SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 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 Drive, Owings Mills, MD 21117
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(Address of principal offices) (Zip Code)
Registrant's telephone number, including Area Code: (410) 581-8042
Securities registered pursuant to Section 12(b) of the Act: None
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 past 12
months, and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Check 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. [ ]
The issuer's revenues for the fiscal year ended December 31, 1997 were
$14,361,000.
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 Small Cap Market on March 24, 1998: $1.50.
Number of shares outstanding of registrant's Common Stock, as of March 20, 1998:
4,400,198 shares
Documents incorporated by reference: None
Transitional Small Business Disclosure Format (check one) yes ____ no X
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PART I
ITEM 1. Business.
Summary
HealthRite, Inc. (the "Company") is engaged in the production, distribution, and
sale of consumable fitness, health and diet products including energy formulated
products, bee pollen, bee-related products, standardized herbal extracts, meal
substitutes and sports nutrition products. These products are currently
manufactured in two modern facilities.
The Company's 1998 plan is to:
o focus on Pure Energy and Medifast branded products while growing
the profitable standardized herbal extracts custom manufacturing
operation;
o restructure the Company's marketing and distribution strategies
to take advantage of relationships with major retail drug chains
and favorable financing;
o consolidate most of the Company's production of branded products
in Montana to capitalize on lower cost structures; and
o develop a strategic manufacturing partnership for the Owings
Mills, Maryland facility.
The Company has implemented a new marketing strategy which focuses on only the
category product leaders from each of its wholly-owned operating subsidiaries,
Montana Naturals International, Inc. ("MTNA") and Jason Pharmaceuticals, Inc.
("Jason"). MTNA's leaders include the Montana Big Sky Pure Energy branded
products, Montana Big Sky bee pollen and bee-related products and its
standardized herbal extracts line. Jason's category leaders are its Medifast
product line including TAKE SHAPE(TM) in both regular and lactose-free
formulations.
The Company is committed to reduce its product manufacturing costs. Within the
next six months the Company will restructure and consolidate some of its
manufacturing operation by enlarging its MTNA operation and combining the Jason
manufacturing into this new facility. Also, new high speed, more efficient
equipment has been purchased at the MTNA operation which will provide more cost
effective manufacturing.
Markets
Herbs
Sales of herbal products have expanded over the past several years fueled by
various studies that demonstrate the positive health benefits of herbal
supplements. This market posted a 66% increase in sales in 1997. Management
therefore believes that there is greater consumer awareness, understanding and
interest in herbal products for a variety of health-related concerns.
HealthRite's Montana Naturals Division, with its widely-recognized brands, is
uniquely poised to maximize the income potential of this market.
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Diet Control
Millions of dieting Americans use a variety of weight loss methods, including
meal replacements, commercial diet programs, prescription diet medications and
hospital-based diet and counseling. The greatest growth trend appears to be in
the use of meal replacements, with the existing and newly developed products.
The Company is developing new meal replacement products and expanding its
existing products to gain a larger share of the current and future meal
replacement market.
Competition
The markets for the Company's products are highly competitive, but fragmented.
The Company sells its herbal products through various retail distribution
channels such as vitamin/fitness stores, health food stores, drug stores,
supermarkets, discount stores, multi-level and direct marketing. In each
instance, the Company competes for market share with larger, well financed
companies such as Pharmavite, Rexall-Sundown and private label manufacturers of
major retailers. Similarly, there are large, well financed competitors in the
meal replacement (Take Shape(TM) by Medifast(R)) industry such as Slimfast. The
very low calorie diet market (Medifast) is much smaller and the competition is
much more limited. Bee pollen products are likewise a small market with fewer
and smaller competitors. Finally, the Company manufactures private label herbal
and meal replacement products for major retailers and manufacturers, a highly
competitive, very fragmented, part of the industry
Products
The Company offers a broad selection of products, all under its branded labels
and private label programs.
Montana Big Sky (Pure Energy) - marketed predominantly to natural foods
enthusiasts.
This brand encompasses a wide range of energy products containing bee pollen and
bee-related ingredients. The Montana Naturals Pure Energy line was recently
extended to include herbal teas. In both 1996 and 1997, Pure Energy Instant Teas
won as "best new product" at the annual natural food industry shows and a
People's Choice Award for taste and quality. Pure Energy products, which have
traditionally only been sold in health food stores, are participating in the
drug store cross over and as such are carried in Rite Aid, Walgreen, CVS,
Phar-Mor, American Stores, Publix, Wal-Mart, "One Source", and AmeriSource. A
program using the Pure Energy two-piece capsule is being advanced in the
convenience store trade. The bee pollen/bee-related products are still widely
distributed in the health food trade and have also participated in the cross
over to selected specialty retailers.
Montana Naturals Standardized Herbal Extracts - only natural ingredients and
quality from start to finish.
Herbal-based products are currently growing in popularity. This leads
manufacturers to new products and private label opportunities. As a world-class
manufacturer of herbs, MTNA expects to develop new products and to capitalize on
these opportunities.
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Medifast(R) - a medically-supervised very-low-calorie diet.
Brand awareness of the Medifast name continues to evolve through line
extensions, quality product development, the Company's emphasis on customer
service, and publications and programs developed by the Company's own
nutritionist.
TAKE SHAPE(TM) - good-tasting, nutritious weight maintenance products.
Take Shape, an over-the-counter weight loss product, has been developed to be
marketed through major drug store chains. The Company believes that new products
for the pharmacist under the Medifast(R) TAKE SHAPE(TM) brand will bring sales
from a previously untapped market. The Company is also producing several private
label weight loss products for the growing diet center market.
Nautilus(R) Nutritionals - sports nutrition for the performance-driven athlete.
"Nautilus", introduced in January 1997, will focus on women's sport drinks and
bio-engineered foods. Nautilus Nutritionals will be repositioned to sell
directly to consumers via infomercial and multi-level marketing.
Sales and Marketing
The Company markets and sells its products through its two operating
subsidiaries:
Montana Naturals International, Inc.
MTNA offers its products principally through 1) a distributor/broker network in
the health food trade, and 2) five brokers in the mass trade managed in each
case by a national sales manager. The key executives Bradley T. MacDonald, Reed
Vordenberg, and Charles Walgreen are also active in implementing sales
strategies and establishment of retail contacts. This means customers will
receive more coverage and attention from the Company's executives and
management.
Montana Big Sky brand products are sold through a network of seven major health
food brokers covering the 58 distributor network in the health food trade. The
brokers are managed and assisted by two field sales managers and a national
sales manager. Foreign sales have been developed and account for approximately
7.4% of sales in 1997. Sales of contract manufacturing for major,
over-the-counter marketers are a significant area of growth for MTNA. These
contracts are a result of direct contacts of the Company's management with the
major marketing companies.
Jason Pharmaceuticals, Inc.
Jason has been a leader in the very-low-calorie diet market with its Medifast
brand which has been administered by more than 150,000 physicians to over
500,000 patients. Medifast products are offered through physicians, hospitals,
diet centers, and pharmacies. Jason solicits these
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entities through its full-time telemarketers and a National Sales Manager.
Private label products are developed and manufactured for diet centers. Jason
plans to promote TAKE SHAPE(TM) by Medifast(R) to pharmacies in 1998. By using
expertise developed over the last 20 years, Jason intends to enter the
over-the-counter meal replacement market with a lactose-free TAKE SHAPE(TM)
product. Jason is also fielding a sales team to sell Medifast(R) products to
diet centers.
Manufacturing
MTNA and Jason manufacture and package products in tablet, hard shell capsules,
powder and liquid form. In the production 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 currently performed at the Company's Arlee,
Montana and Owings Mills, Maryland facilities. The Arlee, Montana facility was
upgraded and expanded during 1995. Further expansion of this facility is
scheduled for completion by the end of 1998 and will enhance the facility to
pharmaceutical grade manufacturing.. 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.
Advertising and Promotion
In the past, advertising and promotion had only been through print and radio
media. Inserts in popular health-related magazines were used such as Energy
Times, Delicious, Alive, Better Nutrition, Let's Live, Body Mind Spirit,
Vegetarian Times, New Age Journal, Health Naturally, Eating Well, Fitness,
Working Woman, Working Mother, as well as trade journals. The Company's Pure
Energy brand is presented and sampled to the 40,000 retailers and consumers who
attend the 16 major bike race sites across the country. The Company owns several
registered trademarks, including Medifast(R), Take Shape(TM), Loving Mood(R),
Pure Energy(R), Montana Big Sky, and a license for Nautilus(R) Nutritionals.
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In January 1998, the previous Board and management obligated the Company to two
advertising programs at a cost of approximately $425,000. The cost will be
realized in the 1st Quarter of 1998. The advertising appeared in the 1st Quarter
of 1998 in nationally recognized magazines. Present management will reevaluate
this program in light of its cost and effectiveness. The cost of the quarterly
advertising is twice as much as previous annual expenditures by the Company. The
second program is the sponsorship of a mountain bike team in 1998 for $100,000,
of which $25,000 will be realized on a quarterly basis. In 1997, the $85,000
spent to sponsor the Nautilus Nutritionals Professional Mountain Bike Team had
no effect on sales.
Governmental Regulation
History
The processing, formulation, packaging, labeling and advertising of the
Company's products are subject to regulation by several federal agencies, but
principally by the Food and Drug Administration (the "FDA"). The Company must
comply with the standards, labeling and packaging requirements imposed by the
FDA for the sale of both pharmaceuticals food products. The food product
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 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, then 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
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ingredient and include the term "dietary supplement" in the labeling. In
addition, the FDA must promulgate regulations regarding physician-supervised
treatment medical treatment programs for obesity. Products are manufactured and
packaged in accordance with customer's specifications and sold under the
customer's labels both domestically and in foreign countries through the
customers' own distribution channels.
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
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 products
from suppliers who do not maintain such coverage.
Employees
At March 15, 1998, the Company employed 97 people, of whom 4 were engaged in
retail, 55 in manufacturing, and 38 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, but is collateral for a bank loan. 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 remaining retail store is leased through February 2000.
The leases require the Company to bear, in addition to the basic rent, the costs
of insurance, tax and certain maintenance costs.
ITEM 3. Legal Proceedings.
There are no material legal proceedings currently pending against the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the shareholders of the Company was held on December 17,
1997. Bradley T. MacDonald, former President of the Company, organized a slate
of directors who solicited proxies in opposition to the nominees of the
Company's management.
Background
Bradley T. MacDonald resigned in August, 1997 after the then incumbent board of
directors accused him of mismanagement. In November he led a proxy contest to
replace the incumbent board of directors.
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MacDonald's proponents asserted that the Company's future growth and
profitability required a board of directors with the necessary blend of
experience and knowledge of (i) distribution of consumer products through major
sales outlets such as national and regional supermarket and drugstore chains,
(ii) product marketing and advertising, and (iii) production and product
development in the dietary supplement and health food industry. The proponents
believed its nominees had this knowledge and experience.
If elected, they intended to rehire Bradley T. MacDonald as Chairman and Chief
Executive Officer of HealthRite. The initial goals would be to reduce costs by
consolidating some production facilities and to restructuring sales and
marketing efforts by focusing on distribution of the Company's products through
major supermarket and drugstore chains and to continue to grow the Company's
health food business.
Summary of Proxy Contest
The proxy contest was won by the Bradley MacDonald proponents and a new slate of
directors was elected on December 17, 1997. The new directors included Charles
Walgreen, Walgreen Co. management for 16 years; David Panasci, former president
of Fay's, Inc., a drugstore chain; and David Green, president of Southwest
Supermarkets, a chain based in Phoenix, Arizona. In addition, the slate included
Bradley T. MacDonald; Ron Hauge, Montana Naturals founder; Reed Vordenberg,
owner of a marketing company; and Beverly Valore, a lawyer who specialized in
drug product liability law.
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 Small Cap Stock Market. The following is a list of the
low and high bid quotations by fiscal quarters for 1997 and 1996 as reported by
Nasdaq:
1997
Low High
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Quarter ended March 31, 1997 2 1/4 3 5/8
Quarter ended June 30, 1997 1 1/2 2 7/8
Quarter ended September 30, 1997 1 3/8 2 3/4
Quarter ended December 31, 1997 1 1/4 2 1/8
1996
Low High
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
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(a) The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
(b) There were 193 record holders of the Company's Common Stock, as of March 19,
1998.
(c) No dividends on common stock were declared by the Company during 1997 or
1996.
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ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
1997 Comparison with 1996
Operating
Consolidated net sales for 1997 were $14,361,000 which is $2,143,000 (13%) less
than 1996 sales of $16,504,000. In 1996, MTNA's sales were $6.3 million, Jason's
sales were $5.2 million and Vitamin Specialties sales were $5 million for a
Company total of $16.5 million. In 1997, sales for MTNA increased to $8.8
million, Jason's sales were $3.8 million and Vitamin Specialty Sales (for a six
month period until sold) were $1.8 million for a total of $14.4 million. Despite
the increase in sales by MTNA, revenues for 1997 decreased due in substantial
part to the sale of the Vitamin Specialties stores in June 1997 and subsequent
loss of revenues, $2,488,000 (computed from 1996 sales) and lower revenue of
$768,000 at Jason Pharmaceuticals. Reduced revenue at Jason is attributed to the
lower demand for weight management supplements and the increased popularity of
diet drug medications such as phentermine, dexfenfluramine and the combination
phentermine-fenfluramine ("phen-fen"). Medifast was used in conjunction with
phen-fen.
Gross margins decreased from 44% in 1996 to 33% in 1997 due to an increase in
lower margin contract manufacturing business, the higher cost of producing
Nautilus product, the loss of the higher margins of the retail operations and
the write-off of inventory.
Selling, General and Administrative expenses for 1997 increased $1,374,000 (22%)
above 1996 expenses attributable to a bad debt write-off ($174,000) and
non-recurring legal costs associated with the proxy contest approximating
$220,000. In addition, advertising, promotional and sales personnel costs to
promote the Nautilus line, in 1997 increased significantly over the prior year.
These factors coupled with disappointing sales, significant returns, and
deferred development cost write-downs resulted in a loss of $3,138,000 from
operations in 1997 compared to increase from operations of 445,000 in 1996. Also
in 1997, the Company recorded a tax expense due to increase in valuation
allowance of deferred tax asset of $342,000.
Non-Operating
Interest expense decreased by $5,000 and reflects the reduced outstanding
balances from the pay down of term debt in the ordinary course of operations.
Also, on June 20, 1997 the assets of the unprofitable Vitamin Specialties
operation were sold to stem the recurring losses of this operation. Proceeds
from the sale of $2,692,000 were used to pay outstanding debt including
$1,275,000 to satisfy debt owed to Fleet Bank by the Company and $105,000 to
satisfy leases on computer hardware and software. The balance of the proceeds of
$1,312,000 proceeds were used as working capital.
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A preferred stock dividend of $68,000 was paid in 1997.
The net loss for 1997 was $3,697,000, an $.88 loss per share on a diluted basis
compared to income of $320,000, $.07 earnings per share income on a diluted
basis in 1996.
Liquidity and Capital Resources
In October 1997, First Bank Montana (with a U.S. Department of Agriculture
guarantee) provided a $4,500,000 financing package, and Lake County Community
Development Corporation (through a CDBG grant) provided an additional $450,000
financing package for the expansion of plant and equipment and working capital,
in return for the Company's pledge to expand operations and increase the
employee count in Arlee, Montana. Funding of these loans began in 1997. Terms of
the loan specify that plant and equipment additions be completed by September
30, 1998.
The Company was granted a waiver for the breach in a covenant for the First Bank
of Montana's loan requirement that prohibits the transfer of funds in excess of
$150,000 for corporate expenses. Previous management transferred $220,000 to the
Company's New York account for corporate expenses from the MTNA account in
violation of the bank covenants.
The Company had working capital of $2,074,000 on December 31, 1997 compared with
$1,962,000 at December 31, 1996. The $112,000 increase reflects the payoff of
current classification of bank debt in 1997.
In August 1996, the Company sold 432,500 shares of 8% convertible preferred
stock due 2001 which generated gross proceeds of $856,000. The shares are
convertible into the Company's common stock on the basis of one share of common
stock for each share of convertible in preferred stock. The proceeds were used
to develop the Nautilus brand products and for working capital.
In April 1996, the Company acquired a three year exclusive license with a two
year renewal option for the use of the Nautilus brand name in connection with
the manufacturing and distribution of nutritional drinks, bars, and dietary
supplements. In connection with this new line of products, the Company, in 1997,
capitalized the development costs of $718,000. The costs relating to the
development of the Nautilus line were originally to be amortized over two to
five years. However, since the product under the Nautilus brand was not
adequately marketed, only minimal sales of the product were realized and it
became necessary to write off all Nautilus costs in 1997.
Vitamin Specialties and Jason had entered into loan agreements on May 17, 1995
aggregating $2,000,000. This loan was paid out in June 1997 with the proceeds
from the sale of Vitamin Specialties' assets. (See Item 6.)
In December 1997 Jason entered into a loan agreement with Century Credit
Corporation to provide working capital. A term loan of $260,000 was obtained in
addition to a revolving credit
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line with loan advances available based on percentages of eligible accounts
receivable and raw materials. The revolving credit and term loan outstanding was
limited to a total of $1,000,000. At December 31, 1997 $578,000 was available,
of which $74,000 had been drawn and the term loan balance was $255,000.
The current board of directors and certain consultants and advisors were issued
a total of 98,726 shares of common stock in lieu of cash to reimburse them for
services and out of pocket expenses incurred in the proxy contest in 1997.
The Company is planning to begin an upgrade of its electronic data systems to
increase efficiency with year 2000 compliant software. It is estimated that at
least $250,000 will be necessary in 1998 to begin this process.
It is the intent of the management of HealthRite to raise $2,000,000 in a
private placement in a combination of debt and equity to fund the consolidation
of selected manufacturing functions in Montana, to modernize the Company's
information systems, and to provide working capital to launch the Medifast TAKE
SHAPE to drug stores and clinics. There is no assurance, however, that the
financing will be completed.
Seasonality
The Company's historical operations have not been subject to significant
seasonality.
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 following are the Board of Directors elected on December 17, 1997*:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Bradley T. MacDonald 51 Chairman of the Board, Chief Executive
Officer, Chief Financial Officer, Director
Reed Vordenberg 47 President, HealthRite, Inc., Secretary and
Director
Charles R. Walgreen, Sr. 37 President, Montana Naturals Int'l, Inc.
and Director
Ronald O. Hauge 51 Director
David M. Green 42 Director
David H. Panasci 39 Director
Beverly L. Valore 55 Director
</TABLE>
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* Operational control was not obtained until January 23, 1998.
(b) The Company's executive officers and directors until December 17, 1997
were as follows:
Warren H. Haber, Chairman of the Board, Director; John L. Teeger, Vice
Chairman of the Board, Secretary and Director, Chief Financial Officer
(August-December 17); Bradley T. MacDonald, President, Chief Executive
Officer and Director (January 1 - July 25); Douglas A. Okland, Executive
Vice President and Co-Chief Operating Officer; Angelo J. Talluto, Chief
Financial Officer (January-August), Corporate Controller
(September-December); Howard M. Bezoza, M.D., Director; Milton Datsopoulos,
Director; John C. Horvitz, Director; John A. McConville, Director; Sidney
Towle, Director (July-December); David A. Illingworth, President (August
-December) and Co-Chief Operating Officer.
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.
Bradley T. MacDonald is a Director, the Chief Executive Officer and Chief
Financial Officer of the Company. He previously served as the President and
Chief Executive Officer of HealthRite from March 1996 to August 1997, when he
resigned as a result of disagreements with prior management over the direction
of the Company. Prior to joining the Company, from 1994 to 1996, he was
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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
Pennsyl-vania Optical Co., Pangburn Candy Co., Chief Operating Officer of the
Bonneau Co., and Chief Financial Officer of Begley Drug Stores.
Mr. Vordenberg, President, joined the Company in January, 1998. He is the
founder and President of Vordenberg Marketing, Inc. ("VMI"), a private label
sales and marketing consulting company. VMI has provided marketing, consulting,
sourcing, advertising, package design and quality assurance assistance to
companies such as Heinz, Starkist, Ore Ida Potatoes, Jergens, Marketing
Corporation of America, and many retailer brands. VMI has developed complete
private label programs for several major retailers covering over 2,500 items and
ten different labels.
Mr. Walgreen, President, Montana Naturals Int'l, Inc., joined the Company in
January, 1998. He was the President and Chief Executive Officer of Walgreen
Asset Group, a holding company which owns and operates a diverse group of
companies. Prior to becoming President of Walgreen Asset Group, he was an
executive in the marketing/purchasing department of Walgreen Company with
responsibility for purchasing over-the-counter consumer products.
Mr. Green, a Director, is the Chairman and Chief Executive Officer of Southwest
Supermarkets, LLC, a supermarket chain based in Phoenix, Arizona with 42 stores
in Arizona, California and Texas. He has over 25 years of experience in the
supermarket and drug store industry and has been President of two other
supermarket chains in the southwestern United States prior to joining Southwest
Supermarkets.
Mr. Hauge, a Director, was the founder of Montana Naturals International, Inc.
and has over 13 years of experience in the health food industry. As President of
Montana Naturals Internationals, Inc., from 1982 until the merger with
HealthRite, Inc., he was responsible for product development and marketing and
for growing Montana Naturals' sales to $4 million with international
distribution of its products.
Mr. Panasci, a Director, was President and Chief Operating Officer of Fay's
Inc., the corporate parent of Fay's super drugstores, from 1993 until Fay's was
sold to J. C. Penney in 1996. Mr. Panasci is currently a consultant in the drug
industry. During his 18 years with Fay's, he became familiar with all aspects of
Fay's business, including directing purchasing products for Fay's drug division.
He has significant experience in managing companies and developing strategic
business plans.
Ms. Valore, a Director, is the principal of Valore Chartered Law Offices in
Linwood, New Jersey. She has acquired management and technology expertise in
operating the business side of law for the past 10 years. Her primary practice
area is drug product liability law.
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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 $100,000 for 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Compensation
Awards
Salary (1) Bonus Stock Options
Name Year ($) ($) Other No. of Shares
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Warren H. Haber 1996 (1) (1) (1) --
1997 (1) (1) -- --
Bradley MacDonald (2) 1997 170,000 100,000
</TABLE>
- - -----------------------------------
(1) Mr. Haber's services were provided pursuant to the Company's agreement with
Founders Management Services, Inc.
(2) Mr. MacDonald's 1997 compensation includes salary and stock. His annual
salary base was $170,000. On August 13, 1997, Mr. MacDonald resigned as
CEO, President and Director. He was employed as a consultant at the same
compensation level until December 11, 1997. On December 11, 1997, his
compensation and stock options were terminated. He accepted 26,015 shares
in stock in lieu of cash for compensation and expenses not paid in 1997.
On August 11, 1997, the Company suspended its agreement with Founders
Management, but on August 13, 1997, the (former) Board of Directors confirmed
the continuation of the agreement. On February 16, 1998, the Company terminated
the Founders Management agreement retroactive to December 17, 1997.
Subject to approval by the Board of Directors (meeting scheduled for April 24,
1998), the Company intends to enter into a two year employment agreement with
Bradley T. MacDonald commencing January 30, 1998, providing for his employment
as Chief Executive Officer at a base salary of $150,000 per year. In addition,
bonuses are to be paid based on achievement of certain goals, with options to be
granted (under the 1993 Plan) to purchase 100,000 shares of common stock at a an
exercise price equal to the market value per share on the date of the grant,
exercisable in three installments of 50,000, 25,000 and 25,000 commencing on the
date of employment.
Stock Options.
The Company's 1993 Stock Option Plan (the "1993 Plan") as amended by stockholder
approval on December 17, 1997 and on January 9, 1998 increased the outstanding
stock options from 500,000 shares to 700,000 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. All directors with the exception of Messrs.
MacDonald, Vordenberg and Walgreen, were issued 20,000 shares of stock options.
Messrs. Green, Panasci, and Ms. Valore constitute the Company's Compensation and
Stock Option Committee.
-14-
<PAGE>
As of March 24, 1998, no options to purchase shares had been exercised and there
were outstanding options to purchase an aggregate of 592,500 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 1997 year. The following table provides information as to the value
of the unexercised options as of March 25, 1998 measured in terms of the closing
sale price of the Company's Common Stock on such date:
Number of Shares Underlying Value of Unexercised In-The
Unexercised Options as of Money Options on
3/25/98 3/25/98*
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
293,348 / 299,152 $440,022 / $448,728
- - --------------------
*On March 25, 1998, the closing sales price of $1.50 on the Nasdaq Small Cap
Stock Market was the same as the option exercise price.
Compensation of Directors.
The Company pays fees to its directors in the amount of $100 per meeting. It
reimburses those who are not employees of the Company for their expenses
incurred in attending meetings. As set forth above, 20,000 stock options have
been granted under the 1993 Plan each to the indepndent directors, Messrs.
Hauge, Green and Panasci and Ms. Valore.
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.
<TABLE>
<CAPTION>
Shares Beneficially % of
Name and Address Owned as of 3/25/97 Outstanding
---------------- ------------------- -----------
<S> <C> <C>
Warren H. Haber 644,000 (1) 14.6
c/o Founders Management Services, Inc.
711 5th Avenue
New York, New York 10022
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially % of
Name and Address Owned as of 3/25/97 Outstanding
---------------- ------------------- ------------
<S> <C> <C>
John L. Teeger 440,625 (2) 10.0
c/o Founders Management Services, Inc.
711 5th Avenue
New York, New York 10022
Bradley T. MacDonald
11445 Cronhill Drive
Owings Mills, MD 21117 206,900 (3) 4.7
Reed Vordenberg
11445 Cronhill Drive
Owings Mills, MD 21117 62,000 (4) 1.4
Charles R. Walgreen
19994 Highway 93
Arlee, MT 59821 104,100 (5) 2.4
David Green
10128 East Topaz Drive
Scottsdale, AZ 85258 62,000 (6) 1.4
Ronald O. Hauge
1014 South Avenue West
Missoula, MT 59801 190,000 (7) 4.3
David Panasci
4914 W. Genesee Street
Camillus, NY 13031 64,901 (8) 1.5
Beverly Valore
2106 New Road, Suite C4
Linwood, NJ 08221 22,000 (9) *
Executive officers and directors
as a group (8 persons)(11) 760,100 (10) 17%
</TABLE>
- - ---------------------
* Less than 1%.
(1) Includes 5,000 shares beneficially owned by his wife.
(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 179,400 shares issuable upon exercise of options which by their
terms are currently exercisable.
(4) Includes 28,667 shares issuable upon exercise of options which by their
terms are currently exercisable.
(5) Includes 37,434 shares issuable upon exercise of options which by their
terms are currently exercisable.
(6) Includes 28,667 shares issuable upon exercise of options which by their
terms are currently exercisable.
(7) Includes 13,333 shares issuable upon exercise of options which by their
terms are currently exercisable.
(8) Includes 13,337 shares issuable upon exercise of options which by their
terms are currently exercisable.
(9) Includes 8,667 shares issuable upon exercise of options which by their
terms are currently exercisable.
(10) Includes 482,936 shares issuable upon exercise of options which by their
terms are currently exercisable.
(11) Includes seven current directors plus Mr. Okland (3,000 shares plus 60,000
options).
-16-
<PAGE>
ITEM 12. Certain Relationships and Related Transactions.
The Company paid Founders' fees of $120,000 and $33,000 for reimbursable
expenses, to include lease payments for a Mercedes and a Lexus. Warren Haber,
former Chairman of the Company's Board of Directors, also received 24,000 (5
year, $2.00) stock warrants for assisting in consummating the sale of assets of
Vitamin Specialties Corp.
The firm of Datsopoulos, MacDonald & Lind, P.C, of which Mr. Datsopoulos, a
director of the Company and, since August 19, 1994, a director of the Company,
received fees for services rendered to MTNA in the respective amounts of $11,000
in 1997.
Included in above, the Company paid Mr. Horvitz paid a fee of $10,000 for
marketing and sales consultation services and 10,000 stock options.
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company and amendments
thereto*
3.2 By-Laws of the Company*
10.1 1993 Stock Option Plan of the Company as amended*
10.2 Lease between the Company and 8200 Ogontz Avenue
Partnership as to building containing offices, warehouse
and distribution facilities and retail location*
10.3 Lease relating to the Company's Owings Mills, Maryland
facility
-17-
<PAGE>
10.4 Employment agreement with Bradley T. MacDonald
21.1 Subsidiaries
27.1 Financial Data Schedule
- - ---------------------------
* 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 - 1997
On June 20, 1997, sold the Vitamin Specialties operations tangible and
intangible assets to IVC Industries, Inc., for approximately $2,692,000, except
the "store within a store" in the Wal-Mart Super Center in Lewistown, PA.
-18-
<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)
- - ----------------------------
Bradley T. MacDonald
Chairman & CEO
Dated: April 15, 1998
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>
<S> <C> <C>
Name Title Date
- - -----------------------
Bradley T. MacDonald Chairman of the Board, April 15, 1998
Director, Chief
Executive Officer and Chief
Financial Officer
- - -----------------------
Reed Vordenberg Secretary, Director and April 15, 1998
President
- - -----------------------
Charles R. Walgreen, Sr. Director and President, MNI April 15, 1998
- - ----------------------
David M. Green Director April 15, 1998
- - ----------------------
Ronald O. Hauge Director April 15, 1998
- - ---------------------
David H. Panasci Director April 15, 1998
- - ---------------------
Beverly L. Valore, Esq. Director April 15, 1998
</TABLE>
-19-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
HEALTHRITE, INC. AND SUBSIDIARY
Page No.
Independent Auditors' Reports:
Report of Richard A. Eisner & Company, LP F-2
Report of McFarland & Alton P.S. F-3
Consolidated Balance Sheet - December 31, 1997 F-4
Consolidated Statements of Operations - Years Ended
December 31, 1997 and 1996 F-5
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997 and 1996 F-7
Notes to Consolidated Financial Statements F-8
<PAGE>
HealthRite, Inc.
<TABLE>
<CAPTION>
Contents
Page
----
Consolidated Financial Statements
<S> <C>
Independent auditors' report F-2
Balance sheet as of December 31, 1997 F-4
Statements of operations for the years ended December 31, 1997 and 1996 F-5
Statements of changes in stockholders' equity for the years ended December 31,
1997 and 1996 F-6
Statements of cash flows for the years ended December 31, 1997 and 1996 F-7
Notes to financial statements F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
HealthRite, Inc.
Owings Mills, Maryland
We have audited the consolidated balance sheet of HealthRite, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the two-year period ended December 31, 1997. 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, as of December 31, 1996 and for the year then ended which statements
reflect total assets and revenues constituting 39 percent and 45 percent,
respectively, of the related consolidated totals in 1996. 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
financial statements enumerated above present fairly, in all material respects,
the consolidated financial position of HealthRite, Inc. and subsidiaries as of
December 31, 1997, and the consolidated results of their operations and their
consolidated cash flows for each of the years in the two-year period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
March 3, 1998
F-2
<PAGE>
[McFARLAND & ALTON P.S. GRAPHICS]
Independent Auditor's Report
Board of Directors and Stockholder
Montana Naturals Int'l., Inc.
Arlee, Montana
We have audited the accompanying statements of income, stockholder's equity, and
cash flows of Montana Naturals Int'l., Inc. for the year ended December 31,
1996. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Montana
Naturals Int'l., Inc. for the year then ended December 31, 1996, in conformity
with generally accepted accounting principles.
McFARLAND & ALTON P.S.
February 10, 1997
Spokane, Washington
F-3
<PAGE>
HealthRite, Inc.
Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 255,000
Accounts receivable, net of allowance for doubtful accounts of $294,000 1,112,000
Inventory 2,397,000
Prepaid expenses and other current assets 266,000
-----------
Total current assets 4,030,000
Property, plant and equipment - net 2,674,000
Other assets 240,000
-----------
$ 6,944,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,623,000
Current maturities of obligations under capital lease 38,000
Current maturities of long-term obligations 295,000
-----------
Total current liabilities 1,956,000
Obligations under capital leases less current maturities 40,000
Long-term obligations less current maturities 2,158,000
-----------
4,154,000
-----------
Redeemable preferred stock; Series A convertible 8%, par value $.001 per share; 2,000,000
shares authorized; 432,500 shares issued and outstanding, redemption value $865,000 774,000
-----------
Commitments and contingencies
Stockholders' equity:
Common stock; par value $.001 per share; 10,000,000 shares authorized; 4,400,198 shares
issued and outstanding 4,000
Additional paid-in capital 7,141,000
Accumulated deficit (5,129,000)
-----------
Total stockholders' equity 2,016,000
-----------
$ 6,944,000
===========
</TABLE>
See notes to financial statements
F-4
<PAGE>
HealthRite, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 14,361,000 $ 16,504,000
Cost of sales 9,670,000 9,216,000
------------ ------------
Gross profit 4,691,000 7,288,000
Selling, general and administrative expenses 7,829,000 6,455,000
Restructuring and relocation costs 388,000
------------ ------------
(Loss) income from operations before other income (expenses) (3,138,000) 445,000
------------ ------------
Other income (expenses):
Interest expense, net (237,000) (242,000)
Other income 32,000 26,000
Loss on sale of assets (12,000)
------------ ------------
(217,000) (216,000)
------------ ------------
(Loss) income before provision (benefit) for income taxes (3,355,000) 229,000
------------ ------------
Provision (benefit) for income taxes:
Current 2,000 55,000
Deferred 340,000 (146,000)
------------ ------------
Net provision (benefit) for income taxes 342,000 (91,000)
------------ ------------
Net (loss) income (3,697,000) 320,000
------------ ------------
Less:
Preferred stock dividend requirement 68,000 27,000
Accretion of difference between carrying amount and redemption
amount of redeemable preferred stock 25,000 10,000
------------ ------------
93,000 37,000
------------ ------------
Net (loss) income attributable to common stockholders - basic $ (3,790,000) $ 283,000
============ ============
Basic net (loss) income per share $ (.88) $ .07
============ ============
Net (loss) income attributable to common stockholders - diluted $ (3,790,000) $ 320,000
============ ============
Diluted net (loss) income per share $ (.88) $ .07
============ ============
Weighted average shares - basic 4,297,000 4,268,000
Incremental potential dilutive common shares 209,000
------------ ------------
Weighted average shares - diluted 4,297,000 4,477,000
============ ============
</TABLE>
See notes to financial statements
F-5
<PAGE>
HealthRite, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------------
(Par Value
Number of $.001)
Shares Amount
---------- ----------
<S> <C> <C>
Balance, January 1, 1996 4,176,472 $4,000
Issuance of common stock 100,000
Common stock warrants issued in preferred stock financing
Accretion of difference between carrying amount and redemption
amount of redeemable preferred stock
Dividend on preferred stock
Net income
--------- -------
Balance, December 31, 1996 4,276,472 4,000
Common stock issued to employees in July 1997 25,000
Common stock issued to employees in December 1997 44,149
Common stock issued to consultants in December 1997 36,615
Common stock issued to directors in December 1997 17,962
Accretion of difference between carrying amount and redemption
amount of redeemable preferred stock
Dividend on preferred stock
Common stock warrants issued in asset sale
Net loss
--------- -------
Balance, December 31, 1997 4,400,198 $4,000
========= ======
Additional
Paid-in Accumulated
Capital Deficit Total
------------ ------------ ----------
<S> <C> <C> <C>
Balance, January 1, 1996 $6,694,000 $(1,657,000) $5,041,000
Issuance of common stock 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 6,934,000 (1,364,000) 5,574,000
Common stock issued to employees in July 1997 66,000 66,000
Common stock issued to employees in December 1997 66,000 66,000
Common stock issued to consultants in December 1997 55,000 55,000
Common stock issued to directors in December 1997 27,000 27,000
Accretion of difference between carrying amount and redemption
amount of redeemable preferred stock (25,000) (25,000)
Dividend on preferred stock (68,000) (68,000)
Common stock warrants issued in asset sale 18,000 18,000
Net loss (3,697,000) (3,697,000)
---------- ----------- ----------
Balance, December 31, 1997 $7,141,000 $(5,129,000) $2,016,000
========== =========== ==========
</TABLE>
See notes to financial statements
F-6
<PAGE>
HealthRite, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $(3,697,000) $ 320,000
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization 875,000 662,000
Write-down of deferred design and distribution costs 378,000
Write-down of impaired assets 39,000
Common stock issued for services 214,000 100,000
Loss (gain) on sale of assets 12,000 (11,000)
Decrease (increase) in deferred taxes, net 342,000 (146,000)
Changes in:
Accounts receivable 443,000 (641,000)
Inventory 137,000 (830,000)
Prepaid expenses 23,000 (62,000)
Other assets (78,000) 26,000
Accounts payable and accrued expenses (591,000) 362,000
----------- -----------
Net cash used in operating activities (1,903,000) (220,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (155,000) (274,000)
Net proceeds from sale of assets (see below) 2,478,000 58,000
Increase in deferred design and distribution costs (718,000)
----------- -----------
Net cash provided by (used in) investing activities 2,323,000 (934,000)
----------- -----------
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 (149,000) (105,000)
Proceeds of long-term debt 1,638,000 662,000
Principal repayments of long-term debt (1,872,000) (354,000)
Dividends paid on preferred stock (68,000)
----------- -----------
Net cash (used in) provided by financing activities (451,000) 1,092,000
----------- -----------
Net decrease in cash and cash equivalents (31,000) (62,000)
Cash and cash equivalents - beginning of the year 286,000 348,000
----------- -----------
Cash and cash equivalents - end of the year $ 255,000 $ 286,000
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid $ 225,000 $ 231,000
Taxes paid $ 17,000 $ 21,000
Supplemental disclosures of noncash investing and financing activities:
Equipment acquired with debt $ 51,000
Dividends on preferred stock $ 27,000
Exchange of inventory for advertising credits $ 146,000
</TABLE>
Sale of Vitamin Specialties Division in 1997 including accounts receivable,
inventory and other tangible and intangible assets, assumption of certain
obligations less expenses related to sale.
See notes to financial statements
F-7
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE A - BUSINESS
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 two
channels of distribution: retail stores and medical professionals. 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.
In June 1997, the Company sold certain assets including the inventory of its
Vitamin Specialties Division (the "Transaction"), which operated fifteen retail
outlets and a catalog operation in the Philadelphia area. The gross proceeds of
the sale were $2,692,000 for tangible and intangible assets. One retail outlet
is being retained by the Company. For the year ended December 31, 1997 a loss on
sale of assets of $12,000 is included in other income (expense). The loss
includes the issuance of five year warrants to purchase 24,000 shares of common
stock of the Company at an exercise price of $2.00 per share to the former
chairman of the Board of Directors, valued at $18,000.
In 1996, the Company had introduced Nautilus, a line of nutritional/health food
products. During 1997, the Company reconsidered and scaled down this product
line. As a result of this decision, the Company expensed various deferred costs
incurred in 1996 and recorded a valuation allowance for the related inventory.
During 1996 the Company completed a consolidation plan whereby the Company
combined management and administrative functions of the Company's three
divisions. Restructuring costs included a $100,000 compensation charge for the
issuance of shares to the Company's president below market value, $265,000 of
severance and $23,000 in recruiting and relocation expenses.
The Company's financial statements have been prepared assuming the Company will
continue as a going concern which assumes the realization of assets and the
satisfaction of liabilities in the normal course of business. During the year
ended December 31, 1997, the Company sustained a net loss of ($3,697,000), had
experienced a reduced gross profit percentage, was not in compliance with the
terms of certain loan covenants and had net cash outflows from operating
activities of $1,903,000.
The Company has taken several steps to streamline and focus on profitable
product lines. Accordingly, the Company has scaled down the Nautilus line of
products, wrote off the unamortized portion of deferred design and distribution
costs and wrote down such product line inventory to its estimated realizable
amount. In addition, the Company sold substantially all of its Vitamin
Specialties Division which did not achieve anticipated levels of profitability.
As of December 31, 1997, the Company's financial resources include various
unused term loans and a revolving line of credit of $3,800,000 available for
future expansion. The Company has received waivers from lenders for
noncompliance of certain covenants.
In late 1997 and January 1998, a proxy fight resulted in a number of personnel
changes in management and the Company incurred various legal fees and other
costs aggregating $221,000, including $50,000 paid to the Founders Management
Services, Inc. ("Founders") (see Note J).
F-8
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies followed in the preparation of the financial
statements are as follows:
[1] 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.
[2] 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.
[3] Inventory:
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.
[4] Prepaid catalog costs and advertising:
Direct mail order costs including printing and mailing were capitalized as
prepaid catalog costs and charged to income over the catalog period,
approximating six months. However, during 1997, in connection with the sale
of the Vitamin Specialties Division such costs were charged to expense.
Advertising costs for the years ended December 31, 1997 and 1996 amounted
to $628,000 and $196,000, respectively, and are expensed as incurred.
[5] Property, plant and equipment:
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. 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, whichever is shorter
[6] 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
capitalization and reserves.
F-9
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] (Loss) income per common share:
In 1997, Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128") replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic
earnings per share excludes any dilutive effects of options, warrants and
other stock-based compensation. In 1997, the Company has not included
potential common shares in the diluted per share computation as the result
would be antidilutive. All (loss) income per share amounts for all periods
have been presented and, conform to SFAS 128 requirements. Adoption of SFAS
128 had no effect on the per share results for the year ended December 31,
1996.
[8] Revenue:
Revenue is recognized when the product is shipped to customers or purchased
by retail customers.
[9] 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.
[10] 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.
[11] 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.
[12] New accounting standards:
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure", No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company has not yet determined if the above pronouncements will have a
significant effect on the information presented in the financial
statements.
F-10
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[13] Valuation of long-lived assets:
Effective January 1, 1997, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS
121"). The Company, using its best estimates based on reasonable and
supportable assumptions and projections, reviews assets for impairment
whenever events or changes in circumstances have indicated that the
carrying amount of its assets might not be recoverable. Impaired assets are
reported at the lower of cost or fair value.
[14] Stock-based compensation:
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
The provisions of SFAS 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 employee stock option incentive plans.
NOTE C - INVENTORY
Inventory consists of the following at December 31, 1997:
Raw materials $1,503,000
Work-in-process 109,000
Finished goods 785,000
----------
$2,397,000
==========
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 consist of the following:
Land $ 69,000
Buildings and improvements 875,000
Leasehold improvements 671,000
Equipment and fixtures 2,588,000
----------
4,203,000
Less accumulated depreciation and amortization 1,529,000
----------
Property, plant and equipment - net $2,674,000
==========
F-11
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
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
manufacture and distribution of nutritional drinks, bars and dietary supplements
under the Nautilus name. In connection with this new line of products, the
Company capitalized approximately $718,000 of such costs in 1996. All of these
costs were incurred before sales of the product commenced.
During the fourth quarter of 1997, management reconsidered continuing the
Nautilus product line and expensed the unamortized portion of these costs.
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
Trade payables $1,042,000
Accrued expenses 375,000
Accrued payroll and related taxes 206,000
----------
$1,623,000
==========
NOTE G - INCOME TAXES
At December 31, 1997, the principal components of the net deferred tax assets
are as follows:
Current deferred tax assets:
Net operating loss carryforwards $1,170,000
Accounts receivable 112,000
Inventory overhead and reserves 254,000
Accrued expenses 25,000
----------
Total current deferred tax assets 1,561,000
Fixed assets and intangible assets 406,000
----------
Total deferred tax assets 1,967,000
Less valuation allowance (1,967,000)
Total deferred tax assets $ 0
==========
F-12
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE G - INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory rate to the income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1997 1996
----------- ---------
<S> <C> <C>
Income tax (benefit) based on federal statutory rate $(1,141,000) $ 79,000
State and local tax (benefit), net of federal benefit (134,000) 30,000
Nondeductible expenses (7,000) 4,000
(Decrease) increase in valuation allowance 1,624,000 (185,000)
Overaccruals of federal tax 0 (19,000)
----------- ---------
Income tax expense (benefit) $ 342,000 $ (91,000)
=========== =========
</TABLE>
The income tax expense for the year ended December 31, 1997 is due to the
increase in the valuation allowance against the prior year deferred tax asset.
The Company has net operating loss carryforwards of approximately $3,100,000
which are available to offset future taxable income. These carryforwards expire
from 2009 to 2012. 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 require the applications of these limitations.
NOTE H - LONG-TERM DEBT
<TABLE>
<CAPTION>
<S> <C>
Long-term debt as of December 31, 1997 consists of the following:
MTNA term loans through a bank from USDA, Rural Business Co-operative Services
bearing interest rate at prime plus 1.25% adjusted to US Treasury Obligation
rate plus 3.5% on the closing date:
Construction term loan not to exceed $1,200,000 through September 1998. Secured
by MTNA land and building, payable in monthly installments through October 2017 $ 381,000
Equipment term loan not to exceed $800,000 through September 1998. Secured by
MTNA all personal property including fixtures and equipment, payable in monthly
installments through June 2005 0
Term loan not to exceed $2,500,000 through September 1998. Secured by MTNA
all accounts receivable, inventory and intangibles, payable in monthly installments
through June 2005 903,000
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 227,000
"CDBG" loan, collateralized by MTNA accounts receivable, inventory, property and
equipment, bearing interest rate at 7.0%, monthly payments of $5,225 through
September 2007 450,000
Jason - revolving credit and term loan not to exceed $1,000,000 collateralized by certain
accounts receivable, inventory and equipment, interest at the greater of 8% or prime
rate plus 3%, payable in monthly installments through December 2000 329,000
Note payable due in 7 annual installments of $42,000 through March 1, 2002 which
includes imputed interest at 8.75% 163,000
----------
2,453,000
Less current maturities 295,000
----------
$2,158,000
==========
</TABLE>
F-13
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE H - LONG-TERM DEBT (CONTINUED)
MTNA term loans and Jason revolving credit and term loans contain various
restrictive financial covenants such as fixed charge coverage ratio, maximum
leverage ratio, minimum net worth requirement, minimum current ratio and
operating covenants, such as limitation on capital expenditure and sharing of
management expenses of the parent. The lenders have waived certain noncompliance
of these covenants.
Future principal payments on long-term debt are as follows:
1998 $ 295,000
1999 287,000
2000 306,000
2001 327,000
2002 239,000
Thereafter 999,000
----------
$2,453,000
==========
NOTE I - LEASES
Operating leases:
The Company has an operating lease for office, manufacturing, warehouse
facilities ("Jason Facilities") and a retail store which expires in the year
2000 plus a renewal option for an additional five years for Jason Facilities and
provides for monthly payments of rent, real estate taxes and operating expenses
and is subject to escalations.
In addition, the Company leases certain office equipment under operating leases.
Future minimum lease payments as of December 31, 1997 are as follows:
1998 $413,000
1999 356,000
2000 4,000
--------
$773,000
========
Rent expense totalled approximately $637,000 and $816,000 for the years ended
December 31, 1997 and 1996, respectively.
F-14
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE I - LEASES (CONTINUED)
Capital leases:
The Company leases certain equipment under capital leases.The future minimum
lease payments required under these lease obligations are as follows:
1998 $44,000
1999 25,000
2000 13,000
2001 5,000
-------
Total minimum lease payments 87,000
Less amount representing interest 9,000
-------
Present value of minimum lease payments 78,000
Less current portion 38,000
-------
Long-term portion $40,000
=======
At December 31, 1997, property, plant and equipment includes assets held under
capital leases with a net book value of $68,000.
NOTE J - EMPLOYMENT AND CONSULTING AGREEMENTS
Pursuant to an agreement, the Founders was obligated to provide to the Company
the services of certain officers of Founders during a three-year term ending
July 31, 1998. The officers of Founders are major stockholders and were members
of the Board of Directors of the Company. The agreement provided for the payment
to Founders of a base fee of $10,000 per month, adjusted yearly for the Consumer
Price Index. In addition, Founders was 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 fees, exceeded $500,000. Founders was paid
management fees of $120,000 per year for 1997 and 1996. In January 1998, the
Company terminated the Founders agreement.
Also, during 1997, the Company reimbursed Founders for $33,000 of expenses
incurred on the Company's behalf.
In February 1996, the Company entered into an employment agreement with the
Chief Executive Officer ("CEO") 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 CEO purchased 100,000
shares of the Company's common stock for $100,000 on the first day of
employment.
F-15
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE J - EMPLOYMENT AND CONSULTING AGREEMENTS (CONTINUED)
In addition, the CEO received options to purchase 100,000 shares of common
stock, exercisable at the market price on the first day of employment.
Such agreement was terminated in August 1997. In connection with certain
management changes, the CEO was reinstated in 1998. Such reinstatement is
occasioned by a two year employment agreement which provides a base salary of
$150,000 per year, a bonus upon achievement of certain targets and a grant of
options to purchase 100,000 shares of common stock at a price of $1.50 per share
which the Board of Directors has not yet approved.
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 stock 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 and as amended in May 1995, the Company adopted a stock
option plan ("Plan") authorizing the grant of incentive and nonincentive options
for an aggregate of 500,000 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 November 1997, the Company amended the Plan by increasing the number of
shares of the Company's common stock subject to the Plan by an aggregate of
200,000 shares.
The Company applies APB 25 and related interpretations in accounting for its
employee stock options. Under APB 25, where the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation is recognized.
F-16
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE L - STOCK OPTION PLAN (CONTINUED)
If compensation expense for the Company's stock-based compensation plans had
been determined consistent with SFAS 123, the Company's net income and net
income per share including pro forma results would have been the amounts
indicated below:
Year Ended December 31,
-----------------------------
1997 1996
----------- --------
Net (loss) income:
As reported $(3,697,000) $320,000
Pro forma (3,744,000) 240,000
Net (loss) income per share:
As reported:
Basic $ (.88) $ .07
Diluted (.88) .07
Pro forma:
Basic (.89) .06
Diluted (.89) .05
The pro forma effect on net (loss) income for 1997 and 1996 may not be
representative of the pro forma effect on net (loss) income of future years due
to, among other things: (i) the vesting period of the stock options and the (ii)
fair value of additional stock options in future years.
For the purpose of the above table, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option-pricing model
with the following assumptions:
1997 1996
------------ -------
Dividend yield 0% 0%
Expected volatility 0.30 0.30
Risk-free interest rate 5.79% - 6.12% 6.27%
Expected life in years 1-5 3.25
The weighted average fair value at date of grant for options granted during the
years 1997 and 1996 were $0.39 and $0.62 respectively, using the above
assumptions.
F-17
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE L - STOCK OPTION PLAN (CONTINUED)
Additional information with respect to 1997 and 1996 stock option activity is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1997 1996
------------------------- ----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 400,000 $2.05 283,000 $2.00
Options granted 352,500 1.87 220,000 2.09
Options forfeited or expired (240,000) 2.03 (103,000) 2.00
-------- --------
Outstanding at end of year 512,500 1.93 400,000 2.05
======== ========
Options exercisable at year end 257,500 1.97 208,000 2.03
======== ========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
-------------------------------------------
Weighted-
Average
Remaining Weighted
Contractual Average
Exercise Number Life Exercise Number
Price Outstanding (In Years) Price Exercisable
-------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
$2.00 165,000 .72 2.00 121,665
2.13 50,000 3.44 2.13 33,335
2.50 10,000 3.83 2.50 6,667
2.65 117,500 2.79 2.65 39,167
1.875 10,000 .33 1.875 3,333
1.25 160,000 .27 1.25 53,333
------- -------
512,500 257,500
======= =======
</TABLE>
As of December 31, 1997, options for the purchase of 187,500 shares were
available for future grants under the Director's Plan.
NOTE M - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[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.
F-18
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE M - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[2] The Company's subsidiary Jason is a defendant in a certain product
liability suit. Management believes that no additional provision should
accrue from this matter, however, the ultimate outcome may be dependent on
the adjudication of this action.
[3] The Company has a sponsorship agreement in connection with Nautilus product
line which requires payment of $100,000 in 1998.
[4] During the year ended December 31, 1996, the Company entered into an
exclusive three-year license agreement with an option on renew for an
additional two years to use the Nautilus name for vitamins, minerals, and
nutritional products. The agreement requires the payment of 6% royalty fee
with guaranteed minimum royalties for each of the initial three years of
the agreement. Minimum royalties of $90,000 and $120,000 are due for the
twelve month periods ended September 30, 1998 and 1999, respectively. The
Company paid $89,000 in royalty fees under this agreement during the year
ended December 31, 1997.
[5] In February 1998, the Company has agreed to purchase certain equipments for
an aggregate purchase price of $460,000 for MTNA, expected to be financed
through an equipment term loan.
NOTE N - EXPORT SALES
Export sales consist of the following:
Year Ended
December 31,
------------------------
1997 1996
-------- ----------
North American (not domestic) $232,000 $ 167,000
Europe 6,000
Asia/Pacific Rim 417,000 788,000
Middle East 176,000 540,000
Other 20,000 52,000
-------- ----------
$845,000 $1,553,000
======== ==========
NOTE O - MAJOR CUSTOMERS
During the year ended December 31, 1997, the Company had sales to two customers
which aggregated 30.7% of net sales. One customer accounted for 33.6% of net
accounts receivable at December 31, 1997.
F-19
<PAGE>
HealthRite, Inc.
Notes to Financial Statements
December 31, 1997
NOTE P - BARTER TRANSACTION
In 1997, the Company sold inventory costing $146,000 in exchange for advertising
credits in the amount of $378,000. However, the Company valued this credit at
$146,000 (the estimated fair market value of the merchandise sold). The credits
received can only be applied towards future advertising to the extent of cash
paid by the Company. The advertising credits have no expiration date.
NOTE Q - RELATED PARTY TRANSACTIONS
During 1997, the Company incurred expenses of approximately $11,000 for legal
services rendered by a law firm wherein a director of the Company is a partner.
Also, during 1997 a director of the Company was paid approximately $10,000 and
was granted 10,000 options to purchase common stock at $1.88 per share, in
connection with consulting and marketing services.
NOTE R - PRO FORMA FINANCIAL DATA (UNAUDITED)
The following condensed pro forma financial information assumes that the
Company's sale of substantially all of its Vitamin Specialties Division
operations ("the Division") occurred on January 1, 1997 (see Note A).
Accordingly, summarized net sales and the related cost of sales for the year
ended December 31, 1997 have been adjusted to reflect the elimination of the
Division's net sales and cost of sales prior to the transaction date.
Net sales $12,561,000
Cost of sales 8,453,000
-----------
Gross profit $ 4,108,000
===========
F-20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 255,000
<SECURITIES> 0
<RECEIVABLES> 1,406,000
<ALLOWANCES> (294,000)
<INVENTORY> 2,397,000
<CURRENT-ASSETS> 4,030,000
<PP&E> 4,203,000
<DEPRECIATION> (1,529,000)
<TOTAL-ASSETS> 6,944,000
<CURRENT-LIABILITIES> 1,956,000
<BONDS> 0
0
774,000
<COMMON> 4,000
<OTHER-SE> 2,012,000
<TOTAL-LIABILITY-AND-EQUITY> 6,944,000
<SALES> 14,361,000
<TOTAL-REVENUES> 14,361,000
<CGS> 9,670,000
<TOTAL-COSTS> 17,499,000
<OTHER-EXPENSES> 217,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237,000
<INCOME-PRETAX> (3,355,000)
<INCOME-TAX> 342,000
<INCOME-CONTINUING> (3,697,000)
<DISCONTINUED> 93,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,790,000)
<EPS-PRIMARY> (.88)
<EPS-DILUTED> (.88)
</TABLE>
