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 June 30, 1996
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25238
NATURAL HEALTH TRENDS CORP.
(Exact name of Small Business Issuer as specified in its charter)
Florida 59-2705336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 West Sample Road, Suite 318
Pompano Beach, FL 33064
(Address of Principal Executive Offices)
(305) 969-9771
(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 August 13, 1996 was 11,295,108 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 1996 (unaudited) 1
Consolidated Statements of Operations (unaudited) for the
Three and six months ended June 30, 1996 and 1995 2
Consolidated Statements of Cash Flows (unaudited) for the
Six months ended June 30, 1996 and 1995 3
Notes to the financial statements 4-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 6-9
PART II - OTHER INFORMATION 10-11
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE 12
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 302,392
Marketable securities 252,584
Accounts receivable 1,044,473
Inventories 217,663
Due from related parties 148,566
Due from affiliate -
Prepaid expenses and other current assets 247,737
-------------------
TOTAL CURRENT ASSETS 2,213,415
PROPERTY, PLANT AND EQUIPMENT 3,174,009
DUE FROM OFFICERS 22,524
GOODWILL 1,516,793
DEPOSITS AND OTHER ASSETS 89,781
-------------------
$ 7,016,522
===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 464,633
Accrued expenses 142,532
Revolving credit lines 401,732
Current portion of long term debt 46,974
Deferred revenue 562,211
Other current liabilities 73,033
-------------------
TOTAL CURRENT LIABILITIES 1,691,115
-------------------
LONG-TERM DEBT 1,923,194
DUE TO BANK 41,646
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; 20,000,000 shares authorized;
11,189,108 shares issued and outstanding at June 30, 1996 11,189
Additional paid-in capital 5,481,930
Retained earnings (accumulated deficit) (2,132,552)
Common stock subject to put (380,000)
-------------------
TOTAL STOCKHOLDERS' EQUITY 2,980,567
-------------------
7,016,522
===================
See notes to consolidated financial statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------------------------
1996 1995 1996 1995
--------------- ---------------- ---------------- ----------------
REVENUES $ 1,889,193 $ 926,327 $ 3,670,430 $ 1,903,970
COST OF SALES 1,079,190 508,200 2,090,870 974,170
--------------- ---------------- ---------------- ----------------
GROSS PROFIT 810,003 418,127 1,579,560 929,800
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,009,164 525,096 1,819,120 938,542
NON-CASH IMPUTED COMPENSATION EXPENSE - 559,000 - 559,000
--------------- ---------------- ---------------- ----------------
OPERATING INCOME (LOSS) (199,162) (665,969) (239,560) (567,742)
OTHER INCOME (EXPENSE):
Interest (net) (57,671) (40,557) (105,626) (56,520)
Write-off of deferred financing costs (314,523) - (347,974)
--------------- ---------------- ---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (57,671) (355,080) (105,626) (404,494)
--------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (256,833) (1,021,049) (345,186) (972,236)
PROVISION FOR INCOME TAXES - - - 5,000
--------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ (256,833) $ (1,021,049) $ (345,186) $ (977,236)
=============== ================ ================ ================
EARNINGS (LOSS) PER COMMON SHARE $ (0.02) $ (0.12) $ (0.03) $ (0.12)
=============== ================ ================ ================
WEIGHTED AVERAGE COMMON SHARES USED 11,189,108 8,645,058 11,132,441 8,442,236
=============== ================ ================ ================
See notes to consolidated financial statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
-----------------------------------
1996 1995
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (345,186) $ (977,236)
---------------- ---------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 112,842 26,503
Non-cash imputed compensation expense - 559,000
Write-off of imputed deferred financing costs - 227,293
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (270,429) (171,455)
(Increase) decrease in inventories (92,776) -
(Increase) decrease in prepaid expenses (5,027) (9,999)
(Increase) decrease in deferred registration costs - 165,421
(Increase) decrease in deposits and other assets (6,352) (158,306)
Increase (decrease) in accounts payable 245,408 55,725
Increase (decrease) in accrued expenses 81,554 54,274
Increase (decrease) in deferred revenue 76,967 37,274
Increase (decrease) in deferred taxes - 5,000
Increase (decrease) in other current liabilities 11,713 39,655
---------------- ---------------
TOTAL ADJUSTMENTS 153,900 830,385
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (191,286) (146,851)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (399,406) (2,516,536)
Acquisition expenses (20,000) -
Purchase of marketable securities (252,584) -
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (671,990) (2,516,536)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due to related parties (13,958) (6,800)
Proceeds from mortgage payable - 1,875,000
Increase (desrease) in due to bank 14,343
Proceeds from notes payable and long-term debt 551,732 510,522
Payments of notes payable and long-term debt (197,092) -
Payment of dividends (184,173) -
Issuance of common stock - 2,752,090
---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 170,852 5,130,812
---------------- ---------------
NET INCREASE (DECREASE) IN CASH (692,424) 2,467,425
CASH, BEGINNING OF PERIOD 994,816 1,763
---------------- ---------------
CASH, END OF PERIOD $ 302,392 $ 2,469,188
================ ===============
See notes to consolidated financial statements.
3
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1996
(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. REVOLVING CREDIT LINES
A. The Company entered into a revolving credit line with Merrill Lynch
as of October 4, 1995 in the amount of $300,000. This revolving credit line
was activated by the Company on February 29, 1996. The revolving credit
line expires on October 31, 1996, at which time the Company is required to
pay back any and all amounts borrowed under the revolving credit line.
Interest accrues at the rate of prime plus 1%. As of June 30, 1996, the
Company had approximately $152,000 outstanding under this revolving credit
line. A $250,000 investment that the Company has with Merrill Lynch is
restricted as security for any loans under this revolving credit line.
B. In April 1996, the Company entered into a revolving credit
agreement with Capital Bank. The agreement provides for advances up to
$350,000, carries interest at 7% and matures in April 1997. A total of
$250,000 is outstanding under this agreement at June 30, 1996.
4. ACQUISITIONS
A. On January 22, 1996, the Company acquired all of the assets of Sam
Lilly, Inc., an alternative health care clinic, in exchange for 380,000 shares
of the Company's common stock. The acquisition was accounted for as a purchase.
The net assets acquired totaled approximately $9,000. As a result of this
acquisition, the Company recorded goodwill of $1,380,000.
B. On June 26, 1996, the Company acquired all of the stock of Medical
Science Consultants, Inc., Diagnostic Services, Inc., Managent Inc. and KBM
Consultants doing business as 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 financial statements have
been restated to reflect the combined companies for all periods presented.
The following table presents a breakdown of amounts included in the
accompanying statement of operations attributable to each company:
Three months ended Six months ended
June 30, June 30,
----------------------------------------- ------------------------------------------
1996 1995 1996 1995
------------------ ------------------ ----------------- ------------------
REVENUES:
Natural Health Trends Corp. $ 1,645,587 $ 725,563 $ 3,183,219 $ 1,502,442
Institute of Natural Medicine 243,606 200,764 487,211 401,528
------------------ ------------------ ----------------- ------------------
Total $ 1,889,193 $ 926,327 $ 3,670,430 $ 1,903,970
================== ================== ================= ==================
NET INCOME (LOSS):
Natural Health Trends Corp. $ (309,162) $ (1,046,129) $ (450,127) $ (1,027,396)
Institute of Natural Medicine 52,471 25,080 104,941 50,160
------------------ ------------------ ----------------- ------------------
Total $ (256,833) $ (1,021,049) $ (345,186) $ (972,236)
================== ================== ================= ==================
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.
On June 26, 1996, the Company acquired the Institute of Natural Medicine,
Inc. in a business combination accounted for as a pooling of interest.
Accordingly, previous financial statements have been restated and the following
discussions include the accounts of the Institute of Natural Medicine, Inc., for
all periods.
THREE MONTHS ENDED JUNE 30,1996 AND 1995
Revenues:
Total revenues were $1,889,193 for the three months ended June 30,1996
compared to $926,327 for the three months ended June 30, 1995. This represents
an increase of $962,866 or 104%.
Management believes that the increase is primarily attributable to $417,698
in fee revenue provided by the alternative health care clinic acquired by the
Company in January 1996, a $42,842 increase from the Institute of Natural
Medicine Inc., $159,208 from the Company's Oviedo school which was acquired in
November 1995, $251,626 in tuition revenue from the previously existing
Lauderhill and Miami schools due to increased enrollment and increased tuition
rates, and $29,060 in rental income which did not commence until property in
Pompano Beach, Florida ( the "Pompano Property") was acquired in May 1995.
Revenues from the Company's on campus bookstores were $96,657 for the three
months ended June 30, 1996 as compared to $55,622 for the comparable period in
1995.
Cost of sales:
Cost of sales for the three months ended June 30,1996 were $1,079,190
compared to $462,920 for the comparable period last year. Gross profit as a
percentage of revenues was 43% compared with 45% for the three months ended June
30,1995. Management believes that the decrease in gross profit percentage is
related to the change in mix of services provided by the Company, specifically
the alternative health care clinics which have higher costs for salaries and
products. Additionally, the cost attributable to the Corporate massage service
which is in the start-up stage contributed to this decrease as there was minimal
revenues from this segment of the business.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $1,039,164 for the three
months ended June 30,1996. This represents an increase of $548,904 over the
three months ended June 30,1995.
Management believes that the increase is primarily due to the new
operations of the alternative health care clinics as well as the Company's
Oviedo school. As a percentage of revenues, these cost were 55% as compared to
58% in the 1995 period.
Non-cash Imputed Compensation Expense
During the six months ended June 30,1995, the Company expensed $559,000
relating to the issuance of 215,000 shares of the Company's common stock to
certain officers and individuals within twelve months of the Company's initial
public offering of its securities ( the "Initial Public Offering"). Such amount
represents the assumed fair market value of the shares of common stock issued to
these individuals.
This non cash expense in the second quarter of 1995 was accompanied by a
corresponding increase in the additional paid-in capital account and resulted in
no change to stockholder's equity.
Writeoff of Deferred Finance Costs
The writeoff of deferred finance costs during the six months ended June 30,
1995 in the amount of $347,974 represents the remaining deferred finance costs
relating to bridge financing in the amount of $350,000 during the first quarter
of 1995(the "Bridge Financing") and a non cash imputed common stock valuation
charge relating to other lenders.
Of such amount, $183,974 represents amortization of the remaining deferred
financing costs in connection with the Bridge Financing. Since the Bridge
Financing was repaid in full in the second quarter from the net proceeds of the
Initial Public Offering, these deferred financing costs were expensed
accordingly.
The remaining amount of $164,000 represents the assumed fair market value
for 66,923 shares of the Company's common stock issued to certain other lenders.
The $164,000 is a non cash expense and resulted in a corresponding increase in
the additional paid-in capital account. The total stockholders' equity amount
was not affected by the recording of this $164,000 non cash expense.
Interest Expense
Interest expense the three months ended June 30, 1996 was $57,671 as
compared to $40,557 for the comparable period of 1995. The increase is primarily
due to the interest on the mortgages of the Pompano Property which was acquired
in May 1995.
Net Loss
For the three months ended June 30, 1996, the net loss was $256,833
compared to a net loss of $1,021,049 for the three months ended June 30, 1995.
The decrease in the loss is attributable to the impact of the individual
elements discussed above.
SIX MONTHS ENDED JUNE 30,1996 AND 1995
Revenues:
Total revenues were $3,670,430 for the six months ended June 30,1996
compared to $1,903,970 for the six months ended June 30, 1995. This represents
an increase of $1,766,460 or 93%.
Management believes that the increase is primarily attributable to $843,606
in fee revenue provided by the alternative health care clinic acquired by the
company in January 1996, an $85,683 increase from the Institute of Natural
Medicine Inc., $308,371 from the Company's Oviedo school which was acquired in
November 1995, $284,904 in tuition revenue from the previously existing
Lauderhill and Miami schools due to increased enrollment and increased tuition
rates, and $106,282 in rental income which did not commence until the Pampano
Property was acquired in May 1995. Revenues from the Company's on campus
bookstores were $178,519 for the six months ended June 30, 1996 as compared to
$55,622 for the 1995 comparable period.
Cost of sales:
Cost of sales for the six months ended June 30,1996 were $2,090,870
compared to $974,170 for the comparable period last year. Gross profit as a
percentage of revenues was 43% for the six months ended June 30, 1996 compared
with 49% for the six months ended June 30,1995. Management believes the decrease
in gross profit as a percentage of revenues in 1996 is attributable to there
being a change in the mix of services offered by the Company, specifically the
alternative health care clinics, which have higher costs for salaries and
products, in addition to the inclusion of costs attributable to the Company's
Corporate Massage service, which is still in a start-up stage, contributed to
such decrease and has provided minimal revenues to date.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $1,819,120 for the six
months ended June 30,1996. This represents an increase of $880,578 over the six
months ended June 30,1995. The increase is primarily due to new operations of
the alternative health care clinics as well as the Company's Oviedo school. As a
percentage of revenues, these cost were 50% as compared to 49% in the 1995
period.
Non-cash Imputed Compensation Expense
During the six months ended June 30,1995, the company expensed $559,000 as
described above in the discussion on the three months ended June 30, 1996 and
1995.
Interest Expense
Interest expense for the six months ended June 30, 1996 was $105,626 as
compared to $56,520 for the comparable period of 1995.The increase is primarily
due to interest on the mortgages on the Pompano Property which was acquired in
May 1995.
Net Loss
For the six months ended June 30, 1996, the net loss was $345,186 compared
to a net loss of $972,236 for the six months ended June 30, 1995. The decrease
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 expenditures
requirements from cash provided through borrowings from individuals and
institutions and from the sale of the Company's securities in a private
placement and the Initial Public Offering. The Company's primary source of cash
receipts is from payment for tuition, fees and books revenue from the operation
of the alternative health care clinics.The payments related to fees, tuition and
books were funded primarily from student and parent educational loans and
financial aid under various Federal and state assistance programs and, to a
significantly lesser extent, from student and parent resources.
At June 30,1996 the ratio of current assets to current liabilities was 1.31
to 1.0, and working capital was approximately $522,000.
Cash used in operations for the period ended June 30,1996 was approximately
$191,286, attributable primarily to the net loss of $256,833.
Capital expenditures, primarily related to construction for the preparation
for use of the Pompano Property, used approximately $399,000 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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS - NONE
Item 2. CHANGES IN SECURITIES - NONE
Item 3. DEFAULTS UPON SENIOR SECURITIES - NONE
Item 4. SUBMISSION OF MATTERS TO A VOTE OFSECURITIES HOLDERS - NONE
Item 5. OTHER INFORMATION
a)REVOLVING CREDIT LINES
A. The Company entered into a revolving credit line with Merrill Lynch as
of October 4, 1995 in the amount of $300,000. This revolving credit line was
activated by the Company on February 29, 1996. The revolving credit line expires
on October 31, 1996, at which time the Company is required to pay back any and
all amounts borrowed under the revolving credit line. Interest accrues at the
rate of prime plus 1%. As of June 30, 1996, the Company had approximately
$152,000 outstanding under this revolving credit line. A $250,000 investment
that the Company has with Merrill Lynch is restricted as security for any loans
under this revolving credit line.
B. In April 1996, the Company entered into a revolving credit agreement
with Capital Bank. The agreement provides for advances up to $350,000, carries
interest at 7% and matures in April 1997. A total of $250,000 is outstanding
under this agreement at June 30, 1996.
b)ACQUISITION
On June 26, 1996, the Company acquired all of the stock of Medical
Science Consultants, Inc., Diagnostic Services, Inc., Managent Inc. and KBM
Consultants doing business as 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 financial statements have
been restated to reflect the combined companies for all periods presented.
Item 6. EXHIBITS AND REPORTS ON FORM 8 - K
a)EXHIBIT INDEX
b)REPORTS ON FORM 8 - K - NONE
SIGNATURES
Pursuant to the requirement 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: Neal Heller
President and Chief Executive Officer
Date: August 14, 1996
NATURAL HEALTH TRENDS CORP. EXHIBIT INDEX
Number Dresciption of Exhibit
1.1 Form of Underwriting Agreement between the Company and
Maidstone Financial Inc. (the "Underwriter").*
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 Form of Class A Warrants issued in the 1995 Bridge Financing.*
4.7 Form of Class B Warrants issued in the 1995 Bridge Financing.*
4.8 Form of Bridge Notes issued in the 1995 Bridge Financing.*
4.9 1994 Stock Option Plan.*
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 Letter Agreement, dated December 27, 1993, between the Company and
Richard Schuman.*
10.4 Lease, dated April 29, 1993, between Florida Institute of Massage Therapy,
Inc., as tenant, and MICC Venture, as landlord, as amended.*
10.5 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.*
10.6 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.*
10.7 Purchase and Sale Agreement between Merrick Venture Capital, Inc., as
seller, and the Company, as buyer.*
10.8 First Mortgage Loan Documents between the Company and Trans Florida Bank
in connection with the purchase of the Pompano Property.*
10.9 Equity Credit Plan and Note, dated March , 1994, among the Company,
F.I.M.T.E., Neal R. Heller, Elizabeth S. Heller and American Bank of
Hollywood.*
10.10 Form of Financial Consulting Agreement between the Company and
Maidstone.*
10.11 Intentionally omitted.
10.12 Agreement dated June 7, 1995 between Natural Health Trends Corp. and
Justin Real Estate Corp.*
10.13 Property Management Agreement dated June 7, 1995 between Natural
Health Trends Corp. and Justin Real Estate Corp.*
10.14 Agreement and Plan of Reorganization by and among the Company, HWNC and
Sam Lilly Corp., dated as of January 22, 1996.
10.15 Employment Agreement between HWNC and Samantha Haimes dated January 22,
1996.
10.16 Employment Agreement between HWNC and Leonard Haimes, M.D. dated
January 27, 1996.
10.18 Employment Agreement between Health Wellness Nationwide Corp., Kaye
Lenzi and Natural Health Trends Corp.
16.1 Letter from Soule & Associates, P.A. on change in certifying accountant.
21.1 List of Subsidiaries.*
27.1 Financial Data Schedule.
* Previously filed with the Company's Registration Statement No.
33-991184