FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25238
NATURAL HEALTH TRENDS CORP.
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(Exact name of Small Business Issuer as specified in its charter)
Florida 59-2705336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 West Sample Road, Suite 318
Pompano Beach, FL 33064
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(Address of Principal Executive Offices)
(954) 969-9771
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
The number of shares outstanding of the issuer's Common Stock, $.001
par value, as of March 31, 1997 was 12,811,261 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 1997 1
(unaudited)
Consolidated Statements of Operations (unaudited) for
the Three months ended March 31, 1997 and 1996 2
Consolidated Statements of Cash Flows (unaudited) for
the Three months ended March 31, 1997 and 1996 3
Notes to the financial statements 4-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7-9
PART II - OTHER INFORMATION 10
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE 11
3
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 219,435
Restricted cash 250,000
Accounts receivable 1,721,295
Inventories 281,299
Due from officers 138,976
Due from affiliate 23,724
Prepaid expenses and other current assets 81,681
--------------------
TOTAL CURRENT ASSETS 2,716,409
PROPERTY, PLANT AND EQUIPMENT 3,161,968
GOODWILL 1,524,241
DEPOSITS AND OTHER ASSETS 78,861
--------------------
$ 7,481,479
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 426,948
Accrued expenses 201,715
Revolving credit line 206,053
Current portion of long term debt 51,685
Deferred revenue 872,995
Current portion of accrued consulting contract 273,307
Other current liabilities 186,485
--------------------
TOTAL CURRENT LIABILITIES 2,219,188
--------------------
LONG-TERM DEBT 1,791,617
ACCRUED CONSULTING CONTRACT 223,939
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 1,500,000
shares authorized; no shares issued and outstanding -
Common stock, $.001 par value; 40,000,000 shares
authorized; 12,811,261 shares issued and
outstanding at March 31, 1997 12,811
Additional paid-in capital 6,582,013
Retained earnings (accumulated deficit) (3,272,464)
Common stock subject to put (380,000)
Prepaid stock compensation (75,625)
--------------------
TOTAL STOCKHOLDERS' EQUITY 2,866,735
--------------------
$ 7,481,479
====================
See notes to consolidated financial statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
-----------------------------------
1997 1996
--------------- ----------------
REVENUES $ 2,073,833 $ 1,781,238
COST OF SALES 1,042,488 1,011,680
--------------- ----------------
GROSS PROFIT 1,031,344 769,558
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,012,973 809,956
COST OF SEVERING EMPLOYMENT AGREEMENT 497,246 -
LITIGATION SETTLEMENT 111,517 -
NON-CASH IMPUTED COMPENSATION EXPENSE 25,000 -
--------------- ----------------
OPERATING INCOME (LOSS) (615,391) (40,399)
OTHER INCOME (EXPENSE):
Interest (net) (61,949) (47,955)
--------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (677,340) (88,354)
PROVISION FOR INCOME TAXES - -
--------------- ----------------
NET INCOME (LOSS) $ (677,340) $ (88,354)
=============== ================
EARNINGS (LOSS) PER COMMON SHARE $ (0.05) $ (0.01)
=============== ================
WEIGHTED AVERAGE COMMON SHARES USED 12,462,324 11,075,775
=============== ================
See notes to consolidated financial statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
------------------------
1997 1996
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (677,340) $ (88,354)
---------- ---------
Adjustments to reconcile net loss to net
loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 82,912 54,868
Non-cash imputed compensation expense 25,000 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (239,706) (126,904)
(Increase) decrease in inventories (26,117) 857
(Increase) decrease in prepaid expenses (35,364) 20,803
(Increase) decrease in deposits and other assets 3,392 (8,029)
Increase (decrease) in accounts payable (20,430) 28,674
Increase (decrease) in accrued expenses 71,375 15,029
Increase (decrease) in deferred revenue 109,115 43,825
Increase (decrease in accrued consulting contract 497,246 -
Increase (decrease) in other current liabilities (68,196) -
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TOTAL ADJUSTMENTS 399,228 29,123
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (278,112) (59,231)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (78,029) (266,808)
Acquisition expenses - (20,000)
Purchase of marketable securities - (250,000)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (78,029) (536,808)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer (2,481) -
Decrease in restricted cash 8,932 -
Proceeds from sale of debentures 326,826 -
Proceeds from notes payable and long-term debt 255,000 170,000
Payments of notes payable and long-term debt (530,024) (26,448)
Distribution to shareholder - (92,087)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 58,253 51,465
--------- ---------
NET INCREASE (DECREASE) IN CASH (297,888) (544,574)
CASH, BEGINNING OF PERIOD 517,323 994,816
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CASH, END OF PERIOD $ 219,435 $ 450,243
=========== ============
See notes to consolidated financial statements.
3
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements are unaudited, but
reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of financial position and the results
of operations for the interim periods presented. All such adjustments
are of a normal and recurring nature. The results of operations for any
interim period are not necessarily indicative of the results attainable
for a full fiscal year.
2. EARNINGS (LOSS) PER SHARE
Per share information is computed based on the weighted
average number of shares outstanding during the period.
3. LITIGATION SETTLEMENT
Litigation settlement resulted from the settlement of the litigation
brought about by the landlord in connection with the property leased by
the Company in Lauderhill, Florida (the former location of the Pompano
school) whose lease was to expire in July 1997. The settlement resulted
in an additional charge of approximately $112,000 during the quarter
ended March 31, 1997 in excess of amounts previously accrued.
4. RESTATEMENT
On June 26, 1996, the Company acquired the Institute of Natural
Medicine, Inc., an alternative health care clinic, in a business
combination accounted for as a pooling of interests. The Company
acquired 100% of this company in exchange for 110,000 shares of its
common stock. The accompanying statements of operations and cash flows
for the three months ended March 31, 1996 have been restated to reflect
the combined companies for all periods presented.
The following table presents a breakdown of amounts included in the
accompanying
4
statement of operations for the three months ended March 31, 1996
attributable to each company:
REVENUES:
Natural Health Trends Corp. $ 1,537,632
Institute of Natural Medicine 243,606
-------------------------
Total $ 1,781,238
=========================
NET INCOME (LOSS):
Natural Health Trends Corp. $ (140,824)
Institute of Natural Medicine 52,470
-------------------------
Total $ (88,354)
=========================
5. ACCRUED CONSULTING CONTRACT
During the quarter ended March 31, 1997, the Company
renegotiated with former a principal of Sam Lily, Inc. with whom it was
obligated under an employment agreement to cancel the employment
agreement and replace it with a consulting agreement. The consulting
agreement requires the individual to provide services to the Company
for one day per week through December 1998 at the rate of $5,862 per
week. The Company has determined that the future services, if any, that
it will require will be of little or no value and is accounting for
this obligation as a cost of severing the employment contract.
Accordingly, the present value (applying a discount rate of 10%) of all
future payments is accrued in full at March 31, 1997.
6. CONVERTIBLE DEBENTURES
In April 1997, the Company issued $1,300,000 of 6% convertible
debentures (the "Debentures"). Principal on the Debentures is due in
March 2000. The principal and accrued interest on the Debentures are
convertible into shares of common stock of the Company commencing the
earlier of July 1997 or the effective date of the registration
statement with the shares of Common Stock issuable upon conversion, at
a conversion price equal to the lesser of $1.4375 or 80% of the average
closing bid price of the Common Stock for the five trading days
immediately preceding the notice of conversion.
5
In conjunction with the issuance of the Debentures, the Company issued
warrants to purchase an aggregate of 200,000 shares of Common Stock.
The warrants are exercisable until April 3, 2002. Warrants to purchase
100,000 shares of Common Stock are exercisable at $2.4375 per share,
and the balance are exercisable at $3.25 per share.
The Company loaned $810,000 of the net proceeds from the issuance of
the Debentures to Global Health Alternatives, Inc. ("Global") pending
the closing of the acquisition of Global by Natural Health Trends Corp.
under the Agreement and Plan of Reorganization (the "Reorganization
Agreement") dated March 19,1997. Principal and interest at prime are
due on December 31,1997 or on demand. The loan is secured by all of the
outstanding shares of common stock and the guarantee of two wholly
owned subsidiaries of Global as well as assets of Global. In the event
of termination of the Reorganization Agreement, the Company has the
option to convert the amount due under the note into shares of common
stock of Global at $2.25 per share.
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes contained in Item 1 hereof.
Forward-Looking Statements
When used in the Form 10-QSB and in future filings by the Company with the
Securities and Exchange Commission, the words "will likely result", and "the
Company expects", "will continue", "is anticipated", "estimated", "project", or
"outlook" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Act of 1995.
The Company wishes to caution readers not to place undue reliance on such
forward-looking statements, each of which speak only as of the date made. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company has no obligation to publicly release the
result of any revisions which may be made to any forward- looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.
Results of Operations
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Revenues:
Total revenues were $2,073,833 for the three months ended March 31,1997 compared
to $1,781,238 for the three months ended March 31,1996. This represents an
increase of $292,595 or 15%.
The Company believes that the increase is primarily attributable to increased
tuition revenue of $321,065 due to increased enrollment primarily in the
Company's Oveido school. Bookstore revenue also increased by $21,742 compared to
the same period last year, which the Company believes is due primarily to the
increased enrollment. Offsetting this was a decrease in the revenue in the
Company's natural health care center in Boca Raton, Florida of $38,915. The
Company believes that the decrease was primarily attributable to the growth
hormone segment which showed a decline in revenue of $48,535. The decline is due
to product becoming more readily available which has necessitated reducing
charges to patients.
Cost of sales:
Cost of sales for the three months ended March 31, 1997 were $1,042,488 compared
to $1,011,680 for the comparable period last year. Gross profit as a percentage
of revenues was 49.7% compared with 43.2% for the three months ended March
31,1996. The Company believes that this is due to the increased enrollment in
its Oviedo school, which did not require
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comparable increases in costs, as well as better control over the natural health
care center expenses.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $1,012,973 for the three
months ended March 31,1997 compared to $809,956 for the three months ended March
31, 1996, an increase of 25.1%. The Company believes that the increase is
primarily due to increased expenses in the natural health care center located in
Pompano Beach, Florida as well as increased expenses in the Oviedo school to
support the increase in student enrollment. Additionally, the Company has
increased its investor relations expense as well as retained an investment
banking firm in connection with possible future acquisitions. As a percentage of
revenues, these cost were 49% in the 1997 period as compared to 45% in the 1996
period
Litigation settlement:
The litigation settlement resulted from the settlement of the litigation
commenced by the landlord in connection with property leased by the Company in
Lauderhill, Florida. The leased property was the previous site of the Company's
school now located in Pompano Beach, Florida.
Non-cash Imputed Compensation Expense:
During the three months ended March 31, 1997, the Company expensed $25,000
relating to the issuance of 20,000 shares of the Company's common stock to an
employee which amount represents the fair market value of the shares of Common
Stock issued to this individual.
This non cash expense in the first quarter of 1997 was accompanied by a
corresponding increase in the additional paid-in capital account and resulted in
no change to stockholder's equity.
Interest Expense
These cost for the three months ended March 31, 1997 were $61,949 as compared to
$47,955 for the comparable period of 1996. The increase was due to increased
line of credit borrowing.
Net Loss
For the three months ended March 31, 1997, the net loss was $180,094 compared to
a net loss of $88,354 for the three months ended March 31, 1996. The increase in
the loss is attributable to the impact of the individual elements discussed
above.
Liquidity and Capital Resources
The Company has funded its working capital and capital expenditure requirements
from cash provided through borrowing from institutions and from the sale of the
Company's securities in private placements and the initial public offering of
its securities. The Company's primary
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source of cash of cash receipts is from the payments for tuition, fees, and
books. These payments were funded primarily from student and parent educational
loans and financial aid under various Federal and state assistance programs and,
to a lesser extent, from student and parent resources. The Company's secondary
source of cash receipts is from services rendered at the Company's natural
health care centers.
In April 1997, the Company issued $1,300,000 of 6% convertible debentures (the
"Debentures"). Principal on the Debentures is due in March 2000. The principal
and accrued interest on the Debentures are convertible into shares of common
stock of the Company commencing the earlier of July 1997 or the effective date
of the registration statement in connection with the shares of Common Stock
issuable upon conversion, at a conversion price equal to the lesser of $1.4375
or 80% of the average closing bid price of the Common Stock for the five trading
days immediately preceding the notice of conversion.
In conjunction with the issuance of the Debentures, the Company issued warrants
to purchase an aggregate of 200,000 shares of common stock. The warrants are
exercisable until April 3, 2002. Warrants to purchase 100,000 shares of Common
Stock are exercisable at $2.4375 per share, and the balance are exercisable at
$3.25 per share.
The Company loaned $810,000 of the net proceeds from the issuance of the
Debentures to Global Health Alternatives, Inc. ("Global") pending the closing of
the acquisition of Global by Natural Health Trends Corp. under the Agreement and
Plan of Reorganization (the "Reorganization Agreement") dated March 19,1997.
Principal and interest at prime are due on December 31,1997 or on demand. The
loan is secured by all of the outstanding shares of common stock and the
guarantee of two wholly owned subsidiaries of Global as well as assets of
Global. In the event of termination of the Reorganization Agreement, the Company
has the option to convert the amount due under the note into shares of common
stock of Global at $2.25 per share.
At March 31, 1997 the ratio of current assets to current liabilities was 1.22 to
1.0. Working capital was approximately $497,221.
Cash used in operations for the period ended March 31, 1997 was approximately
$278,112, attributable primarily to the net loss of $677,340, adjusted for
non-cash expenses and changes in operating assets and liabilities aggregating
$399,228.
Capital expenditures, primarily related to expansion of the natural health care
center in Boca Raton, Florida to allow for introduction in the second quarter of
new modalities used approximately $78,029 of cash.
The Company anticipates that its net cash flow together with available lines of
credit will be sufficient to finance the Company's operations during the next
twelve months. However, there can be no assurance that this will be the case.
The Company anticipates that additional financing will be required for the
Company's expansion, including the acquisition of Global, of which there can be
no assurance.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Principal Mutual Life Insurance Company, as landlord,
commenced an action in July 1996 in the Circuit Court of the 17th Judicial
Circuit in Broward County, Florida against the Company, Neal R. Heller and
Elizabeth S. Heller to recover rent and possession in connection with the
property leased by the Company in Lauderhill, Florida. In April 1997, the
Company settled the litigation for approximately $171,000.
Item 2. Change in Securities.
On April 3, 1997, the Company issued $1,300,000 of 6%
convertible debentures (the "Debentures"). Principal on the Debentures is due in
March 2000. The principal and accrued interest on the Debentures is convertible
into shares of Common Stock commencing the earlier of July 1997 or the effective
date of the registration statement in connection with the shares of Common Stock
issuable upon conversion, at a conversion price equal to the lesser of $1.4375
or 80% of the average closing bid price of the Common Stock for the five trading
days immediately preceding the notice of conversion. J.W. Charles Securities,
Inc. acted as the placement agent in connection with the sale of the Debentures.
In connection with the issuance of the Debentures, the Company
issued warrants to purchase an aggregate of 200,000 shares of Common Stock. The
warrants are exercisable until April 3, 2002. Warrants to purchase 100,000
shares of Common Stock are exercisable at $2.4375 per share, and the balance are
exercisable at $3.25 per share.
Item 5. Other Information.
On March 19, 1997, the Company, GHA Holdings, Inc.
("Holdings") (a wholly-owned subsidiary of the Company) and Global Health
Alternatives, Inc. ("Global") entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement"). The Reorganization Agreement
provides for the purchase by Holdings of substantially all of the assets of
Global in exchange for 5,800,000 shares of the Company's Common Stock. In
addition, additional shares are issuable based upon the earnings of Global
following the consummation of the acquisition. The closing of the transactions
contemplated by the Reorganization Agreement are contingent upon the happening
of certain as yet unfulfilled conditions.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit Index
b) Reports on Form 8-K - None
The Company filed current reports on Form 8-K on January 7,
1997, January 31, 1997 and February 19, 1997. The reports related to the sale of
the Company's securities pursuant to the exemption from the registration
requirements under Regulation S promulgated under the Securities Act of 1933, as
amended.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NATURAL HEALTH TRENDS CORP.
By: /S/ Neal Heller
President and Chief Executive Officer
Date: May 19, 1997
11
Exhibit Index
Number Desccription of Exhibit
2.1 Agreement and Plan of Reorganization dated as of March 19, 1997 among the
Company, GHA Holdings, Inc. and Global Health Alternatives, Inc.+
3.1 Amended and Restated Certificate of Incorporation of the Company.*
3.2 Amended and Restated By-Laws of the Company.*
4.1 Specimen Certificate of the Company's Common Stock.*
4.2 Form of Class A Warrant.*
4.3 Form of Class B Warrant.*
4.4 Form of Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company.*
4.5 Form of Underwriter's Warrants.*
4.6 1994 Stock Option Plan.*
4.7 Form of Debenture.+
10.1 Form of Employment Agreement between the Company and Neal R. Heller.*
10.2 Form of Employment Agreement between the Company and Elizabeth S. Heller.*
10.3 Lease, dated April 29, 1993, between Florida Institute of Massage Therapy,
Inc., as tenant, and MICC Venture, as landlord, as amended.*
10.4 Lease, dated April 10, 1991, between Florida Institute of Massage Therapy,
Inc., as tenant, and Superior Investment & Development Corporation, as
agent, for SIDCOR 50/50 Associates.*
10.5 Department of Education, Office of Postsecondary Education, Office of
Student Financial Assistance Program Participation Agreement, dated
March 28, 1994, between the Company and the USDOE.*
10.6 Purchase and Sale Agreement between Merrick Venture Capital, Inc., as
seller, and the Company, as buyer.*
10.7 First Mortgage Loan Documents between the Company and TransFlorida Bank in
connection with the purchase of the Pompano Property.*
10.8 Equity Credit Plan and Note, dated March , 1994, among the Company,
F.I.M.T.E. Supply, Inc., Neal R. Heller, Elizabeth S. Heller and American
Bank of Hollywood.*
10.9 Form of Financial Consulting Agreement between the Company and the
Underwriter.*
10.10 Second Mortgage Loan Documents between the Company and Merrick Venture
Capital, Inc.*
10.11 Agreement dated June 7, 1995 between Natural Health Trends Corp. and
Justin Real Estate Corp.*
10.12 Property Management Agreement dated June 7, 1995 between Natural Health
Trends Corp. and Justin Real Estate Corp.*
10.13 Agreement among Natural Health Trends Corp. Health Wellness Nationwide
Corp., Samantha Haimes and Leonard Haimes.**
10.14 Employment Agreement between Health Wellness Nationwide Corp. and Kaye
Lenzi.**
10.15 Loan Agreements between the Company and Global Health Alternatives, Inc.+
21.1 List of Subsidiaries.+
27.1 Financial Data Schedule.+
* Previously filed with Registration Statement No. 33-91184.
** Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1996.
+ Filed herewith.