of, and for, the periods
presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business
issuer and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the small business issuer,
including its consolidated subsidiaries, is made known
to us by others within those entities, particularly
during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the small business
issuer's disclosure controls and procedures and
presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based
on such evaluation; and
d) Disclosed in this report any change in the small
business issuer's internal control over financial
reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the small business issuer's auditors
and the audit committee of the small business issuer's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the small business issuer's ability to
record, process, summarize and report financial
information: and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the small business issuer's internal control
over financial reporting.
Date: March 30, 2004
By: Johnny Shannon
Chief Executive Officer
Exhibit 31.1 - Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
1
CERTIFICATIONS
I, Johnny Shannon, certify that:
1. I have reviewed this annual report of Desert Health Products, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the small business issuer as of, and for, the periods
presented in this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business
issuer and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the small business issuer,
including its consolidated subsidiaries, is made known
to us by others within those entities, particularly
during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting
to be designed under our supervision, to provide
reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the small business
issuer's disclosure controls and procedures and
presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based
on such evaluation; and
d) Disclosed in this report any change in the small
business issuer's internal control over financial
reporting that occurred during the small business
issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the small business issuer's
internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the small business issuer's auditors
and the audit committee of the small business issuer's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the small business issuer's ability to
record, process, summarize and report financial
information: and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the small business issuer's internal control
over financial reporting.
Date: March 30, 2004
By: Johnny Shannon
Chief Financial Officer
Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulation S-B, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002xhibit 32.2 - Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Desert Health Products, Inc., (the
"Company") on Form 10-KSB for the period ended December 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation
of the Company.
By: /s/ Johnny Shannon
------------------
Johnny Shannon Date: March 30, 2004
Chief Executive Officer
Exhibit 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Desert Health Products, Inc., (the
"Company") on Form 10-KSB for the period ended December 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation
of the Company.
By: /s/ Johnny Shannon
------------------
Johnny Shannon Date: March 30, 2004
Chief Financial Officer
Exhibit 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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