UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996 Commission File No. 0-23016
HEALTHRITE INC.
(Exact name of small business issues in its charter)
Delaware 13-3714405
(State of Incorporation) (I.R.S. Employer I.D. No.)
11445 Cronhill Drive, Owings Mills, MD 21117
(Address of principal executive offices & zip code)
(410) 581-8042
Registrant's telephone number, include area code
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 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
-- --
Number of shares outstanding of Registrant's Common stock, as of August 9, 1996:
4,276,472 shares
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HEALTHRITE INC.
INDEX
Part I
Financial Information:
Condensed Consolidated Balance Sheets -
June 30, 1996 (unaudited) and December 31, 1995 . . . . . . . . . . 3
Condensed Consolidated Statement of Operations -
Three Months and Six Months Ended
June 30, 1995 and 1996 (Unaudited) . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995 and 1996 (Unaudited) . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . .. . . . . . . 6
Management's Discussion and Analysis . . . . . . . . . . . . . . . 7
Part II
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 11
Signature Page . . . . . . . . . . . . . . . . . .. . . . . . . 12
<PAGE>
HEALTHRITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 1996 Dec. 31, 1995
------------- -------------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 327,000 $ 348,000
Accounts receivable (net) 1,319,000 932,000
Merchandise inventory 2,794,000 3,064,000
Prepaid expenses and other current assets 255,000 238,000
Deferred tax asset 330,000 242,000
----------- -----------
Total Current Assets 5,025,000 4,824,000
Property and equipment 3,773,000 3,909,000
Customer lists - net 121,000 129,000
Excess of purchase price over net assets acquired 587,000 522,000
Other assets 422,000 188,000
----------- -----------
TOTAL ASSETS $9,928,000 $9,572,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 364,000 $ 399,000
Accounts payable and accrued expenses 2,169,000 1,825,000
----------- -----------
Total current liabilities 2,533,000 2,224,000
Long-term obligations and capital leases 2,149,000 2,261,000
Deferred income taxes payable 62,000 46,000
----------- -----------
Total Liabilities $4,744,000 $4,531,000
Stockholders' Equity
Preferred stock; par value $.001 per share
2,000,000 authorized; none issued
Common stock; par value $.001 per share
10,000,000 authorized; 4,276,472
issued at June 30, 1996 and 4,176,472
issued at December 31, 1995 4,000 4,000
Additional paid-in capital 6,894,000 6,694,000
Accumulated deficit (1,714,000) (1,657,000)
----------- -----------
Total Stockholders' Equity 5,184,000 5,041,000
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 9,928,000 $9,572,000
=========== ===========
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<TABLE>
<CAPTION>
HEALTHRITE INC.
CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 4,481,000 $4,150,000 $8,305,000 $8,237,000
Cost of sales, including cost of warehousing
distribution and occupancy 2,576,000 2,211,000 4,711,000 4,434,000
------------ ------------ ----------- -----------
Gross Profit 1,905,000 1,939,000 3,594,000 3,803,000
Selling, general and administrative
expenses 1,628,000 1,751,000 3,234,000 3,436,000
Cost of Consolidation Plan -- -- 388,000 --
------------ ------------ ----------- -----------
Income/(loss) from operations 277,000 188,000 (28,000) 367,000
Other income (expense):
Interest (net) (58,000) 10,000 (118,000) (23,000)
Other income/(expense) 32,000 (21,000) 32,000 48,000
----------- ------------ ----------- ----------
Income (loss) before provision
for income taxes 251,000 177,000 (114,000) 392,000
Provision (Benefit) for income taxes 83,000 20,000 (57,000) 35,000
------------ ------------ ----------- -----------
Net income (loss) $ 168,000 $ 157,000 ($ 57,000) $ 357,000
=========== ========== ========= ===========
Net Income (loss) per share $ 0.04 $ 0.04 ($ 0.01) $ 0.09
=========== ========== ========= ===========
Weighted average shares outstanding 4,276,472 4,176,472 4,229,805 4,176,472
============ ========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
HEALTHRITE INC.
CONDENSED CONSOLIDATED STATEMENT
OF CASH FLOWS
FOR THE SIX MONTHS ENDED
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (loss) $( 57,000) $ 357,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 321,000 262,000
Non-cash compensation 100,000 34,000
Deferred tax asset (88,000) 5,000
Gain on asset sale (26,000) --
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable (387,000) 74,000
(Increase)/decrease in inventory 270,000 (76,000)
(Increase)/decrease in prepaid expenses and other current assets (17,000) 77,000
Increase/(decrease) in accounts payable, accrued expenses and deferred income
taxes payable 361,000 (259,000)
------------- -------------
Net cash provided by operating activities 477,000 474,000
------------- -------------
Cash Flows from (used in) Investing Activities:
Proceeds from sale of equipment 55,000 --
Purchase of equipment (190,000) (388,000)
Purchase of subsidiary (90,000) (1,823,000)
Decrease in other assets (225,000) (123,000)
------------- -------------
Total Cash Flows from (used in) Investing Activities (450,000) (2,334,000)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from debt 51,000 1,260,000
Payment of debt (199,000) (1,106,000)
Proceeds from sale of common stock 100,000 337,000
------------- -------------
Net cash provided by (used in) financing activities (48,000) 491,000
------------- -------------
NET (DECREASE) IN CASH (21,000) (1,369,000)
Cash and cash equivalents at beginning of period 348,000 1,976,000
------------- -------------
Cash and cash equivalents at end of period $ 327,000 $ 607,000
============= =============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest 118,000 8,000
Income Taxes 20,000 --
------------- -------------
Total $ 138,000 $ 8,000
============= =============
</TABLE>
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HEALTHRITE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
-------
In July 17, 1995, the Certificate of Incorporation was amended to
change the name of the corporation from Vitamin Specialties Corp. to
HealthRite, Inc. (the "Company").
The information contained herein with respect to the three and six
month periods ended June 30, 1996 and 1995, has not been audited but
was prepared in conformity with the accounting principles and policies
described in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995. Included are all adjustments which, in the
opinion of management,are necessary for a fair presentation of the
financial information for the three and six month periods ended June
30, 1996 and 1995. The results of interim periods are not necessarily
indicative of results to be expected for the year.
2. Bank Loans
----------
The Company and a subsidiary, Jason Pharmaceuticals. Inc. entered into
loan agreements on May 17, 1995 totaling $2,000,000, of which
$1,800,000 is a working capital loan and $200,000 is a term loan. Loan
advances which are included in long-term debt available from the
working capital loan are based on percentages of accounts receivable
and inventory; as of June 30, 1996, $1,062,000 was available, of which
$33,000 was unused.
In April 1996, another subsidiary of the Company borrowed $250,000
pursuant to another working capital loan agreement from a bank, which
loan is guaranteed by the Company.
-6-
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HEALTHRITE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
In March 1996, the Company instituted a Consolidation Plan. The Plan provided
for the employment of Mr. Bradley T. MacDonald as President and Chief Operating
Officer and the consolidation of management and administrative functions of the
Company's three units: the Vitamin Specialties Division, which conducts
retailing and direct mail activities, and the Company's wholly-owned
subsidiaries, Montana Naturals Int'l Inc. and Jason Pharmaceuticals, Inc. which
conduct brand manufacturing, contract manufacturing and distribution activities.
The cost of the Consolidation Plan aggregated $388,000, comprising $100,000 in
employee compensation, being the excess of market value over the sales price of
100,000 shares acquired from the Company by the President of the Company in
March 1996, $265,000 in compensation and severance costs paid to employees not
retained by the Company, and $23,000 in recruiting and relocation expenses.
Three Months Ended June 30, 1996 and June 30, 1995
- --------------------------------------------------
Revenues increased $331,000 or 8% over the period. The increase was
attributable primarily to expanded contract manufacturing revenues from one
customer, and additional brand product revenues, while revenues generated from
the retail operations remained relatively stable.
Cost of sales, including warehousing, distribution, and occupancy increased by
$365,000 or 17%, and increased as a percentage of revenues by 4% from 53% in
1995 to 57% in 1996. The principal factor contributing to the increase was
reduced gross profit margins on contract manufacturing sales.
Selling, general and administrative expenses decreased by $123,000 or 8%
principally as a result of a reduction in personnel costs associated with the
Consolidation Plan. As a percentage of revenues, these expenses decreased by 6%
from 42% in 1995 to 36% in 1996.
For the three months ended June 30, 1996, the Company's brand and contract
manufacturing and distribution operations generated income from operations of
$435,000, compared with a loss from retail and direct mail operations of
$158,000.
-7-
<PAGE>
HEALTHRITE, INC.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Interest expense was $58,000 in 1996 as compared with $10,000 (credit) in 1995
as a result of an increase in borrowings.
Other income was $32,000 in 1995, consisting primarily of the gain on sale of
fixed assets.
The provision for income taxes increased from 11% in 1995 to 33% in 1996. The
principal factor contributing to the increase was the benefit of a net
operating loss carryforward in 1995.
Six Months ended June 30, 1996 and June 30, 1995
- ------------------------------------------------
Revenues increased $68,000 or 1% over the period. The increase was attributable
primarily to an increase in contract manufacturing revenues offset by a
reduction in brand product revenues.
Cost of sales, including warehousing, distribution, and occupancy increased by
$277,000 or 6%, and as a percentage of revenues, increased by 3% from 54% in
1995 to 57% in 1995. The principal factors contributing to the increase were
expanded revenues and reduced gross margins on contract manufacturing revenues.
Selling, general and administrative expenses decreased by $202,000 or 6%
principally as a result of a reimbursement during the first quarter of
insurance premiums arising from a reclassification of business decription and a
reduction in personnel costs.
For the six months ended June 30, 1996, excluding the $388,000 cost of the
Consolidation Plan, the Company's brand and contract manufacturing and
distribution operations generated income from operations of $673,000 compared
with a loss from retail and direct mail operations of $313,000.
Interest expense was $118,000 in 1996 as compared with $23,000 in 1995, an
increase of $95,000 or 413%, as a result of an increase in borrowings.
Other income was $48,000 in 1995, consisting primarily of the negotiated
reduction of an outstanding obligation and $33,000 in 1996, being a gain on the
sale of fixed assets.
The $35,000 provision for income tax in 1995, reflects the benefit of net
operating loss carry forwards.
-8-
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Seasonality
- -----------
The Company believes that its business is not subject to significant
seasonality.
Liquidity and Capital Resources
- -------------------------------
The Company had working capital of $2,559,000 on June 30, 1996 compared with
$2,600,000 at December 31, 1995.
The Company and Jason entered into agreements on May 17, 1995 providing for
loans totaling $2,000,000, of which $1,800,000 is a working capital loan and
$200,000 is a term loan. Loan advances available from the working capital loan
are based on percentages of accounts receivable and inventory; as of June 30,
1996, $1,062,000 was available, of which $33,000 was unused.
In April 1996, the Company obtained a $250,000 line of credit from one of its
existing lenders to fund working capital needs, all of which has been utilized..
The Company intends to complete a private placement in August 1996 of shares of
its newly created Series A Preferred Stock with the proceeds to be applied to
the development and marketing of a range of products under the brand name
"Nautilus," the rights to which name it acquired pursuant to a long term
license agreement and for working capital.
The Company believes that its working capital and anticipated cash flow from
operations, together with funds available pursuant to the above mentioned loan
agreements and equity financing, will be sufficient to meet the Company's
anticipated working capital requirements for at least twelve months from June
30, 1996.
Inflation
- ---------
To date, inflation has not had a material effect on the Company's business.
-9-
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
In August 1996 the Board of Directors of the Company authorized a
Preferred Stock Series A, par value $.001 per share ("Series A") consisting of
450,000 shares. The terms of the Series A provides that the shares will have a
liquidation preference over shares of Common Stock and shares of Preferred Stock
ranking junior to the Series A of $2.00 per share (the "Liquidation Value") and
will be entitled to dividends prior to any dividends payable to holders of
Common Stock or shares of Preferred Stock ranking junior to the Series A at the
rate of 8% per annum of the Liquidation Value payable annually, with the Company
to be obligated to redeem the shares on a date five years from the date of sale
at their Liquidation Value plus accrued but unpaid dividends. The Series A
shares are to be convertible at the option of the holder into shares of Common
Stock at the rate of one share of Common Stock for each Series A share, subject
to adjustment for stock dividends, stock splits and stock combinations. The rate
is also to be adjusted if at the time of the first registration under the
Securities Act of 1933 of an offering of Series A shares or shares of Common
Stock issued upon conversion, the "Market Price" of the Common Stock as defined
is less than $2.00 per share, in which event shares issuable upon conversion
will be increased to the quotient obtained by dividing $2.00 by the "Market
Price." "Market Price" is defined as the average of the closing sales prices on
the largest trading market on which the Series A shares is then traded for the
20 day period immediately preceding the effectiveness of the registration
statement registering the offering.
The Series A shares are to be non-voting except holders will be
entitled to elect a director to the Board of Directors during the period the
Company is delinquent by at least 90 days in the payment of an annual dividend
installment. The terms of the Series A also require the approval of the majority
of the outstanding shares of the Series to (i) adopt an amendment to the
Certificate of Incorporation which would materially adversely affect the rights
and privileges of the holders of the Series A shares; (ii) authorize a series of
Preferred Stock which ranks senior or in parity with respect to the dividend or
liquidation preference of the Series A; (iii) approve a sale of substantially
all the assets of the Company in a transaction which requires under Delaware
law a vote of the stockholders of the Company and (iv) authorize a merger or
consolidation or the Company other than with a wholly-owned subsidiary.
The Company is about to complete a private placement at a price of
$2.00 per share to accredited investors of up to 450,000 shares with at least
350,000 shares having been sold as of August 13, 1996. The net proceeds after
deducting applicable expenses are to be applied to the development and marketing
of a range of products under the brand name Nautilus, the rights to which name
were obtained by the Company pursuant to a long term license agreement effected
in March 1996, and for working capital. The related stock purchase agreements
with the investors grant them the right to have the Company include, at the
Company's expense, for purposes of registering an offering under the Securities
Act of 1933 of the Series A shares or shares of Common Stock received upon
conversion in a Company registration statement registering securities for the
10
<PAGE>
Company's account or the accounts of other securityholders; such
right to be limited to no more than two occasions.
The Company has agreed in connection with the private placement and
pursuant to its obligations under its Management Consulting Agreement with
Founders Management Services, Inc. ("Founders") to issue to Founders five year
warrants to purchase 30,000 of the Company's Common Stock at a price of $2.50
per share in consideration for its services in negotiating the terms of and
supervising the financing on behalf of the Company. Founders is affiliated with
Messrs. Warren H. Haber, Chairman of the Board and John L. Teeger, Vice
Chairman, Secretary and a Director of the Company. Similar Warrants to purchase
up to 26,200 shares may also be issued to H.C. Wainwright & Co., Inc. in
consideration for its services as a placement agent.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.(i)(a) - Certificate Setting Forth Resolutions of the Board
of Directors with respect to terms of the Preferred Stock Series A.
(b) Reports on Form 8-K
No Current Reports on Form 8-K filed by the Company during the
three months ended June 30, 1996.
11
<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.
HEALTHRITE INC.
---------------
(Registrant)
s/Bradley T. MacDonald
----------------------
Bradley T. MacDonald
President
s/John L. Teeger
-----------------------
John L. Teeger
Vice Chairman,
Chief Financial Officer
Dated: August 13, 1996
-12-
EXHIBIT 3.(i)(a)
CERTIFICATE SETTING FORTH RESOLUTIONS
OF THE BOARD OF DIRECTORS
OF
HEALTHRITE, INC.
PURSUANT TO SECTION 151
OF
THE GENERAL CORPORATION LAW
OF
THE STATE OF DELAWARE
We, the undersigned, Warren H. Haber and John L. Teeger, Chairman
of the Board of Directors and Secretary, respectively, of HealthRite, Inc., a
Delaware corporation, the Certificate of Incorporation of which was filed in
the office of the Secretary of State of Delaware and recorded in the office of
the Recorder of Kent County, Delaware, on May 5, 1989, and amendments and
charges of which Certificate of Incorporation including a change of its name
from Vitamins Specialties Corporation to HealthRite, Inc. were subsequently
duly filed and recorded, DO HEREBY CERTIFY: That by a written consent of at
least a majority of the Directors of the Corporation the following resolutions
were duly adopted:
The designation, preferences and the relative, participating,
optional and other special rights and qualifications, limitations and
restrictions of the Preferred Stock Series A are as follows:
1. Number and Designation. The number of shares to constitute the total
authorized amount of the first series of Preferred Stock, par value $.001 per
share of the Corporation shall be 450,000 shares and the designation of such
shares shall be "Series A Preferred Stock." All shares of the Preferred Stock
Series A shall be identical with each other in all respects.
2. Dividend Rights. The holders of shares of the Preferred Stock Series
A shall be entitled to receive, prior to any payment to be made to the holders
of shares of Common Stock or any other series or class of shares of capital
stock which rank junior to the shares of Series A Preferred Stock, dividends
out of any funds of the Corporation legally available therefor in an amount
equal to eight percent (8%) per annum of the Liquidation Value as defined in
Section 4 per share of Series A Preferred Stock payable in cash in annual
installments on July 31 of each year, with the first installment due on July
31, 1997 (the "Payment Date") to holders of record on the immediate previous
July 15. Such dividends shall accrue from the date of receipt of payment for
such shares and shall accrue from day to day, whether or not earned or
declared. The dividend rights of the holders of the Series A Preferred Stock
shall be cumulative, so that if in any year or years dividends upon the
outstanding Series A Preferred Stock at the rate of eight percent (8%) per
annum of the Liquidation Value thereof shall not have been paid thereon or
declared and set apart for payment, the amount of the deficiency shall be
fully paid and set aside for payment, but without interest, before any
distribution whether by way of dividend or otherwise
<PAGE>
shall be declared or paid upon, or set apart, for shares of Common Stock or
other classes or series of Preferred Stock.
3. Voting Rights.
(a) Except as provided under Section 3(b) and Section 3(c) and
the applicable provisions of the Delaware General Corporation Law, the holders
of shares of the Preferred Stock Series A shall not be entitled to any voting
rights.
(b) In the event the Company has failed to pay for any reason any
dividend installment within ninety (90) days after a Payment Date, the holders
of shares of Series A Preferred Stock shall be entitled so long as such
payment has not been made to the holders to elect a Director by a vote as a
class with the holders of the Series A Preferred Stock entitled to one vote
for each share held. To implement such right, the number of Directors to
constitute the Board shall be deemed increased as of such ninetieth day by the
additional Director; and to the extent the number of Directors as so increased
shall be in excess of the number of Directors authorized by the By-law of the
Company, the related By-laws provision or provisions shall be deemed amended
to authorize such number of Directors as to permit the election of the
additional Director.
(c) In addition to any approval required under the applicable
provisions of the Delaware General Corporation Law or other provisions of the
Certificate of Incorporation, the following transactions shall require the
approval of the holders of at least a majority of the outstanding shares of
the Series A Preferred Stock, voting as one class, with each share entitled to
one vote:
(i) An amendment to the Certificate of Incorporation which, by its
terms, would have a material adverse effect on the rights and privileges
of the holders of the shares of Series A Preferred Stock.
(ii) The authorization or the issuance of any shares of Preferred
Stock ranking senior or in parity, with respect to dividends or
liquidation preferences, to the shares of Series A Preferred Stock.
(iii) A sale of substantially all the assets of the Corporation
requiring a vote of the stockholders of the Corporation pursuant to
Section 271 of the General Corporation Law of Delaware.
(iv) A merger or consolidation of the Corporation other than with a
wholly-owned subsidiary of the Corporation.
4. Liquidation Rights.
(a) In the event of any voluntary or involuntary dissolution,
distribution of the assets, liquidation or winding up of the affairs of the
Corporation, after payment or provision for
2
<PAGE>
payment of the debts and other liabilities of the Corporation and any
preferential amounts payable with respect to shares of the Corporation ranking
prior to the Preferred Stock Series A, the holders of shares of the Series A
Preferred Stock shall be entitled to receive, prior to any payment to be made
pursuant to the liquidation rights of the holders of shares of the Common
Stock and any other class or series of capital stock which ranks junior to the
shares of Series A Preferred Stock out of the assets of the Corporation
whether from capital or surplus or both) Two Dollars ($2.00) per share (the
"Liquidation Value"), together with an amount equal to all dividends accrued
and unpaid to the date fixed for distribution to the holders of the shares of
Series A Preferred Stock (the "Redemption Price").
(b) If upon any such dissolution, distribution of the assets,
liquidation or winding up of the affairs of the Corporation, the assets of the
Corporation distributable among the holders of the Series A Preferred Stock
shall be insufficient to permit the payment to them of the full preferential
amounts to which they are entitled, then the entire assets of the Corporation
so to be distributed shall be distributed ratably among the holders of the
Series A Preferred Stock, to the exclusion of the holders of shares of Common
Stock and the holders of any other shares of the Corporation ranking junior to
the Series A Preferred Stock. Except as provided in Section 4(c), the
foregoing provisions of this paragraph shall not, however, be deemed to
require the distribution of assets among the holders of shares of the Series A
Preferred Stock or the holders of shares of any class or series of capital
stock or the Common Stock, in the event of a consolidation, merger, lease or
sale of substantially all the assets, which does not in fact result in the
liquidation or winding up of the business of the Corporation.
(c) For the purposes of Section 4, a liquidation of the
Corporation shall be deemed to include a merger or consolidation of the
Corporation in which, after such merger or consolidation, the outstanding
shares of Common Stock and Preferred Stock of the Corporation immediately
prior to the effectiveness of such merger or consolidation will not, pursuant
to the terms of the merger or consolidation, be converted to or exchanged for
in whole or in part, capital stock of the surviving corporation with the same
rights and limitations as the corresponding shares of Common Stock and
Preferred Stock of the Corporation.
5. Redemption. The Corporation shall redeem on July 31, 2001 all
outstanding shares of the Series A Preferred Stock by paying in cash therefor
Two Dollars ($2.00) per share and an amount in cash equal to all dividends on
Series A Preferred Stock unpaid and accumulated as provided above, whether
earned or declared or not, to July 31, 2001 or, if later, the date the funds
necessary for redemption at the Redemption Price have been made available
therefor.
6. Conversion.
(a) Each of the holders of the Series A Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(i) Right to Convert. Each share of the Series A Preferred
Stock shall be convertible, at the option of the holder thereof, at any
time after the date of issuance of such share, at the office of the
Corporation or any transfer agent for the Series A Preferred
3
<PAGE>
Stock, into such number of fully paid and non-assessable shares of Common
Stock as is determined by dividing the per share Liquidation Value plus all
declared but unpaid dividends per share on the date of conversion by the
Conversion Price at the time in effect for such shares. The initial Conversion
Price for Series A Preferred Stock shall be Two Dollars ($2.00) per share;
provided, however, that the Conversion Price shall be subject to adjustment as
set forth in subparagraphs 5(a)(iii) hereof.
(ii) Mechanics of Conversion. Before any holder of the Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, the holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, to the Corporation at its principal corporate office, of the election
to convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of the Series A Preferred Stock or to the nominee
or nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the
close of business on the date of such surrender of the shares of the Series A
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock as
of such date.
(iii) Conversion Price Adjustments. The Conversion Price of the Series
A Preferred Stock shall be subject to adjustment from time to time as follows:
(1) In the event the Corporation should at any time or from time to
time after June 30, 1996 fix a record date for (x) the effectuation of a split
or subdivision of the outstanding shares of Common Stock, or (y) the
determination of holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of, Common Stock
(hereinafter referred to as "Common Stock Equivalents") without payment of any
consideration by such holder for the additional shares of Common Stock or the
Common Stock Equivalents, including the additional shares of Common Stock
issuable upon conversion or exercise thereof, then, as of such record date (or
the date of such dividend, distribution, split or subdivision or determination
if no record date is fixed), the Conversion Price shall be appropriately
decreased to an amount equal to the Conversion Price in effect on the record
date (or the date of such dividend, distribution, split, subdivision or
determination) times a fraction, the numerator of which shall be the number of
shares of Common Stock and Common Stock Equivalents outstanding before the
dividend, subdivision, distribution or split, and the denominator of which
shall be the number of shares of Common Stock outstanding before the dividend,
subdivision, distribution or split.
4
<PAGE>
(2) If the number of shares of Common Stock outstanding at any time
after June 30, 1996 is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased to an amount equal to the Conversion Price in effect on the record
date (or the date of such combination) times a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding before the
combination, and the denominator of which shall be the number of shares of
Common Stock outstanding after the combination.
(3) If at the time the first Registration Statement of the
Corporation filed under the Securities Act of 1933, as amended, which
registers shares of the Series A Preferred Stock or shares of Common Stock
issued or issuable upon conversion of shares of Series A Preferred Stock for
the account of a holder of the Series A Preferred Stock or such shares of
Common Stock, which registration was effected pursuant to the "Piggy Back
Registration" rights provided by the Stock Purchase Agreement between the
Corporation and the purchasers of Series A Preferred Stock, is declared
effective by the United States Securities and Exchange Commission the "Market
Price" of the Common Stock of the Corporation is less than the then Conversion
Price, the Conversion Price shall be adjusted to such Market Price. Market
Price shall mean the average of the closing sale prices of the Common Stock of
the Corporation on the largest trading market on which the Common Stock of the
Corporation has been traded for the immediate preceding twenty (20) day
period. The trading markets for the purposes of this Section shall be
considered largest in the following order of priorities: New York Stock
Exchange, Nasdaq National Market, American Stock Exchange and Nasdaq SmallCap
Stock Market. If no sales were effected on any day of the twenty (20) day
period, the price of the Common Stock for such day for purposes of calculating
the Market Price shall be the average of the high bid and low asked prices for
such day on the exchange or market. If the Common Stock of the Corporation is
not listed on any of the foregoing exchanges or markets on any any during the
foregoing twenty (20) day period, the price of the Common Stock for such day
for purposes of calculating the Market Price shall be the average of the high
bid and low asked prices for such day as set forth on the "Bulletin Board" of
the National Association of Securities Dealers.
(iv) Issuance of Common Stock Certificates. The issuance of certificates
for shares of Common Stock upon conversion of Series A Preferred Stock shall
be made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Series A Preferred Stock which is being converted.
(v) Stock Transfer Books to Remain Open. The Corporation will at no time
close its stock transfer books against the transfer of any Series A Preferred
Stock or of any shares of Common Stock issued or issuable upon the conversion
of any shares of Series A Preferred Stock in any manner which interferes with
the timely conversion of such
5
<PAGE>
Series A Preferred Stock, except as may otherwise be required to comply
with applicable securities laws.
(vi) Common Stock Definition. As used in this Paragraph 5, the term
"Common Stock" shall mean and include the Corporation's authorized Common
Stock, par value $.001 per share, as constituted on the date of filing of this
Certificate with the Secretary of State of Delaware, and shall also include
any capital stock of any class of the Corporation thereafter authorized which
shall neither be limited to a fixed sum or percentage in respect of the rights
of the holders thereof to participate in dividends nor be entitled to a
preference in the distribution of assets upon the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation; provided that the
shares of Common Stock receivable upon conversion of shares of Series A
Preferred Stock shall include only shares designated as Common Stock of the
Corporation on the date of filing of this instrument, or in case of any
reorganization or reclassification of the outstanding shares thereof, the
stock, securities or assets to be issued in exchange for such Common Stock
pursuant thereto.
(vii) Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences
or indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends), then, in each such case, the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of
any such distribution as though they were the holders of the number of
shares of Common Stock of the Corporation into which their shares of
Series A Preferred Stock are convertible as of the record date fixed for
the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
(viii) Recapitalization. In the case of a recapitalization of the
Corporation affecting its outstanding shares of Common Stock, the Series
A Preferred Stock shall thereafter be convertible into the kind and
amount of shares of stock, other securities, or property receivable upon
such recapitalization by a holder of the number of shares of Common
Stock into which such Series A Preferred Stock might have been converted
immediately prior to such recapitalization.
(ix) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions
of this Paragraph 6 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of
the holders of the Series A Preferred Stock against impairment.
(x) No Fractional Shares and Certificate as to Adjustment.
6
<PAGE>
(1) No fractional shares shall be issued upon conversion of the
Series A Preferred Stock and the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole share. Whether or not fractional
shares are issuable upon such conversion shall be determined on the basis of
the total number of shares of Series A Preferred Stock the beneficial holder
is at the time converting into Common Stock and the number of shares of Common
Stock issuable upon such aggregate conversion.
(2) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of the Series A Preferred Stock pursuant to this Paragraph 6,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustments in accordance with the terms hereof and prepare and furnish to
each holder of the Series A Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (a) such
adjustment and readjustment, (b) the Conversion Price at the time in effect,
and (c) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of a share of
Series A Preferred Stock.
(xi) Notice of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of Series A Preferred Stock, at least
fifteen (15) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right.
(xii) 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 Series A 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 the Series A Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Series A Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes.
7
<PAGE>
IN WITNESS WHEREOF, we have signed this Certificate as of the 5th
day of August 1996.
/s/ Warren H. Haber
----------------------------
Chairman of the Board
/s/ John L. Teeger
----------------------------
Secretary
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
unaudited consolidated balance sheet as of June 30, 1996 and the unaudited
statement of income for the six months then ended contained in the report on
Form 10-QSB for the three months June 30, 1996 of HealthRite, Inc. and is
qualified in its entirety by reference to such financial statements:
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 327
<SECURITIES> 0
<RECEIVABLES> 1,319
<ALLOWANCES> 0
<INVENTORY> 2,794
<CURRENT-ASSETS> 5,025
<PP&E> 3,773
<DEPRECIATION> 321
<TOTAL-ASSETS> 9,928
<CURRENT-LIABILITIES> 2,533
<BONDS> 0
0
0
<COMMON> 4
<OTHER-SE> 5,180
<TOTAL-LIABILITY-AND-EQUITY> 9,928
<SALES> 8,305
<TOTAL-REVENUES> 8,305
<CGS> 4,711
<TOTAL-COSTS> 3,234
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 388
<INTEREST-EXPENSE> 118
<INCOME-PRETAX> (114)
<INCOME-TAX> (57)
<INCOME-CONTINUING> (57)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
