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, 1998
[ ] 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)
193 Middle Street, Suite 201
Portland, Maine 04101
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(Address of Principal Executive Offices)
(207) 772-7234
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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, 1998 was 4,041,598 shares.
<PAGE>
NATURAL HEALTH TRENDS CORP.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1998 1
(unaudited)
Consolidated Statements of Operations (unaudited) for the
Three and Nine months ended September 30, 1998 and 2
1997
Consolidated Statements of Cash Flows (unaudited) for the
Nine months ended September 30, 1998 and 1997 3
Notes to the financial statements 4-6
Item 2. Management's discussion and analysis of financial
condition and results of operations 7-10
PART II - OTHER INFORMATION 10-12
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 6. Exhibits and Reports on Form 8-K
Signature 13
<PAGE>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED BALANCE SHEET
September 30, 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $1,021,626
Accounts Receivable 19,031
Inventories 436,915
Prepaid Expenses 514,413
----------
TOTAL CURRENT ASSETS 1,991,985
PROPERTY, PLANT AND EQUIPMENT 46,265
PATENTS AND CUSTOMER LISTS 4,733,363
GOODWILL 844,780
DEPOSITS AND OTHER ASSETS 249,951
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$7,866,344
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $989,589
Accrued Expenses 789,833
Accrued Expenses for Discontinued Operations 314,593
Current Portion of Long-Term Debt 587,184
Accrued Consulting Contract 360,131
Other Current Liabilities 104,939
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TOTAL CURRENT LIABILITIES 3,146,269
COMMON STOCK SUBJECT TO PUT 380,000
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value; 1,500,000
shares authorized; 4,330 shares issued and
outstanding at September 30, 1998 3,789,525
Common Stock, $.001 par value; 50,000,000 shares
authorized; 4,041,598 shares issued and
outstanding at September 30, 1998 4,042
Additional Paid-in Capital 14,530,911
Retained Earnings (Accumulated Deficit) (13,604,403)
Common Stock Subject to Put (380,000)
----------
TOTAL STOCKHOLDERS' EQUITY 4,340,075
----------
$7,866,344
==========
1
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
----------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES $168,650 $535,202 $1,001,481 $535,202
COST OF SALES 59,852 125,073 283,206 125,073
---------- ----------- --------- ---------
GROSS PROFIT 108,798 410,129 718,275 410,129
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 772,862 1,810,771 2,470,312 2,092,885
---------- ----------- --------- ---------
OPERATING INCOME (LOSS) (664,064) (1,400,642) (1,752,037) (1,682,756)
OTHER INCOME (EXPENSE):
Interest (net) (67,261) (80,481) (336,314) (715,542)
---------- ----------- --------- ---------
LOSS FROM CONTINUED OPERATIONS
BEFORE INCOME TAXES (731,325) (1,481,123) (2,088,351) (2,398,298)
PROVISION FOR INCOME TAXES 0 0 0 0
---------- ----------- --------- ---------
LOSS FROM CONTINUED OPERATIONS (731,325) (1,481,123) (2,088,351) (2,398,298)
DISCONTINUED OPERATIONS:
Loss From Discontinued Operations 31,154 (2,107,366) (33,289) (2,655,412)
Gain (Loss) on Disposal 595,379 (613,406) 595,379 (613,406)
---------- ----------- --------- ---------
GAIN (LOSS) FROM DISCONTINUED OPERATIONS 626,533 (2,720,772) 562,090 (3,268,818)
---------- ----------- --------- ---------
LOSS BEFORE EXTRAORDINARY GAIN (104,792) (4,201,895) (1,526,261) (5,667,116)
EXTRAORDINARY GAIN - FORGIVENESS OF DEBT (638,576) 0 869,516 0
---------- ----------- --------- ---------
NET INCOME (LOSS) ($743,368) ($4,201,895) ($656,745) ($5,667,116)
---------- ----------- --------- ---------
INCOME (LOSS) PER COMMON SHARE:
Continued Operations ($0.45) ($3.11) ($2.30) ($6.57)
Discontinued Operations 0.22 (5.71) 0.31 (8.95)
Extraordinary Gain (0.23) 0.00 0.49 0.00
---------- ----------- --------- ---------
Net Income (Loss) ($0.46) ($8.82) ($1.50) ($15.52)
---------- ----------- --------- ---------
WEIGHTED AVERAGE COMMON SHARES USED 2,828,559 476,499 1,786,500 365,116
========== =========== ========= =========
</TABLE>
2
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
1998 1997
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($656,745) ($5,667,116)
Adjustments to reconcile Net Loss to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and amortization 513,401 334,660
Non-cash imputed compensation expense 0 425,000
Loss on disposal of fixed assets, net 0 87,191
Interest settled by issuance of stock 112,971 90,650
Write-off of Goodwill 322,219 1,325,605
Amortization of note payable discount 0 433,333
Proceeds from sale of Discontinued Operations (1,783,333) 0
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable 1,960,917 (732,460)
(Increase) Decrease in Inventories 590,084 (175,712)
(Increase) in Prepaid Expenses (329,837) (213,155)
Decrease in Property and Equipment 1,197,603 0
(Increase) Decrease in Deposits & Other Assets 202,621 (213,083)
Increase (Decrease) in Accounts Payable (2,036,847) 861,312
Increase (Decrease) in Accrued Expenses (410,054) 559,379
Increase (Decrease) in Deferred Revenue (1,089,647) 596,660
Increase (Decrease) in Other Current Liabilities (220,176) 31,081
Increase (Decrease) in Accrued Expenses for Discontinued Operations (41,469) 613,105
Increase in Accrued Consulting Contract 0 360,131
----------- -------------
TOTAL ADJUSTMENTS (1,011,547) 4,383,697
----------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,668,292) (1,283,419)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (51,997) (184,026)
Net cash provided by acquisitions 0 20,240
Proceeds from disposition of Discontinued Operations 4,132,106 0
Pre-acquisition loan to Global Health Alternatives, Inc. 0 (1,964,000)
----------- -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,080,109 (2,127,786)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in due from officer 0 (4,904)
Decrease in Restricted Cash 250,000 8,932
Proceeds from preferred stock 5,283,000 2,200,000
Proceeds from sale of debentures 0 1,626,826
Payments of debentures 0 (355,650)
Loan origination costs - preferred stock 0 (299,299)
Proceeds from note payable and long-term debt 196,517 119,873
Payments of notes payable and long-term debt (3,506,695) (286,458)
Cancellation of common stock (96,197) 0
Redemptions of preferred stock (3,621,600) 0
----------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,494,975) 3,009,320
----------- -------------
NET INCREASE (DECREASE) IN CASH 916,842 (401,885)
CASH, BEGINNING OF PERIOD 104,784 517,323
----------- -------------
CASH, END OF PERIOD $1,021,626 $115,438
=========== =============
3
See notes to consolidated financial statements.
</TABLE>
<PAGE>
NATURAL HEALTH TRENDS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
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.
EARNINGS (LOSS) PER SHARE
Basic per share information is computed based on the weighted average
number of shares outstanding during the period. Prior year per share
information has been restated to reflect the one for 40 reverse split
which was effected in April 1998.
GAIN ON FORGIVENESS OF DEBT
During the three months ended September 30, 1998, the Company's
subsidiary Global Health Alternatives, Inc.(GHA) failed to make
payments to three large creditors pursuant to settlement agreements
entered into earlier in the year. Accordingly, the Company reduced its
realized gain on the work-out of various debt and payables of GHA by
approximately $639,000 to about $870,000 year-to-date.
PREFERRED STOCK
In February 1998, the Company sold 300 shares of its convertible Series
B preferred stock for $1,000 a share realizing proceeds of $261,500.
As of September 30, 1998, all 300 shares of the Series B preferred
stock had been converted into a total of 541,330 shares of common
stock.
In April 1998, the Company sold 4,000 shares of its convertible Series
C preferred stock for $1,000 a share realizing proceeds of $3,507,000.
The preferred stock pays dividends at the rate of 10% 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 41 days
after issuance at the rate of 75% of the average closing bid price of
the common stock over the five days preceding the notice of conversion.
From the proceeds raised, the Company paid $2,500,000 to retire
$1,568,407 face value of Series A preferred stock outstanding. As of
September 30, 1998, 1,320 shares of the Series C preferred stock had
been converted into a total of 1,418,912 shares of common stock.
In July 1998, the Company sold 75 shares of its convertible Series D
preferred stock for
4
<PAGE>
$1,000 a share realizing proceeds of $75,000. The preferred stock was
redeemed at 120 percent of the stated value, plus 8% per annum
dividend, in August 1998 upon the sale of the Company's vocational
schools (see Note 6).
In August 1998, the Company sold 1,650 shares of its convertible Series
E preferred stock for $1,000 a share realizing proceeds of $1,439,000.
The preferred stock pays dividends at the rate of 10% 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 at the rate of 75% of the average closing bid price of
the common stock over the five days preceding the notice of conversion.
CONVERSION OF NOTES PAYABLE
In August 1998, $595,000 of short-term notes payable, plus $104,113 of
accrued interest thereon, were converted into 1,195,472 shares of the
Company's common stock.
DISCONTINUED OPERATIONS
In August 1998, the Company sold its three vocational schools and
certain related businesses. Revenues for the vocational school
operations were $ 2,316,028 for the six months ended June 30, 1998 and
$ 2,459,429 for the comparable period in 1997.
Following is a calculation of the gain on the disposition of the
Company's vocational school operations:
<TABLE>
<CAPTION>
<S> <C> <C>
Proceeds from sale of schools:
Cash $1,778,333
Market value of redeemed NHTC Stock 96,197
-------------
$1,874,530
Less book value of school assets transferred:
Cash $(50,710)
Restricted Cash 256,577
Accounts Receivable 1,697,777
Inventories 398,953
Prepaid Expenses 110,757
Property Plant & Equipment 161,335
Deposits & Other Assets 112,491
-------
(2,687,180)
Add liabilities assumed by purchaser:
Accounts Payable $578,076
Accrued Expenses 374,852
Revolving Credit Line 227,953
Deferred Revenue 1,115,983
Other Current Liabilities 110,359
Long-Term Debt 152,026
-------
2,559,249
Less Goodwill written off (322,220)
----------
Gain from sale of schools $1,424,379
==========
5
</TABLE>
<PAGE>
In November 1998, the Company sold an office building located in
Pompano Beach, Florida that previously accommodated the Company's
corporate headquarters and one of its vocational schools. Following is
a calculation of the estimated loss on the disposition of the building:
Proceeds from sale of building $2,900,000
Less estimated closing costs (314,000)
Less net book value of assets transferred (3,261,000)
Less write off of deferred financing costs (154,000)
---------
Estimated Loss from sale of building ($829,000)
==========
The Company has realized the estimated loss on building sale during the
current quarter under Discontinued Operations. Also, the assets and
liabilities related to the building, including the long-term mortgage
debt obligation, have been reclassified as Net Assets Held for Disposal
of $248,951 and are included in Other Assets as of September 30, 1998.
6
<PAGE>
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 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, 1998 AND 1997
Prior to August 1997, the Company's operations consisted entirely of medical
clinics and vocational schools. Upon the acquisition of Global Health
Alternatives, Inc. (GHA) on July 23, 1997, the Company began to market and
distribute a line of natural, over-the-counter homeopathic pharmaceutical
products. The Company subsequently discontinued its medical clinic line of
business during the third quarter of 1997, and sold the schools in August 1998.
For most of the nine month period ended September 30, 1997, the Company's
current ongoing line of business (GHA natural products) was not in operation,
not having been acquired until July 1997. Accordingly, comparison of
year-to-date Revenues, Cost of Sales, and Selling, General & Administrative
Expenses between 1998 and 1997 is not meaningful. The discussion below includes
comparisons of operations for the quarter ended September 30, 1998 with the
three immediately preceding quarters - the only previous quarters which include
a full three months of GHA operations.
Revenues:
Total revenues for continued operations for the quarter ended September 30, 1998
were $168,650, as compared to quarterly revenues of $402,947, $429,884 and
$455,969 (excluding the $142,555 proceeds from a truck theft settlement) for the
three preceding quarters. The current quarter's decrease of 61 percent from the
prior three quarters' average is primarily attributable to a decrease in sales
of the Company's Natural Relief 1222 product to mass market and major drug chain
stores. Prior to the current quarter, sales of Natural Relief 1222 had been
comprised primarily of major account customers' opening fill orders, which
typically are significantly larger than reorders. Unlike in previous quarters,
there were no opening fill order sales of Natural Relief 1222 to major account
customers during the third quarter of 1998.
7
<PAGE>
Cost of Sales:
Cost of Sales for the quarter ended September 30, 1998 were $59,852 (35.5% of
revenues), as compared to $111,255 (27.6% of revenues), $112,099 (26.1% of
revenues) and $249,961 (41.8% of revenues) for the three preceding quarters. The
increase in Cost of Sales as a percentage of revenues that occurred in the most
recent quarter is attributable to a substantial decrease in sales of Natural
Relief 1222, which has a higher margin than the Company's other products, and
higher shipping costs as a percentage of revenues. Cost of Sales in the quarter
ended December 31, 1997 were significantly higher due to higher royalty costs
and year end inventory write-downs.
Selling, General and Administrative Expenses:
Selling, general and administrative expenses for the quarter ended September 30,
1998 were $772,862, as compared to $858,325 $839,125 and $1,826,870 for the
three preceding quarters. The decrease in the most recent quarter is due
primarily to reduced spending on advertising, selling and promotion, and to
lower overhead costs. The higher cost structure in place during the quarter
ended December 31, 1997 included operations in the United Kingdom and a retail
operation that were discontinued in December 1997 and January 1998,
respectively, as well as significantly higher advertising costs (by
approximately $525,000) and minimum royalty charges (of $139,661) that were
eliminated effective December 31, 1997.
Interest Expense:
Interest expense for the nine months ended September 30, 1998 was $336,314 as
compared to $715,542 for the comparable period in 1997. Excluding the
amortization of notes payable discount (related to the Company's convertible
debentures) which amounted to $433,333 in 1997, interest expense increased by 19
percent. The increase is due to the interest payable on GHA's pre-acquisition
notes, partially offset by a reduction in the parent company's interest expense,
resulting from the conversion of its convertible debentures in the fourth
quarter of 1997 and January 1998.
Discontinued Operations:
In October 1997, the Company closed its medical clinic located in Boca Raton,
Florida. In February 1998, the Company sold its remaining medical clinic in
Pompano Beach, Florida. All anticipated losses on these discontinued operations
were reflected in the fiscal year ended December 31, 1997. In August 1998, the
Company sold its three vocational schools and certain related businesses,
recognizing a gain of $1,424,379 from the sale. In November 1998, the Company
sold an office building which previously accommodated its corporate headquarters
and one of its schools, realizing an estimated loss of $829,000 which was
reflected in the quarter ended September 30, 1998.
Gain on Forgiveness of Debt:
During the three months ended September 30, 1998, the Company's subsidiary
Global Health Alternatives, Inc.(GHA) failed to make payments to three large
creditors pursuant to settlement agreements entered into earlier in the year.
Accordingly, the Company reduced its realized gain on the work-out of various
debt and payables of GHA by approximately $639,000 to approximately $870,000.
8
<PAGE>
Net Income (Loss):
For the nine months ended September 30, 1998, the net loss was $656,745, as
compared to a net loss of $5,667,116 for the corresponding period in 1997. The
decrease in net loss is primarly attributable to lower interest expense,
Discontinued Operations and the Extraordinary Gain.
Liquidity and Capital Resources
The Company has funded its working capital and capital expenditure requirements
from cash provided through borrowing from institutions and individuals, and from
the sale of the Company's securities in private placements. The Company's other
ongoing source of cash receipts has been from the sale of GHA's products.
In February 1998, the Company issued $300,000 face amount of Series B
convertible preferred stock, net of expenses of $38,500.
In April 1998, the Company issued $4,000,000 face amount of Series C convertible
preferred stock, net of expenses of $493,000. The preferred stock pays a
dividend of 10% per annum and is convertible into common stock at 75% of the
market value of the common stock, commencing 41 days after issuance. From the
proceeds raised, the Company paid $2,500,000 to retire $1,568,407 face value of
Series A preferred stock outstanding.
In July 1998, the Company issued $75,000 face amount of Series D convertible
preferred stock .
In August 1998, the Company issued $1,650,000 face amount of Series E
convertible preferred stock, net of expenses of $211,000. The preferred stock
pays dividends of 10% per annum and is convertible into common stock valued at
75% of the market value of the common stock.
In August 1998, the Company sold its three vocational schools and certain
related businesses for $1,778,333 and other consideration. From the school sale
proceeds, the Company paid $1,030,309 to retire the remaining $631,593 face
value of Series A preferred stock outstanding, and $91,291 to redeem all of the
Series D preferred stock outstanding. The remaining proceeds were used to pay
down notes payable.
At September 30, 1998 the ratio of current assets to current liabilities was .63
to 1.0. There was a working capital deficit of $1,154,284.
Cash used by operations for the nine months ended September 30, 1998 was
$1,668,292, attributable to the net loss of $656,745 and significant reductions
in accounts payable and accrued expenses. Capital expenditures used $51,997 of
cash.
The Company anticipates that further additional financing will be required to
finance the Company's continued operations during the next six months,
principally to fund the continued development and growth of GHA's product sales
and to finance any acquisitions. Management has revised its business plan of
marketing development and support for GHA's products, decreasing its emphasis on
mass market advertising. Instead, the Company plans to use its resources for
the development of other less capital-intensive distribution channels (e.g.,
multi-level marketing), possibly via acquisition. If the Company is successful
in completing an acquisition, of which there can be no assurance, management
expects that an additional $1.0 to $2.0 million in debt or equity financing will
need to be obtained. The Company is in the process
9
<PAGE>
of negotiating debt settlements with several of GHA's creditors. If the Company
is unable to reduce these debt obligations, an additional $0.5 to $1.0
million in financing will need to be obtained. There can be no assurance that
the Company will be able to secure such additional debt or equity financing. The
failure of the Company to obtain additional financing would have a material
adverse effect on the Company's business, prospects, financial condition and
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 13, 1998, Preferred Real Estate Investments, Ltd. commenced an action in
the Circuit Court of Florida, in and for Palm Beach County, for unpaid rent
against the Company and its wholly-owned subsidiary. The Company claims that
there was a settlement and that there are no additional amounts due to the
landlord.
Item 2. Changes in Securities and Use of Proceeds
In February 1998, the Company sold 300 shares of its convertible Series B
preferred stock for $1,000 a share realizing net proceeds of $261,500 pursuant
to Regulation S. As of September 30, 1998, all 300 shares of the Series B
preferred stock had been converted into a total of 541,330 shares of common
stock.
In April 1998, the Company sold 4,000 shares of its convertible Series C
preferred stock for $1,000 a share realizing net proceeds of $3,507,000 pursuant
to Regulation S. From the proceeds raised, the Company paid $2,500,000 to retire
$1,568,407 face value of Series A preferred stock outstanding. As of September
30, 1998, 1,320 shares of the Series C preferred stock had been converted into a
total of 1,418,912 shares of common stock. On October 1, 1998, an additional 975
shares of Series C preferred stock were converted into 832,182 shares of common
stock.
In July 1998, the Company sold 75 shares of series D preferred stock to two
investors in a private placement under section 4(2) and/or Regulation D of the
Securities Act of its convertible Series D preferred stock for $1,000 a share
realizing net proceeds of $75,000. The preferred stock was redeemed at 120
percent of the stated value, plus 8% per annum dividend, in August 1998 upon
the sale of the Company's vocational schools. The proceeds were used for
working capital.
In August 1998, $595,000 of short-term notes payable, plus $104,113 of accrued
interest thereon, were converted into 1,195,472 shares of common stock.
In August 1998, the Company sold 1,650 shares of its convertible Series E
preferred stock for $1,000 a share realizing net proceeds of $1,439,000 in a
private placement under section 4(2) and/or Regulation D of the Securities Act.
The preferred stock pays dividends at the rate of 10% 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 at the rate of
75% of the average closing bid price of the common stock over the five days
preceding the notice of conversion. The proceeds were utilized for working
capital.
10
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Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 24, 1998, the Company held an annual meeting of its stockholders. The
stockholders voted to approve and ratify the following:
The election of Sir Brian Wolfson, Neal R. Heller, Elizabeth S. Heller,
Martin C. Licht and Dirk D. Goldwasser to the Board of Directors.
The retention of Feldman Sherb Ehrlich & Co., P.C. as the Company's
independent auditors for the year ended December 31, 1998. The shares of
Common Stock were voted as follows: 1,154,400 voted for ratification; 5,736
voted against ratification; and 310 abstained.
The Company's 1998 Stock Option Plan. The shares of Common Stock were
voted as follows: 650,541 voted for approval; 16,856 voted against
approval; and 858 abstained.
The sale of the Company's three vocational schools and certain related
businesses to a Florida corporation controlled by Neal R. Heller and
Elizabeth S. Heller, both of whom are officers, directors and principal
stockholders of the Company, for a purchase price of approximately
$1,800,000. The shares of Common Stock were voted as follows: 658,666
voted for ratification; 9,327 voted against ratification; and 262
abstained.
An increase in the number of authorized shares of Common Stock
from 5,000,000 to 50,000,000 shares. The shares of Common Stock were
voted as follows: 649,407 voted for approval; 20,470 voted against
approval; and 835 abstained.
The conversion of 4,000 shares of Series C Preferred Stock issued in the
Company's April 1998 private placement into shares of Common Stock pursuant
to the terms of such preferred stock, to the extent that the number of
shares of Common Stock issued exceeds 20 percent of the total number of
Common shares then outstanding. The shares of Common Stock were voted as
follows: 651,099 voted for approval; 14,470 voted against approval; and
2,686 abstained.
The conversion of $595,000 of the Company's 12.5% promissory notes and the
interest thereon into the number of shares of Common Stock equal to the
principal and accrued interest thereon divided by 85% of the closing bid
price of the Common Stock for five consecutive trading days ending on May
15, 1998. The shares of Common Stock were voted as follows: 662,209 voted
for approval; 5,736 voted against approval; and 310 abstained.
11
<PAGE>
Item 5. Other Information
On August 4, 1998, the Company sold three vocational schools pursuant to the
agreement dated April 29, 1998 by and among Natural Health Trends Corp., Neal R.
Heller and Elizabeth S. Heller and Florida College of Natural Health, Inc. for a
purchase price of $1,783,333 plus 79,175 shares of Company common stock with a
market value of $96,197, together with the assumption of certain liabilities.
See Note 6 to Financial Statements.
In October 1998, the Company received notification from NASDAQ that the
Company's common stock will continue to be listed on the NASDAQ Small Cap
market, subject to the Company demonstrating continued compliance with the
NASDAQ listing requirements through February 1, 1999.
In November 1998, the Company sold an office building located in Pompano Beach,
Florida for a purchase price of $2.9 Million.
Item 6. Exhibits and Other Reports on Form 8-K
The Company filed a current report of form 8-K on September 8, 1998, disclosing
the signing of a letter of intent between the Company and Kaire International,
Inc., in which the Company has agreed to acquire all of the assets of Kaire for
a contemplated purchase price of $6,610,000. The closing of the acquisition is
subject to, among other conditions, the Kaire assets being in satisfactory
condition to Company management.
12
<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/Roger Guerin
Roger Guerin
Chief Financial Officer
Date: November 19, 1998
13
<PAGE>
<TABLE>
<CAPTION>
NATURAL HEALTH TRENDS CORP. EXHIBIT INDEX
<S> <C>
Number Description of Exhibit
2.1 Assets Purchase Agreement dated April 29, 1998 by and among Natural Health Trends
Corp., Neal R. Heller & Elizabeth S. Heller and Florida College of Natural Health, 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 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 Company.+
4.10 Articles of Amendment of Articles of Incorporation of the Company.***
4.11 Florida Statutes Sections 607.1301, 607.1302, 607.1320 Regarding Appraisal Rights. #
4.12 Articles of Amendment of Articles of Incorporation Series C Preferred Stock. ##
4.13 Articles of Amendment of Articles of Incorporation Series E Preferred Stock. ##
10.1 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp.,
Samantha Haimes and Leonard Haimes.++
10.10 Agreement among Natural Health Trends Corp. Health Wellness Nationwide Corp.,
Samantha Haimes and Leonard Haimes.
14
<PAGE>
Number Description of Exhibit
27.1 Financial Data Schedule.
* Previously filed with the Company's Registration Statement No. 33-991184.
** 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 August 7, 1997.
++ Previously filed with the Company's Form 10-KSB for the year ended December 31, 1996.
+++ Previously filed with the Company's Registration Statement No. 333-35935.
# Previously filed with the Company's Proxy Statement on Schedule 14A, dated May 14, 1998 .
## filed here with.
</TABLE>
15
EXHIBIT A
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
NATURAL HEALTH TRENDS CORP.
Pursuant to the provisions of section 607.1006, Florida Statutes,
Natural Health Trends Corp. (the "Corporation") adopts the following articles of
amendment to its articles of incorporation:
I. ARTICLE IV is hereby amended by adding the following as Part E.
PART E
Series C Preferred Stock
Four thousand (4,000) of the 1,500,000 authorized shares of
Preferred Stock of the Corporation shall be designated Series C Preferred Stock
(the "Series C Preferred Stock") and shall possess the rights and privileges set
forth below:
A. Par Value Stated Value, Purchase Price and
Certificates.
1. Each share of Series C Preferred Stock shall
have a par value of $.001, and a stated value (face amount) of One Thousand
Dollars ($1,000) (the "Stated Value").
2. The Series C Preferred Stock shall be
offered at a purchase price of One Thousand Dollars ($1,000) per share.
3. Certificates representing the shares of
Series C Preferred Stock purchased shall be issued by the Corporation to the
purchasers immediately upon acceptance of the subscriptions to purchase such
shares.
B. Dividends.
Holders of the shares of Series C Preferred Stock
shall be entitled to receive out of the assets of the Corporation legally
available therefor cash dividends at the rate of 10% of the Stated Value per
annum, payable upon the conversion of the shares of Common Stock. Such
dividend shall be payable in shares of Common Stock of the Corporation, at the
option of the Corporation. If such dividends are paid in shares of Common Stock,
then the number of shares of Common Stock to be issued on account of the accrued
dividends shall be equal to the amount of the dividend divided by the lower of
(i) the Closing Bid Price, as hereinafter defined, on the date of issuance
(the "Fixed Conversion Price") or (ii) 75% of the Closing Bid Price, for the
five (5) trading days preceding the Notice Date, as hereinafter defined.
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<PAGE>
C. Liquidation Preference.
1. In the event of any liquidation, dissolution or winding-up of the
Corporation, either voluntary or involuntary (a "Liquidation"), the Holders of
shares of the Series C Preferred Stock then issued and outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any payment shall be made to the Holders of shares of the Common Stock or
upon any other series of Preferred Stock of the Corporation junior to the Series
C Preferred Stock, an amount per share equal to the sum of (i) the Stated Value
and (ii) an amount equal to ten percent (10%) of the Stated Value multiplied by
the fraction N/365, where N equals the number of days elapsed since full payment
for the shares of Series C Preferred Stock. If, upon any Liquidation of the
Corporation, the assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the Holders of shares of the Series C
Preferred Stock and the Holders of any other series of Preferred Stock with a
liquidation preference equal to the liquidation preference of the Series C
Preferred Stock the full amounts to which they shall respectively be entitled,
the Holders of shares of the Series C Preferred Stock and the Holders of any
other series of Preferred Stock with a liquidation preference equal to the
liquidation preference of the Series C Preferred Stock shall receive all the
assets of the Corporation available for distribution and each such Holder of the
Series C Preferred Stock and the Holders of any other series of preferred stock
with a liquidation preference equal to the liquidation preference of the Series
C Preferred Stock shall share ratably in any distribution in accordance with the
amounts due such shareholders. After payment shall have been made to the Holders
of shares of the Series C Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the Holders of shares of the Series C Preferred Stock
shall be entitled to no further distributions thereon and the Holders of shares
of the Common Stock and of shares of any other series of stock of the
Corporation shall be entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available for
distribution to its shareholders.
2. A merger or consolidation of the Corporation with or into any
other corporation, or a sale, lease, exchange, or transfer of all or any part of
the assets of the Corporation which shall not in fact result in the liquidation
(in whole or in part) of the Corporation and the distribution of its assets to
its shareholders shall not be deemed to be a voluntary or involuntary
liquidation (in whole or in part), dissolution, or winding-up of the
Corporation.
D. Conversion of Series C Preferred Stock.
The Holders of Series C Preferred Stock shall have
the following conversion rights:
1. Right to Convert. Each share of Series C Preferred Stock shall be
convertible, on the Conversion Dates and at the Conversion Prices set forth
below, into fully paid and nonassessable shares of Common Stock (sometimes
referred to herein as "Conversion Shares").
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<PAGE>
2. Mechanics of Conversion. Commencing (i) sixty (60) days after the
issuance of the shares of Series C Preferred Stock in the case of the Regulation
D Offering as described in the Subscription Agreement between the Holder and the
Company or (ii) forty one (41) days after the date of the issuance of shares of
Series C Preferred Stock in the case of the Regulation S Offering described in
the Subscription Agreement between the Holder and the Company, each Holder of
Series C Preferred Stock who desires to convert the same into shares of Common
Stock shall provide notice (the "Conversion Notice") via telecopy (or an
original) to the Corporation. The certificate or certificates representing the
shares of Series C Preferred Stock for which conversion is elected, shall
accompany the Conversion Notice. The date upon which a Conversion Notice is
received by the Corporation shall be a "Notice Date."
The Corporation shall use all reasonable efforts to issue and deliver within
five (5) business days after the Notice Date, to such Holder of Series C
Preferred Stock at the address of the Holder on the stock books of the
Corporation, a certificate or certificates for the number of shares of Common
Stock to which the Holder shall be entitled as aforesaid.
3. Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence of the loss, destruction, theft or mutilation of any Series C Preferred
Stock certificates (the "Certificates") and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Series C Preferred
Stock Certificates of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost or stolen Series C Preferred Stock Certificates
if the Holder thereof contemporaneously requests the Corporation to convert such
Series C Preferred Stock into Common Stock, in which event the Corporation shall
be entitle to rely on an affidavit of loss, destruction or theft of the Series C
Preferred Stock Certificate or, in the case of mutilation, tender of the
mutilated certificate, and shall issue the Conversion Shares.
4. Conversion Period. The Series C Preferred Stock shall become
convertible into shares of Common Stock at any time commencing (i) sixty (60)
days after the issuance of the shares of Series C Preferred Stock in the case of
the Regulation D Offering as described in the Subscription Agreement between the
Holder and the Company or (ii) forty one (41) days after the date of the
issuance of shares of Series C Preferred Stock in the case of the Regulation S
Offering described in the Subscription Agreement between the Holder and the
Company.
5. Conversion Formula/Conversion Price. Each share of Series C
Preferred Stock shall be convertible into the number of Conversion Shares based
upon a conversion price (the "Conversion Price") equal to the lower of(i) the
Closing Bid Price of the Common Stock on the date of issuance of the shares of
Series C Preferred Stock or (ii) 75% of the average Closing Bid Price of the
Common Stock for the five (5) trading days immediately preceding the Notice
Date. For purposes hereof, the term "Closing Bid Price" shall mean the closing
bid price on the NASDAQ SmaIlCap Stock Market ("NASDAQ") as reported by
Bloomberg, LP, or if no longer traded thereon, the closing bid price on the
principal national securities exchange on which the Common Stock is so traded.
-3-
<PAGE>
(a) In the event that the Corporation shall at any time after the
date of issuance of the Series C Preferred Stock: (i) declare a dividend on the
outstanding Common Stock payable in shares of its capital stock; (ii) subdivide
the outstanding Common Stock; (iii) combine the outstanding Common Stock into a
smaller number of shares; or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Corporation is the
continuing corporation), then, in each case, the Fixed Conversion Price per
share in effect at the time of the record date for the determination of
stockholders entitled to receive such dividend or distribution or of the
effective date of such subdivision, combination, or reclassification shall be
adjusted so that it shall equal the price determined by multiplying such Fixed
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such action, and the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action. Such adjustment shall be made successively
whenever any event listed above shall occur and shall become effective at the
close of business on such record date or at the close of business on the date
immediately preceding such effective date, as applicable.
6. Automatic Conversion. Each share of Series C Preferred Stock
outstanding twenty four (24) months from the date of issuance automatically
shall be converted into Common Stock based upon the Conversion Price then in
effect, and such date shall be deemed to be the Notice Date with respect to such
conversion.
7. No Fractional Shares. If any conversion of the Series C Preferred
Stock would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion, if the aggregate,
shall be the next higher number of shares.
8. Limitation on the Issuance of shares of Common Stock. In no event
shall the Corporation be required to issue more than 7,676,085 shares of Common
Stock upon the conversion of the shares of Series C Preferred Stock unless the
stockholders of the Corporation approve the issuance of additional shares of
Common Stock upon the conversion of the shares of Series C Preferred Stock or
The NASDAQ Stock Market, Inc. ("NASDAQ") waives the requirements of Market Place
Rule 4460(i)(1)(D). In the event that 7,676,085 shares of Common Stock have been
issued upon the conversion of the Series C Preferred Stock, and (i) NASDAQ has
not waived the requirements of Market Place Rule 4460(i)(1)(D) or (ii) the
stockholders have not approved the issuance of additional shares of Common
Stock, then any shares of Series C Preferred Stock that remain unconverted
shall, at the election of the Holder, be redeemed by the Corporation at a
redemption price equal to 125% percent of the sum of (i) the face amount of the
shares of Series C Preferred Stock and (ii) an amount equal to any accrued and
unpaid dividends thereon, within five (5) business days of the Holder's
election. The Corporation agrees to take such corporate action as may be
necessary to obtain the approval of the stockholders to issue additional shares
of Common Stock upon the conversion of the shares of Series C Preferred Stock.
9. Conversion Defaults.
-4-
<PAGE>
(a) In the event that the Conversion Shares are not delivered per
the written instructions of the Holder, within five (5) business days after the
Notice Date, then in such event the Corporation shall pay to Holder one percent
(1%) of the Stated Value in cash or shares of Common Stock, based upon the
Conversion Price, at the option of the Purchaser, of the shares of Series C
Preferred Stock being converted per each day after the fifth business day
following the Notice Date that the certificates for the Conversion Shares are
not delivered.
(b) To the extent that the failure of the Corporation to issue the
Conversion Shares is due to the unavailability of authorized but unissued shares
of Common Stock, the provisions of this Section 9 shall not apply but instead
the provisions of Section 10 shall apply.
(c) The Corporation shall make any cash payments in
immediately available funds or issue such shares of Common Stock incurred under
this Section 9 within three (3) business days from the date of issuance of the
applicable shares of Common Stock. Nothing herein shall limit a Holder's right
to pursue actual damages or cancel the conversion for the Corporation's failure
to issue and deliver Common Stock to the Holder within ten (10) business days
after the Notice Date.
(d) If the original certificate(s) representing the Conversion
Shares have not been delivered to the Holder within ten (10) business days after
the Notice Date, the Conversion Notice shall become null and void at the option
of the Holder.
10. Lack of Authorized Shares. If, at any time a Holder submits a
Notice of Conversion and the Corporation does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion of
the shares of Series C Preferred Stock (a "Conversion Default"), the date of
such default being referred to herein as the "Conversion Default Date"), the
Corporation shall issue to the Holder all of the shares of Common Stock which
are available, and the Notice of Conversion as to any shares of Series C
Preferred Stock requested to be converted but not converted (the "Unconverted
Shares"), upon Holder's sole option. may be deemed null and void. The
Corporation shall provide notice of such Conversion Default ("Notice of
Conversion Default") to all existing Holders of outstanding shares of Series C
Preferred Stock, by facsimile, within one (1) business day of such default (with
the original delivered by overnight or two day courier), and the Holder shall
give notice to the Corporation by facsimile within five (5) business days of
receipt of the original Notice of Conversion Default (with the original
delivered by overnight or two day courier) of its election to either nullify or
confirm the Notice of Conversion.
The Corporation agrees to pay all Holders of outstanding shares of Series C
Preferred Stock payments for a Conversion Default ("Conversion Default
Payments") in the amount of (N/365) x (.24) x the initial Stated Value of the
outstanding and/or tendered but not converted shares of Series C Preferred Stock
held by each Holder where N = the number of days from the Conversion Default
Date to the date (the "Authorization Date") that the Corporation authorizes a
sufficient number of shares of Common Stock to effect conversion of all
remaining shares of Series C Preferred Stock by the fifth day of the following
calendar month. The
-5-
<PAGE>
Corporation shall send notice ("Authorization Notice") to each Holder of
outstanding shares of Series C Preferred Stock that additional shares of Common
Stock have been authorized, the Authorization Date and the amount of Holder's
accrued Conversion Default Payments. The accrued Conversion Default Payments
shall be paid in cash or shall be convertible into shares of Common Stock at the
Conversion Price, at the Holder's option, payable as follows: (i) in the event
Holder elects to take such payment in cash, cash payments shall be made to such
Holder or (ii) in the event that the Holder elects to take such payment in
Common Stock, the Holder may convert such payment amount into Common Stock at
the Conversion Price at anytime after the fifth day of the calendar month
following the month in which the Authorization Notice was received, until the
expiration of the twenty four month (24) conversion period.
Nothing herein shall limit the Holder's right to pursue actual
damages for the Corporation's failure to maintain a sufficient number of
authorized shares of Common Stock.
11. Limitation on Conversion. Except in the case of the provisions
contained in Section 6, in no event shall the Holder be entitled to convert any
shares of Series C Preferred Stock in excess of that number of shares of Series
C Preferred Stock upon conversion of which the sum of(l) the number of shares of
Common Stock beneficially owned by the Holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the shares of Series C Preferred Stock),
and (2) the number of shares of Common Stock issuable upon the conversion of the
shares of Series C Preferred Stock with respect to which the determination of
this provision is being made, would result in beneficial ownership by the Holder
and its affiliates of more than 4.9% of the outstanding shares of Common Stock
of the Corporation. For purposes of this provision, beneficial ownership shall
be determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (1) above.
12. Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series C Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding shares of Series C Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series C
Preferred Stock, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
E. Voting. Except as otherwise provided below or by the Florida Statutes,
the Holders of the Series C Preferred Stock shall have no voting power
whatsoever, and no Holder of Series C Preferred Stock shall vote or otherwise
participate in any proceeding in which action shall be taken by the Corporation
or the shareholders thereof or be entitled to notification as to any meeting of
the Board of Directors or the shareholders.
-6-
<PAGE>
F. Protective Provisions. So long as shares of Series C Preferred Stock
are outstanding, the Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by Jaw) of the Holders of at least
seventy-five percent (75%) of the then outstanding shares of Series C Preferred
Stock:
1. alter or change the rights, preferences or privileges of the Series C
Preferred Stock so as to affect adversely the Series C Preferred Stock;
2. do any act or thing not authorized or contemplated by this Article
IV which would result in taxation of the Holders of shares of the Series C
Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended); or
3. enter into a merger in which the Corporation is not the surviving
corporation; provided, however, that the provisions of this subparagraph (3)
shall not be applicable to any such merger if the authorized capital stock of
the surviving corporation immediately after such merger shall include only
classes or series of stock for which no such consent or vote would have been
required pursuant to this section if such class or series had been authorized by
the Corporation immediately prior to such merger or which have the same rights,
preferences and limitations and authorized amount as a class or series of stock
of the Corporation authorized (with such consent or vote of the Series C
Preferred Stock) prior to such merger and continuing as an authorized class or
series at the time thereof.
G. Status of Converted Stock. In the event any shares of
Series C Preferred Stock shall be converted as contemplated by this Article IV,
the shares so converted shall be canceled, shall return to the status of
authorized but unissued Preferred Stock of no designated class or series, and
shall not be issuable by the Corporation as Series C Preferred Stock.
H. Taxes. All shares of Common Stock issued upon conversion of
Series C Preferred Stock will be validly issued, fully paid and nonassessable.
The Corporation shall pay any and all documentary stamp or similar issue or
transfer taxes that may be payable in respect of any issue or delivery of shares
of Common Stock on conversion of Series C Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Series C Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such transfer has paid to the Corporation the
amount of any such tax or has established to the satisfaction of the Corporation
that such tax has been paid or that no such tax is payable. The Corporation
shall adjust the amount of dividends paid or accrued so as to indemnify the
Holders of Series C Preferred Stock against any withholding or similar tax in
respect of such dividends.
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<PAGE>
II. These Articles of Amendment of Articles of Incorporation were adopted
by the Board of Directors without shareholder action and shareholder action was
not required on April 1, 1998.
Signed on April 1,1998
NATURAL HEALTH TRENDS CORP.
By: /s/ Neal R. Heller
Name: Neal R. Heller
Title President
-8-
EXHIBIT A
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
NATURAL HEALTH TRENDS CORP.
Pursuant to the provisions of section 607.1006, Florida Statutes,
Natural Health Trends Corp. (the "Corporation") adopts the following articles of
amendment to its articles of incorporation:
I. ARTICLE IV is hereby amended by adding the following as Part G.
PART G
Series E Preferred Stock
One Thousand Seven Hundred Twenty (1,720) of the 1,500,000
authorized shares of Preferred Stock of the Corporation shall be designated
Series E Preferred Stock (the "Series E Preferred Stock") and shall possess the
rights and privileges set forth below:
A. Par Value Stated Value, Purchase Price and Certificates.
1. Each share of Series E Preferred Stock shall have a par value of
$.001, and a stated value (face amount) of One Thousand Dollars ($1,000) (the
"Stated Value").
2. The Series E Preferred Stock shall be offered at a purchase price of
One Thousand Dollars ($1,000) per share.
3. Certificates representing the shares of Series E Preferred Stock
purchased shall be issued by the Corporation to the purchasers immediately upon
acceptance of the subscriptions to purchase such shares.
B. Dividends.
Holders of the shares of Series E Preferred Stock shall be entitled to receive
out of the assets of the Corporation legally available therefor cash dividends
at the rate of 10% of the Stated Value per annum, payable upon the conversion of
the shares of Common Stock. Such dividend shall be payable in shares of Common
Stock of the Corporation, at the option of the Corporation. If such dividends
are paid in shares of Common Stock, then the number of shares of Common Stock to
be issued on account of the accrued dividends shall be equal to the amount of
the dividend divided by the lower of (i) the Closing Bid Price, as hereinafter
defined, on the date of issuance (the "Fixed Conversion Price") or (ii) 75% of
the Closing Bid Price, for the five (5) trading days preceding the Notice Date,
as hereinafter defined.
-1-
<PAGE>
C. Liquidation Preference.
1. In the event of any liquidation, dissolution or winding-up of the
Corporation, either voluntary or involuntary (a "Liquidation"), the Holders of
shares of the Series E Preferred Stock then issued and outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether from capital, surplus or earnings,
before any payment shall be made to the Holders of shares of the Common Stock or
upon any other series of Preferred Stock of the Corporation junior to the Series
E Preferred Stock, an amount per share equal to the sum of (i) the Stated Value
and (ii) an amount equal to ten percent (10%) of the Stated Value multiplied by
the fraction N/365, where N equals the number of days elapsed since full payment
for the shares of Series E Preferred Stock. If, upon any Liquidation of the
Corporation, the assets of the Corporation available for distribution to its
shareholders shall be insufficient to pay the Holders of shares of the Series E
Preferred Stock and the Holders of any other series of Preferred Stock with a
liquidation preference equal to the liquidation preference of the Series E
Preferred Stock the full amounts to which they shall respectively be entitled,
the Holders of shares of the Series E Preferred Stock and the Holders of any
other series of Preferred Stock with a liquidation preference equal to the
liquidation preference of the Series E Preferred Stock shall receive all the
assets of the Corporation available for distribution and each such Holder of the
Series E Preferred Stock and the Holders of any other series of preferred stock
with a liquidation preference equal to the liquidation preference of the Series
E Preferred Stock shall share ratably in any distribution in accordance with the
amounts due such shareholders. After payment shall have been made to the Holders
of shares of the Series E Preferred Stock of the full amount to which they shall
be entitled, as aforesaid, the Holders of shares of the Series E Preferred Stock
shall be entitled to no further distributions thereon and the Holders of shares
of the Common Stock and of shares of any other series of stock of the
Corporation shall be entitled to share, according to their respective rights and
preferences, in all remaining assets of the Corporation available for
distribution to its shareholders.
2. A merger or consolidation of the Corporation with or into any other
corporation, or a sale, lease, exchange, or transfer of all or any part of the
assets of the Corporation which shall not in fact result in the liquidation (in
whole or in part) of the Corporation and the distribution of its assets to its
shareholders shall not be deemed to be a voluntary or involuntary liquidation
(in whole or in part), dissolution, or winding-up of the Corporation.
D. Conversion of Series E Preferred Stock.
The Holders of Series E Preferred Stock shall have
the following conversion rights:
1. Right to Convert. Each share of Series E Preferred Stock shall be
convertible, on the Conversion Dates and at the Conversion Prices set forth
below, into fully paid and nonassessable shares of Common Stock (sometimes
referred to herein as "Conversion Shares").
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<PAGE>
2. Mechanics of Conversion. Commencing sixty (60) days after the
issuance of the shares of Series E Preferred Stock each Holder of Series E
Preferred Stock who desires to convert the same into shares of Common Stock
shall provide notice (the "Conversion Notice") via telecopy (or an original) to
the Corporation. The certificate or certificates representing the shares of
Series E Preferred Stock for which conversion is elected, shall accompany the
Conversion Notice. The date upon which a Conversion Notice is received by the
Corporation shall be a "Notice Date."
The Corporation shall use all reasonable efforts to issue and deliver within
five (5) business days after the Notice Date, to such Holder of Series E
Preferred Stock at the address of the Holder on the stock books of the
Corporation, a certificate or certificates for the number of shares of Common
Stock to which the Holder shall be entitled as aforesaid.
3. Lost or Stolen Certificates. Upon receipt by the Corporation of
evidence of the loss, destruction, theft or mutilation of any Series E Preferred
Stock certificates (the "Certificates") and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Certificates, if
mutilated, the Corporation shall execute and deliver new Series E Preferred
Stock Certificates of like tenor and date. However, the Corporation shall not be
obligated to re-issue such lost or stolen Series E Preferred Stock Certificates
if the Holder thereof contemporaneously requests the Corporation to convert such
Series E Preferred Stock into Common Stock, in which event the Corporation shall
be entitle to rely on an affidavit of loss, destruction or theft of the Series E
Preferred Stock Certificate or, in the case of mutilation, tender of the
mutilated certificate, and shall issue the Conversion Shares.
4. Conversion Period. The Series E Preferred Stock shall become
convertible into shares of Common Stock at any time commencing sixty (60) days
after the issuance of the shares of Series E Preferred Stock.
5. Conversion Formula/Conversion Price. Each share of Series E
Preferred Stock shall be convertible into the number of Conversion Shares based
upon a conversion price (the "Conversion Price") equal to the lower of (i) the
Closing Bid Price of the Common Stock on the date of issuance of the shares of
Series E Preferred Stock or (ii) 75% of the average Closing Bid Price of the
Common Stock for the five (5) trading days immediately preceding the Notice
Date. For purposes hereof, the term "Closing Bid Price" shall mean the closing
bid price on the NASDAQ SmaIlCap Stock Market ("NASDAQ") as reported by
Bloomberg, LP, or if no longer traded thereon, the closing bid price on the
principal national securities exchange on which the Common Stock is so traded.
(a) In the event that the Corporation shall at any time after the
date of issuance of the Series E Preferred Stock: (i) declare a dividend on the
outstanding Common Stock payable in shares of its capital stock; (ii) subdivide
the outstanding Common Stock; (iii) combine the outstanding Common Stock into a
smaller number of shares; or (iv) issue any shares of its capital stock by
reclassification of the Common Stock (including any such reclassification in
connection with a consolidation or merger in which the Corporation is the
-3-
<PAGE>
continuing corporation), then, in each case, the Fixed Conversion Price per
share in effect at the time of the record date for the determination of
stockholders entitled to receive such dividend or distribution or of the
effective date of such subdivision, combination, or reclassification shall be
adjusted so that it shall equal the price determined by multiplying such Fixed
Conversion Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such action, and the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action. Such adjustment shall be made successively
whenever any event listed above shall occur and shall become effective at the
close of business on such record date or at the close of business on the date
immediately preceding such effective date, as applicable.
6. Automatic Conversion. Each share of Series E Preferred Stock
outstanding twenty four (24) months from the date of issuance automatically
shall be converted into Common Stock based upon the Conversion Price then in
effect, and such date shall be deemed to be the Notice Date with respect to such
conversion.
7. No Fractional Shares. If any conversion of the Series E Preferred
Stock would create a fractional share of Common Stock or a right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon conversion, if the aggregate,
shall be the next higher number of shares.
8. Limitation on the Issuance of shares of Common Stock. In no event
shall the Corporation be required to issue more than 20% of the number of shares
of Common Stock outstanding on the date of issuance of the Series E Preferred
Stock upon the conversion of the shares of Series E Preferred Stock unless the
stockholders of the Corporation approve the issuance of additional shares of
Common Stock upon the conversion of the shares of Series E Preferred Stock or
The NASDAQ Stock Market, Inc. ("NASDAQ") waives the requirements of Market Place
Rule 4460(i)(1)(D). In the event that 20% of the number of shares of Common
Stock outstanding on the date of issuance of the Series E Preferred Stock have
been issued upon the conversion of the Series E Preferred Stock, and (i) NASDAQ
has not waived the requirements of Market Place Rule 4460(i)(1)(D) or (ii) the
stockholders have not approved the issuance of additional shares of Common
Stock, then any shares of Series E Preferred Stock that remain unconverted
shall, at the election of the Holder, be redeemed by the Corporation at a
redemption price equal to 133% percent of the sum of (i) the face amount of the
shares of Series E Preferred Stock and (ii) an amount equal to any accrued and
unpaid dividends thereon, within five (5) business days of the Holder's
election. The Corporation agrees to take such corporate action as may be
necessary to obtain the approval of the stockholders to issue additional shares
of Common Stock upon the conversion of the shares of Series E Preferred Stock.
9. Conversion Defaults.
(a) In the event that the Conversion Shares are not delivered per
the written instructions of the Holder, within five (5) business days after the
Notice Date, then in such event the Corporation shall pay to Holder one percent
(1%) of the Stated Value in cash or shares of Common Stock, based upon the
Conversion Price, at the option of the Purchaser, of the
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<PAGE>
shares of Series E Preferred Stock being converted per each day after the fifth
business day following the Notice Date that the certificates for the Conversion
Shares are not delivered.
(b) To the extent that the failure of the Corporation to issue the
Conversion Shares is due to the unavailability of authorized but unissued shares
of Common Stock, the provisions of this Section 9 shall not apply but instead
the provisions of Section 10 shall apply.
(c) The Corporation shall make any cash payments in
immediately available funds or issue such shares of Common Stock incurred under
this Section 9 within three (3) business days from the date of issuance of the
applicable shares of Common Stock. Nothing herein shall limit a Holder's right
to pursue actual damages or cancel the conversion for the Corporation's failure
to issue and deliver Common Stock to the Holder within ten (10) business days
after the Notice Date.
(d) If the original certificate(s) representing the Conversion
Shares have not been delivered to the Holder within ten (10) business days after
the Notice Date, the Conversion Notice shall become null and void at the option
of the Holder.
10. Lack of Authorized Shares. If, at any time a Holder submits a
Notice of Conversion and the Corporation does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion of
the shares of Series E Preferred Stock (a "Conversion Default"), the date of
such default being referred to herein as the "Conversion Default Date"), the
Corporation shall issue to the Holder all of the shares of Common Stock which
are available, and the Notice of Conversion as to any shares of Series E
Preferred Stock requested to be converted but not converted (the "Unconverted
Shares"), upon Holder's sole option. may be deemed null and void. The
Corporation shall provide notice of such Conversion Default ("Notice of
Conversion Default") to all existing Holders of outstanding shares of Series E
Preferred Stock, by facsimile, within one (1) business day of such default (with
the original delivered by overnight or two day courier), and the Holder shall
give notice to the Corporation by facsimile within five (5) business days of
receipt of the original Notice of Conversion Default (with the original
delivered by overnight or two day courier) of its election to either nullify or
confirm the Notice of Conversion.
The Corporation agrees to pay all Holders of outstanding shares of Series E
Preferred Stock payments for a Conversion Default ("Conversion Default
Payments") in the amount of (N/365) x (.24) x the initial Stated Value of the
outstanding and/or tendered but not converted shares of Series E Preferred Stock
held by each Holder where N = the number of days from the Conversion Default
Date to the date (the "Authorization Date") that the Corporation authorizes a
sufficient number of shares of Common Stock to effect conversion of all
remaining shares of Series E Preferred Stock by the fifth day of the following
calendar month. The Corporation shall send notice ("Authorization Notice") to
each Holder of outstanding shares of Series E Preferred Stock that additional
shares of Common Stock have been authorized, the Authorization Date and the
amount of Holder's accrued Conversion Default Payments. The accrued Conversion
Default Payments shall be paid in cash or shall be convertible into shares of
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<PAGE>
Common Stock at the Conversion Price, at the Holder's option, payable as
follows: (i) in the event Holder elects to take such payment in cash, cash
payments shall be made to such Holder or (ii) in the event that the Holder
elects to take such payment in Common Stock, the Holder may convert such payment
amount into Common Stock at the Conversion Price at anytime after the fifth day
of the calendar month following the month in which the Authorization Notice was
received, until the expiration of the twenty four month (24) conversion period.
Nothing herein shall limit the Holder's right to pursue actual
damages for the Corporation's failure to maintain a sufficient number of
authorized shares of Common Stock.
11. Limitation on Conversion. Except in the case of the provisions
contained in Section 6, in no event shall the Holder be entitled to convert any
shares of Series E Preferred Stock in excess of that number of shares of Series
E Preferred Stock upon conversion of which the sum of(l) the number of shares of
Common Stock beneficially owned by the Holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the shares of Series E Preferred Stock),
and (2) the number of shares of Common Stock issuable upon the conversion of the
shares of Series E Preferred Stock with respect to which the determination of
this provision is being made, would result in beneficial ownership by the Holder
and its affiliates of more than 4.9% of the outstanding shares of Common Stock
of the Corporation. For purposes of this provision, beneficial ownership shall
be determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13 D-G thereunder, except as otherwise provided
in clause (1) above.
12. Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series E Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
then outstanding shares of Series E Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series E
Preferred Stock, the Corporation will take such corporate action as may be
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
E. Voting. Except as otherwise provided below or by the Florida Statutes,
the Holders of the Series E Preferred Stock shall have no voting power
whatsoever, and no Holder of Series E Preferred Stock shall vote or otherwise
participate in any proceeding in which action shall be taken by the Corporation
or the shareholders thereof or be entitled to notification as to any meeting of
the Board of Directors or the shareholders.
F. Protective Provisions. So long as shares of Series E Preferred Stock
are outstanding, the Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by Jaw) of the Holders of at least
seventy-five percent (75%) of the then outstanding shares of Series E Preferred
Stock:
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<PAGE>
1. alter or change the rights, preferences or privileges of the Series E
Preferred Stock so as to affect adversely the Series E Preferred Stock;
2. do any act or thing not authorized or contemplated by this Article
IV which would result in taxation of the Holders of shares of the Series E
Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as
amended (or any comparable provision of the Internal Revenue Code as hereafter
from time to time amended); or
3. enter into a merger in which the Corporation is not the surviving
corporation; provided, however, that the provisions of this subparagraph (3)
shall not be applicable to any such merger if the authorized capital stock of
the surviving corporation immediately after such merger shall include only
classes or series of stock for which no such consent or vote would have been
required pursuant to this section if such class or series had been authorized by
the Corporation immediately prior to such merger or which have the same rights,
preferences and limitations and authorized amount as a class or series of stock
of the Corporation authorized (with such consent or vote of the Series E
Preferred Stock) prior to such merger and continuing as an authorized class or
series at the time thereof.
G. Status of Converted Stock. In the event any shares of
Series E Preferred Stock shall be converted as contemplated by this Article IV,
the shares so converted shall be canceled, shall return to the status of
authorized but unissued Preferred Stock of no designated class or series, and
shall not be issuable by the Corporation as Series E Preferred Stock.
H. Taxes. All shares of Common Stock issued upon conversion of
Series E Preferred Stock will be validly issued, fully paid and nonassessable.
The Corporation shall pay any and all documentary stamp or similar issue or
transfer taxes that may be payable in respect of any issue or delivery of shares
of Common Stock on conversion of Series E Preferred Stock pursuant hereto. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the Series E Preferred Stock so
converted were registered, and no such issue or delivery shall be made unless
and until the person requesting such transfer has paid to the Corporation the
amount of any such tax or has established to the satisfaction of the Corporation
that such tax has been paid or that no such tax is payable. The Corporation
shall adjust the amount of dividends paid or accrued so as to indemnify the
Holders of Series E Preferred Stock against any withholding or similar tax in
respect of such dividends.
-7-
<PAGE>
II. These Articles of Amendment of Articles of Incorporation were adopted
by the Board of Directors without shareholder action and shareholder action was
not required on August __, 1998.
Signed on August ___, 1998
NATURAL HEALTH TRENDS CORP.
By: Sir Brian Wolfson
Name: Sir Brian Wolfson
Title: Chairman
-8-
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