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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996 Commission File
No. 0-23016
HEALTHRITE, INC.
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(Exact name of small business issuer in its charter)
Delaware 13-3714405
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11445 Cronhill Dr. Owings Mills, MD 21117
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(Address of principal offices) (Zip Code)
Registrant's telephone number, including Area Code: (410) 581-8042
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
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(Title of Class)
Check 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 period
commencing December 30, 1994, 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
March 20, 1997: 4,276,472 shares.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
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The Registrant's revenues for the year ended December 31, 1996 were
$16,503,917.
Aggregate market value of voting stock held by non-affiliates of Registrant
(deemed by Registrant for this purpose to be neither a director nor a person
known to Registrant to beneficially own, exclusive of shares subject to
outstanding options, less than 5% of the outstanding shares of Registrant's
Common Stock) computed by reference to the closing sales price as reported on
the NASDAQ on March 24, 1997: $7,131,315.
Documents incorporated by reference: None
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PART I
ITEM 1. BUSINESS.
SUMMARY
HealthRite, Inc. (the "Company") is engaged in the production, distribution and
sale of vitamins, natural nutritional and dietary nutritional supplements,
herbal-based products, weight-loss products, sports nutrition products,
personal care products, and natural cosmetics. It is also engaged to a limited
extent in the retail sale of over-the-counter products, food snacks and
beverages. The Company's basic business strategy has been to capitalize on the
emerging awareness by the general public and the medical community of the
"wellness" approach to personal health. This approach focuses on proper dietary
habits, an exercise regimen, and the ingestion of appropriate vitamin, mineral
and other nutritional supplements.
On July 29, 1993, the Company commenced operations by acquiring for $1,590,000
in cash the assets of Vitamin Specialties Corporation ("VSC") and of NHP
Corporation ("NHP"). These two privately-held corporations had been in business
since 1963 selling vitamin and nutritional products through a chain of retail
stores and by direct marketing through catalog sales. On August 10, 1994, the
Company acquired Montana Naturals Int'l, Inc., a Montana corporation ("MTNA"),
through a merger. Since June 1987, MTNA has manufactured and marketed natural
nutritional supplements containing bee pollen, bee propolis and royal jelly as
basic ingredients. On January 3, 1995 the Company acquired all of the
outstanding capital stock of Jason Pharmaceuticals, Inc., a Maryland
corporation ("Jason") for $2,788,000 and the issuance of 67,500 shares of its
Common Stock. Jason had developed, manufactured and distributed medical weight
loss nutritional supplement products for 15 years. On 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").
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MARKET
The nutrition industry is broadly defined by product segments which include
natural foods, dietary supplements, and natural personal care. The August 1996
issue of the Nutritional Business Journal reported that in the nutrition
industry:
o Revenues were $17.2 billion;
o Revenue growth is at a 14% - 16% rate annually;
o The supplements share of that market is 52%; and
o The sport nutrition market exceeded $800 million in 1995.
COMPETITION
The market for the Company's products is highly competitive, but fragmented.
Many manufac turers and wholesalers sell directly to retail customers in the
Company's current channels of distribution and direct marketing. The Company's
private label products compete with both national brand name and other private
name products containing similar ingredients. Retail distribution of vitamins
occurs through various channels such as specialty vitamin stores, General
Nutrition Company stores, local drug stores, health food stores, supermarkets,
department stores, mass merchandisers, multi-level companies and direct
marketing. In its distribution through direct marketing, the Company competes
with national marketers of vitamins and other nutrition supplements, such as
Nature's Bounty, Rexall SunDown, and with a large number of smaller,
regionally-based direct marketers, some of which also manufacture their own
products and some of which sell products manufactured by others. Other
competitors are engaged in franchise operations. The Company has an
insignificant share of the market.
In 1996, the Company launched the following initiatives:
1) On April 4, 1996, the company executed an exclusive three year license, with
an option to renew for an additional two years, to use the Nautilus(R) name for
vitamins, minerals, and nutritional products including but not limited to
weight loss and gain products. The license obligates the Company to pay a
percentage of royalties on all net invoiced sales, contribute a percentage to
the Nautilus(R) advertising, and the direct Nautilus(R) Nutritional
advertising. Nautilus(R) is an internationally known name in the sports
nutrition industry and the Nautilus(R) name is exclusively under license to the
Company for sports nutrition products.
2) In anticipation of the Nautilus(R) introduction, the Company organized a
sales team in 1996 headed by a former national sales director of a major
producer of paper products. Reporting to this Senior Vice President are three
direct call salespersons with extensive experience and relationships in mass
markets and retail brokers in nutritional/health food products. As a result,
the Company is negotiating with major mass market accounts in addition to
fitness centers, sporting goods chains, and military exchanges. Since its
introduction in mid-January 1997, Nautilus shipments, as of March 20, 1997
total $245,452.
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3) The Company will test a new health food "store within a super store" concept
called the TAKE SHAPE(R) Nutrition Center. The first TAKE SHAPE(R) Nutrition
Center will open in a Wal-Mart Supercenter located in Lewistown, Pennsylvania
in mid-April 1997. The Company intends to roll out additional TAKE SHAPE(R)
Nutrition Centers on military bases and other (leased department) locations
later this year.
PRODUCTS
The Company offers, principally under its brand labels, a broad selection of
vitamins, minerals and herbal-based products, natural nutritional supplements,
dietary nutritional supplements, weight-loss, sports nutrition and personal
care products, and natural cosmetics. Its product line also includes many
over-the-counter drug items such as laxatives, antacids, expectorants,
decongestants, cold and sinus products, and analgesics. The Company recently
launched a variety of Pure Energy Herbal Instant Teas and won a "Best Product
in its Class" award at the NNFA show.
Sales of products under the Company's brand labels accounted for 83% of the
Company's net sales for 1996 and 86% of the Company's net sales for 1995 with
sales of national brand-name products and products under customer labels
accounting for the balance. Of the more than 2,600 items offered, approximately
500 items are offered under the VITAMIN SPECIALTIES(R) name. The Company's
natural nutritional supplement products contain bee pollen, bee propolis or
royal jelly as their basic ingredients and are offered under the MONTANA BIG
SKY(R) brand label.
"Nautilus(R)" was introduced in January 1997 and will provide a range of
products to include sports nutrition and dietary supplements in bars, tablets,
capsules, and powders.
Jason Pharmaceuticals, Inc., maintained its market share in its core business
of offering physician-supervised weight loss porgrams. Jason's Medifast(R) and
TAKE SHAPE(R) meal replacement programs were selected to be used in a new study
on obesity conducted by the National Institutes of Health.
SALES
The Company offers its products principally through 1) a distributor/broker
network; 2) telemarketing in connection with its Medifast(R) products; 3) a
chain of fourteen (14) retail stores; and 4) direct marketing through a Company
catalog of its private label products which currently comprises 500 nutritional
supplements. The Company also contracts production of its energy and herbal
supplement capacity to selected companies under their labels, in accordance
with their specifications.
The company has three units:
MONTANA NATURALS INTERNATIONAL, INC. Sales of the MONTANA BIG SKY brand
products are effected through a distributor/broker network currently consisting
of seven brokerage houses
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and 58 distributors throughout the United States. Foreign sales accounted for
approximately 9.4% and 7.4% of net sales, respectively, for 1996 and 1995.
Montana Naturals distributes the new Nautilus(R) line.
JASON PHARMACEUTICALS, INC. Medifast(R) products are offered through
physicians, hospitals and pharmacies. Jason solicits these entities through its
full-time telemarketers in connection with physician-supervised medical
treatment programs for obesity. Products are manufactured and packaged in
accordance with customers' specifications and sold under the customers' labels
both domestically and in foreign countries through the customers' own
distribution channels. New medical protocols which recommend diet supplements
be taken with appetite control drugs (Redux and "Fen-Phen") to offset certain
side-effects of these drugs were published in March 1997.
VITAMIN SPECIALTIES operates fourteen retail stores and a catalog operation
in the Philadelphia area. A Senior Citizen Day every Tuesday offering 20%
discounts has allowed the chain to build traffic and sales while selected
price increases on high demand items improved margins.
DIRECT MARKETING. Direct marketing consists of preparing and mailing catalogs
of the Company's Vitamin Specialties and branded products. Two mailings of the
catalog were accomplished during 1996. The current catalog contains 500 items,
many of which are packaged and offered in varying quantities. Most of the
catalog items are also offered at the Company's retail locations. The mailing
list, which currently contains 19,000 names, is regularly updated.
The design, preparation and printing of the catalog are performed by a
non-affiliated entity. Orders may be placed by an "800" number, telefax or by
mail. Orders are computer processed and shipped UPS or US Mail. Occasionally,
orders are bulk-shipped to customers in foreign countries. Orders are filled in
four designated catalog stores staffed with senior health supple ment experts,
who also answer customer questions.
MANUFACTURING. The Company manufactures and packages a majority of its products
in tablet and hard shell capsules and a portion of its products in powder and
liquid form. In the produc tion and packaging of the products the Company
maintains a quality control program which includes sample testing of raw
materials and finished products, weight testing and purity testing.
Products are packaged in tamper-resistant containers.
Manufacturing and packaging are performed at its Arlee, Montana and Owings
Mills, Maryland facilities. The Arlee, Montana facility was upgraded and
expanded during 1995. Further expansion of this facility is planned for 1997.
Primary components of the products are supplied from various U.S vendors and,
if economically advantageous, from overseas suppliers. Alternate sources of
supply exist for all components.
WAREHOUSING AND DISTRIBUTION
The Company maintains warehouse and distribution operations at its Arlee and
Owings Mills facilities. In 1996, a distribution facility in Temple, Texas,
managed by McLane Inc., was
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contracted to manage the inventory of Nautilus(R) and ship to customers in the
mass market segment of the business. Product is shipped via UPS or common
carrier.
ADVERTISING AND PROMOTION
Historically, advertising and promotion have been through print and radio
media. Inserts in local publications and regional newspaper supplements,
supplemented by local radio advertising serve to promote and advertise
products. In 1997, the Company expects to advertise in national publications
such as Muscle & Fitness, Shape, Men's Fitness, Prime Health & Fitness, and
Women's Sports & Fitness. Advertising will also be placed in select regional
publications including California Competitor, California City Sports, Florida
Sports, and New York Metro Sports.
The Company's Nautilus Nutritionals Division is the major sponsor for a
professional mountain bike team - the Nautilus Nutritionals/Barracuda Team.
During 1997, the team will make special appearances at trade and consumer
shows, grand opening events, and other promotional venues. The Nautilus
Nutritionals/Barracuda Team will also have dedicated areas at all 16 scheduled
mountain bike events for Nautilus Nutritionals and Montana brands sampling.
The Company owns several registered trademarks registered, including VITAMIN
SPECIALTIES(R), MEDIFAST(R), TAKE SHAPE(R), PRO-TECH(R), STAY CALM(R), LOVING
MOOD(R) and PURE ENERGY(R). MONTANA BIG SKY is registered with the state of
Montana.
GOVERNMENTAL REGULATION
Current
New FDA standards on ingredients and labeling prompted Vitamin Specialties to
revamp its product line and significant resources were expended to meet these
new requirements. Inventory shortages in the last quarter of 1996 were higher
than normal during the transition to the updated line. Vitamin Specialties
products and labels will be in compliance with the new regulations by the end
of the second quarter of 1997.
History
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal agencies,
principally the Food and Drug Administration (the "FDA"). The Company also must
comply with the standards, labeling and packaging requirements imposed by the
FDA for the sale of food products. These regulations prevent the Company from
representing in its literature and labeling that its products produce or create
medicinal effects or possess drug-related characteristics. The FDA could, in
certain circumstances, require the reformulation of certain products to meet
new standards, require the recall or discontinuance of certain products not
capable of reformulation, or impose additional
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record keeping, expanded documentation of the properties of certain products,
expanded or different labeling, and scientific substantiation. The FDA, in
particular, regulates the advertising, labeling and sales of vitamin and
mineral supplements. If the FDA believes the products are unapproved drugs or
food additives rather than food supplements, than the FDA may initiate
enforcement proceedings. Any or all of such requirements could adversely affect
the Company's operations and its financial condition.
To the extent that sales of vitamins and nutritional supplements may constitute
improper trade practices or endanger the safety of consumers, the operations of
the Company may also be subject to the regulations and enforcement powers of
the Federal Trade Commission (" FTC"), and the Consumer Product Safety
Commission. The Company's activities are also regulated by various agencies of
the states and localities in which the Company's products are sold. The FDA has
suspended enforcement of some of the regulations as to dietary supplements
required by the Dietary Supplement Health and Education Act of 1994 ("DSHEA")
enacted on October 25, 1994. The DSHEA significantly alters the federal
regulatory framework for dietary supplements and contains several provisions
directly affecting the labeling of the Company's products. Under the DSHEA, a
dietary supplement manufacturer may include in its labeling a "statement of
nutritional support" which claims a benefit related to a classical nutrient
deficiency disease and describes the general well-being resulting from
consumption of a dietary supplement as long as the statement is truthful and
not misleading. The manufacturer must include in the statement of nutritional
support a required qualification that the supplement is not intended to
diagnose, treat, cure or prevent any disease and that the FDA has not evaluated
the statement. The DSHEA also requires dietary supplement labeling to list the
name and quantity of each ingredient and include the term "dietary supplement"
in the labeling. In addition, the FDA must promulgate regulations regarding
nutrition information labeling for dietary supplements. The DSHEA directed that
such regulations were to become mandatory for dietary supplement manufacturers
after December 31, 1996.
The nutrition labeling and nutrient content claim provisions of Nutrition
Labeling and Education Act ("NLEA") are presently not being enforced for
dietary supplements. The enforcement date for the rules in this area will
probably be January 1, 1998. At this point in time, the rules have not been
finalized and thus the enforcement date for the rules in this area may be
pushed back further. However, the health claim provisions of NLEA, as modified
by DSHEA, are being presently enforced.
Compliance with the provisions of national, state and local environmental laws
and regulations has not had a material effect upon the capital expenditures,
earnings or the competitive position of the Company.
PRODUCT LIABILITY AND INSURANCE
The Company, like other producers and distributors of products that are
ingested, faces an inherent risk of exposure to product liability claims in the
event that, among other things, the use of its products results in injury. The
Company maintains insurance against product liability claims with respect to
the products it manufactures. With respect to the retail and direct marketing
distribution of products produced by others, the Company's principal form of
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insurance consists of arrangements with each of its suppliers of those
products, to name the Company as beneficiary on each of such vendor's product
liability insurance policy to the extent of $1,000,000. The Company does not
buy any products from any supplier who does not afford such coverage. The
Company in 1994 supplemented such coverage by acquiring a $1,000,000 liability
policy as an umbrella with respect to product liability and as direct insurance
with respect to liabilities arising from its own actions. The Company's product
liability insurance policies with respect to the products it acquires for
resale do not cover claims arising prior to the acquisition of VSC and NHP.
There can be no assurance that the Company's coverage will continue to be
available or, if available, that it will be adequate to cover all liabilities
to which the Company might be subject.
EMPLOYEES
At March 15, 1996, the Company employed 167 people, of whom 63 were engaged in
retail, 58 in manufacturing, and 46 in marketing, administrative and corporate
support functions. None of the employees are subject to a collective bargaining
agreement with the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's manufacturing, warehousing and distribution operations are in two
facilities. A 24,000 square-foot facility in Arlee, Montana is owned by the
Company (subject to an outstanding mortgage) and its 43,300 square-foot
facility in Owings Mills, Maryland is leased through the year 2000, with a
5-year renewal option.
The Company's 14 retail stores are leased with various expiration dates ranging
from June 1997 through June 2000. The leases require the Company to bear, in
addition to the basic rent, the costs of insurance, tax and certain operating
costs. Six of the 14 leases provide for the payment as additional annual rent
of a designated percentage (ranging from 4% to 6%) of the store revenues which
exceed certain designated thresholds.
ITEM 3. LEGAL PROCEEDINGS.
There are two claims that may have a financial affect on the company. In Skees
vs. Jason Pharmaceuticals, Inc., the opinion of counsel is that the outcome is
uncertain. In Montgomery Realty Company vs. Vitamin Specialties, the Company
believes that the matter will be resolved for under $20,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the twelve
months ended December 31, 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock has been quoted under the symbol HLRT since July
17, 1995 on the Nasdaq SmallCap Stock Market. The following is a list of the
low and high bid quotations by fiscal quarters for 1996, 1995 and 1994 as
reported by Nasdaq:
1996
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Low High
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Quarter ended March 31, 1996 1 7/8 2 1/4
Quarter ended June 30, 1996 1 7/8 2 5/8
Quarter ended Sept 30,1996 1 7/8 3
Quarter ended Dec 31, 1996 2 1/2 3 1/8
1995
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Low High
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Quarter ended March 31, 1995 3 1/2 5
Quarter ended June 30, 1995 2 3/8 3 5/8
Quarter ended Sept 30, 1995 2 3/8 3 1/8
Quarter ended Dec 31, 1995 1 7/8 2 5/8
1994
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Low High
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Quarter ended March 31, 1994 4 3/4 5
Quarter ended June 30, 1994 4 3/8 4 3/4
Quarter ended September 30, 1994 4 1/2 5 1/8
Quarter ended December 31, 1994 4 3/4 5
The quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions.
(b) There were 248 record holders of the Company's Common Stock, as of March
19, 1997.
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(c) No dividends were declared by the Company during 1996, 1995 or 1994.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1996 Compared with 1995
Consolidated net sales for 1996 were $16,504,000 which were $485,000, (3%) more
than 1995 sales of $16,019,000. The net increase was a result of MTNA increased
private label, contract manufacturing and international sales, offset by the
decrease in retail store sales due to the closing of three stores. Same stores
sales increased from $2,865,000 to $3,082,000, or a 7% increase.
Cost of sales including cost of warehousing, distribution and occupancy
($9,216,000) increased by $49,000 (0.5%), but as a percentage of net sales
decreased by 1.4% from 57.2% in 1995 to 55.8% in 1996. This resulted because
of lower production cost and price increases.
Reducing the number of divisional executives, general cost cutting, business
consolidation, and payroll reduction across the Company lowered Selling,
General and Administrative expenses ($6,455,000) by $395,000 (39% of revenues),
as compared to 43% in 1995.
Interest expense of $242,000 in 1996 increased from $157,000 in 1995
principally from larger balances in borrowing needed for additional working
capital and the Nautilus investment.
The $91,000 benefit for income tax for 1996 represents an anticipated use of
net operating loss carry forwards compared with $100,000 in 1995.
For the year ended December 31, 1996, the Jason and MTNA operations generated
income from continuing operations before provision for income taxes of $860,000
compared with losses from continuing operations (before income tax benefit) of
$631,000 for Vitamin Specialties.
Net income before taxes for 1996 was $229,000 as compared to the 1995 loss of
$466,000, an increase of $695,000 (149%). Net Income attributable to common
stockholders in 1996 was $283,000 or $.07 per share compared to the 1995 loss
of $366,000 or ($.09) per share.
Seasonality
The Company's historical operations have not been subject to significant
seasonality.
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Liquidity and Capital Resources
In April 1996, the Company acquired a three-year exclusive license agreement
with a two-year renewal option for the use of a brand name in connection with
the manufacturing and distribution of nutritional drinks, bars, and dietary
supplements under the Nautilus(R) name. In connection with this new line of
products, the Company capitalized the following items:
Fees paid under license agreement.............. $ 45,000
Deferred design and packaging cost............. 316,000
Direct incremental costs, consisting of:
Salaries.............................. 103,000
Promotional costs and other........... 254,000
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$718,000
All of these costs were incurred before sales of the product commenced. As of
December 31, 1996, inventory included $731,000 of Nautilus products and raw
materials.
The Company will amortize all costs relating to the business development of the
Nautilus division over two to five years. Included in prepaid expenses as of
December 31, 1996, is approximately $56,000 of deferred advertising which will
be amortized over one year. Shipments of the products began during the first
quarter of 1997.
In August 1996, the Company sold 432,500 shares of 8% Convertible Preferred
Stock Due 2001 which generated gross proceeds of $865,000. The shares are
convertible into the Company's common stock on the basis of one share of common
for each share of convertible preferred stock. The proceeds was used to develop
the Nautilus brand products and for working capital.
The Company had working capital of $1,962,000 on December 31, 1996 compared
with $2,600,000 at December 31, 1995. The $638,000 decrease reflects the
current classification of bank debt to short term which was long term in the
prior year.
Vitamin Specialties and Jason entered into loan agreements on May 17, 1995
aggregating $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. Total loan
advances available at December 31, 1996 were $1,135,295 of which $76,775 was
unused.
As of December 31, 1996, the Company was not in compliance with certain
covenants of the loan agreements. The bank has waived the events of default at
December 31, 1996 and at the same time has accelerated the due date of both the
revolving and term loans to January 1, 1998. The covenants in the loan
agreement become more restrictive each quarter during 1997. Since
determinations cannot be made that the company will meet these covenants the
loans have been classified as current. The Company expects to have additional
financing to replace these loans.
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The Company is seeking financing to expand its operations and to provide
working capital for the new product lines. The State of Montana and the US
Department of Agriculture has agreed to guarantee 80% of $5.4 million financing
in return for the Company's pledge to expand operations and increase the
employee count in Arlee, Montana. A bank has made a formal proposal to fund
this loan.
The Company believes that its working capital and anticipated cash flow from
operations, together with the above mentioned credit facility agreements, will
be sufficient to meet the Company's anticipated working capital requirements
for at least twelve months from December 31, 1996.
Inflation
To date, inflation has not had a material effect on the Company's business.
ITEM 7. FINANCIAL STATEMENTS
See pages F-1 through F-20.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
None
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
(a) The Company's executive officers and directors are as follows:
NAME AGE POSITION
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Warren H. Haber* 56 Chairman of the Board, Director
John L. Teeger* 53 Vice Chairman of the Board,
Secretary and Director
Bradley T. MacDonald* 50 President, Chief Executive Officer,
and Director
Douglas A. Okland 50 Executive Vice President
Angelo J. Talluto 58 Chief Financial Officer
Howard M. Bezoza, M.D. 43 Director
Milton Datsopoulos 56 Director
John C. Horvitz 61 Director
John A. McConville 70 Director
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* Member of the Executive Committee.
Under the By-Laws, the directors are to serve for a period of one year and
until the due election and qualification of their respective successors.
Mr. Haber, an Officer and Director since May 1989, has been for more than 20
years Chairman of the Board and Chief Executive Officer of Founders Management
Services, Inc. and affiliates ("Founders"), all private investment concerns
engaged in the business of locating businesses for
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acquisition by companies in which Founders' principal stockholders are
principals, and managing for its own account such businesses. He had been, from
December 1986 until December 1992, Chairman of the Board and Chief Executive
Officer of International Power Machines, an American Stock Exchange-listed
manufacturer of uninterruptable power equipment, with which he had remained a
director until February 1995 when it was merged into another company. He is a
director of Lunn Industries, Inc., a composite product manufacturer. In June of
1995 he became Chairman of Batteries Batteries Inc., a distributor of batteries
and cellular accessories. Mr. Haber has been for more than 20 years an officer
and director of Founders Property, Inc., a private real estate investment
concern.
Mr. Teeger, an Officer and Director of the Company since May 1989, was Chief
Financial Officer from May 1989 to March 1995, and from March 28, 1996 to
August 14, 1996. He has been employed since 1981 by, and has served since 1984
as President of, Founders. In June 1995, he became an officer and director of
Batteries Batteries Inc.. From 1976 to 1981, Mr. Teeger was a Vice
President--Corporate Finance of Bear Stearns & Co., Inc., investment bankers.
Mr. MacDonald was appointed President on March 15, 1996. Prior to joining the
Company, from 1994 to 1996, he was appointed as Program Director of the U.S.
Olympic Coin Program of the Atlanta Centennial Olympic Games. From 1991 through
1994, Colonel MacDonald was Deputy Director and Chief Financial Officer of the
Retail, Food and Hospitality and Recreation Business (Morale, Welfare and
Recreation Support Activity) for the United States Marine Corps. Prior thereto,
Mr. MacDonald served as Presidents of Pennsylvania Optical Co., Pangburn Candy
Co., Chief Operating Officer of the Bonneau Co., and Chief Financial Officer of
Begley Drug Stores.
Mr. Talluto, Chief Financial Officer, joined the Company in November 1996. Mr.
Talluto brings over twenty years of professional experience in the areas of
finance, accounting, and MIS. He is a former Director of CSX Internal Audit and
has more recently served as Finance Director for a large medical facility.
Before that, he held management positions with RJR Nabisco.
Mr. Okland joined the Company in April, 1996. Before joining the Company, he
was the Staff Director of the United States Mint's Olympic Coin Program,
coordinating sales and distribution of Coins of the Atlanta Centennial Olympic
Games. From 1969 to 1995, he served in the United States Marine Corps, retiring
at the rank of Colonel.
Dr. Bezoza, a Director since July 1993, has conducted, for more than five
years, a medical practice in New York City focussed on nutrition. He hosts a
weekly one-hour radio program for WEVD, a New York City radio station, and
appears frequently on radio and television programs as an expert on medical and
nutritional issues.
Mr. Datsopoulos, a Director of the Company since the acquisition of MTNA in
August 1994, has been, since 1983, a director of MTNA and was the Chairman of
its Board from December 1993 to August 1994. He is a senior partner in the law
firm Datsopoulos, MacDonald & Lind, P.C. of Missoula, Montana, with which he
has been associated since 1968. Mr. Datsopoulos is the President, a director
and principal stockholder of Athens Investments, Inc., a Montana corporation
engaged in real estate development and acquisition. Since 1984, Mr. Datsopoulos
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has served as director of Criticare Systems, Inc. of Milwaukee, Wisconsin, a
publicly-held corporation engaged in the business of developing, manufacturing
and marketing medical equipment nationally and internationally. He has also
served as a director of Mascot Silver-Lead Mines, Inc. of Kellogg, Idaho since
1983.
Mr. Horvitz, Director of the Company since July 1993, has been President of
Horvitz & Associates, a management consulting firm providing strategic
marketing services to leading companies in the health, beauty, toiletries, and
fashion industries. Previously, Mr. Horvitz had served as an officer and senior
marketing executive with Warner Fragrances (a Time-Warner Communications
subsidiary), Estee Lauder, Inc. and Bristol-Myers Products Division.
Mr. McConville is a retired senior executive of J.C. Penney with 40 years in
retail operations. In 1983, he was appointed Senior Vice President of
Merchandising and a Director. In 1988, he was named President of the Women's
Division. Since 1987, when appointed by the Secretary of the Navy, he has been
on the Navy Exchange Advisory Board, providing advice to the world-wide Navy
Exchange System.
(b) Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(d), during the year ended December
31, 1996, no person who was a director, officer or beneficial owner of more
than 10% of the Common Stock of the Company ("10% owner") failed to file on a
timely basis reports required by Section 16(a) of the Securities & Exchange Act
of 1934 during the year ended December 31, 1996, except that Messrs. Douglas A.
Okland and Gregory E. Andrews were late in the filing of Form 3 Reports and
each of them has been either late or delinquent with respect to their filing of
Form 4 Reports with respect to the receipt or amendment of employee stock
options.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth compensation information of the chief executive
officer of the Company and each executive officer who received compensation in
excess of $100,000 for 1996 and 1995.
Long-Term
ANNUAL COMPENSATION Compensation
-------------------------------- Awards
Salary (1) Bonus Stock Options
Name Year ($) ($) Other No. of Shares
- ------------------------ ---- -------- ----------- ---------- -------------
Warren H. Haber 1996 (1) (1) (1) --
1995 (1) (1) -- --
Bradley MacDonald (2) 1996 170,000 4,000 -- 100,000
- -----------------------------------
(1) Mr. Haber's services are provided pursuant to the Company's agreement with
Founders Management Services, Inc. (see below).
(2) Mr. MacDonald's 1996 compensation includes moving allowances. His annual
salary base is $170,000. In March of 1996, he received the option to purchase
100,000 shares of restricted stocks under the Company's 1993 Stock Option Plan.
On January 1997, he received 4,000 shares of unrestricted common stocks as an
incentive to continue his contributions to the Company.
The services of Mr. Warren H. Haber and Mr. John L. Teeger have been provided
pursuant to an agreement between the Company and Founders Management Services,
Inc. ("Founders") entered into on August 1, 1993 and amended and restated in
October 1993 and which was superseded by an agreement dated January 3, 1995.
The earlier agreement obligated Founders to provide the services of Mr. Haber
as Chief Executive Officer and Mr. Teeger as Vice President, Chief Financial
Officer and Secretary of the Company. The time devoted by Messrs. Haber and
Teeger to the performance of their duties, on the average, aggregated from
approximately 60 to 80 hours per week through December 31, 1994. Pursuant to
the agreement, Founders received a fee of $7,500 per month, or $90,000 per
annum. The revised agreement obligates Founders to provide advice and
administrative services regarding management policies, executive employment,
strategic planning, merger and acquisition policy, asset dispositions, cash
management, commercial and investment banking relationships, and stockholder
and investor relation matters
17
<PAGE>
and provides for a fee to Founders of $10,000 per month, or $120,000 per annum
subject to adjustment each year with respect to the following year for
increases in the cost-of-living index and an incentive fee equal to 5% of the
amount by which the Company's annual consolidated pre-tax income, as defined,
exceeds $500,000. The fees for the 1996 and 1995 amounted to $120,000. The term
of the new agreement will expire in July 1998. The agreement further provides
that the Company is to indemnify Founders, its officers and employees against
judgments, fines, amounts paid in settlement and expenses (including reasonable
attorneys' fees) with respect to any action or proceeding against them arising
from the provision of services by Founders pursuant to the agreement, other
than an action by the Company against Founders by reason of a breach of the
agreement by Founders, Haber or Teeger. See Item 12 for information as to fees
paid by the Company to Founders for its services in connection with
acquisitions.
The Company entered into a two year employment agreement with Bradley T.
MacDonald commencing March 15, 1996 providing for his employment as President
and Chief Executive Officer at a base salary of $170,000 per year, plus bonuses
based on achievement of certain goals and the grant on the date of commencement
of his employment of options under the 1993 Plan to purchase 100,000 shares of
common stock at a price of $2.00 per share, exercisable in three annual
installments of 50,000, 25,000 and 25,000 commencing on the date of employment.
At the same time, Mr. MacDonald acquired 100,000 shares of common stock at a
price of $1.00 per share. During 1996, Mr. MacDonald's contract was extended
one year to March 15, 1999.
STOCK OPTIONS. The Company's 1993 Stock Option Plan (the "1993 Plan") as
amended by stockholder approval in July 1995 increased the outstanding stock
options from 300,000 shares to 500,000 shares of common stock. The 1993 Plan
authorizes the Board of Directors or a Stock Option Committee appointed by the
Board to grant incentive stock options and non-incentive stock options to
officers and key employees, directors and independent consultants, with
directors who are not employees and consultants eligible only to receive
non-incentive stock options. Messrs. Horvitz, McConville, and Bezoza constitute
the Company's Compensation and Stock Option Committee.
As of March 27, 1997 options to purchase 65,000 shares had been exercised and
there were outstanding options to purchase an aggregate of 457,500 shares of
common stock.
On October 12, 1995, the Company amended outstanding options to purchase an
aggregate 160,000 shares of common stock of which 5,000 were exercisable at
$5.25 per share, 20,000 at $5.00 per share, 25,000 at $4.50 per share and
110,000 at $3.00 per share by reducing the exercise price from $3.00 to $2.00
per share, which approximated market price.
There was no exercise by any of the named executive officers of stock options
during the 1996 year. The following table provides information as to the value
of the unexercised options held by the one named executive officer who is an
option holder as of December 31, 1996 measured in terms of the closing sale
price of the Company's Common Stock on such date:
18
<PAGE>
Number of Shares Underlying Value of Unexercised In-The
Unexercised Options as of Money Options on
12/31/96 12/31/96*
-------------------------- -------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
-------------------------- -------------------------
259,182 / 208,318 $555,712 / $491,305
- ------------------------
*On December 31, 1996, the closing sales price of $2.625 on the Nasdaq SmallCap
Stock Market was the same as the option exercise price.
COMPENSATION OF DIRECTORS. The Company does not pay fees to its directors. It
reimburses those who are not employees of the Company for their expenses
incurred in attending meetings. As set forth above, stock options have been
granted under the 1993 Plan to Dr. Bezoza and Messrs. Horvitz, McConville and
Datsopoulos.
Dr. Bezoza's options were granted in connection with his agreement to provide
consulting services to the Company for a five-year period, including advice to
the Company with respect to the development and endorsement of a premium line
of vitamins and dietary supplements, compliance with FDA regulations and
guidelines, the publication and distribution of a periodic health and nutrient
newsletter, the preparation and endorsement of the Company's catalogue and
participation in radio and television presentations as to a new line of premium
products developed with his assistance. In connection with the line of premium
products to be developed with his advice, Dr. Bezoza is to receive a fee equal
to 2% of the amount by which the "net sales" as defined in the agreement, of
such products exceed $2,000,000 for any fiscal year during the terms of the
agreement. No fees have been earned under the agreement through December 31,
1996.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock as of March 20, 1997 of the Chief Executive
Officer, each director and each stockholder of the Company known to the Company
to be a beneficial owner of more than 5% of the outstanding shares of Common
Stock, and all executive Officers and directors as a group.
SHARES BENEFICIALLY % OF
NAME AND ADDRESS OWNED AS OF 3/27/96 OUTSTANDING
- ----------------------------- ------------------------ -----------------
Warren H. Haber* 437,500 (1) 10.2
John L. Teeger* 440,625 (2) 10.3
19
<PAGE>
SHARES BENEFICIALLY % OF
NAME AND ADDRESS OWNED AS OF 3/27/96 OUTSTANDING
- ----------------------------- ------------------------ -----------------
Bradley T. MacDonald 179,000 (3) 4.2
9332 Owings Choice Court
Owings Mills, MD 21117
John C. Horvitz 40,000 (4) **
77 Park Avenue
New York, NY 10016
Howard M. Bezoza, M.D. 55,000 (5) 1.3
24 West 57 Street, Suite 701
New York, NY 10019
Milton Datsopoulos 88,354 (6) 2.0
5520 Skyway Drive
Missoula, MT 59803
John A. McConville 3,334 (7) **
3525 Turtle Creek #17A
Dallas, TX 75219
Executive officers and
directors as a group 1,273,813 (8) 29.8
(10 persons)
- --------------------------------
* The address of each of Messrs. Haber and Teeger is c/o Founders Management
Services, Inc., 711 5th Avenue, New York, New York 10022.
** Less than 1%.
(1) Does not include 31,250 shares owned by his two adult sons.
(2) Includes 15,625 shares owned as custodian for his daughter, but does not
include 15,625 shares owned by his adult son.
(3) Includes 75,000 shares issuable upon exercise of options which by their
terms are currently exercisable.
(4) Includes 30,000 shares issuable upon exercise of options which by their
terms are currently exercisable.
(5) Represents 55,000 shares issuable upon exercise of options which by their
terms are currently exercisable.
20
<PAGE>
(6) Includes 33,016 shares owned by Athens Investments, Inc., of which he is an
officer, director and principal stockholder and 21,666 shares issuable upon
exercise of options which by their terms are currently exercisable.
(7) Represents 3,334 shares issuable upon exercise of options which by their
terms are currently exercisable.
(8) Includes 248,672 shares issuable upon exercise of options which by their
terms are currently exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See Item 10 for information as to the management services agreement between the
Company and Founders Management Services, Inc. and as to the compensation to
Dr. Bezoza, a Director of the Company, for consulting services.
The firm of Datsopoulos, MacDonald & Lind, P.C., of which Mr. Datsopoulos, a
director of MTNA and, since August 19, 1994, a director of the Company,
received fees for services rendered to MTNA in the respective amounts of
$18,251 in 1996 and $93,273 in 1995.
The Company paid Founders fees of (I) $60,000 in July 1993 for its services in
originating and negotiating the acquisition of the businesses of VCS and NAP
and sale of the Class A Stock effected on July 29, 1993 in an offering which
was exempt under Rule 504 of Regulation D from registration under the
Securities Act and (ii) $84,000 in January 1995 for its services in connection
with the acquisition of Jason.
During 1996, in accordance with the Company's agreement to reimburse certain
expenses and to pay fixed monthly management fees of $10,000, the Company
incurred management fees to Founders of $120,000 plus expenses of $39,206 for a
total of $159, 206.
Mr. MacDonald purchased 100,000 shares of common stock at $1.00 per share on
March 20, 1996.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a)Exhibits
2(a) - Asset Purchase Agreement between the Company and Vitamin Specialties
Company and NAP Corporation, dated July 29, 1993*
2(b) - Amended and Restated Agreement and Plan of Merger among the Company, VC
Acquisition Corp. and Montana Naturals Int'l, Inc.**
21
<PAGE>
2(C) - Stock Purchase Agreement between the Company and the stockholders of
Jason Pharmaceuticals, Inc.***
3(I) - Certificate of Incorporation of the Company and amendments thereto*
3(ii) - By-Laws of the Company*
10(a) - 1993 Stock Option Plan of the Company as amended*
10(b) -Lease between the Company and 8200 Ogontz Avenue Partnership as to
building containing offices, warehouse and distribution facilities and retail
location*
10(c)-1- Lease relating to the Company's Owings Mills, Maryland facility
10(d)- Amended and Restated Agreement between the Company and Founders
Management Services, Inc.
10(e) - Consulting Agreement between the Company and Dr. Howard M. Bezoza*
10(f) - Employment agreement with Bradley T. MacDonald
- ---------------------------
* Filed as an exhibit to and incorporated by reference to the Registration
Statement on Form SB-2 of the Company, File No. 33-71284-NY.
** Filed as an exhibit to and incorporated by reference to the Registration
Statement on Form S-4 of the Company, File No. 33-81524.
*** Filed as an exhibit to and incorporated by reference to the Current Report
on Form 8-K of the Company dated January 3, 1995.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1996.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEALTHRITE, INC.
---------------------
(Registrant)
/s/ Bradley T. MacDonald
------------------------
Bradley T. MacDonald
Chief Executive Officer
Dated: April 3, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------- -------------------------------- -------------
<S> <C> <C>
/s/ Warren H. Haber Chairman of the Board and April 4, 1996
- ---------------------------------- Director
Warren H. Haber
/s/ John L. Teeger Vice Chairman of the Board, April 4, 1996
- ---------------------------------- Secretary and Director
John L. Teeger
/s/ Bradley T. MacDonald Chief Executive Officer, President April 3, 1996
- ---------------------------------- and Director
Bradley T. MacDonald
/s/ Anjelo J. Talluto
- ---------------------------------- Chief Financial Officer April 3, 1996
Angelo J. Talluto
/s/
- ---------------------------------- Director April 4, 1996
Howard M. Bezoza, M.D.
- ---------------------------------- Director April , 1996
Milton Datsopoulos, Esq.
<PAGE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------- -------------------------------- -------------
<S> <C> <C>
/s/ John C. Horvitz
- ---------------------------------
John C. Horvitz Director April 4 , 1996
- ---------------------------------
John A. McConville Director April , 1996
</TABLE>
<PAGE>
HEALTHRITE, INC.
- I N D E X -
PAGE
NUMBER
REPORT OF INDEPENDENT AUDITORS F-2
CONSOLIDATED BALANCE SHEET AS AT
DECEMBER 31, 1996 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996
AND DECEMBER 31, 1995 F-5
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995 F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995 F-7
NOTES TO FINANCIAL STATEMENTS F-8
F-1
<PAGE>
[RAE LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Healthrite, Inc.
Owings Mills, MD
We have audited the consolidated balance sheet of Healthrite, Inc.
and subsidiaries as at December 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
the years ended December 31, 1996 and December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Montana Naturals
Int'l., Inc., a wholly owned subsidiary, which statements reflect total assets
and revenues constituting 39 percent and 45 percent (1996) and 33 percent and
38 percent (1995), respectively, of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for Montana
Naturals Int'l., Inc., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements enumerated above present
fairly, in all material respects, the consolidated financial position of
Healthrite, Inc. as at December 31, 1996, and the results of its operations and
cash flows for the years ended December 31, 1996 and December 31, 1995 in
conformity with generally accepted accounting principles.
Richard A. Eisner & Company LLP
New York, New York
February 28, 1997
F-2
<PAGE>
[MCFARLAND & ALTON P.S. LOGO]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Montana Naturals Int'l., Inc.
Arlee, Montana
We have audited the accompanying balance sheet of Montana Naturals Int'l.,
Inc. as of December 31, 1996, and the related statements of income,
stockholders' equity, and cash flows for the years ended December 31, 1996
and 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Montana Naturals Int'l.,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the years ended December 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
/s/ McFarland & Alton P.S.
--------------------------
McFarland & Alton P.S.
February 10, 1997
Spokane, Washington
F-3
<PAGE>
HEALTHRITE, INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
A S S E T S
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286,000
Accounts receivable, net of allowance for doubtful
accounts of $107,000 . . . . . . . . . . . . . . . . . 1,573,000
Merchandise inventory. . . . . . . . . . . . . . . . . . 3,894,000
Prepaid expenses and other current assets. . . . . . . . 300,000
Deferred tax asset - current portion . . . . . . . . . . 176,000
-----------
Total current assets. . . . . . . . . . . . . . . 6,229,000
Property, plant and equipment - net . . . . . . . . . . . . 3,589,000
Customer lists. . . . . . . . . . . . . . . . . . . . . . . 113,000
Excess of purchase price over net assets acquired . . . . . 474,000
Deferred design and distribution costs. . . . . . . . . . . 718,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . 162,000
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . 166,000
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . $11,451,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of obligations under capital lease. . $ 96,000
Current maturities of long-term obligations. . . . . . . 1,957,000
Accounts payable and accrued expenses. . . . . . . . . . 2,214,000
-----------
Total current liabilities . . . . . . . . . . . . 4,267,000
Obligations under capital leases. . . . . . . . . . . . . . 131,000
Long-term obligations . . . . . . . . . . . . . . . . . . . 730,000
-----------
Total liabilities . . . . . . . . . . . . . . . . 5,128,000
-----------
Commitments and contingencies
Series A redeemable convertible 8% preferred stock; par
value $.001; 2,000,000 authorized; 432,500 issued and
outstanding, redemption value $865,000. . . . . . . . . 749,000
-----------
Common stock; par value $.001 per share; 10,000,000
authorized; 4,276,472 issued and outstanding . . . . . . 4,000
Additional paid-in capital. . . . . . . . . . . . . . . . . 6,934,000
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (1,364,000)
------------
Total stockholders' equity. . . . . . . . . . . . 5,574,000
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . $11,451,000
===========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-4
<PAGE>
HEALTHRITE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $16,504,000 $16,019,000
Cost of sales, including cost of warehousing,
distribution and occupancy. . . . . . . . . 9,216,000 9,167,000
------------ -----------
Gross profit . . . . . . . . . . . . . . . . . 7,288,000 6,852,000
Selling, general and administrative expenses . 6,455,000 6,850,000
Restructuring and relocation costs . . . . . . 388,000 382,000
------------ -----------
Income (loss) from operations. . . . . . . . . 445,000 (380,000)
------------ ------------
Interest and other income (expenses):
Interest (expense). . . . . . . . . . . . . (242,000) (157,000)
Other income. . . . . . . . . . . . . . . . 26,000 71,000
------------ -----------
T o t a l. . . . . . . . . . . . . . (216,000) (86,000)
------------ ------------
Income (loss) before provision for income
taxes . . . . . . . . . . . . . . . . . . . 229,000 (466,000)
------------ ------------
(Benefit) provision for income taxes:
Current . . . . . . . . . . . . . . . . . . 55,000 10,000
Deferred. . . . . . . . . . . . . . . . . . (146,000) (110,000)
------------ ------------
Net (benefit) for income taxes . . . (91,000) (100,000)
------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . . . . 320,000 (366,000)
------------ ------------
Less:
Preferred stock dividend requirement. . . . 27,000
Accretion of difference between carrying
amount and redemption amount of
redeemable preferred stock. . . . . . . . 10,000
-----------
37,000
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS. . . . . . . . . . . . . . . . $ 283,000 $ (366,000)
============ ============
Net income (loss) per share. . . . . . . . . . $.07 $(.09)
===== ======
Weighted average shares outstanding. . . . . . 4,313,418 4,176,472
========== =========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-5
<PAGE>
HEALTHRITE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------
(Par Value Additional Unamortized
Number of $.001) Paid-in Accumulated Deferred
Shares Amount Capital Deficit Compensation Total
----------- ---------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 . . . . . . . 4,108,972 $4,000 $6,357,000 $(1,291,000) $(51,000) $5,019,000
Stock issued in acquisition of Jason
Pharmaceuticals, Inc. . . . . . . . 67,500 337,000 337,000
Amortization of deferred compensation. 51,000 51,000
Net (loss) . . . . . . . . . . . . . . (366,000) (366,000)
---------- ------- ----------- ------------ --------- -----------
Balance, December 31, 1995 . . . . . . 4,176,472 4,000 6,694,000 (1,657,000) - 0 - 5,041,000
Issuance of common stock . . . . . . . 100,000 200,000 200,000
Common stock warrants issued in
preferred stock financing . . . . . 50,000 50,000
Accretion of difference between
carrying amount and redemption
amount of redeemable preferred
stock . . . . . . . . . . . . . . . (10,000) (10,000)
Dividend on preferred stock. . . . . . (27,000) (27,000)
Net income . . . . . . . . . . . . . . 320,000 320,000
---------- ------- ----------- ------------ --------- ----------
BALANCE, DECEMBER 31, 1996 . . . . . . 4,276,472 $4,000 $6,934,000 $(1,364,000) $ - 0 - $5,574,000
========== ======= =========== ============ ========= ==========
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-6
<PAGE>
HEALTHRITE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 320,000 $ (366,000)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . 662,000 540,000
Amortization of deferred compensation . . . . . . . . 51,000
Common stock issued for services. . . . . . . . . . . 100,000
(Gain) on asset sale. . . . . . . . . . . . . . . . . (11,000)
(Increase) in deferred taxes, net . . . . . . . . . . (146,000) (100,000)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable. . . . . (641,000) 263,000
(Increase) in merchandise inventory . . . . . . . . (830,000) (980,000)
Decrease (increase) in prepaid expenses . . . . . . (62,000) 118,000
Decrease in other assets. . . . . . . . . . . . . . 26,000 68,000
(Decrease) increase in accounts payable and
accrued expenses. . . . . . . . . . . . . . . . . 362,000 (40,000)
----------- ------------
Net cash (used in) operating activities. . . (220,000) (446,000)
----------- ------------
Cash flows from investing activities:
Purchase of acquired business (net of acquired cash of
$1,175,000) . . . . . . . . . . . . . . . . . . . . . . (1,613,000)
Purchase of property and equipment. . . . . . . . . . . . (274,000) (654,000)
Proceeds from sale of equipment . . . . . . . . . . . . . 58,000
(Increase) in deferred design and distribution
costs . . . . . . . . . . . . . . . . . . . . . . . . . (718,000)
----------- ------------
Net cash (used in) investing activities . . . (934,000) (2,267,000)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common stock. . . . . . . . . . 100,000
Net proceeds from issuance of preferred stock . . . . . . 789,000
Repayment of capital lease obligations. . . . . . . . . . (105,000) (40,000)
Proceeds of long-term debt. . . . . . . . . . . . . . . . 662,000 1,324,000
Principal repayments of long-term debt. . . . . . . . . . (354,000) (199,000)
----------- ------------
Net cash provided by financing activities. . . . . 1,092,000 1,085,000
----------- -----------
NET (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . (62,000) (1,628,000)
Cash - beginning of the period . . . . . . . . . . . . . . . 348,000 1,976,000
----------- -----------
CASH - END OF THE PERIOD . . . . . . . . . . . . . . . . . . $ 286,000 $ 348,000
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . $ 231,000 $ 146,000
Taxes paid. . . . . . . . . . . . . . . . . . . . . . . . 21,000
Supplemental schedule of noncash investing and financing
activities:
Equipment acquired with debt. . . . . . . . . . . . . . 51,000 130,000
Issuance of stock for acquired business . . . . . . . . 337,000
Dividends on preferred stock. . . . . . . . . . . . . . 27,000
</TABLE>
The accompanying notes to financial statements are an integral part hereof.
F-7
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Business Operations:
Healthrite, Inc. (the "Company") and its wholly owned
subsidiaries Jason Pharmaceuticals, Inc. ("Jason") and Montana
Naturals Int'l., Inc. ("MTNA") manufacture and distribute vitamins,
food supplements and health and beauty aids. These products are sold
primarily in the United States through three channels of distribution:
retail stores, medical professionals and direct mail. The
processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by one or more federal
agencies, including the Food and Drug Administration, the Federal
Trade Commission, the Consumer Product Safety Commission, the
United States Department of Agriculture and the United States
Environmental Protection Agency.
Acquisitions:
On January 3, 1995, the Company acquired all of the outstanding
common stock of Jason a manufacturer of dietary nutrition supplements, for
approximately $3,125,000. Included in the purchase price was 67,500 shares of
common stock valued at $5.00 per share. Additionally, the Company entered into
noncompete agreements with Jason's former shareholders valued at $3,000. The
acquisition was accounted for under the purchase method of accounting.
The purchase price has been allocated to the assets acquired and
liabilities assumed based on their fair values as follows:
Purchase price:
Cash . . . . . . . . . . . . . . . . . . $1,837,000
Repayment of stockholders notes. . . . . 485,000
Common stock . . . . . . . . . . . . . . 337,000
Costs of acquisition . . . . . . . . . . 466,000
----------
T o t a l . . . . . . . . . . . . $3,125,000
==========
Assets acquired and liabilities assumed:
Current assets . . . . . . . . . . . . . $2,153,000
Property, plant and equipment. . . . . . 1,556,000
Other assets . . . . . . . . . . . . . . 41,000
Current liabilities. . . . . . . . . . . (415,000)
Noncurrent liabilities . . . . . . . . . (210,000)
----------
T o t a l . . . . . . . . . . . . $3,125,000
==========
(continued)
F-8
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Business Operations: (continued)
Restructuring and relocation costs:
The Company completed a consolidation plan during 1996 whereby the
Company combined management and administrative functions of the Company's three
divisions. Restructuring costs include a $100,000 compensation charge for the
issuance of shares to the Company's newly hired president below market value,
$265,000 of severance and $23,000 in recruiting and relocation expenses.
During 1995, the Company completed the relocation of its retail and
catalog operations to Maryland. Relocation costs included $167,000 of
severance, moving and relocation costs, $145,000 of inventory writeoffs, and
$70,000 for the disposal of machinery and equipment.
(NOTE B) - Significant Accounting Policies:
Significant accounting policies followed in the preparation of the
financial statements are as follows:
Principles of consolidation and basis of presentation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts have been
eliminated.
Cash and cash equivalents:
For the purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Merchandise inventory:
Merchandise inventory is stated at the lower of cost or market,
utilizing the first-in, first-out method. The cost of finished goods includes
the cost of raw materials, packaging supplies, direct and indirect labor and
other indirect manufacturing costs.
Prepaid catalog costs and advertising:
Mail order direct printing and mailing costs are capitalized as
prepaid catalog costs and charged to income over the catalog period,
approximating six months. Advertising costs are expensed as incurred.
(continued)
F-9
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Significant Accounting Policies: (continued)
Property, plant and equipment:
Property, plant and equipment are stated at cost. The Company
computes depreciation and amortization using the straight-line method over the
estimated useful lives of the assets acquired as follows:
Buildings . . . . . . . . . . 25 - 40 years
Equipment and fixtures. . . . 3 - 15 years
Vehicles. . . . . . . . . . . 3 years
Leasehold improvements. . . . life of lease or assets,
if shorter
Income taxes:
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
Deferred taxes are recognized for temporary differences in the recognition of
income and expenses for financial reporting and income tax purposes,
principally due to accelerated depreciation, inventory overhead and reserves.
Intangible assets:
Excess of purchase price over net assets acquired, customer lists
and covenants not to compete are amortized on a straight-line basis over a
period of twenty, ten and three years, respectively.
Net income (loss) per share:
Net income (loss) per share of common stock is computed by dividing
net income, after deducting the preferred stock dividend requirements and
accretion of preferred stock to redemption value, by the weighted average
number of common shares and common stock equivalent shares outstanding;
however, common stock equivalent shares are excluded from the calculation when
they are anti-dilutive.
Revenue:
Revenue is recognized when the product is shipped to customers or
purchased by retail customers.
Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(continued)
F-10
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Significant Accounting Policies: (continued)
Fair value of financial instruments:
The carrying amount reported in the balance sheet for cash,
accounts receivable, accounts payable and accrued liabilities approximates fair
value because of the immediate or short-term maturity of the financial
instruments.
The carrying amount reported for outstanding bank indebtedness
approximates fair value because the debt is at a variable rate that reprices
frequently. The Company believes that its nonbank indebtedness approximates
fair value based on current yields for debt instruments of similar quality and
terms.
Concentration of credit risk:
Financial instruments that potentially subject the Company to
credit risk consist of trade receivables. The Company markets its products
primarily to medical professionals and distributors. The risk associated with
this concentration is believed by the Company to be limited due to the
performance of credit evaluation procedures.
New accounting standards:
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The provisions of SFAS No. 123 allow companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic value method
set forth in Accounting Principles Bulletin Opinion 25, "Accounting for Stock
Issued to Employees" ("APB 25") but disclose the pro forma effects on net
income (loss) had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its stock option
incentive plans.
(NOTE C) - Inventory:
Inventory consists of the following at December 31, 1996:
Raw materials. . . . . . . . . . . . $1,519,000
Work-in-process. . . . . . . . . . . 134,000
Finished goods . . . . . . . . . . . 2,241,000
Total inventory. . . . . . $3,894,000
(continued)
F-11
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE D) - Property, Plant and Equipment:
Property, plant and equipment at December 31, 1996 consist of the
following:
Land . . . . . . . . . . . . . . . . $ 65,000
Buildings and improvements . . . . . 758,000
Leasehold improvements . . . . . . . 1,217,000
Equipment and fixtures . . . . . . . 3,147,000
Vehicles . . . . . . . . . . . . . . 7,000
-----------
5,194,000
Less accumulated depreciation. . . . (1,605,000)
-----------
Property, plant and equipment - net. $ 3,589,000
===========
(NOTE E) - Deferred Design and Distribution Costs:
During 1996, the Company acquired a three-year exclusive license
agreement with a two-year renewal option for the use of a brand name in
connection with the manufacturing and distribution of nutritional drinks, bars
and dietary supplements under the Nautilus name. In connection with this new
line of products, the Company capitalized the following items:
Fees paid under license agreement . . . $ 45,000
Deferred design and packaging costs . . 316,000
Direct incremental distribution costs,
consisting of:
Salaries . . . . . . . . . . . . . 103,000
Promotional costs and other. . . . 254,000
--------
$718,000
========
All of these costs were incurred before sales of the product commenced. As of
December 31, 1996, inventory included $731,000 of Nautilus products and raw
materials.
The Company will amortize all costs relating to the business
development of the Nautilus division over two to five years. Included in
prepaid expenses as of December 31, 1996, is approximately $56,000 of deferred
advertising which will be amortized over one year. Shipments of the products
began during the first quarter of 1997.
(continued)
F-12
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses include the following:
Trade payables. . . . . . . . . . . . $1,772,000
Accrued expenses. . . . . . . . . . . 296,000
Accrued payrolls and related taxes. . 146,000
----------
$2,214,000
==========
(NOTE G) - Income Taxes:
At December 31, 1996, the principal components of the net deferred
tax assets are as follows:
Current deferred tax assets (liabilities):
Net operating loss carryforwards . . . . . $ 339,000
Accounts receivable. . . . . . . . . . . . 12,000
Inventory overhead and reserves. . . . . . 151,000
Accrued expenses . . . . . . . . . . . . . 17,000
Total gross current deferred tax
assets (liabilities). . . . . . . 519,000
Less valuation allowance . . . . . . . . . (343,000)
Current deferred tax assets
(liabilities) . . . . . . . . . . 176,000
Noncurrent deferred tax assets (liabilities):
Fixed assets . . . . . . . . . . . . . . . 152,000
Intangible assets. . . . . . . . . . . . . 18,000
Other. . . . . . . . . . . . . . . . . . . (4,000)
----------
Total gross noncurrent deferred
tax assets (liabilities). . . . . 166,000
---------
Total deferred tax asset. . . . . . $ 342,000
=========
(continued)
F-13
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE G) - Income Taxes: (continued)
Temporary differences arising from the acquisition of Jason
resulted in deferred taxes of $262,000 for which a valuation reserve was
recorded at the time of acquisition.
A reconciliation of the federal statutory rate to the income tax
expense is as follows:
For The Year Ended
December 31,
---------------------
1996 1995
--------- ---------
Income tax (benefit) based on federal
statutory rate. . . . . . . . . . . $ 79,000 $(158,000)
State and local tax, net of federal
benefit . . . . . . . . . . . . . . 30,000
Nondeductible expenses . . . . . . . . 4,000
(Decrease) increase in valuation
allowance . . . . . . . . . . . . . (185,000) 43,000
Overaccruals of federal tax . . (19,000)
Other. . . . . . . . . . . . . . . . . 5,000
---------- ---------
Income tax (benefit) . . . . . . . . . $ (91,000) $(110,000)
========== ==========
The Company has net operating loss carryforwards of approximately
$1,103,000 which are available to offset future taxable income. These
carryforwards expire from 2009 to 2010. The Tax Reform Act of 1986 contains
provisions which limit the net operating loss carryforwards available for use,
should significant changes in ownership interests occur. The Company has had an
ownership change which may result in the applications of these limitations.
(continued)
F-14
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Long-Term Debt:
Long-term debt as at December 31, 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
SBA 70% Guaranteed Bank loan, collateralized by all MTNA
accounts receivable, inventory, property and equipment
bearing interest at 9.17%, monthly payments of $12,925
through December 31, 1999 . . . . . . . . . . . . . . . . . . . . . $ 405,000
Bank loan, collateralized by equipment, quarterly variable interest
rate (9.25% at December 31, 1996) monthly payments
at $817 through April 1999. . . . . . . . . . . . . . . . . . . . . 22,000
Community Development Block Grant ("CDBG") loan, second position
security on MTNA equipment and inventory, bearing interest
at 5%, monthly payments at $4,947 through April 2002. . . . . . . . 274,000
Bank loan, collateralized by MTNA accounts receivable, inventory,
property and equipment second position, quarterly variable
interest rate (10.25% at December 31, 1996), monthly payments
of $2,111 through November 1999 . . . . . . . . . . . . . . . . . . 65,000
Revolving credit and term loan collateralized by certain
accounts receivable, inventory and equipment, interest at
the prime rate plus 2%, (1) . . . . . . . . . . . . . . . . . . . . 1,275,000
Note payable due in 7 annual installments of $42,000 through
March 1, 2002 which includes imputed interest at 8.75%. . . . . . . 187,000
Bank loan, collaterized by accounts receivable, inventory and
equipment bearing interest at 10.25% due
November 5, 1997 (2). . . . . . . . . . . . . . . . . . . . . . . . 459,000
-----------
2,687,000
Less current maturities. . . . . . . . . . . . . . . . . . . . . . . . (1,957,000)
------------
T o t a l . . . . . . . . . . . . . . . . . . . . . . . . . . $ 730,000
===========
</TABLE>
(1] As at December 31, 1996, the Company was not in compliance with
certain covenants of the loan agreement. The bank has waived the
events of default at December 31, 1996 and at the same time has
accelerated the due date of both the revolving and term loans to
January 1, 1998 from May 17, 1998. The covenants in the loan
agreement become more restrictive each quarter during 1997. Since
determination cannot be made that the Company will meet these
covenants, the loans have been classified as current. The Company
expects to have additional financing to replace these loans.
[2] As at December 31, 1996, the Company was in default of
a certain covenant which has been waived by the bank
through June 30, 1997 at which time the Company
believes it will be in compliance.
(continued)
F-15
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Long-Term Debt: (continued)
Future principal payments on long-term debt are as follows:
1997 . . . . . . . . . . . . . . . . . . . $1,957,000
1998 . . . . . . . . . . . . . . . . . . . 242,000
1999 . . . . . . . . . . . . . . . . . . . 257,000
2000 . . . . . . . . . . . . . . . . . . . 86,000
2001 . . . . . . . . . . . . . . . . . . . 107,000
Thereafter . . . . . . . . . . . . . . . . 39,000
----------
T o t a l. . . . . . . . . . . . $2,688,000
==========
(NOTE I) - Leases:
Operating leases:
The Company has an operating lease for office, manufacturing and
warehouse facilities which expires on January 31, 2000 and provides for monthly
payments of rent, real estate taxes and operating expenses and is subject to
escalations.
The Company leases its retail stores under operating leases which
expire at various dates through 2000. The lease agreements usually provide for
the lessee to pay real estate taxes, maintenance and other operating expenses.
Certain store leases provide for additional contingent rentals based upon sales
("percent rent").
In addition, the Company leases certain office equipment under
operating leases.
Future minimum lease payments as at December 31, 1996 are as
follows:
1997 . . . . . . . . . . . . . . . . $ 588,000
1998 . . . . . . . . . . . . . . . . 530,000
1999 . . . . . . . . . . . . . . . . 401,000
2000 . . . . . . . . . . . . . . . . 12,000
----------
T o t a l. . . . . . . . . $1,531,000
==========
Rent expense totalled approximately $816,000 and $848,000 for the
years ended December 31, 1996 and December 31, 1995, respectively. The
Company's retail stores did not meet certain sales levels and accordingly no
minimum percent rent was incurred during 1996 and 1995.
(continued)
F-16
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Leases:
Capital leases:
The Company leases certain equipment under capital leases.
The future minimum lease payments required under these lease
obligations are as follows:
1997 . . . . . . . . . . . . . . . . $110,000
1998 . . . . . . . . . . . . . . . . 89,000
1999 . . . . . . . . . . . . . . . . 38,000
2000 . . . . . . . . . . . . . . . . 13,000
2001 . . . . . . . . . . . . . . . . 5,000
--------
Total minimum lease payments . . . . 255,000
Less amount representing interest. . (28,000)
--------
Present value of minimum lease
payments. . . . . . . . . . . . . 227,000
Less current portion . . . . . . . . (96,000)
--------
Long-term portion. . . . . . . . . . $131,000
========
(NOTE J) - Employment and Consulting Agreements:
Pursuant to an agreement Founders Management Services, Inc.
("Founders"), a related party, is obligated to provide to the Company the
services of certain officers of Founders during the three-year term ending July
31, 1998. The stockholders and officers of Founders are major shareholders and
members of the Board of Directors of the Company. The agreement provides for
the payment to Founders of a base fee of $10,000 per month, adjusted yearly for
the Consumer Price Index. In addition, Founders is to receive an annual
incentive fee equal to 5% of the amount by which the consolidated pre-tax
income of the Company, before accrual for such incentive fee, exceeds $500,000.
Founders was paid management fees of $120,000 for the fiscal years 1996 and
1995.
In February 1996, the Company entered into an employment agreement
with a new officer of the Company providing for a two-year employment agreement
commencing in March 1996 for a base salary of $170,000 per annum and a bonus
based on the Company's profitability during the employment term.
In connection with the employment agreement, the officer purchased
100,000 shares of the Company's common stock for $100,000 on the first day of
employment.
In addition, the officer received options to purchase 100,000
shares of common stock, exercisable at the market price on the first day of
employment.
(continued)
F-17
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE K) - Redeemable Preferred Stock:
In August 1996, the Company sold 432,500 shares of Series A
nonvoting preferred stock which generated gross proceeds of $865,000, or $2.00
per share. Each share is entitled to a dividend of 8% ($.16) per share and is
to be redeemed in August 2001 at its liquidation value of $2.00 per share plus
unpaid accrued dividends. The shares are convertible into the Company's common
stock on the basis of one share of common for each share of convertible
preferred stock.
In connection with the preferred stock offering, the Company issued
warrants expiring in August 2001 to purchase 51,375 shares of common stock at
$2.50 per share. The warrants were valued at a fair value of $50,000.
Accordingly, the preferred stock has been recorded at its fair value including
the value of the warrants and expenses related to the preferred stock offering
as a preferred stock discount, which is to be accreted in annual installments
against the preferred stock until the expiration of the warrants.
(NOTE L) - Stock Option Plan:
On October 9, 1993, the Company adopted a Stock Option Plan
authorizing the grant of incentive and nonincentive options for an aggregate of
300,000 shares of the Company's common stock to officers, employees, directors
and consultants. Incentive options are to be granted at fair market value.
Options are to be exercisable as determined by the Stock Option Committee.
In May 1995, the Company amended the Stock Option Plan by
increasing the number of shares of the Company's common stock subject to the
Plan by 200,000 shares. During fiscal year 1995, all exercise prices of
outstanding options were reduced to $2.00.
The Company applies APB 25 in accounting for its stock option
incentive plan and, accordingly, recognizes compensation expense for the
difference between the fair value of the underlying common stock and the grant
price of the option at the date of grant. The effect of applying SFAS No. 123
on 1996 and 1995 pro forma net income and loss, respectively, as stated below,
is not necessarily representative of the effects on reported net income or loss
for future years due to, among other things, (1) the vesting period of the
stock options and (2) the fair value of additional stock options in future
years.
If such accounting provisions of SFAS No. 123 were applied, then
the Company's net income and net income per share would have been $240,000 and
$.06, respectively, for the period ended December 31, 1996 and the Company's
net loss in 1995 and net loss per share in 1995
(continued)
F-18
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE L) - Stock Option Plan: (continued)
would have been $(368,000) and $(.09), respectively. The fair value of the
options granted during 1996 and 1995 are estimated as $.62 and $.30 per share,
respectively, on the date of grant using the Black- Scholes option-pricing
model with the following assumptions: dividend yield 0%, volatility of 30%,
risk-free interest rate of 6.27% for 1996 and 6.26% for 1995, and expected life
of 3.25 years in 1996 and 1 year in 1995.
Additional information with respect to 1996 and 1995 stock option
activity is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995
--------------------- ----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year. . 283,000 $2.00 205,000 $2.00
Options granted . . . . . . . . . . 220,000 2.09 138,000 2.00
Options canceled or expired . . . . (103,000) 2.00 (60,000) 2.00
-------- -------
Outstanding at end of year. . . . . 400,000 2.05 283,000 2.00
======== =======
Options exercisable at year end . . 208,000 2.03 164,000 2.00
======== =======
</TABLE>
(NOTE M) - Commitments and Contingencies:
[1] The Company, like other retailers and distributors of products
that are ingested, faces an inherent risk of exposure to product liability
claims in the event that, among other things, the use of its products results
in injury.
[2] The Company's subsidiary Jason is a defendent in certain
product liability suits filed by its customers. The legal fees and damages to
Jason are limited to its insurance deductible. According to the Company's legal
counsel as of December 31, 1996, the maximum loss contingency on existing
claims totalled $25,000. The amount has not been recorded since in the opinion
of legal counsel, the outcome of these claims is uncertain.
[3] During the year, the Company entered into an exclusive three
year license agreement with an option to renew for an additional two years to
use the Nautilus name for a new line of products. The agreement requires the
payment of a royalty fee with guaranteed minimum royalties for each of the
initial three years of the agreement.
(continued)
F-19
<PAGE>
HEALTHRITE, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE N) - Export Sales:
Export sales consist of the following:
Year Ended
December 31,
-----------------------
1996 1995
---------- ----------
North American (not domestic) . $ 167,000 $ 420,000
Europe. . . . . . . . . . . . . 6,000 6,000
Asia/Pacific Rim. . . . . . . . 788,000 415,000
Middle East . . . . . . . . . . 540,000 327,000
Central/South America . . . . . 3,000
Other . . . . . . . . . . . . . 52,000 17,000
----------- ----------
T o t a l . . . . . . $1,553,000 $1,188,000
=========== ==========
F-20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
unaudited consolidated balance sheet as of September 30, 1996 and the unaudited
statement of income for the nine months then ended contained in the report on
Form 10-Q for the nine months September 30, 1996 of HealthRite, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 286,000
<SECURITIES> 0
<RECEIVABLES> 1,180,000
<ALLOWANCES> 707,000
<INVENTORY> 3,894,000
<CURRENT-ASSETS> 6,229,000
<PP&E> 3,589,000
<DEPRECIATION> 662,000
<TOTAL-ASSETS> 11,451,000
<CURRENT-LIABILITIES> 4,267,000
<BONDS> 0
0
749,000
<COMMON> 4,000
<OTHER-SE> 6,934,000
<TOTAL-LIABILITY-AND-EQUITY> 11,451,000
<SALES> 16,504,000
<TOTAL-REVENUES> 16,530,000
<CGS> 9,216,000
<TOTAL-COSTS> 16,059,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,000
<INCOME-PRETAX> 224,000
<INCOME-TAX> (91,000)
<INCOME-CONTINUING> 320,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 320,000
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
