FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-25238
NATURAL HEALTH TRENDS CORP.
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(Exact name of Small Business Issuer as specified in its charter)
Florida 59-2705336
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 West Sample Road, Suite 318
Pompano Beach, FL 33064
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(Address of Principal Executive Offices)
(954) 969-9771
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(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
The number of shares outstanding of the issuer's Common Stock, $.001
par value, as of September 30, 1997 was 20,290,101 shares.
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NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1997 1
(unaudited)
Consolidated Statements of Operations (unaudited) for the
Three and Nine months ended September 30, 1997 and 2
1996
Consolidated Statements of Cash Flows (unaudited) for the
Nine months ended September 30, 1997 and 1996 3
Notes to the financial statements 4-8
Item 2. Management's discussion and analysis of financial
condition and results of operations 9-13
PART II - OTHER INFORMATION 14-15
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.III OTHER INFORMATIONOTHE
Item 6. Exhibits and Reports on Form 8-K
Signature 16
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NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
September 30, 1997
(UNAUDITED)
ASSETS
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CURRENT ASSETS:
Cash $ 115,439
Restricted cash 250,000
Accounts receivable 2,282,106
Inventories 931,475
Due from officers 141,399
Due from affiliate 23,723
Prepaid expenses and other current assets 373,165
--------------------
TOTAL CURRENT ASSETS 4,117,307
PROPERTY, PLANT AND EQUIPMENT 3,157,157
GOODWILL AND OTHER ASSETS 7,004,660
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$ 14,279,124
====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,274,166
Accrued expenses 1,022,583
Revolving credit line 132,042
Accrued expenses of discontinued operations 338,446
Current portion of long term debt 837,196
Deferred revenue 1,360,540
Current portion of accrued consulting contract 246,607
Other current liabilities 402,367
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TOTAL CURRENT LIABILITIES 6,613,947
--------------------
LONG-TERM DEBT 2,196,934
DEBENTURES PAYABLE 609,665
ACCRUED CONSULTING CONTRACT 113,524
ACCRUED EXPENSES OF DISCONTINUED OPERATIONS 274,660
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; 40,000,000 shares authorized;
20,290,101 shares issued and outstanding at September 30, 1997 20,290
Additional paid-in capital 10,309,687
Retained earnings (accumulated deficit) (7,725,909)
Common stock subject to put (380,000)
Prepaid stock compensation (34,375)
--------------------
TOTAL STOCKHOLDERS' EQUITY 4,090,395
--------------------
$ 14,279,124
====================
See notes to consolidated financial statements.
1
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NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30 September 30
----------------------------------- --------------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
REVENUES $ 1,875,674 $ 1,242,704 $ 4,752,995 $ 3,582,317
COST OF SALES 814,222 636,348 1,774,124 1,372,968
---------------- ---------------- ---------------- ---------------
GROSS PROFIT 1,061,452 606,356 2,978,871 2,209,349
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,582,254 745,306 4,677,659 2,646,584
NON-CASH IMPUTED COMPENSATION EXPENSE 400,000 - 400,000 -
LITIGATION SETTLEMENT - - 118,206 -
---------------- ---------------- ---------------- ---------------
OPERATING INCOME (LOSS) (1,920,802) (138,950) (2,216,994) (437,235)
OTHER INCOME (EXPENSE):
Interest (net) (80,481) (55,952) (282,209) (161,578)
---------------- ---------------- ---------------- ---------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX (2,001,283) (194,902) (2,499,203) (598,813)
PROVISION FOR INCOME TAXES - - - -
---------------- ---------------- ---------------- ---------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS (2,001,283) (194,902) (2,499,203) (598,813)
---------------- ---------------- ---------------- ---------------
DISCONTINUED OPERATIONS:
Income (Loss) From Discontinued
Operations (1,484,206) (14,195) (2,018,174) 44,528
(Loss) on Disposal (613,406) - (613,406) -
---------------- ---------------- ---------------- ---------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS (2,097,612) (14,195) (2,631,580) 44,528
---------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) $ (4,098,895) $ (209,097) $ (5,130,783) $ (554,285)
================ ================ ================ ===============
INCOME (LOSS) PER COMMON SHARE:
Continuing Operations $ (0.11) $ (0.02) $ (0.18) $ (0.05)
Discontinued Operations (0.11) (0.00) (0.18) 0.00
---------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) PER COMMON SHARE $ (0.22) $ (0.02) $ (0.36) $ (0.05)
================ ================ ================ ===============
WEIGHTED AVERAGE COMMON SHARES USED 19,059,951 11,189,108 14,604,629 11,159,665
================ ================ ================ ===============
See notes to consolidated financial statements.
2
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NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss $ (5,130,783) $ (554,285)
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Adjustments to reconcile net loss to net
Cash provided by (used in) operating activities:
Depreciation and amortization 334,660 180,988
Non-cash imputed compensation expense 425,000 -
Loss on disposal of fixed assets,net 87,191 -
Interest settled by issuance of stock 90,650
Write-off of clinic goodwill 1,325,605 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (732,460) (615,032)
(Increase) decrease in inventories (175,712) (99,541)
(Increase) decrease in prepaid expenses (213,155) 38,544
(Increase) decrease in and other assets (213,083) (3,325)
Increase (decrease) in accounts payable 861,312 136,706
Increase (decrease) in accrued expenses 456,379 97,634
Increase (decrease) in deferred revenue 596,660 201,158
Increase (decrease) in other current liabilities 31,081 68,511
Increase (decrease) in accrued expenses for disc. operations 613,105 -
Increase (decrease) in accrued consulting contract 360,131 -
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TOTAL ADJUSTMENTS 3,847,364 5,643
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,283,419) (548,642)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (184,026) (433,228)
Net cash provided by (used for) acquisitions 20,240 (20,000)
Purchase of marketable securities - (255,714)
Pre-acquisition loan to Global Health Alternatives, Inc. (1,964,000) -
---------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (2,127,786) (708,942)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer (4,904) (22,728)
Increase in due to bank - 16,188
Decrease in restricted cash 8,932 -
Proceeds from preferred stock 2,200,000 -
Proceeds from sale of debentures 1,626,826
Payment of debentures (355,650) -
Loan origination costs preferred stock (299,299) -
Proceeds from notes payable and long-term debt 119,873 780,465
Payments of notes payable and long-term debt (286,458) (208,427)
Payments of dividends - (184,173)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,009,320 381,325
---------------- ---------------
NET INCREASE (DECREASE) IN CASH (401,885) (876,259)
CASH, BEGINNING OF PERIOD 517,323 994,816
---------------- ---------------
CASH, END OF PERIOD $ 115,438 $ 118,557
================ ===============
See notes to consolidated financial statements.
3
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NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 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. Per share amounts for the
three and nine months ended September 30, 1997 are reduced by
approximately $56,000 in cumulative preferred stock dividends.
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 $118,000
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
4
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Company for one day per week through December 1998 at the rate of
$5,862 per week. The Company has determined that the future services,
if any, that it will require will be of little or no value and is
accounting for this obligation as a cost of severing the employment
contract. Accordingly, the present value (applying a discount rate of
10%) of all future payments is accrued in full at September 1997. The
expense associated with this accrual is recorded as part of the loss
from discontinued operations.
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 balance are exercisable at $3.25 per share.
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 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.
5
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7. ACQUISITION
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
5,800,000 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 800,000 shares if Global 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 5,800,000 share initial
consideration or the 800,000 contingent 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 (1,231,955)
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Goodwill $ 6,198,786
===========
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.
6
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<CAPTION>
Nine months ended September 30,
1997 1996
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<S> <C> <C>
REVENUES $ 5,376,145 $ 3,867,802
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Loss from continuing operations $ (4,871,730) $ (1,773,728)
=========== ===========
Net loss $ (7,503,310) $ (1,729,200)
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Loss per share from
continuing operations $ (0.26) $ (0.11)
=========== ===========
Net loss per share $ (0.40) $ (0.10)
=========== ============
Shares used in computation 18,955,121 16,753,155
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8. ISSUANCE OF OPTIONS
During the quarter ended September 30, 1997, the Company's president
and secretary were issued an aggregate of 800,000, 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.
9. DISCONTINUED OPERATIONS
During the third quarter of 1997, the Company reached a decision to
discontinue the medical clinic line of business. Revenues from the
medical clinics amounted to $1,516,967 for the nine months ended
September 30, 1997 and $1,881,663 for the nine months ended September
30, 1996. Net assets of the medical clinics were approximately $120,000
consisting primarily of furniture and equipment and accounts
receivable. Liabilities were approximately $26,000. The Company has
accrued an estimated loss on disposal of approximately $613,000
representing primarily accrued employment contract terminations.
7
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10. 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.
11. BRIDGE NOTES
Prior to the acquisition of Global by the Company, Global issued
$685,000 of unsecured 12.5% bridge notes which matured on September 15,
1997. Global is attempting to extend the maturity dates of the
bridge notes and is also seeking to refinance the bridge notes.
12. 1997 STOCK OPTION PLAN
In August 1997, the Company adopted a stock option plan covering
officers, directors, employees and consultants. In August the Company
issued 10 year options, exercisable at fair market value to certain of
its officers who were former principals of Global.
8
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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 therein 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 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
NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
Revenues:
Total revenues were $4,752,995 for the nine months ended September 30, 1997
compared to $3,582,317 for the nine months ended September 30, 1996. This
represents an increase of $ 1,170,678 or 32.7%. The Company believes that this
increase is primarily attributable to a $636,000 increase in tuition and
bookstore revenue by the Company's Florida College of Natural Health division,
and the addition of $535,000 in product sales by Global Health Alternatives,
Inc. ("Global"), the Company's wholly-owned subsidiary (acquired on July 23,
1997).
Cost of sales:
Cost of sales for the nine months ended September 30, 1997 were $1,774,124
compared to $1,372,968 for the comparable period last year. Gross profit as a
percentage of revenues was 62.6% for the nine months ended September 30, 1997
compared with 61.6% for the nine months ended September 30, 1996. The gross
profit for the Florida College of Natural Health was 58% for 1997 compared to
59% in 1996. The Company believes that the decline is primarily attributable to
increased expenses related to expansion of libraries at each of the three school
locations, as required for licensing of the schools as a degree-granting
college. Moreover, additional space was leased at the Company's Miami school to
accommodate the introduction of an electrolysis class.
9
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Selling, General and Administrative Expenses:
Selling, general and administrative expenses were $4,677,659 for the nine months
ended September 30, 1997. This represents an increase of $2,031,068 over the
nine months ended September 30, 1996. The Company believes that this increase is
due primarily to $1,618,492 of selling, general and administrative expenses
related to Global's operations. These costs consisted principally of advertising
and promotion expense of $1,006,228 and salaries and related employee costs of
$277,408. The advertising and promotion expenses were incurred in conjunction
with the launch and continued media support of Global's Natural Relief 1222 TM
line of all-natural, over-the-counter pharmaceutical products, as well
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 $143,000, due to added staffing requirements at
the Company's Oviedo school to accommodate increased enrollments as well as the
addition of certain support personnel resulting from the accreditation of the
programs as colleges. Legal and accounting expenses increased by $217,000
primarily as a result of costs associated with the potential acquisition of
additional medical clinics, and obtaining additional financing. Travel expenses
increased approximately $109,000 during the nine month period in 1997, due to
travel related to Global's nationwide marketing program.
Consulting fees increased approximately $60,000 due to the engagement of an
investment banking firm to advise the Company regarding potential acquisitions
and the Company's efforts to raise additional capital.
Litigation Settlement:
The litigation settlement expense of approximately $118,000 resulted from the
settlement of litigation for approximately $198,000 commenced by the landlord of
property previously 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 the Company's common stock 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 the Company's common stock 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 stockholders' equity.
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Interest Expense:
Interest expense for the nine months ended September 30, 1997 was $282,209 as
compared to $161,578 for the comparable period in 1996. This increase is due
primarily to interest payable to holders of the Company's convertible debentures
issued in April 1997, as well as interest payable on Global's bridge notes.
Income (Loss) from Continuing Operations:
The loss from continuing operations was $2,499,203 for the nine months ended
September 30, 1997 compared to $598,813 for the comparable prior period. The
increase in the loss is primarily attributable to the impact of the individual
elements discussed above.
Gain (Loss) from Discontinued Operations:
In October 1997, the Company closed its medical clinic located in Boca Raton,
Florida. The Company anticipates, although there can be no assurance, the sale
of its remaining medical clinic, located in Pompano Beach, Florida, prior to the
end of the first quarter of 1998. The Company has reflected a loss of $2,631,580
in the nine months ending September 30, 1997 compared to income of $44,528 in
the same period in 1996 for the discontinued segment. This loss includes the
write-off of goodwill associated with the acquisition of the Boca Raton medical
clinic, the write-off of fixed assets, estimated future costs associated with
the medical clinics such as future rents due on the Boca Raton medical clinic,
as well as the $497,246 cost of severing an employment agreement with an
employee at the Boca Raton clinic, previously recognized by the Company in the
quarter ended June 30, 1997. Revenues of the clinic segment were $1,516,967 for
the nine months ended September 30, 1997 and $1,881,663 for the nine months
ended September 30, 1996.
Net Loss:
For the nine months ended September 30, 1997, the net loss was $5,130,783
compared to a net loss of $554,285 for the nine months ended September 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
by cash provided from 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 payments for
tuition, fees and books by students of the Company's schools. These payments are
funded primarily from student and parent educational loans and financial aid
under various federal and state assistance programs and, to a lesser extent,
from student and parent resources. The Company's secondary source of cash
receipts is from the sale of Global's products.
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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. As of September 30, 1997, a
total of $390,000 in principal and $9,800 in related interest had been converted
into 1,702,700 shares of common stock. As of November 10, 1997, an additional
$273,000 in principal and $9,400 in related interest had been converted into an
additional 4,082,467 shares of common stock.
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 per share, and realized net proceeds of $1,900,702.
The preferred stock pays a dividend at the rate 8% per annum payable in cash or
shares of the Company's common stock valued at 75% of the market price. The
preferred stock is convertible, provided that a registration statement covering
the resale of the shares of common stock is effective, at a conversion price
equal to 75% of the common stock's market price. The Company is liable to make a
penalty payment to the holders of the preferred stock at the rate of 2.5% of the
face amount of the preferred stock for each 30 day period beginning 60 days
after the sale date that the registration statement has not been declared
effective. As of November 15, 1997, the registration statement covering such
conversion shares had not been declared effective. The Company has the right to
redeem the preferred stock for 240 days after the issuance at a premium.
On July 23, 1997, the Company acquired all of the capital stock of Global. The
purchase price for the acquisition of Global was settled with the issuance of
5,800,000 shares of the Company's common stock, plus additional shares of common
stock to be issued to the former Global shareholders contingent upon the
operating performance of Global. Specifically, the Company has agreed to issue
to former Global shareholders additional shares of common stock as follows: I)
up to 800,000 shares if Global 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 5,800,000 share
initial consideration or the 800,000 contingent shares, 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 Oveido schools into a larger
facility. The 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 Global. The secured promissory
notes pay interest at the rate of 12.5% per annum and are due on February 28,
1998.
At September 30, 1997 the ratio of current assets to current liabilities was .62
to 1.0. There was a working capital deficit of approximately $2,497,000.
Cash used in operations for the period ended September 30, 1997 was
approximately $1,283,000, attributable primarily to the net loss of $5,130,783,
adjusted for non-cash expenses and changes in operating assets and liabilities
aggregating $3,847,000.
12
<PAGE>
Capital expenditures, primarily related to the expansion of the Company's
medical clinic in Boca Raton, Florida and the transition of the Company's
Florida schools to college status used approximately $184,026 of cash.
Cash provided by financing activities was approximately $3,009,000, primarily
attributable to the issuance of preferred stock and convertible debentures.
The Company maintains a $300,000 line of credit secured by a $250,000 cash
deposit and certain other assets of the Company. This credit facility expires in
1998.
The Company anticipates that additional financing will be required to finance
the Company's operations during the next twelve months, principally to fund the
continued development and growth of the Global's product sales. Management is
currently seeking at least $1.0 million in additional capital to continue to
pursue Global'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 will require reductions in operational expenses, and may
have a material impact on the ability of the Company to increase Global's sales.
If the Company obtains additional financing 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 a period of at least 12 months thereafter.
Prior to the acquisition of Global by the Company, Global issued $685,000 of
unsecured 12.5% bridge notes which matured on September 15, 1997. Global is
attempting to extend the maturity dates of the bridge notes and is also seeking
to refinance the bridge notes.
13
<PAGE>
Item 1. 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 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.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 4, 1997 the Company held an annual meeting of its stockholders. Neal
R. Heller, Elizabeth S. Heller and Martin C. Licht were elected to the Board of
Directors. In addition, Sir Brian Wolfson and Hiram Knott were elected by the
Board of Directors to fill two vacancies on the Board of Directors. The
stockholders voted for the ratification of the retention of Feldman Radin & Co.,
P.C. as the Company's independent auditors for the year ended December 31, 1997.
The shares of Common Stock were voted as follows: 11,776,003 voted for
ratification; 43,370 voted against ratification; and 18,300 abstained.
The stockholders voted for the approval of the Company's 1997 Stock Option Plan.
The shares of Common Stock were voted as follows: 6,263,148 voted for approval;
260,470 voted against approval; and 5,245,355 abstained.
Item 6. Exhibits and Reports on Form 8-K.
The Company filed a report on Form 8-K on August 7, 1997 which was amended on
October 6, 1997.
14
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index.
Number Description of Exhibit
<S> <C>
2.1 Amended and Restated Agreement and Plan of Reorganization dated July 23, 1997 by and among
the Company, Global and the Global Stockholders. t
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 Registration Rights Agreement dated July 23, 1997 by and among the Company, Global and the
Global Stockholders. t
4.9 Agreement as to Transfers dated July 23, 1997 by and between Capital Development, S.A. and the
Company. t
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 NUCC Venture, as landlord, as amended.*
10.4 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp., Samantha
Haimes and Leonard Haimes. t t
10.5 Employment Agreement between Health Wellness Nationwide Corp. and Kaye Lenzi.t t
10.6 Employment Agreement dated July 23, 1997 between the Company and Robert Bruce.**
* Previously filed with Registration Statement No. 33-91184.
** Previously filed with the Company's Form IO-QSB for the quarter ended March 31, 1997.
*** Previously filed with the Company's Form IO-QSB dated June 30, 1997.
t Previously filed with the Company's Form 8-K dated August 7, 1997.
t t Previously filed with the Company's Form I O-KSB for the year ended December 3 1, 1996.
ttt Filed with Registration Statement No. 333-35935.
15
</TABLE>
<PAGE>
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/ Robert C. Bruce
Chief Financial Officer
Date: November 19, 1997
16
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