SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10- KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number 0-25238
NATURAL HEALTH TRENDS CORP.
(Name of small business issuer in its charter)
Florida 59-2705336
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2001 West Sample Road, Pompano Beach, Florida 33064
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (954) 969-9771
Securities registered pursuant to Section 12(b) of the Exchange Act: ___
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Class A Warrants
(Title of Class)
----------------
Class B Warrants
----------------
(Title of Class)
Units
-----
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES _X_ NO ___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $6,992,516
The number of shares of Common Stock held by nonaffiliates of the registrant (as
determined for the purpose of this Form 10-KSB only) as of March 31, 1998 was
$32,460,427, with an approximate aggregate market value of $2,598,889 (based
upon the average of the bid and asked prices of such shares as of such date).
The number of shares of the Common Stock of the issuer outstanding as of March
31, 1998 was 38,380,427 (not adjusted for the one for 40 reverse stock split in
April 1998).
TABLE OF CONTENTS
Page
Number
------
Item Number and Caption
PART I
Item 1. Description of Business.................................. 4
Item 2. Description of Properties................................ 19
Item 3. Legal Proceedings........................................ 21
Item 4. Submission of Matters to a Vote of Security Holders...... 21
PART II
Item 5. Market for Common Equity and Related Stockholder Matters. 22
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation............... 23
Item 7. Financial Statements..................................... 23
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... 23
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons.............................. 24
Item 10. Executive Compensation................................... 26
Item 11. Security Ownership of Certain Beneficial
Owners and Management............................ 28
Item 12. Certain Relationships and Related Transactions........... 30
Item 13. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.......................... 31
-3-
PART I
Item 1. Description of Business.
Natural Health Trends Corp. (the "Company") is a corporation which develops
and operates businesses to promote human wellness. The Company is presently
engaged in two separate lines of business. Through Global Health Alternatives,
Inc. ("GHA"), the Company's wholly-owned subsidiary, the Company markets a line
of natural, over-the-counter ("OTC") homeopathic pharmaceutical products. Doing
business as the Florida College of Natural Health, the Company owns and operates
three vocational schools as a junior college in the Orlando area, Pompano Beach
and Miami, Florida (individually, the "Orlando School," the "Pompano Beach
School" and the "Miami School" and collectively the "Schools") that offer
training and preparation for licensing in therapeutic massage and for
registration in skin care. Unless the context otherwise requires, the Company
and its subsidiaries, including GHA, are sometimes referred to collectively as
the "Company."
In July 1997 the Company acquired all of the capital stock of GHA in
exchange for 5,800,000 shares of Common Stock, plus a number of additional
shares of Common Stock to be determined based upon the operating performance of
GHA. In June 1997, GHA commenced marketing Natural Relief 1222, a line of
topical homeopathic medicines in a patented base of natural ingredients,
acquired in May 1997 from Troy Laboratories, Inc. From GHA's inception on August
3, 1993 through June 1997, GHA was primarily engaged in organizational and
financing activities, including business and product line acquisitions, and
preliminary marketing and distribution activities. GHA's primary focus has been
to develop a distribution network for its line of Natural Relief 1222 products.
GHA has obtained initial distribution of Natural Relief 1222 in mass channels
primarily chain drug stores and health food stores. Other GHA products include
the Ellon flower remedies which utilize homeopathic active ingredients in a
tincture appropriate for oral consumption or in a topical form without a
patented inactive base.
The Schools seek to fulfill the educational needs of adults seeking
augmented career skills or whose educational needs have not been met in
traditional educational environments. These individuals are primarily high
school graduates and underemployed adults seeking specific career skills and
training. As of December 31, 1997, 707 students were enrolled in the Schools.
The Schools are licensed under Florida law and approved by the United States
Department of Education (the "USDOE") to provide financial aid to qualified
applicants. For the year ended December 31, 1997, the Schools derived
approximately 66% of its revenues from financial aid provided under Federal or
state assistance programs.
The Company's strategy is to focus on developing GHA's business, which is
to identify natural products that have demonstrable health benefits and can be
marketed without prior approval of the United States Food and Drug
Administration (the "FDA"), and to promote and market those products. In
addition, the Company intends to acquire, although there can be no assurance
thereof, existing products and companies which are complementary to the
Company's existing products.
-4-
As part of the Company's shift in emphasis to the sale and marketing of
natural health products, the Company closed the Company's natural health care
center in Boca Raton, Florida in October, 1997 and the natural health care
center in Pompano Beach, Florida in January 1998. The natural health care
centers provided multidisciplinary complementary health care in the areas of
alternative and nutritional medicine. In March 1998, the Company sold the assets
of The Corporate Body, Inc., which offered on-site massages to businesses. The
Company intends to sell the Schools to Neal R. Heller, the Company's President,
Chief Executive Officer, a principal stockholder and a director, Elizabeth S.
Heller, his wife, the Company's secretary, a principal stockholder and a
director and Florida College of Natural Health, Inc., a company controlled by
Mr. and Mrs. Heller. The purchase price for the Schools is $1,800,000. In
connection with the sale of the Schools, Mr. and Mrs. Heller's employment
agreements will be cancelled, Mr. and Mrs. Heller will resign as directors and
officers of the Company, and Mr. and Mrs. Heller will transfer to the Company
3,034,000 shares of Common Stock (78,850 shares of Common Stock post-split) and
options to purchase 800,000 shares of Common Stock (20,000 shares of Common
Stock post-split).
The Company was incorporated under the name Florida Institute of Massage
Therapy, Inc. in Florida in December 1988 and changed its name to Natural Health
Trends Corp. in June 1993. The Company's principal offices are located at 2001
West Sample Road, Pompano Beach, Florida 33064 and its telephone number is (954)
969-9771.
Product Acquisition and Licensing Agreements
GHA has obtained its current product portfolio by acquiring product lines
and companies and entering into licensing agreements relating to the marketing
and manufacture of its products. GHA has not developed any of its products, and
does not maintain a research and development staff or research facilities.
In October 1996 GHA acquired two natural product lines: Ellon flower
essence products and Fruitseng(R) new age beverages. The Ellon products comprise
38 traditional English homeopathic flower remedies and one combination flower
remedy. These products are sold principally through natural and health food
stores. The Fruitseng line of ginseng-supplemented fruit juice drinks and iced
tea drinks was distributed prior to the acquisition through specialty food
distributors and mass market beverage distributors. Following the acquisition of
the Fruitseng line, GHA elected to develop, less capital-intensive products, and
Fruitseng is not currently in distribution nor does the Company have any
intention of allocating resources to reintroduce the brand.
In November 1996 GHA entered into an option agreement to acquire all of the
capital stock of Natural Health Laboratories, Inc., which held marketing and
distribution rights to a line of natural, homeopathic topical medical products
utilizing a patented base and marketed under the Natural Relief 1222 trademark.
In connection with the acquisition, Natural Health Laboratories, Inc. acquired
the rights to the patent from Troy Laboratories, Inc. and H. Edward Troy. Prior
to the acquisition, GHA funded the operations of Natural Health Laboratories,
Inc. pursuant to the option agreement.
-5-
In April 1998, the Company restructured its agreement with the previous
holder of the patented base for Natural Relief 1222. The Company agreed to make
certain payments to and on behalf of the previous holders of the patent in
settlement of accrued royalties and for the modification of the scheduled
royalties. Under the agreement, the Company will pay royalties in connection
with the patent equal to 3% of net sales up to $2,000,000, 2% of net sales from
$2,000,000 to $4,000,0000 and 1% of net sales thereafter. In the event of a
default in the payment of royalties or other payments in connection with the
agreement, the patent will revert back to the original holders.
Overview of the Natural Health Product Market
The Company believes that the market for natural products and supplements
is being driven by information in the mass media which continues to highlight
problems with the American diet; the fact that American consumers are becoming
increasingly disenchanted with and skeptical about many conventional medical
approaches to disease treatment; growing consumer interest in and acceptance of
natural and alternative therapies and products; and, finally, recent
clarifications and changes of food and drug laws that have eased significantly
the regulatory burdens associated with the introduction and sale of dietary
supplements.
The Company believes that public awareness of the positive effects of
nutritional supplements and natural remedies on health has been heightened by
widely publicized reports and medical research findings indicating a correlation
between the consumption and use of a wide variety of nutrients and natural
remedies and the reduced incidence of certain diseases.
The Company believes, although there can be no assurance, that the aging of
the United States population, together with an increased focus on preventative
and alternative health care measures, will continue to fuel increased demand for
certain nutritional supplement products and natural remedies. Management also
believes that the continuing shift to managed healthcare delivery systems will
place greater emphasis on disease prevention and health maintenance, areas with
which natural health products are most identified.
With respect to the distribution of natural health products, while
distribution through small to large sized natural and health food stores remains
significant, the bulk of the growth is found in the mass merchandisers and
health food chains such as General Nutrition Centers which now represent the
majority of sales, and represent the fastest growing channels of distribution.
Products
The Company's initial mass market-oriented product, Natural Relief 1222
Arthritis Relief ("Arthritis Relief") is a topical, natural, homeopathic
medicine. The active ingredients are Bryonia 6X and Rhus Toxicodendron 6X, in a
patented base of natural ingredients. This product is intended to be utilized
for the temporary relief of minor pains and stiffness of muscles and joints
associated with arthritis. Arthritis Relief was introduced in July 1997 through
a nationwide television direct response advertising campaign. The Company also
introduced Arthritis Relief to the mass
-6-
consumer distribution channels through a broker network. The Company has
obtained distribution of Arthritis Relief in eight of the top ten drug chains,
including Rite Aid, Walgreens and Eckerd Drug. The Company also markets
Arthritis Relief through catalogue and electronic media marketing companies.
The total market for topical analgesics in mass market channels in 1997
exceeded $230 million. The category consists of two general types of products -
counter-irritants, such as BenGay, which mask pain by irritating the skin in the
area of application, and capsaicin products, such as Zostrix, which utilize the
pain-reducing properties of a component of hot chili peppers. It is estimated
that approximately 50 million Americans have some form of arthritis.
In December 1997 GHA introduced three extensions to the Natural Relief 1222
product line - Sports Rub, Wart Remover and Dermatitis & Eczema Relief. These
products have been introduced to existing mass market and natural/health food
distribution channels through the Company's broker networks and direct selling
efforts.
Natural Relief 1222 Sports Rub, like Arthritis Relief, is a topical
analgesic comprised of a homeopathic active ingredient, Thuja occidentalis 2C,
in a patented base of natural ingredients. This product is intended to be
utilized for prompt, temporary relief of minor pain, strains, sprains,
stiffness, bruising, inflammation and weakness in muscles and joints due to
overexertion and athletic activity. The Company intends Sports Rub to be a
companion product to Arthritis Relief within the topical analgesics category.
Natural Relief 1222 Wart Remover is a natural alternative to traditional
salicylic acid-based products, and is comprised of a homeopathic active
ingredient, Thuja occidentalis 2C, in a patented based of natural ingredients.
This product is intended to be utilized for the removal of common warts.
Natural Relief 1222 Dermatitis & Eczema Relief is a natural alternative to
traditional hydrocortisone-based products, and is comprised of a homeopathic
active ingredient, Lycopodium 2C, in a patented base of natural ingredients.
This product is intended to be utilized for temporary relief of scalp or skin
itching, irritation, redness, flaking and scaling associated with seborrheic
dermatitis or eczema.
The Company markets a line of homeopathic flower remedies under the Ellon
trade name, which consists of 38 individual flower remedies and one combination
flower remedy, sold as Calming Essence(R). These products are regulated OTC
pharmaceuticals which are intended to be utilized for the relief of a range of
emotional and psychological stresses. Calming Essence is sold principally to
natural and health food retailers and distributors, and to alternative health
care practitioners. The Company utilizes a combination of brokers and in-house
telemarketers to sell the Ellon products. The Company competes in this category
with several other established tines of homeopathic flower remedies, including
the Bach and Flower Essence Services product lines.
-7-
Management anticipates introducing additional products under the Natural
Relief 1222 product line. The Company currently has developed formulations for
acne relief and for first aid use for minor abrasions and contusions. Other
Natural Relief 1222 products in development include a natural anti-fungal
topical pharmaceutical and a natural burn and wound topical pharmaceutical.
Manufacturing
The Company does not intend to develop its own manufacturing capabilities
since management believes that the availability of manufacturing services from
third parties on a contract basis is adequate to meet the Company's needs. The
Company has utilized a number of manufacturers who have sufficient manufacturing
capacity to meet the Company's anticipated production needs.
The Company has used the services of a number of companies to manufacture
its Natural Relief 1222 and the Ellon product lines. Natural Relief 1222
products generally require the mixing and processing of the active and inactive
ingredients, which are then filled in tubes and packaged for retail sale. Ellon
products involve the preparation of homeopathic medicines according to the
Homeopathic Pharmacopecia of the United States, and are generally sold in the
form of tinctures packaged in small dropper bottles labeled for retail sale. The
products are shipped from the Company's Portland, Maine facility or independent
distribution centers located in Maine and New Jersey. The Company's products are
manufactured to the Company's specifications in facilities in compliance with
Federal Good Manufacturing Practice regulations.
The Company has no existing contractual commitments or other arrangements
for the future manufacture of its products. Rather, it places orders for
component or finished goods manufacturing services as required based upon price
quotations and other terms obtained from selected manufacturers.
Natural Relief 1222 Arthritis Relief, Sports Rub and Wart Remover are
manufactured in the United States. Natural Relief 1222 Dermatitis & Eczema
Relief utilizes certain components manufactured in the Peoples' Republic of
China, and packaged in the United States. Ellon products utilize certain
components manufactured in the United Kingdom. and are further manufactured and
packaged in the United States. The Company anticipates that it will, for the
foreseeable future, continue to rely on foreign sources for certain key
components for certain of its products.
Marketing and Distribution
Natural Relief 1222 Arthritis Relief was introduced in July 1997.
Commercial shipments of the product were initiated in the same month. Extensions
on the Natural Relief 1222 product line (Sports Rub, Wart Remover and Dermatitis
& Eczema Relief) were introduced in December 1997.
The Company has pursued a "multi-channel" distribution strategy in
marketing its line of Natural Relief 1222 products, and intends to follow a
similar strategy with future products. The Natural Relief 1222 line of products
is sold in eight of the top 10 drug chains, including Rite Aid,
-8-
Walgreens and Eckerd Drug, as well as in certain supermarket chains, including
Smith's. The Company also distributes its products to the health and natural
food market through distributors and independent health and natural food
retailers. In addition, the Company sells through other specialty channels,
including catalogues such as the Carol Wright catalogue, television marketing
channels such as Home Shopping Network and electronic media such as CUC
International's world-wide web catalogue/website. The nature of the product and
its target market dictate the channels of distribution in which a particular
product is launched, and the level of effort directed to each channel of
distribution.
The Company utilizes a number of independent brokers to assist in the sale
of its products in the mass market and natural and health food distribution
channels. Brokers receive a commission on sales, and in certain cases a fixed
monthly payment, under agreements that are terminable at will by either party on
short notice. In most cases, the Company sells and ships its products directly
to the warehouses and distribution centers of major retail chains. To reach
smaller chains and independent retailers, the Company distributes products
through drug wholesalers such as McKesson and Bergen Brunswig, and natural foods
distributors such as Cornucopia (United Natural Foods).
To support its marketing efforts, the Company advertises in trade and
consumer health magazines, on television, and on radio, attends trade shows and
exhibitions, sponsors promotional programs and events and in-store promotions,
and engages in a public relations effort that has resulted in articles in
health, mature audience, trade and natural products publications, which the
Company uses to promote its products. In May 1997, GHA entered into a five year
endorsement contract with actor and dancer Donald O'Connor. Mr. O'Connor
receives royalties on sales of Natural Relief 1222 Arthritis Relief products at
the rate of 1.5% for domestic retail sales up to $10,000,000; 1.0% for sales
between 10,000,000 and $20,000,000; .5% for sales between $20,000,000 and
$30,000,000 and .25% for sales over $30,000,001. In addition, Mr. O'Connor
receives royalties for direct response sales at the rate of between 2% and 4%
and between 2.5% and 1.5% for electronic home shopping sales. Mr. O'Connor will
receive 1% of all retail and direct response international sales. All royalties
to be paid to Mr. O'Connor will be applied against a minimum guaranteed royalty
payment. The Company has made extensive use of television and other media
advertising featuring Mr. O'Connor, and it is anticipated that Mr. O'Connor will
be featured in future promotional and public relations activities. The Company
may utilize additional paid endorsers for its products in the future.
In the twelve-month periods ended December 31, 1996 and December 31, 1997,
GHA's expenditures for product advertising and promotion were approximately
$89,100 and $2,317,800, respectively.
Competition - Products
Over the counter medicine products are distributed primarily through the
mass market channels of distribution, including chain drug stores, independent
drug stores, supermarkets and mass merchandisers. The Company's competitors
include such companies as Genderm, Thompson Medical,
-9-
Schering Plough, Pfizer, Chattem and Warner Lambert.
The Company's products include FDA recognized homeopathic active
ingredients in a patented base of natural ingredients. The Company's competitors
have access to these same homeopathic ingredients and would be able to develop
and market similar products. However, competitors would be unable to completely
duplicate the products' formulae due to the patent protection that extends to
the use of certain inactive ingredients. Nonetheless, marketplace success will
probably be determined more by marketing and distribution strategies and
resources than by product uniqueness.
Government Regulation
The Company believes that all of its existing products are homeopathic
medicines which do not require governmental approvals prior to marketing in the
United States. The processing. formulation, packaging, labeling and advertising
of such products, however, are subject to regulation by one or more federal
agencies including the FDA, the Federal Trade Commission, the Consumer Products
Safety Commission, the Department of Agriculture, the Department of Alcohol,
Tobacco and Firearms and the Environmental Protection Agency. The Company's
activities are also subject to regulation by various agencies of the states and
localities in which its products are sold. In addition, the sale of the
Company's products by distributors in foreign markets are subject to regulation
and oversight by various federal, state and local agencies in those markets.
The FDA traditionally has been the main agency regulating the types of
products sold by homeopathic and natural OTC pharmaceutical firms. Official
legal recognition of homeopathic drugs in the United States dates to the federal
Food, Drug and Cosmetic Act of 1938 ("FDCA"). The FDCA provides that the term
"drug" includes articles recognized in the official Homeopathic Pharmacopoeia of
the United States ("HPUS"). The FDCA further recognizes the separate nature of
homeopathic drugs from traditional, allopathic drugs by providing that whenever
a drug is recognized in both the United States Pharmacopoeia ("USP") and the
HPUS it shall be subject to the requirements of the USP unless it is labeled and
offered for sale as a homeopathic drug, in which case it shall be subject to the
provisions of the HPUS and not to those of the USP.
In 1988, the FDA issued a Compliance Policy Guide ("CPG") that formally
established the manner in which homeopathic drugs are regulated. The CPG
provides that homeopathic drugs may only contain ingredients that are generally
recognized as homeopathic. Such recognition is most often obtained via the
publication of a monograph in the HPUS. The FDA has also noted that a product's
compliance with a HPUS monograph system does not necessarily mean that it has
been shown to be safe and effective. According to the CPG, and consistent with
established FDA principals regarding allopathic drugs, a homeopathic drug may
only be marketed without a prescription if it is intended solely for
self-limiting disease conditions amenable to self-diagnosis and treatment. Other
homeopathic drugs must be marketed as prescription products. In addition, if an
HPUS monograph states that a drug should only be available on a prescription
basis, this criteria will apply even if the drug is intended for a self limiting
condition. The CPG provides that the FDA's general allopathic drug labeling
requirements are also applicable to homeopathic drugs. All firms that
manufacture, prepare,
-10-
compound, or otherwise process homeopathic drugs must register their drug
establishments with the FDA and must also "list" their drugs with the agency.
Homeopathic drugs must also be manufactured in conformance with "current good
manufacturing practices" ("GMP"). In addition, homeopathic drugs are exempt from
FDA's requirements for expiration date labeling.
The HPUS is updated regularly. The HPUS was initially published by the
Committee on Pharmacy of the American Institute of Homeopathy and is currently
published by the Homeopathic Pharmacopoeia Convention of the United States
("HPCUS"), a private, non-profit entity organized exclusively for charitable,
educational, and scientific activities. The HPUS is an official publication that
is cited in the Federal Food and Drug Laws and CPU. The HPUS contains hundreds
of monographs for homeopathic ingredients that have been found by the HPCUS to
be both safe and effective. The HPUS also contains general standards for the
preparation of homeopathic drugs.
Employees
As of December 31, 1997 the Company's Schools had 54 full time employees
and 16 part time employees including 34 full time administration employees and
33 part time administration employees. The Schools have 20 full time and 13 part
time faculty members and the Corporate Massage Service had one full time
employee. GHA also has 13 full time employees and one part time employee, of
which, five are executive and administrative, six are in accounting and
operations and three are in marketing and sales. GHA also employs three full
time consultants. None of the Company's employees are represented by a union,
and the Company believes that its employee relations are good.
Insurance
The Company presently maintains workers' compensation coverage and
liability insurance relating to hazards on the Company's premises. The Company
carries a general liability policy which provides for coverage of $1,000,000 per
occurrence and $2,000,000 in the aggregate. The Company's professional liability
policy provides for coverage of $1,000,000 per occurrence and $3,000,000 in the
aggregate. The Company is and will be engaged in a business which could expose
it to personal injury and other liability claims. GHA carries general liability
insurance in the amount of $5,000,000 per occurrence and $6,000,000 in the
aggregate including products liability insurance. There can be no assurance,
however, that the Company's insurance will be sufficient to cover potential
claims or that an adequate level of coverage will be available in the future at
a reasonable cost, if at all. A successful claim could have a material adverse
effect on the Company.
Patents and Trademarks
GHA, through Natural Health Laboratories, Inc., has a United States Patent
covering the use of certain inactive botanical ingredients as a base for several
of its Natural Relief 1222 products. The Company also has obtained marketing and
manufacturing rights to a family of Chinese-origin, patented, natural topical
medical products.
-11-
GHA has federal trademark registrations for Natural Relief 1222, Ellon,
Calming Essence and Mesozoic Minerals. The Company also has trademark
registrations for Nature's Relief and Nature's Relief 1222 in Canada. The
Company's general policy is to pursue registrations of trademarks associated
with its key products and to protect its legal and commercial rights with
respect to the use of those trademarks. The Company relies on common law
trademark rights to protect its unregistered trademarks.
Additional trademark registration applications which may be filed by the
Company with the United States Patent and Trademark Office and in other
countries may or may not be granted and the breadth or degree of protection of
the Company's existing or future trademarks may not be adequate. Moreover, the
Company may not be able to defend successfully any of its legal rights with
respect to its present or future trademarks. The failure of the Company to
protect its legal rights to its trademarks from improper appropriation or
otherwise may have a material adverse affect on the Company.
Seasonality
Sales of topical analgesic products are strongest during the colder winter
months when arthritis sufferers tend to feel pain and stiffness more acutely.
Conversely, sales of skin treatment products (e.g., hydrocortisone creams, etc.)
are slightly stronger during the non-winter months. The Company does not believe
that the sales of wart removal products are seasonal.
Operation of the Schools
Curricula
The primary focus of the Schools has been on massage therapy, which the
Company believes has achieved increased public awareness and acceptance.
Currently, 23 states, including Florida and New York, require individuals who
practice massage therapy to be licensed. The Schools prepare students to take
the examination offered by the National Certification Board for Therapeutic
Massage and Bodywork (the "NCBTMB") for certification as a massage therapist.
The NCBTMB's certification of massage therapists satisfies the requirements for
licensing in 11 of the states requiring licenses, including Florida. The Schools
also offer training in skin care. The State of Florida requires registration of
skin care professionals. Upon completing the skin care program and passing an
exam administered by the School, the School's students satisfy the requirements
for registration as a skin care professional by the State of Florida.
The Schools also offer a combined massage therapy and skin care program,
requiring approximately 900 hours of study. The Schools require that the massage
therapy portion of the curriculum be completed first, followed by 300 hours of
skin care.
-12-
Student Recruitment
The Company believes that enrollment at the Company's Schools is influenced
by a number of factors, including (i) a growing need for individuals to have
technical and occupational training in order to obtain employment, (ii) the
number of high school graduates and other demographic trends, and (iii) the
availability of competing alternatives, including other educational
opportunities, other vocational training alternatives, employment and service in
the U.S. military. The Company believes that successful student recruitment
depends upon a number of factors, including a school's educational reputation
and accreditation, job placement record, frequency and schedule of classes and
location, as well as the availability of Federal student financial aid. In order
to attract potential students and increase recognition of its name and programs
of study, the Company utilizes a variety of marketing methods including radio,
newspapers, mailings, presentations and public relations.
Job Placement
The Company believes that the placement of its graduates is essential to
its ability to attract students. The Company's Office of Job Placement works
with students and graduates by advising them about employment opportunities and
offering other placement assistance. Based on the placement calculation mandated
by the Accrediting Commission of Career Schools and Colleges of Technology,
approximately 84% of the School's 1997 graduates have found positions, including
those who are self-employed and have entered private practice.
The Natural Health Shoppe, Inc.
The Natural Health Shoppe, Inc., the Company's wholly-owned subsidiary,
operates a bookstore at each of the Schools' campuses. Inventory consists of
such items as massage tables, headrests, other equipment related to the practice
of and utilized to provide massage therapy services, educational materials, skin
care products, and clothing, including uniforms and shirts. Customers include
students, instructors, graduates of the Schools, practicing therapists and the
public. The Natural Health Shoppe, Inc. intends to continue to offer these
products and expand its inventory to include updated and related products.
Regulation of the Schools
General
Participation in Federal student financial aid programs subjects the
Company to extensive regulation and to audit and compliance review by the USDOE
and other administering agencies. Failure to comply with these regulations may
have serious consequences and may result in suspension, limitation, or
termination hearings to determine if an institution's participation in these
programs should be reduced or terminated. No such suspension, limitation or
termination proceeding has been instituted against the Company. The Company
would be materially affected adversely if one of these
-13-
proceedings were instituted against the Company and it resulted in a curtailment
of the Company's participation in government student financial aid programs.
The Schools must hold a state license or be registered with the appropriate
state authorities to operate as a school. The Schools are licensed by the
Florida Department of Education (the "Florida Department of Education"). In
addition, the Schools must generally comply with standards established by
Florida state laws governing proprietary schools. Typically, these laws and the
related regulations concern such matters as standards and methods of
instruction, qualifications of teachers and management personnel, adequacy of
school facilities and equipment, advertising, form and content of contracts
between schools and their students and tuition collection methods. The Company
holds all required Florida licenses and registrations, and believes that it is
in substantial compliance with such laws and related regulations. As a result of
these laws and regulations, the Company must obtain the approval of the
appropriate state education departments before offering new programs or courses
and before implementing any changes in existing programs or courses.
The Company and its Schools must comply with a variety of Federal and state
regulations to qualify as institutions where eligible students can obtain
government financial aid for tuition and related expenses. These regulations
include rules which set minimum tuition refund levels for students who leave
school before completing their programs of study. In addition, the Federal
regulations require the accreditation of the school by private commissions
recognized by the USDOE. The accreditation commissions establish additional
standards with respect to such matters as curriculum and teacher qualifications.
Under current USDOE regulations, a change in control of the Schools could
result in a temporary or a permanent loss of Federal financial aid funds to the
Schools' students. In addition, under the regulations of the Florida Department
of Education a change of ownership resulting in a change of control may result
in the termination of the Schools' licenses. The Schools will also require the
approval of the Schools' accrediting commission upon a change of control.
Pursuant to the USDOE regulations, a determination of a change of control would
involve a review of which persons or entities have the power to direct or cause
the direction of management and policies of the Schools. Under the Florida
Department of Education's regulations, a change of control constitutes a change
in the authority to establish or modify school policies, standards and
procedures or the authority to make the effective decisions regarding the
implementation or enforcement of school policies, standards and procedures. In
such event, the prior approval of the Florida Department of Education is
required. Under the rules of the Schools' accrediting commission, a change of
control occurs when a person or a corporation obtains authority to control the
actions of the institution, including a change of control which occurs as a
result of a transfer in voting interest. The Company believes, although there
can be no assurance, that there has not been a change of control that would
result in a loss of its eligibility for Federal financial aid funds, a review of
its licenses, or the requirement of prior approval by its accrediting
commission. The issue of whether there was a change of control, if raised by the
USDOE, the Florida Department of Education or the accrediting commission, would
be determined pursuant to the standards set forth above, on the basis of the
facts then existing, including the percentage ownership of the present
shareholders, officers and directors, as compared with the holdings of others
and other factors
-14-
relating to the actual control of the Company. Should there be a determination
that a change of control had occurred by the USDOE, the Florida Department of
Education or the Schools' accrediting commission and there was a disruption or
termination of the availability of Federal financial aid to the Schools'
students or a termination or interruption of the licenses or accreditation of
the Schools, there would be a material adverse effect on the Company, its
business and its prospects.
Accreditation and Licensing
Accreditation is a means of recognizing that learning institutions have met
uniform standards of educational performance, primarily through impartial,
non-governmental peer evaluations by national or regional professional
associations. A school becomes accredited by formal action of the accrediting
body, which bases its decision on information submitted by the school and the
reports of a specially appointed inspection team which has visited the school
and evaluated the programs and operations according to established standards.
Accreditation by at least one accrediting body recognized by the USDOE is
required to permit a school's students to participate in Federal student
financial aid programs. Accreditation is also an important factor in
establishing an institution's reputation with potential students and employers
of its graduates.
Accredited schools are subject to periodic review by accrediting bodies to
ensure that the schools maintain the level of performance, integrity and quality
required by the accrediting body. There can be no assurance that the existing
accreditation of the School will be renewed. In addition, a change in ownership
of the Company would require notification of, and possible re-evaluation of, the
Company's accreditation by the accrediting agencies in order for the Schools to
retain their accreditation.
Although accreditation is a private, voluntary process designed to promote
educational quality, the Company believes that accreditation is an important
asset. Accreditation of a school provides significant competitive advantages
over non-accredited, for-profit educational institutions. College and university
administrators look to accreditation in deciding whether to accept transfers of
credit. Employers rely on an institution's accredited status when evaluating a
job applicant's credentials. Moreover, accreditation is required for
participation in government financial aid programs.
Each School is licensed by the Florida Department of Education as an
institution that provides instruction or training that leads to an occupational
objective. Such institutions are subject to annual or, if they have been
licensed and in good standing for five years or more, biennial licensing
renewal. The present state licenses for the Miami School and Orlando School are
subject to annual review, while the license for the Pompano Beach School is
subject to biennial review, and expire on September 30, 1998, November 30, 1998
and March 31, 2000, respectively. Each institution must meet certain minimum
standards established by the Florida Department of Education with respect to
administrative organization, educational program and curricula, finances,
financial stability, faculty requirements, library facilities, student personnel
services, physical plant and facilities, and publications. In addition, the
institution is required to disclose to the Florida Department of Education
-15-
and its students the status of the institution with respect to professional
certification and licensure. Failure to maintain compliance with the Florida
Department of Education's minimum standards could result in revocation or
suspension of a School's license, or other penalties imposed by the Florida
Department of Education. The rules of the Florida Department of Education
require prior approval of written contracts between the student and the
institution, changes of location in certain events and significant changes to
programs and methods of operation. Each institution is required to be
incorporated and have adequate administrative staff and faculty to provide
instruction in its licensed programs. In addition, each program to be offered by
an institution must be described in detail in the institution's catalog,
including a listing of required equipment and instructional materials. Moreover,
institutions must submit financial statements at the time of application for
renewal. If the institution has a ratio of current assets to current liabilities
of less than 1 to 1, the Florida Department of Education is authorized to deny
the renewal of the license or to require a demonstration to provide further
justification for the renewal of the license. The Florida Department of
Education may also require the institution to post a bond to assure the Florida
Department of Education that the institution will be able to fulfill its
obligations to its students. The institution must maintain a placement rate of
its graduates of at least 60%, otherwise the institution will be required to
submit reports implementing placement improvement measures. In addition, each
institution must maintain a retention rate of 50% of its students. Presently,
the Florida Department of Education rules require a minimum of 500 hours of
training for massage practice. Agents employed by the institution to solicit
students outside the institution are required to be licensed and are subject to
annual licensure and payment of fees. The rules of the Florida Department of
Education provide that the advertising of the institution must be in compliance
with its requirements, which include limits on the use of superlatives or
non-factual statements or illustrations. Any statement which is intended to
mislead the public could result in revocation of licensure or other sanctions
imposed by the Florida Department of Education.
The School's are accredited by the Accrediting Commission of Career Schools
and Colleges of Technology. The Schools' Therapeutic Massage Training Program is
accredited by the Commission on Massage Training Approval/Accreditation of the
American Massage Therapy Association. There can be no assurance that the Schools
will be able to maintain their accreditation.
The Company is also a member of the Career College Association, the Florida
Association of Post Secondary Schools and Colleges and the Florida Association
of Estheticians. The Schools are approved by the Florida State Board of Massage
as a provider of continuing education units and by the Immigration and
Naturalization Service to provide student visas. The Schools are also approved
by the Veteran's Administration to accept veteran's benefits.
Degree-Granting Junior College
As a degree-granting junior college, the success of the Schools may be
dependent, in part, upon the transferability of credits from the Schools to four
year institutions. The transferability of credits from one educational
institution to another, absent an articulation agreement between the two
schools, is generally at the discretion of the receiving institution. The
factors that receiving institutions typically consider include, but are not
limited to, the similarity of accrediting commissions, the
-16-
licensing status of the two institutions and the similarity of program content,
curriculum and textbooks. In addition, many institutions enter into articulation
agreements which establish specific guidelines for the transfer of credits from
one institution to another. However, these agreements are not required by law,
and the content may vary dramatically depending on whether the institution is a
public, private, academic or vocational/technical school. In general, if the
institutions are accredited by the same or a similar accreditation commission,
then the transfer of credits between such institutions is more likely. The
accreditation commission requirements may be identical or similar in terms of
faculty to student ratios, equipment requirements, library facilities,
curriculum development and other factors. Students may also attempt to transfer
credits from one institution to another without regard to whether the
institutions are licensed by the Florida Department of Education of Independent
Colleges and Universities or the Florida Board of Regents (the head of the state
university system). Absent articulation agreements between the two schools,
consideration for the acceptance of transfer of credits is more subjective than
the transfer of credits between otherwise similar public or private
institutions. There can be no assurance that credits from the Schools' courses
will be transferable.
Student Financial Aid
Students at the Schools finance their education through a variety of
sources, including individual resources, earnings from part-time employment,
family contributions and tuition payment from their employers. However, the
principal source of tuition financing at the Schools is government-sponsored
financial aid programs. Students at the Schools receive financial aid under the
following primary programs: (i) Federal Pell Grant Program (formerly known as
Basic Educational Opportunity Grants); (ii) Federal Direct Student Loan
Programs, which includes subsidized and unsubsidized loans (previously known as
the Guaranteed Student Loan Program), the Parent Loans for Undergraduate
Students ("PLUS") program, and the Federal Perkins Loan Program; (iii)
Supplemental Educational Opportunity Grants; and (iv) the College Work Study
program.
Commencing in April 1995, the Schools became participants in the National
Direct Student Loan Program ("NDSL"). NDSL Loans are available to students
studying at least 16 hours per week at an approved educational institution. NDSL
Loans may be obtained in amounts up to $6,625 per year. If a student's income or
family income is below a specified level, a student pays no interest on an NDSL
Loan while in school and for a six-month "grace period" thereafter, after which
time the student is required to pay monthly installments of at least $50, which
includes interest at a rate prescribed by Federal law. If the student's income
or family income is above a specified level, then interest accrues on the loan
at a rate prescribed by Federal law. The interest rate on NDSL Loans ranges from
8.25% to 8.98% per annum. NDSL Loans are direct loans from the Federal
government.
Under the provisions of the Reauthorization of Higher Education Act of
1965, as amended (the "Reauthorization Act"), educational institutions with
annual student loan default rates in excess of 25% (30% prior to 1994) for three
consecutive years may lose their eligibility for student loans. The Schools'
student loan default rates for 1994 and 1995 were determined to be 9.9% and
12.9%, respectively. The default rates for 1996 and 1997 will not be available
from the USDOE until the third quarters of 1997 and 1998, respectively, since a
student is not deemed to be in default until
-17-
eight months after a six-month grace period from the time that the student
leaves school. There can be no assurance that the Company will be successful in
continuing to maintain an acceptable student loan default rate, or otherwise
remain eligible for Federal funding.
The Reauthorization Act prohibits an institution from enrolling more than
50% of its students on the basis of "Ability to Benefit." "Ability to Benefit"
students are those without a high school or general equivalency degree. As of
December 31, 1995, 1996 and 1997, approximately 12%, 15% and 15% respectively,
of the Company's students at the School's were classified as "Ability to
Benefit" students.
Under USDOE regulations, the Schools are proprietary schools (a
"for-profit" educational institution that provides job or career-related
training). A proprietary school may be deemed ineligible to participate in
financial aid programs if the USDOE determines that 85% or more of the
institution's operating revenue is derived from Title IV financial aid programs.
The application of the 85-15 Rule depends largely on the USDOE's interpretation
of what constitutes "revenue" for such institutions. According to the Company's
preliminary calculations, the Schools derived approximately 66% of their
revenues for the calendar year ending December 31, 1997 from the Title IV
financial aid programs. The official determination of the Company's compliance
for the year ended December 31, 1997 with the 85-15 Rule will likely be made by
the end of 1999. Accordingly, if it is determined that the Company did or does
not comply with these regulations, some or all of the student financial aid
received by the students at the Schools could be curtailed or eliminated. The
reduction or termination of Federal student financial aid would have a material
adverse effect on the Company.
The USDOE has considered, and the U.S. Congress is presently considering,
changes in the administration of certain student financial aid programs. There
is no assurance that government funding of the financial aid programs in which
the Company's students participate will be maintained at current levels. A
reduction in funding levels could result in lower enrollments. Extensive and
complex regulations govern all of the government grant and loan programs in
which the Company participates. As such, the Company is subject to periodic
reviews and audits by the USDOE and Federal and State Guaranty Agencies to
determine compliance with applicable regulations. Because financial assistance
programs are required to be administered in accordance with the standard of care
and diligence of a fiduciary, any regulatory violation could be the basis for
the initiation of a suspension, limitation or termination proceeding against the
Company. If such a proceeding were initiated against the Company and resulted in
a substantial reduction or termination of the Company's participation in
government grant or loan programs the Company would be materially and adversely
affected.
The Company's Schools also offer a payment plan which enables students to
pay for their tuition in monthly installments. The Company charges students
participating in this payment program a finance charge of $25 and interest at
the annual rate of 12%. Students participating in this program are required to
pay the remaining balance of their tuition accounts prior to graduation.
-18-
Competition - The Schools
The Schools compete with (i) regional vocational schools and national
vocational schools which offer occupational training programs in massage
therapy, holistic skin care and in related and unrelated fields, (ii) two and
four year universities and colleges, and (iii) on-the-job training offered by
private and government employers. The Company believes that there are
approximately five schools in the Schools geographic area that offer programs of
study in massage therapy and approximately five schools that offer programs of
study in holistic skin care. The Company believes that the massage therapy and
holistic skin care programs of study offered by its Schools offer a broader
range of courses than other schools in its geographic area. In addition, the
ability of the Schools' students to receive financial aid under Federal programs
provides a competitive advantage over those schools which do not have such
ability. Many competitors have greater financial, recruiting and job placement
resources than the Company, have longer operating histories and are more
established than the Company, and have more extensive facilities and more
personnel than the Company has now or will have in the foreseeable future.
Item 2. Description of Properties
Leased Properties
The Company leases approximately 12,000 square feet for the Miami School at
7925 Northwest 12th Street, Miami, Florida. The current annual rent is $199,000
and the lease expires on October 31, 1998. The Company leases approximately
7,590 square feet in Orlando, Florida, the former site of the Company's Orlando
School. The lease and the sublease expire in November, 2000. The Company leases
such space at an annual rent of $86,000 while the annual rental income under the
sublease is $81,500. In September 1997, the Company leased approximately 18,240
square feet for the Orlando School. The current annual rent is $266,424 and the
lease expires in September 2002.
The Company leases approximately 2,200 square feet of office and warehouse
space in Portland, Maine at a monthly rental of $2,150 plus utilities. This
lease expires on November 30, 2001. although the Company may elect to terminate
the lease commencing December 1, 1998 with six months notice.
Pompano Property
The Company owns the property located at 2001 West Sample Road, Pompano
Beach, Broward County, Florida, which includes a four story building consisting
of 50,438 square feet which is known as the Tricom Office Center (the "Pompano
Property"). The Pompano Property is encumbered by a mortgage in the amount of
$2,250,000 held by Banc One Mortgage Capital Markets LLC. The note provides for
monthly payments of principal in the amount of $17,725 plus accrued interest at
the rate of 8.24% per annum. The unpaid balance of the principal is due and
payable on November 1, 2007. Principal on the note may not be prepaid prior to
the third year without penalty.
-19-
Approximately 42.8% of the building is occupied by the Company's corporate
offices, and the Pompano Beach School and the balance is occupied by
non-affiliated tenants. Approximately 26,000 square feet of the Pompano Property
is presently leased to seven tenants at an aggregate rental of approximately
$309,000 per annum. The current leases expire at various times between 1998
through 2001 and require annual rentals that range from $16,600 to $56,800 per
annum. The three largest tenants account for approximately 66% of the Pompano
Property's rental income, and none of the other tenants accounts for more than
9% thereof. Three of the largest tenant leases expire in October 1998, May 2001,
and July 2001 and such leases provide for current annual rentals of
approximately $20,800, $137,446 and $27,500 respectively. In the event that
leases representing a significant percentage of rental income expire and the
space is not promptly rented on advantageous terms, there may be a material
adverse effect on the Company's earnings.
In March 1998, NHTC Real Estate Inc., the Company's wholly-owned subsidiary
which owns the Pompano Property, entered into a purchase agreement to sell the
Pompano Property for a purchase price of $3,000,000. The purchase agreement is
subject to the satisfaction of certain conditions prior to the closing.
-20-
Item 3. Legal Proceedings.
On August 4, 1997 Samantha Haimes brought an action in the Fifteenth
Judicial Circuit of Palm Beach County, Florida, against the Company and National
Health Care Centers of America, Inc., the Company's wholly-owned subsidiary. The
Company has asserted counterclaims against Samantha Haimes and Leonard Haimes.
The complaint arises out of the defendant's alleged breach of contract in
connection with the Company's natural health care center which was located in
Boca Raton, Florida. The Company is vigorously defending the action. The
plaintiff is seeking damages in the amount of approximately $535,000.
On September 10, 1997 Rejuvenation Unlimited, Inc. and Sam Lilly, Inc.
brought an action in the Fifteenth Judicial Circuit of Palm Beach County,
Florida, arising out of the Company's alleged breach of contract in connection
with the acquisition of the Company's natural health care center which was
located in Boca Raton, Florida from the plaintiff. The plaintiff is seeking
damages in excess of $15,000.
In an action brought by Troy Laboratories, Inc. ("Labs") and H. Edward Troy
("Troy") v. Patricia J. Fisher, Richard Aji and Edward G. Coyne in the Supreme
Court of the State of New York, Onondaga County, the plaintiffs are seeking to
have a purported assignment of patent utilized for Natural Relief 1222 to the
defendants declared null and void and to have Labs declared the lawful owner of
such patent. The plaintiffs have prevailed at the trial level, however, the
defendants have filed a notice of appeal. In the event that the defendants
prevail, then the defendants would have equal rights to the patent.
Item 4. Submission of Matters to a Vote of Security Holders
None.
-21-
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Market Information
The Common Stock is quoted on the NASDAQ SmallCap Market under the symbol
"NHTC." The following table sets forth the range of high and low bid quotations
as reported by The NASDAQ SmallCap Market for the Common Stock for the quarters
indicated. The quotations reflect inter-dealer prices without retail mark-up,
mark-down or commissions, and may not represent actual transactions. The table
below does not reflect the Company's one for 40 reverse stock split which
occurred in April 1998.
Common Stock
--------------
High Low
---- ---
1996
First Quarter............................. 6 4 1/4
Second Quarter............................ 5 3/4 4 7/8
Third Quarter............................. 5 3 1/2
Fourth Quarter............................ 3 5/8 1
1997
First Quarter ............................ 2 1/2 1
Second Quarter............................ 2 7/6 25/32
Third Quarter............................. 1/16 1/16
Fourth Quarter............................ 1/16 1/16
1998
First Quarter............................. 5/32 1/32
Holders
As of March 31, 1998, the Company had approximately 179 record holders of
its Common Stock, and as of January 21, 1998, 1,685 beneficial holders of its
Common Stock.
Dividends
The Company has not paid any dividends since its inception. The Company has
no intention of paying any cash dividends on its Common Stock in the foreseeable
future, as it intends to use any earnings to generate increased growth. The
payment by the Company of cash dividends, if any, in the future rests within the
discretion of its Board of Directors and, among other things, will
-22-
depend upon the Company's earnings, capital requirements and financial
condition, as well as other relevant factors.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Years ended December 31. 1996 and 1997
The following discussion should be read in conjunction with the consolidated
financial statements and the notes contained therein.
Forward-Looking Statements
When used in this Form 10-KSB 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
YEAR ENDED DECEMBER 31,1997 AND 1996
Revenues:
Total revenues were $6,992,516 for the year ended December 31, 1997 compared to
$4,844,372 for the year ended December 31,1996. This represents an increase of
$2,148,144 or 44.3%. The Company believes that the increase is primarily
attributable to a $1,010,000 increase in tuition and bookstore revenue by the
Company's Florida College of Natural Health division. The main portion of this
increase was reflected in the Orlando School which relocated to larger premises
during the latter portion of the fiscal year. Additionally, the addition of
$1,134,000 in product sales by GHA, acquired on July 23,1997, accounted for the
other significant portion of the increase.
Cost of sales:
Cost of sales for the year ended December 31,1997 were $2,868,094 compared to
$1,909,989 for the comparable period last year. Gross profit as a percentage of
revenues was 59.0% compared with 60.6% for the year ended December 31,1996. The
School's gross profit was 55.4% for 1997 compared to 57.9% in 1996. The Company
believes that the decline is attributable to increased expenses related to
expansion of each of the Schools' library as required for licensing as a degree
granting junior college. In addition, additional space was leased at the Miami
School with the introduction of an electrolysis class. Global's gross profit was
65%.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $7,636,911 for the year ended
December 31,1997. This represents an increase of $4,171,384 over the year ended
December 31,1996. The Company believes that this increase is due primarily to
$3,608,470 of selling, general and administrative expenses related to GHA's
operations. These costs consisted principally of advertising and promotion
expense of $1,771,095 and salaries and related employee costs of $708,602. The
advertising and promotion expenses were incurred in conjunction with the launch
and the continued media support of GHA's Natural Relief 1222 line of
all-natural, over-the-counter pharmaceutical products, as well as promotional
support for the initial sale of products into national chain drug accounts.
An additional component of the Company's increase in selling, general and
administrative expense was an increase in payroll expense at the Florida College
of Natural Health division of $111,000 due to the need for additional staff
because of the increase in enrollment at the Orlando School as well as personnel
such as librarians. Legal and accounting expenses increased by $251,000 as the
result of costs associated with potential acquisitions of additional medical
clinics, obtaining additional financing and litigation related to the Boca Raton
Natural Health Care Center for accreditation as a degree granting junior
college. Travel expenses increased approximately $190,000 over the previous
year. This increase is due in part to costs associated with GHA acquisition as
well as travel related to GHA's nationwide marketing program.
Litigation settlement:
The litigation settlement expense of approximately $118,000 resulted from the
settlement of the litigation for approximately $198,000 commenced by the
landlord in connection with property leased by the Company in Lauderhill,
Florida. The Company had previously accrued approximately $80,000 for this
litigation. The leased property was the previous site of the Company's School
now located in Pompano Beach, Florida.
Non-cash Imputed Compensation Expense:
In the first quarter of 1997, the Company expensed $25,000 relating to the
issuance of 20,000 shares of Common Stock (pre-split) to an employee which
amount represents the fair market value of the shares issued to this individual.
In the third quarter of 1997, the Company expensed $400,000 related to the
issuance of options to acquire 800,000 shares of Common Stock (pre-split) to two
officers. The expense represents the difference between the fair market value of
the shares underlying the options on the date of grant and the exercise price of
the options. These non-cash expenses were accompanied by corresponding increases
in the Company's additional paid in capital account and resulted in no change to
stockholder's equity.
Interest Expense
Interest expense for the year ended December 31, 1997 were $1,064,301 as
compared to $231,112 for the year ended December 31, 1996. The increase is
mainly due to the interest payable to holders of the Company's convertible
debentures issued in April 1997, as well as interest payable on GHA's notes.
Income(Loss) from Continuing Operations:
The loss from continuing operations was $5,200,679 for the year ended December
31,1997 as compared to $786,346 for the year ended December 31, 1996. The
increase in the loss is primarily attributable to the impact of the individual
elements discussed above.
Discontinued Operations
In October 1997, the Company closed its natural health care center in Boca
Raton, Florida. In February 1998, the Company sold its remaining natural health
care center in Pompano Beach, Florida. The Company has reflected a loss of
$2,524,441 in the year ending December 31, 1997 compared to a loss of $103,192
in the same period for 1996 for the discontinued segment.. The loss includes the
write-off of goodwill associated with the acquisition of the Boca Raton natural
health care center, the write-off of fixed assets, estimated future costs
associated with the medical clinics such as future rents due on the Boca Raton
natural health care center, as well as the $497,246 cost of severing an
employment agreement with an employee at the Boca Raton natural health care
center, previously recognized by the Company in the quarter ended June 30, 1997.
Revenues for the natural health care center segment were $1,754,066 for the year
ended December 31,1997 and $2,374,469 for the year ended December 31, 1996.
Net Loss
For the year ended December 31, 1997, the net loss was $7,725,120 compared to a
net loss of $889,539 for the year ended December 31, 1996. The increase in the
net 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 source of cash receipts is from the
payments for tuition, fees, and books. These payments were funded primarily from
students 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 has been from the
sale of GHA's products.
In January 1997, the Company sold $100,000 of convertible debentures which were
subsequently converted into Common Stock. In February 1997, the Company sold
$300,000 of convertible debentures which were subsequently converted into
Common Stock.
In April 1997, the Company issued $1,300,000 of 6% convertible 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
commencing July 1997 at a conversion price equal to the lesser of $1.4375 or 80%
of the average closing bid price for the five trading days immediately preceding
the notice of conversion. As of December 31,1997, a total of $820,233 in
principal and $25,416 in related interest had been converted into 11,789,312
shares of Common Stock (pre-split). In January 1998, the remaining principal of
$179,767 and related interest of $8,858 was converted into an additional
7,054,994 shares of Common Stock (pre-split).
In conjunction with the debenture issuance, the Company issued warrants to
purchase 200,000 shares of Common Stock. The warrants are exercisable until
April 3, 2002. Half of the warrants are exercisable at $2.4375 per share, while
the remaining half are exercisable at $3.25 per share.
In June 1997, the Company sold 2,200 shares of its convertible series A
preferred stock for $1,000 a share, and realized net proceeds of $1,900,702. The
preferred stock pays a dividend at the rate of 8% per annum payable in shares of
Common Stock. The preferred stock is convertible commencing 60 days after the
issuance, provided that a registration statement covering the resale of the
shares of common stock is effective, at the rate of 75% of the market price of
the Common Stock. In addition, a penalty of 2.5% per month for a period of six
months accrued on the Series A Preferred Stock which is payable in cash or
shares of Common Stock at the conversion price. The registration statement
covering such conversion shares was declared effective on January 12, 1998. In
April 1998, the Company sold an aggregate of $4,000,000 of 10% convertible
preferred stock, realizing proceeds after expenses of approximately $3.4
million, $2.5 million of which were utilized to redeem the previously issued
preferred stock. The new preferred stock provides for a conversion to common at
75% of the market price.
On July 23, 1997, the Company acquired all of the capital stock of GHA. The
purchase price for the acquisition of GHA was settled with the issuance of
5,800,000 shares of Common Stock, plus additional shares of common stock to be
issued to the former GHA shareholders contingent upon the operating performance
of GHA. Specifically, the Company has agreed to issue to former GHA shareholders
additional shares of Common Stock as follows: (i) up to 800,000 shares
(pre-split) if GHA pre-tax operating earnings equal or exceed $1,200,000 for the
period from July 1, 1997 through June 30, 1998, and (ii) shares equal to the
market value of the lesser of $45 million or eight times GHA's pre-tax operating
earnings for the period from July 1, 1999 through June 30, 2000 minus the fair
market value on the date of issuance of the 5,800,000 shares of Common Stock
(pre-split) initial consideration or the 800,000 contingent shares (pre-split),
if they are earned.
In August 1997, the Company issued a $100,000 unsecured promissory note at an
interest rate of 18% to fund the expansion of the Orlando School into a larger
facility. This note is due on August 26, 1998.
In October and November 1997, the Company issued $850,000 of 12.5% secured
promissory notes to fund continuing operations of GHA. The secured promissory
notes pay interest at the rate of 12.5% per annum and are due on February 28,
1998.
At December 31, 1997 the ratio of current assets to current liabilities was .43
to 1.0. There was a working capital deficit of approximately $4,635,000.
In February 1998, the Company sold 300,000 shares of Series B Convertible
Preferred Stock which are convertible into shares of Common Stock commencing on
April 4, 1998 at a conversion price equal to the lower of (i) seventy (70%)
percent of the average closing bid price of the Common Stock or (ii) $.0625.
In April 1998 the Company issued 40,000 shares of Series C Preferred Stock.
Each share of Series C Preferred Stock is convertible into shares of Common
Stock commencing 41 days after the date of issuance at a conversion price
equal to the lower of the closing bid price of the Common Stock on the date
of issuance or 75% of the average closing bid price of the Common Stock
for the five trading days immediately preceding the date of the notice of
conversion. Each share of Series C Preferred Stock shall automatically be
converted into Common Stock on the date which is 24 months from the date of
issuance. In no event shall the Company be required to issue more than
7,676,085 shares of Common Stock (pre-split) unless the stockholders of the
Company approve the issuance of additional shares of Common Stock or Nasdaq
waives the requirement of stockholder approval. In the event that the Company
has issued 7,676,085 shares of Common Stock (pre-split) upon the conversion
of the Series C Preferred Stock and the Company has not obtained such waiver
from Nasdaq or stockholder approval, then the Company has agreed to redeem
any shares of Series C Preferred Stock outstanding at a redemption price
equal to 133% of the face amount of the shares of Series C Preferred Stock
and any accrued and unpaid dividends. The net proceeds from the sale of the
Series C Preferred Stock was approximately $3,400,000. Of such amount,
$2,500,000 was utilized to redeem 1,568.407 shares of Series A Preferred Stock.
Cash used in operations for the period ended December 31,1997 was $2,357,551,
attributable primarily to the net loss of $7,725,120 adjusted for non cash
expenses and changes in operating assets and liabilities aggregating $5,367,569.
The major elements of operations requiring the use of cash were increases in
accounts receivable of $533,815 and inventory of $271,235. Cash inflows were
provided by increases in accounts payable of $1,613,581, increases in accrued
expenses of $737,197 and increases in accrued consulting contracts of 360,131.
Cash provided by financing activities during fiscal 1997 was approximately
$4,501,000, mainly from the issuance of preferred stock of $2,200,000 and the
issuance of debentures of $1,626,826. Proceeds from notes payable and long-term
debt provided approximately $3,274,000 which was mainly a result of refinancing
the Pompano Property. Payments of notes payable and long-term approximated
$2,114,000 which was mainly attributable to the pay down of the original
building financing.
The Company maintains a $300,000 line of credit secured with a $150,000 cash
deposit and certain other assets of the Company. This credit facility expires
in 1998.
The Company's capital expenditures totaled $611,863, primarily due to the
expansion in the early part of fiscal 1997 of the Boca Raton natural health care
center and $424,000 in connection with the refinancing of the Pompano Property.
The Company also anticipates utilizing the proceeds from the anticipated sale of
the Schools and the sale of the Pompano Property to provide financing, although
there can be no assurance thereof.
The Company anticipates that future additional financing will be required
to finance the Company's continued operations during the next twelve months,
principally to fund the continued development and growth of GHA's product sales
Management is currently seeking at least $4.0 million in additional capital to
continue to pursue GHA's business plan of national advertising in support
of national retail distribution. There can be no assurance that the Company
will be able to secure such additional debt or equity financing. Failure to
obtain additional financing of at least $2.5 million within the next 12
months will require reductions in operating expenses, and may have a material
impact on the ability of the Company to increase GHA's sales and to continue
operations. If the Company obtains additional financing of at least $2.5 million
for the next twelve months, of which there can be no assurance, the Company
believes that its net cash flow, together with available lines of credit may
be sufficient to finance the Company's operations for the period of at
least 12 months thereafter.
Item 7. Financial Statements.
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity F-5
Consolidated Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Natural Health Trends Corp. and Subsidiaries
Pompano Beach, Florida
We have audited the accompanying consolidated balance sheet of Natural
Health Trends Corp. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
the financial position of Natural Health Trends Corp. and Subsidiaries as of
December 31, 1997, and the results of its operations and its cash flows for the
years ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses in
each of the last two fiscal years and as more fully described in Note 2, the
Company anticipates that additional funding will be necessary to sustain the
Company's operations through the fiscal year ending December 31, 1998. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Certified Public Accountants
New York, New York /S/ Feldman Radin & Co., P.C.
March 10, 1998 and Feldman Radin & Co., P.C.
April 14, 1998 as to
Notes 2 (O), 6 (E) and 16
F-2
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ 104,784
Restricted cash 250,000
Accounts receivable 1,979,948
Inventories 1,026,999
Prepaid expenses and other current assets 184,576
----------------
TOTAL CURRENT ASSETS 3,546,307
PROPERTY AND EQUIPMENT 3,518,117
DEPOSITS AND OTHER ASSETS 6,740,497
----------------
$ 13,804,921
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,026,436
Accrued expenses 1,199,887
Revolving credit line 217,422
Accrued expenses for discontinued operations 338,446
Current portion of long term debt 2,020,349
Deferred revenue 1,089,647
Current portion of accrued consulting contract 246,607
Other current liabilities 325,115
----------------
TOTAL CURRENT LIABILITIES 8,463,909
----------------
LONG-TERM DEBT 2,254,591
DEBENTURES PAYABLE 179,767
ACCRUED CONSULTING CONTRACT 113,524
ACCRUED EXPENSES DISCONTINUED OPERATIONS 17,616
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value,
1,500,000 shares authorized;
2,200 shares issued and outstanding 1,900,702
Common stock, $.001 par value; 5,000,000
shares authorized; 758,136 shares
issued and outstanding at December 31, 1997 758
Additional paid-in capital 11,941,381
Retained earnings (accumulated deficit) (11,053,577)
Common stock subject to put (380,000)
Prepaid stock compensation (13,750)
----------------
TOTAL STOCKHOLDERS' EQUITY 2,395,514
----------------
$ 13,804,921
================
See notes to consolidated financial statements.
F-3
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------
REVENUES $ 6,992,516 $ 4,844,372
COST OF SALES 2,868,094 1,909,989
---------------- ----------------
GROSS PROFIT 4,124,422 2,934,383
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,636,911 3,465,527
NON-CASH IMPUTED COMPENSATION EXPENSE 425,000 22,000
LITIGATION SETTLEMENT 118,206 -
---------------- ----------------
OPERATING INCOME (LOSS) (4,055,695) (553,144)
OTHER INCOME (EXPENSE):
Interest (net) (1,064,301) (231,112)
Other (103,000) -
Miscellaneaous Revenue 22,317 (2,090)
---------------- ----------------
INCOME(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (5,200,679) (786,346)
PROVISION FOR INCOME TAX - -
---------------- ----------------
INCOME (LOSS) FROM CONTINUED
OPERATIONS (5,200,679) (786,346)
---------------- ----------------
DISCONTINUED OPERATIONS:
(Loss) From Discontinued Operations (2,022,602) (185,642)
(Loss) On Disposal (501,839) 82,450
---------------- ----------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (2,524,441) (103,192)
---------------- ----------------
NET INCOME (LOSS) $ (7,725,120) $ (889,538)
================ ================
BASIC INCOME (LOSS) PER COMMON SHARE:
Continued Operations $ (11.98) $ (2.80)
Discontinued Operations (5.81) (0.37)
---------------- ----------------
NET INCOME (LOSS) PER COMMON SHARE $ (17.79) $ (3.17)
================ ================
WEIGHTED AVERAGE COMMON SHARES USED 434,265 280,350
================ ================
See notes to consolidated financial statements.
F-4
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common
Common Stock Preferred Stock Additional Retained Stock Deferred
-------------------------------------- Paid-in Earnings Subject Stock
Shares Amount Shares Amount Capital (Deficit) to Put Compensation Total
---------- -------- ------- ----------- ----------- ------------ ---------- ------------- ------------
BALANCE
DECEMBER 31, 1995 267,728 $ 268 - $ - $ 3,877,730 $ (1,705,584) $ - $ - $ 2,172,414
Shares issued for
acquisitions 9,500 9 - - 1,367,991 - - - 1,368,000
Shares issued for
consulting agreement 2,500 2 - - 164,998 - - (165,000) -
Amortization of
prepaid consulting - - - - - - - 68,750 68,750
Shares issued to employees 400 1 - - 21,999 - - - 22,000
Convertible debentures
treated as converted 28,522 29 - - 809,971 - - - 810,000
Common stock
subject to put - - - - - - (380,000) - (380,000)
Net loss - - - - - (889,539) - - (889,539)
---------- -------- ------- ----------- ---------- ------------ ---------- ------------- ----------
BALANCE
DECEMBER 31, 1996 308,650 309 - - 6,242,689 (2,595,123) (380,000) (96,250) 3,171,625
Sale of convertible
Series A preferred stock - - 2,200 1,900,702 - - - - 1,900,702
Preferred stock
dividends imputed - - - - 733,333 (733,333) - - -
Conversion of debentures 303,986 303 - - 1,207,172 - - - 1,207,475
Stock issued
for acquisition 145,000 145 - - 2,899,855 - - - 2,900,000
Other issuances 500 1 - - 24,999 - - - 25,000
Issuance of stock options - - - - 400,000 - - - 400,000
Amortization of
deferred stock compensation - - - - - - - 82,500 82,500
Discount on debentures - - - - 433,333 - - - 433,333
Net loss - - - - - (7,725,120) - - (7,725,120)
---------- -------- ------- ----------- ---------- ------------ ---------- ------------- ------------
BALANCE
DECEMBER 31, 1997 758,136 $ 758 2,200 $ 1,900,702 $11,941,381 $(11,053,577)$ (380,000)$ (13,750)$ 2,395,514
========== ======== ======= =========== =========== ============ ========== ============= ============
See notes to consolidated financial statements.
F-5
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
December 31
-----------------------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ---------------- ----------------
Net loss $ (7,725,120) $ (889,539)
---------------- ----------------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 567,670 244,571
Non-cash imputed compensation expense 425,000 22,000
Loss on disposal of fixed assets, net 105,001 -
Interest settled by issuance of stock 116,065 -
Write-off of goodwill 1,325,605 -
Amortization of note payable discount 433,333 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (533,815) (707,544)
(Increase) decrease in inventories (271,235) (130,295)
(Increase) decrease in prepaid expenses (24,566) 31,393
(Increase) decrease in due from affiliate - (1,200)
(Increase) decrease in deposits and other assets (112,238) (34,518)
Increase (decrease) in accounts payable 1,613,581 97,959
Increase (decrease) in accrued expenses 737,197 286,463
Increase (decrease) in deferred revenue 325,767 278,636
Increase (decrease) in other current liabilities (55,989) -
Increase (decrease) in accrued expenses for disc. operations 356,062 -
Increase (decrease) in accrued consulting contract 360,131 -
---------------- ----------------
TOTAL ADJUSTMENTS 5,367,569 87,465
---------------- ----------------
NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES (2,357,551) (802,074)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (611,863) (438,650)
Net cash provided by (used for) acquistions 20,241 (11,388)
Loan to Global Health Alternatives, Inc. (1,964,000) -
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (2,555,622) (450,038)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in due from officer 136,495 (1,887)
(Increase) decrease in due to related parties 23,724 -
(Increase) decrease in restricted cash 8,932 (258,932)
Proceeds from preferred stock 2,200,000 -
Proceeds from sale of debentures 1,626,826 810,000
Payment of debentures (355,650) -
Offering costs of preferred stock (299,299) -
Proceeds from notes payable and long-term debt 3,273,551 349,851
Payments of notes payable and long-term debt (2,113,945) (44,215)
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,500,634 854,817
---------------- ----------------
NET INCREASE (DECREASE) IN CASH (412,540) (397,295)
CASH, BEGINNING OF YEAR 517,323 914,618
---------------- ----------------
CASH, END OF YEAR $ 104,784 $ 517,323
================ ================
See notes to consolidated financial statements.
F-6
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
Year ended
December 31
-----------------------------------
1997 1996
---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 450,470 $ 236,671
================ ================
Income taxes $ - $ -
================ ================
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
During fiscal year 1997, debentures and accrued interest totaling $1,207,474
were converted to Common Stock.
See notes to consolidated financial statements.
F-7
NATURAL HEALTH TRENDS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
Natural Health Trends Corp. (formerly known as Florida
Institute of Massage Therapy, Inc.) (the "Company") was incorporated
under the laws of the State of Florida in December 1988.
The Company's primary business is the operation of schools which
develop, market and offer curricula in therapeutic massage training
and skin care therapy. The Company presently has a total of three
schools, located in the Miami, Pompano Beach and Orlando, Florida
areas. Natural Health Shoppe, Inc. is a wholly owned subsidiary which
owns and operates on-site book stores servicing the school's students,
practicing therapists and the public.
In July 1997, the Company acquired Global Health Alternatives,
Inc.,("Global") a company incorporated in Delaware and headquartered in
Portland, Maine, which is in the business of marketing and distribution
of over-the-counter homeopathic pharmaceutical health products. Global
operates its business through its wholly owned subsidiaries: GHA
(UK), Ltd., Ellon, Inc. ("Ellon"), Maine Naturals, Inc. ("MNI") and
Natural Health Laboratories, Inc.
In 1996, the Company opened two natural health care centers
which provided multi- disciplinary complementary health care in the
areas of alternative and nutritional medicine. These facilities were
closed during 1997 and accordingly are being accounted for as
discontinued operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The accompanying consolidated
financial statements include the accounts of Natural Health Trends
Corp. and its subsidiaries. All material intercompany transactions
have been eliminated in consolidation.
B. Accounts Receivable - Accounts receivable are stated net of
allowance for doubtful accounts of $92,912.
F-8
C. Inventories - Inventories consisting primarily of books and
supplies for the schools, and natural remedies for Global, are stated
at the lower of cost or market. Cost is determined using the
first-in, first-out method.
D. Property and Equipment - Property and equipment is carried
at cost. Depreciation is computed using the straight-line method and
accelerated methods over the useful lives of the various assets, which
is generally five to seven years for equipment, and furniture and
fixtures, and thirty-nine years for the building.
E. Cash Equivalents - Cash equivalents consist of money market accounts
and commercial paper with an initial term of fewer than three months.
For purposes of the statement of cash flows, the Company considers
highly liquid debt instruments with original maturities of three months
or less to be cash equivalents.
F. Deferred Revenue - Deferred revenue represents tuition
revenues which will be recognized into income as earned. Tuition
revenue is recognized as earned over the enrollment period.
G. Earnings (Loss) Per Share - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS No. 128"), which became
effective for both interim and annual financial statements for periods
ending after December 15, 1997. FAS No. 128 requires a presentation of
"Basic" and (where applicable) "Diluted" earnings per share. Generally,
Basic earnings per share are computed on only the weighted average
number of common shares actually outstanding during the period, and the
Diluted computation considers potential shares issuable upon exercise
or conversion of other outstanding instruments where dilution would
result. Furthermore, FAS No. 128 requires the restatement of prior
period reported earnings per share to conform to the new standard. The
per share presentations in the accompanying financial statements
reflect the provisions of FAS No. 128.
H. Accounting Estimates - The preparation of financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
I. Concentration of Credit Risk - The Company has most of its cash
maintained in an asset trust account with a financial institution where
account balances are not federally-insured. The Company has not
experienced any losses in the account. The Company believes it is not
exposed to any significant credit risk on cash and cash equivalents.
F-9
J. Income Taxes - Pursuant to SFAS 109, the Company accounts for income
taxes under the liability method. Under the liability method, a
deferred tax asset or liability is determined based upon the tax effect
of the differences between the financial statement and tax basis of
assets and liabilities as measured by the enacted rates which will be
in effect when these differences reverse.
K. Fair Value of Financial Instruments - The carrying amounts reported
in the balance sheet for cash, receivables, and accrued expenses
approximate fair value based on the short-term maturity of these
instruments.
L. Stock Based Compensation - The Company accounts for stock
transactions in accordance with APB Opinion No. 25, "Accounting For
Stock Issued To Employees." In accordance with Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation,
" the Company has adopted the pro forma disclosure requirements of
Statement No. 123 in fiscal 1997.
M. Impairment of Long - Lived Assets - The Company reviews long-lived
assets, certain identifiable assets and goodwill related to those
assets for impairment whenever circumstances and situations change such
that there is an indication that the carrying amounts may not be
recovered. At December 31, 1997, the Company believes that there has
been no impairment of its long-lived assets.
N. Recent Accounting Pronouncements - SFAS No. 130, "Reporting
Comprehensive Income," established standards for the reporting and
display of comprehensive income and its components. SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,
" establishes standards for reporting information about operating
segments in annual and interim financial statements. The Company will
adopt these standards in the first quarter of 1998. They will not have
any significant effect on the Company's financial position or results
of operations.
O. Basis of Presentation - At December 31, 1997, the Company has a
working capital deficiency of approximately $4,918,000 and has recorded
a net loss of approximately $7,725,000 for the year then ended. The
Company's continued existence is dependent on its ability to obtain
additional debt or equity financing and to generate profits from
operations. Management has instituted certain plans in regard to these
matters as more fully described in Note 16.
P. Royalty Expense - Royalties that are incurred on a per unit sold
basis are included in Cost of Sales. Additional royalty amounts
incurred to meet contractual minimum levels are classified as Selling,
General and Administrative Expenses.
F-10
3. PROPERTY AND EQUIPMENT
Property and Equipment consisted of the following at December 31, 1997:
Life Range Amount
--------------------- -----------------
Equipment, furniture and fixtures 5 to 7 $ 393,507
Building and improvements 3 to 5 2,693,449
Land --- 893,809
-----------------
3,980,764
Less: Accumulated depreciation (462,647)
-----------------
$ 3,518,117
=================
4. OTHER ASSETS
Other assets consisted of the following at December 31, 1997:
Deposits and other assets $ 162,732
Goodwill, net of accumulated
amortization of $50,181 1,223,276
Deferred finance costs, net of accumulated
amortization of $72,832 185,985
Patents and customer list, net of
accumulated amortization of $216,909 5,063,091
Other intangible assets net of accumulated
amortization of $194,800 105,413
-----------------
$ 6,740,497
================
The goodwill, the patents, and the customer list arise in
connection with the acquisitions of businesses made by the Company in
1997, 1996 and 1995. The deferred finance costs relate to convertible
debentures made in 1997. The goodwill, the patents, the customer list,
and the deferred finance costs are being amortized over their estimated
useful lives which are 5 years for the customer list, 20 years for
goodwill and 11 and 17 years for patents.
F-11
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997:
Note payable for purchase of school, bearing interest at
8.75%, principal and interest payments due quarterly
commencing February 1996 through November 1999 $ 67,896
Mortgage Note payable to a bank, bearing interest at
8.24%. Monthly payments consisting of principal and
interest are approximately $29,352 and are payable
through November 2007, at which time the balance of
principal is due in a balloon payment in November 2007 2,247,725
$100,000 promissory note, bearing interest at 18%.
Interest starts accruing on August 26, 1997, with monthly
interest payments of $1,500 due on the 15th day of each
month. Principal amount due in full on August 26, 1998 100,000
Line of Credit - Merrill Lynch, for a maximum availability
of $300,000, annually renewable in November with
interest at prime +1%, collateralized by money market
accounts held with Merrill Lynch 217,422
$375,000 face amount note payable, noninterest bearing,
due October 1, 2000 (less unamortized discount based on
imputed interest rate of 12% per annum - $41,385). Initial
payment of $93,750 on October 15, 1996, then monthly
payments of $7,813 beginning on November 1, 1997 and
ending October 1, 2000 239,865
$75,000 face amount note payable, noninterest bearing,
due September 15, 1998 (less unamortized discount based
on imputed interest rate of 12% per annum - $1,349).
Monthly payments of $4,166 from October 1996 through
September 1997, and $2,084 from October 1997 through
September 1998 47,819
$69,000 face amount note payable, noninterest bearing,
due October 15, 1997 (less unamortized discount based on
imputed interest rate of 12% per annum - $0). Initial
payment of $19,500 on October 15, 1996, then monthly
payments of $4,500 from December 1996 through October
1997 27,000
F-12
Various bridge notes totaling $685,000, bearing
interest at 12.5%. In the event of default, 14.5%
interest rate will be applied from the date of default
on the unpaid principal and interest balances.
Principal and interest payments due in full on
September 15, 1997 685,000
Bridge notes issued in October and November 1997,
bearing interest at 14% per annum, due in
February 1998, $700,000 of which are secured by
the schools and the Pompano building and $150,000
of which are secured by Global common stock. 850,000
Other 9,635
------------------
4,492,362
Less: Current portion (2,237,771)
------------------
$ 2,254,591
==================
The two noninterest bearing notes and the various bridge notes
above were not paid on the maturity date and accordingly all unpaid
balances are included in current portion of long-term debt.
Long-term debt maturities for the next five years are as
follows:
1998 $ 2,237,771
1999 66,411
2000 33,647
2001 36,527
2002 39,653
6. STOCKHOLDERS' EQUITY
A. Common Stock - The Company was authorized to issue 40,000,000
shares of common stock, $.001 par value per share.
B. Preferred Stock - The Company is authorized to issue a maximum of
1,500,000 shares of $.001 par preferred stock, in one or more series
and containing such rights, privileges and limitations, including
voting rights, dividend rates, conversion privileges, redemption rights
and terms, redemption prices and liquidation preferences, as the
Company's board of directors may, from time to time, determine.
F-13
In June 1997, the Company sold 2,200 shares of its convertible
Series A preferred stock for $1,000 a share realizing net proceeds of
$1,900,702. The preferred stock pays dividends at the rate of 8% per
annum payable in cash or shares of the Company's common stock valued at
75% of the closing bid price. The preferred stock has a liquidation
preference of $1,000 per share. The preferred stock is convertible
commencing 60 days after issuance, provided that a registration
statement covering the resale of the shares of common stock is
effective, at the rate of 75% of the average closing bid price of the
common stock over the five days preceding the notice of redemption. The
Company has the right to redeem the preferred stock for 240 days after
the date of issuance at the rate of 125% of the stated value. If a
registration statement is not deemed effective within 60 days of the
date of issuance, then the Company is obligated to pay a penalty at the
rate of 2.5% per month.
C. 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. The Debentures are convertible into shares of common
stock at a conversion price equal to the lesser of $1.4375 or 75% of
the average closing bid price of the Common Stock for the five trading
days immediately preceding the notice of conversion. In June 1997, the
Company repaid $300,000 of the Debentures. As of December 1997,
$820,233 of such debentures were converted into shares of common stock.
In conjunction with the issuance of the Debentures, the
Company issued warrants to purchase an aggregate of 5,000 shares of
Common Stock. The warrants are exercisable until April 3, 2002.
Warrants to purchase 2,500 shares of Common Stock are exercisable at
$2.4375 per share, and the balance are exercisable at $3.25 per share.
D. Issuance Of Options - During the quarter ended September 30, 1997,
the Company's president and secretary were issued an aggregate of
20,000, 10 year options, exercisable at $.001 per share. The Company
has recorded a non-cash expense of $400,000 representing the difference
between the exercise price and the fair value of the common stock.
E. 1 For 40 Reverse Stock Split - On April 6, 1998, the Company
effected a 1 for 40 reverse split of its Common Stock, amending its
certificate of incorporation to provide for the authority to issue
5,000,000 shares of $.001 par value Common Stock. All per share data in
these financial statements is retroactively restated to reflect this
reverse split.
F-14
7. DISCONTINUED OPERATIONS
During the third quarter of 1997, the Company reached a
decision to discontinue the medical clinic line of business. Net assets
of the medical clinics were approximately $1,509,405 consisting
primarily of furniture and equipment, accounts receivable and goodwill.
Liabilities were approximately $213,987. The Company has accrued an
estimated loss on disposal of approximately $716,193 representing
primarily accrued employment contract and lease terminations.
Accordingly, the results of the clinic operations are shown separately
as "discontinued operations." The Company's 1996 financial information
has been reclassified to conform with the 1997 presentation.
Revenues of the discontinued business were $1,754,066 for 1997
and $2,374,469 for 1996.
8. INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires the recognition
of deferred tax assets and liabilities for both the expected impact of
differences between the financial statement and tax basis of assets and
liabilities, and for the expected future tax benefit to be derived from
tax loss and tax credit carryforwards. SFAS No. 109 additionally
requires the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. At December 31,
1997, the Company had net deferred tax assets of approximately
$4,119,000. The Company has established a valuation allowance for the
full amount of such deferred tax assets. The following table gives the
Company's deferred tax assets and (liabilities) at December 31, 1997:
Net operating loss deduction $ 3,760,000
Deferred revenue 436,000
Section 481 adjustment (124,000)
Other 5,000
Valuation allowance (4,077,000)
--------------------
$ -
====================
F-15
The provision for income taxes (benefits) differs from the
amount computed by applying the statutory federal income tax rate to
income (loss) before income taxes as follows:
Year Ended
-----------------------------------------
December 31,
-----------------------------------------
1997 1996
------------------ -----------------
Income tax (benefit) computed at statutory rate $ (2,704,000) $ (670,000)
Effect of temporary differences 152,000 146,000
Effect of permanent differences 13,000 19,000
Tax benefit not recognized 2,539,000 505,000
------------------ -----------------
Provision for income taxes (benefit) $ - $ -
================== =================
The net operating loss carryforward at December 31, 1997 was
approximately $9,401,000 and expires in the years 2011 to 2012.
9. COMMITMENTS AND CONTINGENCIES
A. The Company leases its school facilities under non-cancelable
operating leases. The lease terms are five years and expire from
October 1998 through December 2002. The Company leases its Portland
Maine office under a lease expiring in 1999. Rent expense for the years
ended December 31, 1997 and 1996 was $1,306,597 and $647,907,
respectively. Minimum rental commitments over the next five years are
as follows:
1998 $ 538,899
1999 364,378
2000 378,272
2001 293,317
2002 302,112
F-16
B. During the quarter ended March 31, 1997, the Company renegotiated
with a former stockholder of Sam Lily, Inc. with whom it was obligated
under an employment agreement to cancel the employment agreement and
replaced 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 rated 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 September 1997. The expense associated
with this accrual is recorded as part of the loss from discontinued
operations.
C. Litigation - On August 4, 1997 Samantha Haimes brought an action in
the Fifteenth Judicial Circuit of Palm Beach County, Florida, against
the Company and Health Wellness Nationwide Corp., the Company's
wholly-owned subsidiary. The Company has asserted counterclaims against
Samantha Haimes and Leonard Haimes. The complaint arises out of the
defendant's alleged breach of contract in connection with the Company's
medical clinic located in Pompano Beach, Florida. The Company is
vigorously defending the action. The plaintiff is seeking damages in
the amount of approximately $535,000. No accrual for the litigation has
been made in the financial statements as it is the Company's belief
that it will prevail in the litigation.
On September 10, 1997 Rejuvenation Unlimited, Inc. and Sam Lilly, Inc.
brought an action in the Fifteenth Judicial Circuit of Palm Beach
County, Florida, arising out of the Company's alleged breach of
contract in connection with the acquisition of the Company's medical
clinic in Pompano Beach, Florida from the plaintiff. The plaintiff is
seeking damages in excess of $15,000. The Company is vigorously
defending the action and believes that the loss, if any, will be
immaterial.
10. PURCHASE OF BUILDING AND REFINANCE
The Company purchased a building located in Pompano Beach,
Florida (the "Pompano Property") to which it relocated its Lauderhill,
Florida school and corporate offices. The purchase price for the
property was $2,350,000, of which $1,875,000 was financed through
a first and second mortgage. The Pompano Property was encumbered by
mortgages securing repayment of loans made to acquire an adjacent
parcel which is owned by Justin Real Estate Corp. ("Justin Corp.").
All of the common stock of Justin Corp. is owned by principal
shareholders of the Company.
F-17
In October 1997, the Company refinanced the mortgage and
entered into a new mortgage with another financial institution in the
amount of $2,250,000. Monthly payments, including principal and
interest are $17,725 through October 2007, with the balance of any
unpaid principal due in November 2007. The interest rate is 8.24%
per annum. Simultaneously with this transaction, the Company paid
off the underlying mortgage on the adjacent parcel owned by Justin
Corp. in the amount of $435,000. The Company has recorded this amount
as an increase in the basis of the land.
11. REVENUES
The schools obtain a large proportion of their revenues from
Federal and State student financial aid programs. For the year ended
December 31, 1997, the schools derived approximately 66% of tuition
collections from students with financial aid and approximately 34% from
students without financial aid. The schools' ability to obtain such
funding is dependent on a number of factors, including meeting various
educational accreditation and licensing standards and also certain
financial standards such as maintaining at least a 15% ratio of
non-financial aid students. The Company believes it has complied with
all other factors necessary to obtain funding.
The duties of disbursing Federal aid funds is handled by an
independent service company through separate federal trust accounts.
All requests and payments for Federal funds are done by the outside
service company. Federal aid funds are wired into a separate U.S.
Federal Pell Trust Account and the money can only be transferred to the
Company's operating accounts with check registers issued by the outside
service company. The Company believes that it is in compliance with
Federal requirements with respect to the administration of Federal aid
programs.
12. COMMON STOCK SUBJECT TO PUT
In connection with the January 1996 acquisition of the net
assets of Sam Lilly, Inc. the 9,500 shares issued in connection with
the acquisition are subject to the seller's ability to require the
Company to repurchase such shares for a three year period for $380,000,
in the event that the aggregate market value of the shares falls below
$380,000. Such shares are excluded from permanent equity on the
accompanying balance sheet. As of March 1998, this matter is subject to
litigation.
F-18
13. STOCK OPTION PLAN
Under the Company's 1994 Stock Option Plan, up to 16,667
shares of common stock are reserved for issuance. The exercise price of
the options will be determined by the Stock Option Committee selected
by the board of directors, but the exercise price will not be less than
85% of the fair market value on the date of grant. Towards the end of
1995, 50 options were issued to each of two directors at an exercise
price equal to the market price at the time. During 1996 the Company
issued 250 options to a director at a price equal to the fair market
value on the date of grant. In August 1997, the Company adopted a stock
option plan covering officers, directors, employees and consultants. In
August the Company issued 43,750 ten year options under the 1997 Plan,
exercisable at fair market value (which was $22.40 per share) to
certain of its officers who were former principals of Global.
Options to purchase 21,875 shares will be exercisable in August
1998, and the remaining 21,875 will be exercisable in August 1999.
In fiscal 1997, the Company adopted the disclosure provisions
SFAS No. 123, "Accounting for Stock-Based Compensation". For disclosure
purposes, the fair value of options is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for stock options granted during the
years ended December 31, 1997 and December 31, 1996: annual dividends
of $0; expected volatility of 50%; risk free interest rate of 7% and
expected life of 10 years. The weighted average fair value of stock
options granted during the years ended December 31, 1997 and December
31, 1996 was $21.60 and $142.00, respectively. If the Company had
recognized compensation cost of stock options in accordance with SFAS
No. 123, the Company's proforma net income (loss) and net income (loss)
per share would have been $(8,608,120) and $(19.82) per share for the
fiscal year ended December 31, 1997 and $(983,538) and $(3.40) per
share for the fiscal year ended December 31, 1997. Pro forma income
(loss) from continuing operations would have been $(6,083,679) and
$(14.01) per share in 1997 and $(850,346) and $(3.03) per share in
1996.
14. ACQUISITIONS
On July 23, 1997, the Company closed on the acquisition of the capital
stock of Global Health Alternatives, Inc. ("Global"). The purchase price for the
acquisition of Global was settled with the issuance of 145,000 shares of the
Company's common stock. The Company has agreed to issue to former Global
shareholders additional shares of common stock as follows: I) up to 20,000
shares if Global's pre-tax operating earnings equal or exceed $1,200,000 for the
period from July 1, 1997 through June 30, 1998, and ii) shares equal in market
value to the lesser of $45 million or eight times Global pre-tax operating
earnings for the period from July 1, 1999 through June 30, 2000 minus the fair
market value on the date of issuance of the 145,000 share initial consideration
or the 20,000 contingent
F-19
shares, if they are earned. The following table summarizes the acquisition.
Purchase price $ 2,900,000
Liabilities assumed 4,530,741
Fair value of assets acquired (6,511,954)
------------
Goodwill $ 918,787
============
The assets acquired included two patents, one (the"Troy Patent") is
valued at $4,819,000, and is being amortized over its remaining life of 11
years, the other (the "Xu Patent") is valued at $404,000 and is being amortized
over its remaining life of 17 years. Additionally, the Company acquired a
customer list valued at $57,000, which is being amortized over 5 years.
The following schedule combines the unaudited pro-forma results of
operations the Company and Global, as if the acquisition occurred on January 1,
1996 and includes such adjustments which are directly attributable to the
acquisition, including the amortization of goodwill. It should not be considered
indicative of the results that would have been achieved had the acquisition not
occurred or the results that would have been obtained had the acquisitions
actually occurred on January 1, 1996.
Year ended December 31,
--------------------------------------------------
1997 1996
--------------------- ---------------------
Revenues $ 7,856,071 $ 5,129,857
===================== =====================
Loss from continuing operations $ (7,709,728) $ (2,933,434)
===================== =====================
Net loss $ (10,234,169) $ (3,036,626)
===================== =====================
Loss per share from continuing operations $ (15.21) $ (6.90)
===================== =====================
Net loss per share $ (20.20) $ (7.14)
===================== =====================
Shares used in computation 506,765 425,350
===================== =====================
15. SEGMENT INFORMATION
Summary information for the Company's two significant industry segments
is as follows:
Natural and
Year ended December 31, 1997 Schools Health Products Total
------- --------------- -----
Revenues $ 5,858,790 $ 1,133,726 $ 6,992,516
================== ====================== =====================
Operating income (loss) $ (2,188,072) $ (3,012,652) $ (5,200,679)
================== ====================== =====================
Identifiable assets $ 8,712,964 $ 5,091,957 $ 13,804,921
================== ====================== =====================
Other information:
Depreciation and amortization $ 177,881 $ 196,669
================== ======================
Capital expenditures $ 431,570 $ 37,588
================== ======================
16. SUBSEQUENT EVENTS
A. Sale of Preferred Stock - In April 1998, the Company sold an
aggregate of $4,000,000 of 10% convertible preferred stock, realizing proceeds
after expenses of approximately $3.5 million, $2.5 million of which were
utilized to redeem previously issued preferred stock. The preferred stock
provides for a conversion to common at 75% of the market price.
B. Renegotiation of Patent Agreement - In April 1998, the Company renegotiated
the terms of its acquisition of the Troy Patent, due to the agreement being in
breach because of unpaid minimum royalties. Under the new agreement, royalties
are payable at the rate of 3% of the first $2,000,000 of related product sales;
2% of the next $2,000,000 in sales and 1% of sales in excess of $4,000,000. In
connection with the new agreement, the Company was required to assume $585,000
of debt owed to third parties by the Troy Sellers.
C. Proposed Sale of Schools - In February, 1998, the Company entered into
discussions with its Chief Executive Officer, who is also a principal
stockholder and director, and his wife, who is the Company's secretary and a
principal stockholder and director, for the sale of the schools division. The
contemplated sales price is $1,800,000.
F-20
D. Proposed Sale of Building - In March, 1998, the Company entered in
discussions for the sale of the building, in which its Pompano School is
located.
F-21
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-23-
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth certain information concerning the directors
and executive officers of the Company.
Directors and Executive Officers
Name Age Position
---- --- --------
Sir Brian Wolfson 62 Chairman of the Board and Director
Neal R. Heller 38 President, Chief Executive Officer
and Director
Elizabeth S. Heller 36 Secretary and Director
Martin C. Licht 56 Director
Arthur Keiser 43 Director
The following is a brief summary of the background of each executive
officer and director of the Company:
Sir Brian Wolfson has served as Chairman and a director of the Company
since July 1997 and Chief Executive Officer and Chairman of the Board of
Directors of GHA since its inception in October 1995. Prior to co-founding GHA
in October 1995, Sir Brian served as Chairman of Wembley, PLC from 1986 to
1995. Sir Brian is currently a director of Fruit of the Loom, Inc.,
Kepner-Tregoe, Inc., Playboy Enterprises, Inc., and Autotote Corporation, Inc.
Neal R. Heller has been the President, Chief Executive Officer and a
director of the Company since its inception in 1988. Mr. Heller is an attorney
and has been admitted to practice in the State of Florida since 1985. Mr. Heller
earned a Bachelor of Arts degree from the University of Miami in 1982 and a
Juris Doctor degree from Nova University in 1985. On December 18, 1990, Mr.
Heller filed a voluntary petition under Chapter 7, Title 11 of the United States
Code, in the United States Bankruptcy Court for the Southern District of
Florida. The Bankruptcy Court entered an Order of Discharge of Debtor on April
5, 1991. Mr. Heller currently serves as President of the Broward Association of
Career Schools and is the treasurer and a member of the Board of Directors of
the Florida Association of Post-Secondary Schools and Colleges. Mr. Heller is
the husband of Elizabeth S. Heller.
Elizabeth S. Heller has been Secretary and a director of the Company since
its inception in 1988. Mrs. Heller earned a Bachelor of Arts degree from the
University of Miami in 1983. Mrs. Heller is the wife of Neal R. Heller.
-24-
Arthur Keiser has been the President of Keiser College since 1977. Mr.
Keiser became a director of the Company in July 1995. Keiser College is a
regionally accredited independent privately-owned junior college which has
facilities in five Florida locations, namely Ft. Lauderdale, Melbourne,
Tallahassee, Sarasota and Daytona. Mr. Keiser is a member of the board of
directors of the Career College Association and is the Secretary of the Florida
Association of Post-Secondary Schools and Colleges. Mr. Keiser received a B.A.
from Tulane University in 1975.
Martin C. Licht has been a practicing attorney since 1967 and has been a
partner of the law firm of McLaughlin & Stern, LLP since January 1998. Mr. Licht
became a director of the Company in July 1995. Mr. Licht is also a director of
Cable & Co. Worldwide, Inc., a publicly traded company, which imports and
markets footwear on a wholesale basis.
Key Employees
Joseph P. Grace, age 48, has been the Co-Chief Operating Officer of GHA
since October 1996. From 1995 to 1996, Mr. Grace was a marketing consultant
of Natural Health Laboratories, Inc., Inc. From 1994 to 1996 Mr. Grace
was head of marketing for Marketing Resources of America From 1989 to 1994,
Mr. Grace was Vice Chairman of Ovation, Inc., a health and fitness equipment
supplier. Mr. Grace has an M.B.A. from Cornell University and a B.S. in
Electrical Engineering, also from Cornell University. [need 1992- 1997
employment history]
John M. Eldredge, age 43, has been the Co-Chief Operating Officer of GHA
since 1996. From 1991 to 1996, Mr. Eldredge was a principal of Commonwealth
Marketing & Development, Inc., a marketing consulting firm. From 1990 to 1991,
Mr. Eldredge served as Vice President of Marketing at Earth's Best, Inc.
(organic baby food). Mr. Eldredge has an M.B.A. from the Amos Tuck School
at Dartmouth College and an A.B. in Psychology, also from Dartmouth.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e), promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), during the Company's
fiscal year ended December 31, 1997, and (ii) Forms 5 and amendments thereto
and/or written representations furnished to the Company by any director, officer
or ten percent security holder of the Company (collectively "Reporting Persons")
stating that he or she was not required to file a Form 5 during the Company's
fiscal year ended December 31, 1997, it has been determined that no Reporting
Person is delinquent with respect to his or her reporting obligations set forth
in Section 16(a) of the Exchange Act, except that Arthur Keiser, a director of
the Company, has not filed a Form 5 for the fiscal year ended December 31, 1997
and Azure Limited Partnership I has not filed a Form 5 for the fiscal year ended
December 31, 1997.
-25-
Item 10. Executive Compensation.
Summary Compensation Table
The following table provides a summary of cash and non-cash compensation
for each of the last three fiscal years ended December 31, 1995, 1996, and 1997
with respect to the following officers of the Company:
Annual Compensation Long Term Compensation
---------------------------------------- -------------------------------------
Awards Payouts
------------------------ -------
Securities
Other Restricted Underlying LTIP All Other
Other
Name and Annual Stock Award(s) Options Payouts
Payouts Compensa-
Principal Position Year Salary($) Bonus($) Compensation ($)(1) $ SARs(#) $
($) tion($)
------------------ ---- --------- -------- ------------------- -------------- ------- ---
- -------
Sir Brian Wolfson, Chairman of 1997 $240,000 ---- ---- ---- ----
- ---- ----
the Board (2)
Neal R. Heller, 1997 201,500 ---- ---- ---- ---- ----
- ----
President and 1996 162,500 ---- ---- ---- ---- ----
- ----
Chief Executive Officer 1995 150,000 ---- ---- ---- ---- ----
- ----
Elizabeth S. Heller 1997 141,100 ---- ---- ---- ---- ----
- ----
Secretary 1996 150,000 ---- ---- ---- ---- ---- ----
1995 150,000 ---- ---- ---- ---- ---- ----
- --------------------------------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Sir Brian Wolfson waived his 1997 salary.
Options Grants in Last Fiscal Year. The following table sets forth certain
information with respect to option grants during the fiscal year ended December
31, 1997 to the named executive officers. The table below does not reflect the
Company's one for 40 reverse stock split which occurred in April 1998.
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Fiscal Exercise or Base Price
Name Granted Year ($.SH) Expiration Date
---- ------- ---- ------ ---------------
Sir Brian Wolfson 800,000 31.4% $ .56 July 2007
Neal R. Heller 400,000 14.7% .001 July 2007
Elizabeth S. Heller 400,000 15.7% .001 July 2007
Year-end Option Table. During the fiscal year ended December 31, 1997, none of
the named executive officers exercised any options issued by the Company. The
following table sets forth information regarding the stock options held as of
December 31, 1997 by the named executive officers. The table below does not
reflect the Company's one for 40 reverse stock split which occurred in April
1998.
-26-
Number of Securities Underlying Unexercised Value of Unexercised
In-the-Money
Options at Fiscal Year-End Options at Fiscal Year End
------------------------------------------- ------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Sir Brian Wolfson 0 800,000 -- --
Neal R. Heller 400,000 0 18,750 --
Elizabeth S. Heller 400,000 0 18,750 --
Employment Agreements
The Company has entered into employment agreements with Neal R. Heller and
Elizabeth S. Heller, which will expire in December 2001, under which they will
be full-time employees and shall receive salaries of $247,000 and $78,000,
respectively. Mr. and Mrs. Heller received salaries in 1997 of $201,500 and
$141,000, respectively. Each agreement provides that the executive will be
eligible to receive short-term incentive bonus compensation if the Company is
profitable, the amount of which, if any, will be determined by the Board of
Directors based on the executive's performance, contributions to the Company's
success and on the Company's ability to pay such incentive compensation. The
employment agreements also provide for termination based on death, disability,
voluntary resignation or material failure in performance and for severance
payments upon termination under certain circumstances. The agreements contain
non-competition provisions that will preclude each executive from competing with
the Company for a period of two years from the date of termination of
employment.
Sir Brian Wolfson has fixed-term employment agreement of one year,
commencing January 1, 1998, at an annual salary of $50,000. Joseph Grace has a
fixed-term employment agreement of two years, commencing October 15, 1996. Mr.
Grace's base salary in year one was $150,000, with an escalator to $200,000 in
year two. Mr. Grace's agreement calls for a guaranteed bonus of 25% of base
salary, payable at the end of each contract year, which has been deferred in the
first year. John Eldredge has a fixed-term employment agreement of two years,
commencing October 15, 1996. Mr. Eldredge's base salary in year one was $90,000,
with an escalator to $112,500 in year two. Mr. Eldredge's agreement calls for a
bonus of up to 25% of base salary, at the Company's discretion, payable at the
end of each contract year, which was deferred in the first year.
Directors' Compensation
Directors of the Company do not receive any fixed compensation for their
services as directors. The Company grants each non-employee director options to
purchase 1,000 shares of Common Stock under the 1994 Stock Option Plan, at an
exercise price equal to the fair market value of the Common Stock on the date of
grant, and pays non-employee directors $500 for each meeting of the Board of
Directors they attend. Directors are reimbursed for their reasonable
-27-
out-of-pocket expenses incurred in connection with performance of their duties
to the Company. The Company did not pay its directors any cash or other form of
compensation for acting in such capacity, although directors who were also
executive officers of the Company received cash compensation for acting in the
capacity of executive officers. See "-- Executive Compensation." No director
received any other form of compensation for the fiscal year ended December 31,
1997.
Stock Options
The 1997 Stock Option Plan (the "1997 Plan") provides for the granting of
options ("Options") to key employees, including officers, non-employee directors
and consultants of the Company and its subsidiaries to purchase up to 3,000,000
shares of Common Stock (pre-split) which are intended to qualify either as
incentive stock options ("Incentive Stock Options") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended, (the "Code"), or
as options which are not intended to meet the requirements of such section
("Nonstatutory Stock Options").
The Company has adopted the 1994 Stock Option Plan (the "1994 Plan") under
which up to 666,666 options (pre-split) to purchase shares of Common Stock may
be granted to key employees, officers, consultants and members of the Board of
Directors of the Company. Options granted under the 1994 Plan may be either
Incentive Stock Options or Nonstatutory Options.
The plans are administered by the Board of Directors. Under the plans, the
Board of Directors has the authority to determine the persons to whom options
will be granted, the number of shares to be covered by each option, whether the
options granted are intended to be incentive stock options, the manner of
exercise, and the time, manner and form of payment upon exercise of an option.
Incentive stock options granted under the Plan may not be granted at a
price less than the fair market value of the Common Stock on the date of grant
(or less than 110% of fair market value in the case of employees holding 10% or
more of the voting stock of the Company). Non-qualified stock options may be
granted at an exercise price established by the Stock Option Committee selected
by the Board of Directors, but may not be less than 85% of fair market value of
the shares on the date of grant. Incentive stock options granted under the Plan
must expire not more than ten years from the date of grant, and not more than
five years from the date of grant in the case of incentive stock options granted
to an employee holding 10% or more of the voting stock of the Company.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as to the Common Stock
ownership of each of the Company's directors, executive officers, all executive
officers and directors as a group, and all persons known by the Company to be
the beneficial owners of more than five
-28-
percent of the Company's Common Stock. The table below does not reflect the
Company's one for 40 reverse stock split which occured in April 1998.
Number of Approximate
Name and Address of Beneficial Owner(1) Shares(2) Percentage of
Common Stock
- --------------------------------------- --------- --------------------------
Neal R. Heller and Elizabeth S. Heller
2397 N.W. 64th Street
Boca Raton, Florida 33496 5,834,000(3) 18.7%
Martin C. Licht
Selden Lane
Greenwich, Connecticut 06831 52,000(4) *
Arthur Keiser
6324 NW 79th Way
Parkland, Florida 33067 34,000(5) *
Sir Brian Wolfson
Global Health Alternatives, Inc.
44 Welbeck Street
London, England W1N7HF 0(6) *
Azure Limited Partnership I
13 Eagles Nest Drive
La Conner, Washington 98257 1,662,667 5.5%
All Executive Officers and Directors as a
Group
(5 persons) 5,920,000 19.0%
(1) Unless otherwise noted, all persons named in the table have sole voting
and dispositive power with respect to all shares of Common Stock beneficially
owned by them.
(2) The table does not include shares of Common Stock issuable upon the
conversion of the Company's Series A Preferred Stock. Pursuant to the terms of
the Series A Preferred Stock, the holders thereof generally are not entitled to
convert such instruments to the extent that such conversion would increase the
holders' beneficial ownership of Common Stock to in excess of 4.9%.
Notwithstanding the foregoing, on June 4, 2000, the date of a mandatory
conversion of the Series A Preferred Stock a change in control of the Company
may occur, based upon the number of shares of Common Stock issuable.
(3) Mr. Heller owns 2,374,000 shares of Common Stock, and Mrs. Heller owns
2,660,000 shares of Common Stock and each has sole voting and dispositive power
with respect to such shares. As they are husband and wife, each may be deemed
the beneficial owner of the shares owned by the other. Includes up to 800,000
shares of Common Stock issuable upon the exercise of options held by Mr. and
Mrs. Heller.
-29-
(4) Includes presently exercisable options to purchase up to 2,000 shares
of Common Stock held by Mr. Licht.
(5) Includes presently exercisable options to purchase up to 14,000 shares
of Common Stock held by Mr. Keiser.
(6) Does not include options to purchase up to 800,000 shares of Common
Stock which are not exercisable within 60 days.
* Represents less than 1% of applicable shares of Common Stock outstanding.
Item 12. Certain Relationships and Related Transactions.
In connection with the refinancing of the Pompano Property in October,
1997, the Company paid a mortgage loan in the amount of $443,727 (the "Prior
Mortgage Loan") which encumbered both the Pompano Property and an adjacent
parcel of land (the "Adjacent Parcel") which was owned by Justin Real Estate
Corp. ("Justin"). The capital stock of Justin is owned by Neal R. Heller and
Elizabeth S. Heller. Mr. and Mrs. Heller also had guaranteed the Prior Mortgage
Loan.
As of October 1997, the Company had advanced to Mr. and Mrs. Heller
$142,442. In October 1997, Mr. and Mrs. Heller advanced the sum of $240,295 on
behalf of the Company and the Company advanced $24,412 to Justin. In November,
1997, the Company advanced $53,523 on behalf of Justin. In December 1997, Mr.
and Mrs. Heller waived the repayment of the sum of $19,918 from the Company. As
of December 31, 1997, there were no amounts due to the Company from Mr. and Mrs.
Heller or Justin and no amounts were due to the Company from Mr. and Mrs. Heller
or Justin.
In connection with the refinancing of the Pompano Property, Neal R. Heller
has guaranteed the obligations of the Company pursuant to leases between the
Company and its wholly owned subsidiary which owns the Pompano Property. Mr.
Heller has collateralized such guarantee with a $100,000 letter of credit. In
addition, Mr. Heller has agreed to indemnify Banc One Mortgage Capital Markets,
LLC, in certain limited instances. In July 1997, the Company issued an aggregate
of 800,000 options (pre-reverse split) exercisable for a period of 10 years at
an exercise price of $.001 per share to Mr. and Mrs. Heller. Martin C. Licht, a
director of the Company, was a member of law firms which received $189,452
attributable to 1996 and $153,351 attributable to 1997. In addition, as of
December 31, 1997, the Company owed law firms of which Mr. Licht was a member
$150,112. In July 1996 the Company borrowed $125,000 from Arthur Keiser, a
director of the Company, and repaid such amount plus interest at the rate of 12%
per annum in December 1996. In July 1996, in connection with such loan the
Company granted Mr. Keiser an option to purchase 10,000 shares of the Company's
Common Stock at an exercise price equal to the fair market value on the date of
the grant for a period of five years.
-30-
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements
1. Financial Statements Page
----
Independent Auditor's Report F-2
Consolidated Balance Sheet - December 31, 1997 F-3
Consolidated Statements of Operations -
Years Ended December 31, 1997 and 1996 F-4
Consolidated Statement of Changes in Stockholders'
Equity - For the period from December 31, 1995 through
December 31, 1997 F-5
Consolidated Statements of Cash Flow - Years Ended
December 31, 1997 and 1996 F-6
Notes to Financial Statements F-8
2. Exhibits Included Herein
See Exhibit Index on page __ hereof for the exhibits filed as part
of this Form 10-KSB.
(b) Reports on Form 8-K
None.
(c) Exhibit Index
Number Description of Exhibit
- ------ ----------------------
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.*
-31-
Number Description of Exhibit
- ------ ----------------------
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 **
4.8 Registration Rights Agreement dated July 23, 1997 by and among the
Company, Global and the Global Stockholders. +
4.9 Agreement as to Transfers dated July 23, 1997 by and between
Capital Development, S.A. and the Compant. +
4.10 Articles of Amendment of Articles of Incorporation of the
Company. ***
4.11 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 Agreement among Natural Health Trends Corp., Health Wellness
Nationwide Corp., Samantha Haimes and Leonard Haimes. ++
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 Mortgage note in the amount of $2,250,000, dated October 30, 1997
between NHTC Real Estate, Inc. as maker and BANC One Mortgage
Capital Markets, LLC as payee.
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-QSB for the quarter ended
March 31,1997.
*** Previously filed with the Company's Form 10-QSB dated June 30, 1997.
+ Previously filed with the Company's Form 8-K dated Auhust 7, 1997.
++ Previously filed with the Company's Form 10-KSB for the year ended
December 31, 1996.
+++ Previously filed with this Registration Statement No. 333-35935
-32-
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
its behalf by the undersigned, thereunto duly authorized.
Dated: April , 1998 NATURAL HEALTH TRENDS CORP.
By: /s/ Neal R. Heller
------------------------------------
Neal R. Heller, President, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Name Title Date
---- ----- ----
/s/ Sir Brian Wolfson Chairman of the Board April 15, 1998
- -------------------------
Sir Brian Wolfson
/s/ Neal R. Heller President, Chief Executive Officer April 15, 1998
- ------------------------- and Director
Neal R. Heller
\s\ Elizabeth S. Heller Secretary and Director April 15, 1998
- -------------------------
Elizabeth S. Heller
\s\ Arthur Keiser Director April 15, 1998
- -------------------------
Arthur Keiser
\s\ Martin C. Licht Director April 15, 1998
- -------------------------
Martin C. Licht