FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 0-25238 NATURAL HEALTH TRENDS CORP. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Exact name of Small Business Issuer as specified in its charter) Florida 59-2705336 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2001 West Sample Road, Suite 318 Pompano Beach, FL 33064 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (954) 969-9771 - -------------------------------------------------------------------------------- (Issuer's telephone number) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the issuer's Common Stock, $.001 par value, as of June 30, 1997 was 12,811,261 shares. NATURAL HEALTH TRENDS CORP. INDEX Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet as of June 30, 1997 1 (unaudited) Consolidated Statements of Operations (unaudited) for the Six and Three months and ended June 30, 1997 and 1996 2 Consolidated Statements of Cash Flows (unaudited) for the Six months ended June 30, 1997 and 1996 3 Notes to the financial statements 4-6 Item 2. Management's discussion and analysis of financial condition and results of operations 7-9 PART II - OTHER INFORMATION 10 Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information ITEM 5. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signature 11 NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET June 30, 1997 (UNAUDITED) ASSETS CURRENT ASSETS: Cash $ 172,393 Restricted cash 250,000 Accounts receivable 1,582,486 Inventories 335,003 Due from officers 141,379 Due from affiliate 23,724 Prepaid expenses and other current assets 318,443 -------------------- TOTAL CURRENT ASSETS 2,823,428 -------------------- NOTES RECEIVABLE 1,964,000 PROPERTY, PLANT AND EQUIPMENT 3,206,377 GOODWILL 1,504,798 DEPOSITS AND OTHER ASSETS 370,936 -------------------- $ 9,869,539 ==================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 548,114 Accrued expenses 140,911 - Current portion of long term debt 56,468 Deferred revenue 758,200 Current portion of accrued consulting contract 246,607 Other current liabilities 244,726 -------------------- TOTAL CURRENT LIABILITIES 1,995,026 -------------------- LONG-TERM DEBT 1,876,704 DEBENTURES PAYABLE 1,000,000 ACCRUED CONSULTING CONTRACT 149,294 COMMON STOCK SUBJECT TO PUT 380,000 STOCKHOLDERS' EQUITY: Convertible preferred stock, $.001 par value, 1,500,000 shares authorized; 2,200 shares issued and outstanding 1,900,702 Common stock, $.001 par value; 40,000,000 shares authorized; 12,811,261 shares issued and outstanding at June 30, 1997 12,811 Additional paid-in capital 6,617,013 Retained earnings (accumulated deficit) (3,627,011) Common stock subject to put (380,000) Prepaid stock compensation (55,000) -------------------- TOTAL STOCKHOLDERS' EQUITY 4,468,515 -------------------- $ 9,869,539 ==================== See notes to consolidated financial statements. 1
NATURAL HEALTH TRENDS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three months ended Six months ended June 30 June 30 ----------------------------------- -------------------------------------- 1997 1996 1997 1996 --------------- ---------------- ---------------- ---------------- REVENUES $ 1,987,089 $ 1,889,193 $ 4,060,922 $ 3,670,430 COST OF SALES 1,143,988 1,079,190 2,186,476 2,090,870 --------------- ---------------- ---------------- ---------------- GROSS PROFIT 843,101 810,003 1,874,446 1,579,560 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,051,181 1,009,164 2,064,154 1,819,120 COST OF SEVERING EMPLOYMENT AGREEMENT - - 497,246 - LITIGATION SETTLEMENT 6,689 - 118,206 - NON-CASH IMPUTED COMPENSATION EXPENSE - - 25,000 - --------------- ---------------- ---------------- ---------------- OPERATING INCOME (LOSS) (214,769) (199,161) (830,160) (239,560) OTHER INCOME (EXPENSE): Interest (net) (139,779) (57,671) (201,728) (105,626) --------------- ---------------- ---------------- ---------------- INCOME (LOSS) BEFORE INCOME TAXES (354,548) (256,832) (1,031,888) (345,186) PROVISION FOR INCOME TAXES - - - --------------- ---------------- ---------------- ---------------- NET INCOME (LOSS) $ (354,548) $ (256,832) $ (1,031,888) $ (345,186) =============== ================ ================ ================ EARNINGS (LOSS) PER COMMON SHARE $ (0.03) $ (0.02) $ (0.08) $ (0.03) =============== ================ ================ ================ WEIGHTED AVERAGE COMMON SHARES USED 12,811,261 11,189,108 12,611,868 11,132,441 =============== ================ ================ ================ See notes to consolidated financial statements. 2
NATURAL HEALTH TRENDS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30 ----------------------------------------- 1997 1996 ------------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,031,888) $ (345,186) Adjustments to reconcile net loss to net ------------------ ---------------- Depreciation and amortization 162,038 112,842 Non-cash imputed compensation expense 25,000 - Changes in assets and liabilities: (Increase) decrease in accounts receivable (100,897) (270,429) (Increase) decrease in inventories (79,821) (92,776) (Increase) decrease in prepaid expenses (272,128) (5,027) (Increase) decrease in deposits and other assets (288,683) (6,352) Increase (decrease) in accounts payable 100,736 245,408 Increase (decrease) in accrued expenses 10,572 81,554 Increase (decrease) in deferred revenue (5,680) 76,967 Increase (decrease) in other current liabilities (9,955) 11,713 Increase (decrease) in accrued consulting contract 395,900 - --------------- --------------- TOTAL ADJUSTMENTS (62,918) 153,900 --------------- --------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,094,806) (191,286) --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (161,494) (399,406) Acquisition expenses - (20,000) Purchase of marketable securities - (252,584) Loan to Global Health Alternatives, Inc. (1,964,000) - --------------- --------------- NET CASH USED IN INVESTING ACTIVITIES (2,125,494) (671,990) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in due from officer (4,884) - Increase in due to related parties - (13,958) Increase in due to bank - 14,343 Decrease in restricted cash 8,932 - Proceeds from sale of debenture 3,262,528 - Proceeds from notes payable and long-term debt 577,342 551,732 Payments of debt (968,548) (197,092) Payments of dividents - (184,173) Issuance of common stock - - --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,875,370 170,852 --------------- --------------- NET INCREASE (DECREASE) IN CASH (344,930) (692,424) 517,323 994,816 --------------- --------------- CASH, END OF PERIOD $ 172,393 $ 302,392 =============== =============== See notes to consolidated financial statements.
3 NATURAL HEALTH TRENDS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying financial statements are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position and the results of operations for the interim periods presented. All such adjustments are of a normal and recurring nature. The results of operations for any interim period are not necessarily indicative of the results attainable for a full fiscal year. 2. EARNINGS (LOSS) PER SHARE Per share information is computed based on the weighted average number of shares outstanding during the period. 3. LITIGATION SETTLEMENT Litigation settlement resulted from the settlement of the litigation brought about by the landlord in connection with the property leased by the Company in Lauderhill, Florida (the former location of the Company's Pompano school), which lease was to expire in July 1997. The settlement resulted in an additional charge of approximately $112,000 during the quarter ended March 31, 1997 in excess of amounts previously accrued. 4. ACCRUED CONSULTING CONTRACT 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 replace it with a consulting agreement. The consulting agreement requires the individual to provide services to the Company for one day per week through December 1998 at the rate of $5,862 per week. The Company has determined that the future services, if any, that it will require will be of little or no value and is accounting for this obligation as a cost of severing the employment contract. Accordingly, the present value (applying a discount rate of 10%) of all future 4 payments is accrued in full at June 30, 1997. 5. 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. In conjunction with the issuance of the Debentures, the Company issued warrants to purchase an aggregate of 200,000 shares of Common Stock. The warrants are exercisable until April 3, 2002. Warrants to purchase 100,000 shares of Common Stock are exercisable at $2.4375 per share, and the balances are exercisable at $3.25 per share. The Company loaned $600,000 of the net proceeds from the issuance of the Debentures to Global Health Alternatives, Inc. ("Global") pending the closing of the acquisition of Global under the Agreement and Plan of Reorganization (the "Reorganization Agreement") dated July 23, 1997. 6. PREFERRED STOCK 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 shares of the Company's common stock valued at 80% 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 80% of the average closing bid price of the common stock over the five days preceeding 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. 7. ACQUISITION On July 23, 1997, the Company closed on the acquisition of the capital stock of Global Health Alternatives, Inc. ("Global"). The note receivable in the amount of $1,964,000 at June 30, 1997 which 5 is due from Global will be eliminated upon consolidation of the two companies. The purchase price for the acquisition of Global was settled with the issuance of 5,800,000 shares of the Company's common stock. 6 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes contained in Item 1 hereof. Forward-Looking Statements When used in Form 10-QSB and in future filings by the Company with the Securities and Exchange Commission, the words "will likely result", and "the Company expects", "will continue", is anticipated", "estimated", "project", or "outlook" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. The Company wishes to caution readers not to place undue reliance on such forward-looking statements, each of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation to 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. Result of Operations Revenues: Total revenues were $4,060,922 for the six months ended June 30, 1997 compared to $3,670,430 for the six months ended June 30, 1996. This represents an increase of $390,492 or 10.6%. The Company believes that the increase is primarily attributable to a $489,049 increase in tuition revenue by the Company's schools. In addition, revenues from the Company's bookstores increased by $48,109. Offsetting these increases was a decline in revenues from the Companies natural health care centers of $178,731 due primarily to a decrease in revenues from the sale of human growth hormone of approximately $71,000, as well as decreased revenues as a result of the restructuring of the Boca Raton Clinic. Cost of sales: Cost of sales for the six months ended June 30, 1997 were $2,186,476 compared to $2,090,870 for the comparable period last year. Gross profit as a percentage of revenues was 46.2% for the six months ended June 30, 1997 as compared to 43% for the six months ended June 30, 1996. Management believes that the primary reason for the increase is the increased enrollments at the Company's Oviedo school. Selling, General and Administrative Expenses: Selling, general and administrative expenses were $2,064,154 for the six months ended June 30, 7 1997. This represents an increase of $245,034 over the six months ended June 30, 1996. As a percentage of revenues, these costs were 50.8% for the six months ended June 30, 1997 as compared to 49.6% in the 1996 period. The Company believes that the increase is primarily due to increased expenses in the natural health care center located in Pompano Beach, Florida as well as increased expenses in the Oviedo School to support the increase in student enrollment. The increase of expenses is also attributable to increased investor relations expense as well as retaining an investment banking firm in connection with possible future acquisitions. Litigation settlement: The litigation settlement resulted from the settlement of the litigation commenced by the landlord in connection with property leased by the Company in Lauderhill, Florida. The leased property was the previous site of the Company's school now located in Pompano Beach, Florida. Non-cash Imputed Compensation Expense: In the first quarter of 1997, the Company -expensed $25,000 relating to the issuance of 20,000 shares of the Company's common stock to an employee which amount represents the fair market value of the shares issued. Interest Expense Interest expense for the six months ended June 30, 1997 was $201,728 as compared to $105,626 for the comparable period of 1996. The increase is primarily due to interest cost associated with the issuance of the convertible debentures in December 1996 and April 1997 offset by less borrowing against available lines of credit as well as the investment of excess funds in higher yield accounts. Net Loss For the six months ended June 30, 1997, the net loss was $1,031,888 compared to a net loss of $345,186 for the six months ended June 30, 1996. The increase in the loss is primarily attributable to the impact of the individual elements discussed above. Liquidity and Capital Resources The Company has funded its working capital and capital 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 8 Company's secondary source of cash receipts is from services rendered at the Company's natural health care centers. In April 1997, the Company issued $1,300,000 of 6% convertible debentures. Principal on the debentures is due in March 2000. The principal and accrued interest on the debentures are convertible into shares of common stock of the Company commencing July 1997 at a conversion price equal to the lesser of $1.4375 or 75% of the average closing bid price for the five trading days immediately preceding the notice of conversion. 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. On July 23, 1997 the Company aquired all of the capital stock of Global Health Alternatives, Inc. ("Global"). The note receivable in the amount of $1,964,000 at June 30, 1997 which is due from Global will be eliminated upon consolidation of the two companies. The purchase price for the acquisition of Global was settled with the issuance of 5,800,000 shares of the Company's common stock. 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 shares of the Company's common stock valued at 80% of the market price. 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 80% of the common stock's market price. The Company has the right to redeem the preferred stock for 240 days after the issuance at the rate of 125% of the stated value. At June 30, 1997 the ratio of current assets to current liabilities was 1.42 to 1.0. Working capital was approximately $828,000. Cash used in operations for the period ended June 30, 1997 was approximately $1,094,806, attributable primarily to the net loss of $1,031,888, adjusted for non cash expenses and changes in operating assets and liabilities aggregating $62,918. Capital expenditures, primarily related to the expansion of the alternative health care clinic in Boca Raton, Florida to allow for introduction of new modalities and the transition of the Company's schools to college status used approximately $161,494 of cash. The Company anticipates that its net cash flow together with available lines of credit will be sufficient to finance the Company's operations during the next twelve months. However, there can be no assurance that this will be the case. The Company anticipates that additional financing will be required for the Company's expansion, including the acquisition of Global. 9 PART II- OTHER INFORMATION Item 1 Legal Proceedings - None Item 2 Changes in Securities - None On June 5, 1997 , the Company consummated a private placement to four investors of an aggregate of 2,200 shares of Series A Preferred Stock (the "Preferred Stock") at a purchase pricee of $100 per share. The shares of Preferred Stock are convertible into shares of Common Stock commencing August 5, 1997 provided that a registration statement covering the resale of such shares of Common Stock is effective. The conversion price of the shares of Preferred Stock is equal to 80% of the average closing bid price of the Common Stock as reported by the NASDAQ SmallCap Market for the five trading days immediately preceding the date of the notice of conversion. Domain Investments, Ltd. received consulting fees of $264,000 in connection with the private placement. The sale of the shares of Preferred Stock and the shares of Common Stock issuable upon conversion thereof are intended to be exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Rule 506 promulgated thereunder. Item 3 Defaults Upon Senior Securities - None Item 4 Submission of Matters to a Vote of Security Holders - None Item 5 Other Information - None Item 6 Exhibits and Reports on Form 8-K The Company filed a current report on Form 8-K on August 7, 1997 with respect to the Company's acquisition of all of the shares of capitacl stock of Global Health Alternatives, Inc. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATURAL HEALTH TRENDS CORP. By: /s/ Neal Heller President and Chief Executive Officer Date: August 18, 1997 11
Exhibit Index Number Description of Exhibit 2.1 Agreement and Plan of Reorganization dated as of July 23, 1997 among the Company, GHA Holdings, Inc. and Global Health Alternatives, Inc.**** 3.1 Amended and Restated Certificate of Incorporation of the Company.* 3.2 Amended and Restated By-Laws of the Company.* 4.1 Specimen Certificate of the Company's Common Stock.* 4.2 Form of Class A Warrant.* 4.3 Form of Class B Warrant.* 4.4 Form of Warrant Agreement between the Company and Continental Stock Transfer & Trust Company.* 4.5 Form of Underwriter's Warrants.* 4.6 1994 Stock Option Plan.* 4.7 Form of Debenture.*** 4.8 Articles of Amendment of Articles of Incorporation of the Company 10.1 Form of Employment Agreement between the Company and Neal R. Heller.* 10.2 Form of Employment Agreement between the Company and Elizabeth S. Heller.* 10.3 Lease, dated April 29, 1993, between Florida Institute of Massage Therapy, Inc., as tenant, and MICC Venture, as landlord, as amended.* 10.4 Lease, dated April 10, 1991, between Florida Institute of Massage Therapy, Inc., as tenant, and Superior Investment & Development Corporation, as agent, for SIDCOR 50/50 Associates.* 10.5 Department of Education, Office of Postsecondary Education, Office of Student Financial Assistance Program Participation Agreement, dated March 28, 1994, between the Company and the USDOE.* 10.6 Purchase and Sale Agreement between Merrick Venture Capital, Inc., as seller, and the Company, as buyer.* 10.7 First Mortgage Loan Documents between the Company and TransFlorida Bank in connection with the purchase of the Pompano Property.* 10.8 Second Mortgage Loan Documents between the Company and Merrick Venture Capital, Inc.* 10.9 Agreement dated June 7, 1995 between Natural Health Trends Corp. and Justin Real Estate Corp.* Number Description of Exhibit 10.10 Property Management Agreement dated June 7, 1995 between Natural Health Trends Corp. and Justin Real Estate Corp.* 10.11 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp., Samantha Haimes and Leonard Haimes.** 10.12 Employment Agreement between Health Wellness Nationwide Corp. and Kaye Lenzi.** 10.13 Loan Agreements between the Company and Global Health Alternatives, Inc.*** 10.14 Employment Agreement dated July 23, 1997 between the Company and Robert Bruce 27.1 Financial Data Schedule. * Previously filed with Registration Statement No. 33-91184. ** Previously filed with the Company's Form 10-KSB for the year ended December 31, 1996. *** Previously filed with the Company's Form 10-QSB for the quarter ended March 31, 1997. **** Previously filed with the company's Form 8-K dated August 7,1997