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 September 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)
(954) 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 November 14, 1996 was 11,195,108 shares.
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 1996 1
(unaudited)
Consolidated Statements of Operations (unaudited) for the
Three and Nine months ended September 30, 1996 and 2
1995
Consolidated Statements of Cash Flows (unaudited) for the
Nine months ended September 30, 1996 and 1995 3
Notes to the financial statements 4-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 7-10
PART II - OTHER INFORMATION 11-13
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE 14
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 118,558
Marketable securities 255,714
Accounts receivable 1,389,076
Inventories 224,428
Due from officers 147,770
Prepaid expenses and other current assets 228,702
--------------------
TOTAL CURRENT ASSETS 2,364,247
PROPERTY, PLANT AND EQUIPMENT 3,137,838
DUE FROM OFFICERS 22,524
GOODWILL 1,518,640
DEPOSITS AND OTHER ASSETS 86,754
--------------------
$ 7,130,003
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 355,931
Accrued expenses 158,612
Revolving credit lines 505,465
Notes payable 125,000
Current portion of long term debt 48,083
Deferred revenue 686,402
Other current liabilities 144,803
--------------------
TOTAL CURRENT LIABILITIES 2,024,295
--------------------
LONG-TERM DEBT 1,910,750
DUE TO BANK 43,491
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 September 30, 1996 11,189
Additional paid-in capital 5,481,930
Retained earnings (accumulated deficit) (2,341,652)
Common stock subject to put (380,000)
--------------------
TOTAL STOCKHOLDERS' EQUITY 2,771,467
--------------------
$ 7,130,003
====================
See notes to consolidated financial
statements.
1
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------------------------
1996 1995 1996 1995
--------------- ---------------- ---------------- ----------------
REVENUES $ 1,791,214 $ 1,077,356 $ 5,461,644 $ 2,981,326
COST OF SALES 834,775 493,473 2,925,645 1,467,643
--------------- ---------------- ---------------- ----------------
GROSS PROFIT 956,439 583,883 2,535,999 1,513,683
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,109,585 874,116 2,928,705 1,812,658
NON-CASH IMPUTED COMPENSATION EXPENSE - - - 559,000
--------------- ---------------- ---------------- ----------------
OPERATING INCOME (LOSS) (153,146) (290,233) (392,706) (857,975)
OTHER INCOME (EXPENSE):
Interest (net) (55,952) (55,800) (161,578) (112,320)
Write-off of deferred financing costs - - - (347,974)
--------------- ---------------- ---------------- ----------------
TOTAL OTHER INCOME (EXPENSE) (55,952) (55,800) (161,578) (460,294)
--------------- ---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (209,098) (346,033) (554,284) (1,318,269)
PROVISION FOR INCOME TAXES - - - 5,000
--------------- ---------------- ---------------- ----------------
NET INCOME (LOSS) $ (209,098) $ (346,033) $ (554,284) $ (1,323,269)
=============== ================ ================ ================
EARNINGS (LOSS) PER COMMON SHARE $ (0.02) $ (0.03) $ (0.05) $ (0.14)
=============== ================ ================ ================
WEIGHTED AVERAGE COMMON SHARES USED 11,189,108 10,673,262 11,159,665 9,185,912
=============== ================ ================ ================
See notes to consolidated
financial statements.
2
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
-----------------------------------
1996 1995
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (554,284) $ (1,323,269)
---------------- ---------------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 180,988 54,160
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 (615,032) (321,830)
(Increase) decrease in inventories (99,541) (1,224)
(Increase) decrease in prepaid expenses 38,544 (27,804)
(Increase) decrease in deferred registration costs - 165,421
(Increase) decrease in deposits and other assets (3,325) (182,898)
Increase (decrease) in accounts payable 136,706 128,666
Increase (decrease) in accrued expenses 97,634 54,852
Increase (decrease) in deferred revenue 201,158 89,377
Increase (decrease) in deferred taxes - 5,000
Increase (decrease) in other current liabilities 68,512 56,184
---------------- ---------------
TOTAL ADJUSTMENTS 5,643 806,197
---------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (548,641) (517,072)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (433,228) (2,692,023)
Acquisition expenses (20,000) -
Purchase of marketable securities (255,714) -
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (708,942) (2,692,023)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer (22,728) (6,800)
Proceeds from mortgage payable - 1,875,000
Increase (decrease) in due to bank 16,188 -
Proceeds from notes payable and long-term debt 780,465 570,000
Payments of notes payable and long-term debt (208,427) (761,917)
Payment of dividends (184,173) -
Issuance of common stock - 2,752,090
---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 381,325 4,428,373
---------------- ---------------
NET INCREASE (DECREASE) IN CASH (876,258) 1,219,278
CASH, BEGINNING OF PERIOD 994,816 57,805
---------------- ---------------
CASH, END OF PERIOD $ 118,558 $ 1,277,083
================ ===============
See notes to consolidated financial
statements.
3
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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, 1997, 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 September 30, 1996, the Company
had approximately $185,000 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 $320,000 is
outstanding under this agreement at September 30, 1996.
4
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. This
goodwill is being amortized over a period of 20 years.
B. 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 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 statements of operations attributable to each company:
Three months ended Nine months ended
September 30, September 30,
------------------------------------------ ------------------------------------------
1996 1995 1996 1995
------------------ ------------------ ----------------- ------------------
REVENUES:
Natural Health Trends Corp. $ 1,602,464 $ 876,592 $ 4,785,683 $ 2,379,034
Institute of Natural Medicine 188,750 200,764 675,961 602,292
------------------ ------------------ ----------------- ------------------
Total $ 1,791,214 $ 1,077,356 $ 5,461,644 $ 2,981,326
================== ================== ================= ==================
NET INCOME (LOSS):
Natural Health Trends Corp. $ (222,593) $ (371,113) $ (672,720) $ (1,398,509)
Institute of Natural Medicine 13,495 25,080 118,436 75,240
------------------ ------------------ ----------------- ------------------
Total $ (209,098) $ (346,033) $ (554,284) $ (1,323,269)
================== ================== ================= ==================
5
5. WARRANTS
On August 9, 1996, the Company effected a 2:1 split of both
its Class A and Class B Warrants. Each Class A Warrant now entitles the
holder to purchase one share of Common Stock for an exercise price of
$3.00. Each Class B Warrant now entitles the holder to purchase one
share of Common Stock for an exercise price of $3.625. Additionally,
the redemption price of Class A Warrants was adjusted to $.025 per
warrant and the closing bid price at which the Class A Warrants are
redeemable was adjusted to $4.50 per share. The redemption price of
Class B Warrants was adjusted to $.025 per warrant and the closing bid
price at which the Class B Warrants are redeemable was adjusted to
$5.00 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.
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 SEPTEMBER 30, 1996 AND 1995
Revenues:
Total revenues were $1,791,214 for the three months ended September 30,1996
compared to $1,077,356 for the three months ended September 30, 1995. This
represents an increase of $718,858 or 66%.
Management believes that the increase is primarily attributable to $359,759 in
fee revenue provided by the alternative health care clinic acquired by the
Company in January 1996, a decrease in revenue from the Institute of Natural
Medicine, Inc. of $12,014, an increase in revenue of $283,144 from the Company's
Oviedo school which was acquired in November 1995, $68,943 in tuition revenue
from the previously existing Lauderhill and Miami schools due to increased
enrollment and increased tuition rates, and $75,644 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
$73,080 for the three months ended September 30, 1996 as compared to $75,516 for
the comparable period in 1995.
Cost of sales:
Cost of sales for the three months ended September 30,1996 were $834,775
compared to $493,473 for the comparable period last year. Gross profit as a
percentage of revenues was 53% compared with 54% for the three months ended
September 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 Company's
7
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 $1,109,585 for the three
months ended September 30,1996. This represents an increase of $235,469 over the
three months ended September 30,1995. Management believes that the increase is
primarily due to the new operations of the alternative health care clinic as
well as the Company's Oviedo school. As a percentage of revenues, these cost
were 62% as compared to 81% in the 1995 period.
Interest Expense
Interest expense for the three months ended September 30, 1996 was $55,952 as
compared to $55,800 for the comparable period of 1995.
Net Loss
For the three months ended September 30, 1996, the net loss was $209,098
compared to a net loss of $346,033 for the three months ended September 30,
1995. Management believes that the decrease in the loss is primarily
attributable to the impact of the individual elements discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues:
Total revenues were $5,461,644 for the nine months ended September 30,1996
compared to $2,981,326 for the nine months ended September 30, 1995. This
represents an increase of $2,480,318 or 83%.
Management believes that the increase is primarily attributable to $1,201,277 in
fee revenue provided by the alternative health care clinic acquired by the
Company in January 1996, $591,516 from the Company's Oviedo school which was
acquired in November 1995, $353,879 in increased tuition revenue from the
previously existing Lauderhill and Miami schools due to increased enrollment and
increased tuition rates, and $108,501 in rental income which did not commence
until the Pompano Property was acquired in May 1995. Revenues from the Company's
on campus bookstores were $251,822 for the nine months ended September 30, 1996
as compared to $131,138 for the 1995 comparable period. The Company believes
that this increase is primarily attributable to increased enrollment, the
addition of the Oviedo school and a wider array of products.
8
Cost of sales:
Cost of sales for the nine months ended September 30,1996 were $2,925,645
compared to $1,467,643 for the comparable period last year. Gross profit as a
percentage of revenues was 46% for the nine months ended September 30, 1996
compared with 50% for the nine months ended September 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 $2,928,705 for the nine months
ended September 30,1996. This represents an increase of $1,116,047 over the nine
months ended September 30,1995. The increase is primarily due new operations of
the alternative health care clinic as well as the Company's Oviedo school. As a
percentage of revenues, these cost were 54% in the 1996 period as compared to
61% in the 1995 period.
Non-cash Imputed Compensation Expense
During the nine months ended September 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 it's 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 nine months ended September
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.
9
Interest Expense
Interest expense for the nine months ended September 30, 1996 was $161,578 as
compared to $112,320 for the comparable period of 1995.The increase is primarily
due to interest on the mortgage of the Pompano Property which was acquired in
May 1995.
Net Loss
For the nine months ended September 30, 1996, the net loss was $554,284 compared
to a net loss of $1,323,269 for the nine months ended September 30, 1995.
Management believes that the decrease in the loss is primarily 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 the
payments for tuition, fees and books revenue from the operation of the Company's
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 September 30,1996 the ratio of current assets to current liabilities was 1.17
to 1.0, and working capital was approximately $340,000.
Cash used in operations for the period ended September 30,1996 was approximately
$549,000, attributable primarily to the net loss of $554,000.
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, 1997, 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 September 30, 1996, the Company had approximately
$185,000 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.
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 $320,000 is outstanding
under this agreement at September 30, 1996.
Capital expenditures, primarily related to construction for the preparation for
use of the Pompano Property, used approximately $433,000 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.
10
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 OF SECURITIES HOLDER
The Company held an annual meeting of stockholders on August 7, 1996. The
selection of Feldman Radin & Co., P.C. to serve as independent auditors for
the year ending December 31, 1996 by the Board of Directors was ratified by
a stockholder vote of 11,012,867 for, 0 against and 100 abstained. The
amendment of the Company's certificate of incorporation increasing the
number of authorized shares of Common Stock from 20,000,000 to 40,000,000
was approved by the stockholders by a vote of 11,012,867 for and 0 against.
Item 5. OTHER INFORMATION - none
Item 6. EXHIBITS AND REPORTS OF FORM 8-K
a) Exhibit Index
b) Reports on Form 8-K - none
11
NATURAL HEALTH TRENDS CORP. EXHIBIT INDEX
Number Description 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.*
12
Number Description of Exhibit
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.
10.17 Agreement by and among the Company, HWNC, Medical Service Consultants,
Inc., Diagnostic Services, Inc., Managenet, Inc. and KBM Consultants.
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
13
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.
/S/Neal Heller___________________
By: Neal Heller
President and Chief Executive Officer
Date: November 15, 1996
14