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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1998
Commission File No. 0-23016
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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
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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, 1998 were
$15,901,000
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 26, 1999:
5,482,251 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", or "HealthRite") is a Delaware corporation,
incorporated in 1993. The Company has two operating subsidiaries, Montana
Naturals Int'l., Inc. ("MTNA") and Jason Pharmaceuticals ("Jason"). The
Company is engaged in the production, distribution, and sale of consumable
energy, health and diet products. HealthRite's product lines include energy
formulated products, bee pollen, bee-related products, standardized herbal
extracts, and meal substitutes. These products are currently manufactured in two
modern facilities, one operated by Jason in Owings Mills, Maryland and the other
operated by MTNA in Arlee, Montana. The Company at December 31, 1998 had 111
full time employees.
During January 1998, the Company's management changed due to the results of a
proxy contest. Current management was elected on January 9, 1998, but did not
take control of HealthRite's operations until January 23, 1998.
New management was faced with many challenges. The Company's marketing, business
and strategic plan required a complete review and revision. The Company had
substantial expenses resulting from a larger than normal advertising expenditure
in the first quarter of 1998, proxy expenses (including those incurred by former
management) and severance costs.
Management immediately implemented a new business and marketing strategy
focusing on its category product leaders from each of its wholly-owned operating
subsidiaries MTNA and 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. MTNA's "Pure Energy" products were
repositioned to mass market accounts and are now sold in three of the nation's
largest drug chains. Jason's category leaders are its Medifast product line.
Late in the second quarter the Company launched a new over-the-counter diet
product, Medifast Take Shape (TM) at the National Association of Chain Drug
Stores trade show in Philadelphia. The Medifast Take Shape (TM) brand has been
well received in the marketplace. Medifast Take Shape is currently distributed
in over 30,000 retail outlets, including all of the top ten drug chains and many
of the regional combination food-drug chains. Management plans to continue it's
focus on these category leaders in 1999.
The Company continues to engage in contract manufacturing at MTNA's Arlee,
Montana facility. In 1998 MTNA received a significant portion of its revenue
from contract manufacturing. During a six month period from the second through
fourth quarters contractual manufacturing for herbal products surged. However,
there has been a significant slowdown in contract manufacturing in late 1998 and
continuing into early 1999.
The Company's overall strategic plan is to:
o Rebuild the Medifast(R)doctors and clinic business to 20% market share or
$20 million.
o Become number 2 in the retail meal replacement business, utilizing our
unique products - Medifast Take Shape (TM).
o Participate in the crossover from the health food trade to the mass market
with our Pure Energy (R) & Montana Naturals brands.
o Become a premier contract manufacturer for the nutraceutical industry of
most delivery systems; powders, hard shell, and tablets.
o Raise additional capital through traditional equity or debt financing, and
explore strategic alternatives such as divestitures, mergers, acquisitions,
a strategic partnership, sale or joint venture to enhance shareholder
value and participate in the consolidation of the nutraceutical industry.
o Implement certain cost efficiencies and savings at its MTNA facility.
The Company believes that raising additional capital is an essential element of
its plan. Inability to raise funds will negatively effect the Company's ability
to succeed with its overall plan. There is no assurance that the Company will be
able to raise additional capital.
On July 24, 1998 the Company completed a private placement to accredited
investors of 880,000 shares of common stock at a net price of $1.20 per share
which netted proceeds to the Company of approximately $1,000,000. The proceeds
were used as working capital, advertising for the launch of Medifast Take Shape
(TM), and to partially fund plant expansion of the MTNA facility.
MARKETS
DIET CONTROL
The U.S. weight loss and diet control market has continued to increase at a
steady rate since 1995 and is forecast to grow another 4.5%, to 41 billion.
Between 1997 and 2000, according to a Marketdata Research study. In 1997 45
million dieting Americans used a variety of weight loss methods, including meal
replacements, commercial diet programs, prescription diet
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medications and hospital-based diet and counseling. The greatest growth trend is
in the use of meal replacements, with sales expected to reach $1.6 billion,
almost a 10% increase over 1997. Drug store and multi-level sales represent 56%
of the meal replacement market. Historically, the Company has never attempted to
sell in these markets. The Company's Medifast (R) brand has traditionally been
sold through physicians and has long been represented as the top quality meal
replacement in the industry. The Company's new formula, Medifast Take Shape (TM)
will for the first time be marketed through mass retailers and diet centers. The
Company expects brand recognition of the Medifast name not only to attract first
time buyers, but also previous users of the product who can now purchase the
meal replacements without first visiting a physician. The Company's efforts are
directed toward capturing its share of a previously untapped $1.6 billion meal
replacement market. With over 500,000 patients and 15,000 doctors previously
working with Medifast (R) products, this program has been pre-sold to much of
the consumer base. In addition, June 1998 guidelines established by the National
Institute of Health (NIH) classify about 95 million people as overweight or
obese. Included in this group are 29 million who thought they were at a healthy
weight.
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. The Company launched it's Medifast Take Shape (TM)
over the counter meal replacement product in the second quarter of 1998. The
Company is also expanding its physician based Medifast products to gain a larger
share of the meal replacement market. HealthRite also continues to seek
arrangements with weight loss centers to produce branded products as a contract
manufacturer.
HERBS
Industry sales of herbal products have expanded over the past several years
fueled by studies demonstrating the positive health benefits of herbal
supplements. This growth is expected to continue as the percentage of U.S.
households that purchase supplements, including herbs rises to 20%-25%. As with
other nutritional products the growth has attracted the attention of the larger
pharmaceutical firms. Three major firms introduced brands in the fall of 1998
supported by large advertising budgets. See competition.
COMPETITION
Medifast Brand (TM) is a niche product which is lactose-free, Kosher, physician
recommended and nutritionally complete. The Medifast Brand has clinicals from a
study done at the University of Vermont in collaboration with Johns Hopkins
University. Medifast Take Shape (TM) affords the consumer a choice and retailers
a much better profit margin. The clinic, hospital, and physician brand ranks
number three in the category and competes with Novantis, Health Management
Resources and Bariatrix.
The retail meal replacement market is dominated by one company, SlimFast (TM),
which has an 88% market share. The other competitor in this category, Nestle's
(TM) is essentially a "me to" product mix. 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. During fall, 1998 three large
pharmaceutical firms entered the herbal market. They were Bayer (One-A-Day
(TM)), American Home Products (Centrum (TM)), and Warner-Lambert (Quanterra
(TM)). The financial resources of these companies have already impacted the
industry. Bayer launched a $17 million advertising campaign in September, 1998.
It has received large orders from major retailers such as Wal-Mart and
Shop-Rite. This effected both the Company's branded product sales as well as its
contract manufacturing. The contract manufacturers had overstocked inventory as
a result of lost of shelf space to the large pharmaceutical firms. Additionally,
the introduction of herbal products in new delivery forms (blended products) by
the major pharmaceutical companies derailed the progress management made during
the year in MTNA's custom manufacturing of traditional capsules.
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 through health food stores.
This brand encompasses a wide range of energy products containing bee pollen and
bee-related ingredients, and 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. Additionally, Montana Big Sky
Bee Pollen was voted the best selling product ("VityAward") of 1998 based on a
nationwide survey conducted by Vitamin Retailer magazine.
Pure Energy products, which have traditionally been sold only in health food
stores, are participating in the drug store cross over
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and as such are carried in Rite Aid, 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, while still widely distributed in the health food
trade, 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 manufacturer
of herbs, MTNA expects to develop new products and to capitalize on these
opportunities. In 1998 MTNA supplied contract herbal products to sixteen of the
industries top supplement manufacturers, including seven of the top ten.
However, management has concerns regarding the delivery systems manufacturers
are now using in herbal products. The current trend is to deliver these products
in soft-gel and time released formats. MTNA manufactures hard shell capsules, of
which the industry has excess capacity.
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, publications and
programs developed by the Company's own nutritionist. Medifast (R) products are
being used in clinical studies conducted by the U.S. government and major
hospitals.
MEDIFAST TAKE SHAPE (TM) - good-tasting, nutritious weight maintenance products,
were launched in the maintenance caloric levels to the retail over-the-counter
trade.
Medifast Take Shape (TM), an over-the-counter weight loss product, has been
developed to be marketed through major drug store chains. The Company believes
that new products marketed through pharmacists under the Medifast 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. The most effective delivery system for this product is in the
ready to use, liquid format. The facility at Owings Mills, MD currently
manufactures only powder. The Company has developed a ready-to-drink product and
is negotiating to subcontract production of the product.
SALES AND MARKETING
The Company markets and sells its products through its two operating
subsidiaries.
HealthRite, Inc. organizes its sales strategy by trade class. The Company is
represented in the health food trade by health food brokers. These brokers sell
directly to the health food chains. However, a much larger portion of the
Company's distribution is by these brokers to domestic and international
distributors.
The Company's sales channels are managed by a Director of Sales operating out of
the MTNA facility in Montana. Similarly the mass channels are represented by
major brokers and a Director of Sales with two Regional Managers.
Jason solicits sales of Medifast (R) through full-time telemarketers and a
National Sales Manager. Private label products are developed and manufactured
for selected diet centers. Medifast Take Shape (TM), the Company's
over-the-counter product has significantly larger distribution than its Medifast
(R) product. Medifast Take Shape (TM) is distributed to large retail drug
chains, food stores, mass retailers, and food/drug combination stores.
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 was begun in 1998 for completion in mid 1999.
The additional 16,000 square feet of space and redesign of the plant will
enhance the facility's manufacturing, warehousing and distribution capabilities.
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. Jason operates a 43,000 square foot facility in Owings
Mills, MD which is leased through the year 2000, with a 5 year renewal option.
The facility is designed to produce diet powders and meets all the requirements
and are kosher certified by the Kashruth Division of the Orthodox Union.
ADVERTISING AND PROMOTION
In 1998, a strategy emphasizing the three initiatives of Montana Naturals
products, Pure Energy, and Medifast dominated the Company's sales and
promotional efforts. In the health food trade, the Company emphasized a
simplified promotional plan with heavy emphasis on co-op advertising with the
retailers. As a way of participating with the major mass retailers, the strategy
was for Pure Energy and Montana Naturals products to be positioned as price
brands or private label opportunities. Four major trade shows allowed the
Company to promote these products to the trade. Also, three major trade
advertisements featured the
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Pure Energy, Montana Naturals and Medifast Take Shape (TM) brands. Finally, in
the 4th Quarter 1998 the first radio ads were aired to support the Medifast Take
Shape (TM) product launch.
FINANCING AND STRATEGIC ALTERNATIVES
The Company is evaluating additional financing and strategic alternatives
including, divestitures, mergers, acquisitions, sales, strategic partnerships or
joint ventures. The Company believes the value of HealthRite's brands and
infrastructure exceeds its market value. The success of the Medifast Take Shape
(TM) and Pure Energy brands at retail have attracted the attention of major
consumer product companies. Discussions regarding several possible strategic
alternatives are in progress. However, there is no assurance that any of these
strategic alternatives will materialize.
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 marketing and sale of dietary supplement, vitamin, and nutritional
products. Applicable 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
require additional record keeping, expanded documentation of the properties of
certain products, expanded or different labeling, and scientific substantiation.
If the FDA believes the products are unapproved drugs or food additives, the FDA
may initiate similar enforcement proceedings. Any or all of such requirements
could adversely affect the Company's operations and its financial condition.
On September 23, 1997, the FDA promulgated final regulations governing the
labeling of dietary supplements as 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, among other things, 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 identify the product as a "dietary supplement" in the labeling.
Enforcement of the FDA's regulations governing the labeling of dietary
supplements commenced on March 23, 1999.
To the extent that sales of vitamins or diet or 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
Company's 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 policies. The Company does not buy products from suppliers who do not
maintain such coverage.
Additionally, the company has also acquired directors and officers liability
insurance in order to attract "high quality and experienced" directors.
EMPLOYEES
At December 31, 1998, the Company employed 111 people, of whom 70 were engaged
in manufacturing, and 41 in marketing, administrative and corporate support
functions. None of the employees are subject to a collective bargaining
agreement with the Company.
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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. In August, 1998 an expansion of 16,000 square feet began at this
facility. The Company leases a 43,300 square-foot facility in Owings Mills,
Maryland through the year 2000, with a 5-year renewal option. The Company's
remaining retail store was moved to Owings Mills, MD in December with a five
year lease. The leases require the Company to bear, in addition to the basic
rent, the costs of insurance, tax and certain maintenance costs. This store
replaced, at half the cost, a Wal-Mart and sells Medifast weight loss,
nutrition, herbal products, and offers weight loss counseling. The store serves
as an outlet store for Medifast products similar to companies such as Celestial
Seasoning.
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,
1998. On the ballot was election of the Board of Directors and confirmation of
Richard A. Eisner and Company, LLP as the Company's Auditors. The shareholders
elected the following directors: Bradley T. MacDonald, Reed Vordenberg, Charles
Walgreen, David Green, Ronald O. Hauge, Randall W. Rueb, Michael C. MacDonald,
John W. Galuchie, Jr., Donald Reilly; and Beverly Valore. The report of the
independent inspector of elections reflects a vote of 3,154,396 in favor of
electing the Board of Directors. The vote also confirmed Richard A. Eisner &
Company, LLP as the Company's auditors by a vote of 3,858,664 for, 5,253
against, and 648 abstaining.
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 1998 and 1997 as reported by
Nasdaq:
1998
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Low High
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Quarter ended March 31, 1998 ................... 1 3/8 2
Quarter ended June 30, 1998 .................... 1 1/8 1 3/4
Quarter ended September 30, 1998 ............... 1 3/8 2 5/16
Quarter ended December 31, 1998 ................ 1 1/4 2 3/8
1997
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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 Sept 30,1997 ..................... 1 3/8 2 3/4
Quarter ended Dec 31, 1997 ..................... 1 1/4 2 1/8
(b) The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
(c) There were 195 record holders of the Company's Common Stock, as of March 26,
1999.
(d) No dividends on common stock were declared by the Company during 1998 or
1997.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
This document contains forward-looking statements which may involve known and
unknown risks, uncertainties and other factors that may cause HealthRite, Inc.
actual results and performance in future periods to be materially different from
any future results or performance suggested by these statements. HealthRite,
Inc. cautions investors not to place undue reliance on forward-looking
statements, which speak only to management's expectations on this date.
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1998 COMPARISON WITH 1997
OPERATING
Consolidated net sales for 1998 were $15,901,000 as compared to 1997 sales of
$14,361,000, an increase of $1,540,000, or 10.7%. Sales for 1998 for the
Company's two wholly owned subsidiaries, MTNA's herbal energy and Jason' diet
control were $10.4 million and $5.5 million, respectively. This compares with
1997 sales of $8.8 million for MTNA and $3.8 million for Jason. The revenue
growth for the Company can be attributed to the introduction of the Medifast
Take Shape (TM) product into Company's distribution channel, which added sales,
and the increase in sales to a major contract customer which increased custom
manufacturing sales by $2.6 million over 1997.
Gross margins improved to 36.5% in 1998 from 32.6% in 1997, partially due to the
elimination of both the higher cost Nautilus product line and the Vitamin
Specialties Stores, improved manufacturing efficiencies, and the introduction of
a high margin product (Medifast Take Shape (TM)).
Selling, general and administrative (SG&A) expenses of $6,575,000 for 1998 were
$1,254,000 (16.2%) less than the $7,829,000 in 1997, mostly due to the
elimination of expenditures of Vitamin Specialties and Nautilus during 1997.
SG&A for 1998 included approximately $690,000 of non-recurring charges. These
were committed by previous management during the proxy contest to protect
certain employees. These expenditures included $60,000 in salary and severance
payments to previous management, $160,000 for the proxy contest, and $470,000 of
advertising cost.
Interest expense increased by $113,000 due to the Company's increased borrowing
to fund operations and the expansion of the MTNA manufacturing facility. Other
income includes $130,000 from the sale of the rights under Nautilus Agreement
including the sale of near dated and expired Nautilus products.
A preferred stock dividend in the amount of $69,000 was paid in 1998, including
2000 shares of common stock valued at $4,000.
The Company experienced a net loss for the year of $949,000. This compares with
a net loss of $3,697,000 in 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the second quarter of 1998, management determined that additional working
capital was needed to fund the Company's operations. It was further determined
that some portion of the funding would come from a private offering of common
stock. The Company completed a placement at a net price of $1.20 per share. On
July 24, 1998 the Company closed the Private Placement Offering providing net
cash proceeds of $977,000. Proceeds were used as working capital, advertising
for the launch of Medifast Take Shape (TM), and plant expansion of the MTNA
facility. The Company is considering raising additional capital through either
debt or equity financing, divestiture, merger, joint venture, sale,or a
strategic alliance as it deems necessary. This is due to the slow down in the
herbal industry because of increased competition and nutraceutical industry
consolidation.
In October 1997, U.S. Bank (formally First Bank Montana), with a U.S. Department
of Agriculture guarantee, provided a $4,500,000 financing arrangement to MTNA,
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 for MTNA. Funding of these loans began in 1997.
Terms of the loan have been modified so that the completion of plant and
equipment additions have been extended to June 30, 1999. At that time the U.S.
Bank loans will begin amortization.
The Company was granted a waiver by U.S. Bank for 1998 for a failure to comply
with certain loan covenants such as fixed charge coverage ratio, maximum
leverage ratio, minimum net worth requirement, minimum current ratio and
operating covenants, such as limitations on capital expenditure.
The Company had working capital of $3,551,000 at December 31, 1998 compared with
$2,074,000 at December 31, 1997. The $1,477,000 increase is the result of an
increase in accounts receivable due to sales of Medifast Take Shape (TM) and
contractual sales in the last four months of 1998, as well as proceeds from the
Company's private offering.
Jason currently has a loan agreement with Century Credit Corporation to provide
working capital. In 1997 a term loan of $260,000 was obtained in addition to a
revolving credit line with loan advances available based on percentages of
eligible accounts receivable and raw materials. The revolving credit and term
loan outstanding is limited to a total of $1,000,000. At December 31, 1998
approximately $500,000 was available. On January 20, 1999 Century and Jason
agreed to amend the loan agreement to include finished goods, and increased
availability under the term loan to $264,000 and the revolving credit line to
$1,500,000.
In early 1999, the Company implemented a plan that management believes will
generate additional internal funds to continue its operations into 2000. The
Company has implemented a cost reduction and other cost cutting initiatives at
its Montana Naturals
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facility. The Company believes it can generate funds and implement cost savings
in 1999 to continue in operation through December 31, 1999, although Management
may not be successful in raising additional capital on terms favorable for the
Company, management believes that it has sufficient resources to sustain
operations through at least December 31, 1999. If during the course of 1999,
management of the Company determines that the measures already implemented are
insufficient to achieve the stated goal, the Company will implement additional
cost reductions or seek additional financing alternatives. The Company believes
that the plan devised above constitutes a viable plan for the Company's business
until 2000.
During the years ended December 31, 1998 and 1997, the Company had sales to one
customer which aggregated 45.8% and 22.7%, respectfully, of net sales. This
customer for 50% of net accounts receivable at December 31, 1998. During 1998
orders from this customer have significantly decreased.
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.
YEAR 2000 COMPLIANCE
The Company recently contracted with major hardware, software and data
communications vendors to obtain computer hardware and software data
communications equipment and services which will be needed for all divisions to
achieve "Year 2000" (Y2K) compliance. It is anticipated that all operating units
will be compliant by June 30, 1999. Computer hardware and software and data
communications hardware and software is financed by existing credit facilities.
The Company has received a grant from the State of Maryland to partially fund
training. At this time the Company is assessing the negative effect various
potential Y2K problems could have on the Company. The Company is currently
devising a Y2K contingency plan to avoid any interruption to its business. The
Company has spent $130,000 for these upgrades and estimates additional
expenditures of $80,000 will be required to complete the project.
Presently, Montana Naturals Int'l, Inc. is Y2K compliant. Testing of the new
system hardware and software is ongoing to insure continuing operations post
January 1, 2000. Jason Pharmaceuticals, Inc. is scheduled to receive training to
upgrade to a Y2K compliant platform in May with transition to the new system in
June, 1999.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F-20.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
None
8
<PAGE>
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, 1998:
Date First
Name Age Position Became Director
- --------------------------- --- ----------------------- ---------------
Bradley T. MacDonald ...... 52 Chairman of the Board, 1998
Chief Executive Officer
and Director
Reed Vordenberg ........... 48 President, Healthrite, 1998
Inc., Secretary and
Director
Randall Rueb ............... 53 Chief Financial Officer 1998
and Director
Ronald O. Hauge ............ 52 Director 1998
David M. Green ............. 43 Director 1998
Beverly L. Valore .......... 56 Director 1998
Donald F. Reilly ........... 51 Director 1998
John W. Galuchie, Jr. ...... 46 Director 1998
Michael C. MacDonald ....... 45 Director 1998
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 became Chairman of the Board and Chief Executive Officer of
Healthrite on January 28, 1998. Prior to joining the Company, he was appointed
as Program Director of the U.S. Olympic Coin Program of the Atlanta Centennial
Olympic Games. Mr. MacDonald previously was employed by the Company as its Chief
Executive Officer from September, 1996 to August, 1997. From 1991 through 1994,
Mr. MacDonald was Deputy Director and Chief Financial Officer of the Retail,
Food and Hospitality and Recreation Business for the United States Marine Corps.
Prior thereto, Mr. MacDonald served as President of Pennsylvania Optical Co.,
Pangburn Candy Co., and Chief Financial Officer of Begley Drug Stores. Mr.
MacDonald retired from the United States Marine Corps Reserve as a Colonel in
1997.
REED 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.
RANDALL W. RUEB, Chief Financial Officer, joined the company in January 1998. He
was formerly the CFO of Smoot Lumber Company, Treasurer and Director of Bill
Jackson Rig Co., Inc. and Schell Crane and Rigging, Inc., and is an experienced
financial systems consultant. He modernized computer systems for the United
States Marine Corps Exchange System. Mr. Rueb retired from the United States
Marine Corps Reserve as a Colonel in 1998.
RONALD O. 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.
DONALD M. GREEN, a Director, was 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
9
<PAGE>
experience in the supermarket and drug store industry and has been President of
two other supermarket chains Ralph's and Smitty's prior to joining Southwest
Supermarkets.
BEVERLY L. 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.
REVEREND DONALD FRANCIS REILLY, O.S.A., a Director holds a Doctorate in Ministry
(Counseling) from New York Theological and an M.A. from Washington Theological
Union as well as a B.A. from Villanova University. Reverend Don Reilly was
ordained a priest in 1974. His assignments included Associate Pastor, pastor at
St. Denis, Havertown, Pennsylvania, Professor at Villanova University, Personnel
Director of the Augustinian Province of St. Thomas of Villanova, Provincial
Counselor, Founder of SILOAM Ministries where he ministers and counsels HIV/AIDS
patients and caregivers. He is currently on the Board of Directors of Villanova
University, is President of the board of "Bird Nest" in Philadelphia,
Pennsylvania and is Board Member of Prayer Power.
JOHN W. GALUCHIE, JR., a Director has held directorships and executive positions
as follows: (i) President of T.R. Winston, Inc. an investment firm, since 1990
and a director of that firm since 1989; (ii) President and director of Cortech,
Inc., a biopharmaceutical company, since 1998; (iii) Executive Vice President of
Pure World, Inc. since 1988, and a director from 1990 to 1994; (iv) Vice
President, Treasurer and director of American Metals Service, Inc. since 1992;
(v) Director of Crown North Corp., Inc., an asset management company from 1992
until 1996; and (vi) Director of Kent Financial Services, Inc., from 1989 to
1993, as well as holding various executive positions within the corporation. Mr.
Galuchie is a Certified Public Accountant.
MICHAEL C. MACDONALD, a Director is a corporate officer, the President, North
American General Market Operations for the Xerox Corporation. Mr. MacDonald's
former positions at Xerox Corporation include executive positions in the sales
and marketing areas. He is currently on the Board of Trustees of Rutgers
University. Mr. MacDonald is the brother of Bradley T. MacDonald, the CEO of the
Company.
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 $100,000 for 1998, 1997 and 1996.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------------------------- Awards
Salary Bonus Stock Options
Name Year ($) ($) Other No. of Shares
- ---- ---- ---------- --------- ----- -------------
<S> <C> <C> <C> <C>
Bradley MacDonald (2)............... 1998 $88,669 $50,000(1) 100,000(5)
1997 $170,000 100,000(5)
1996 $170,000 $8,000
Reed Vordenberg..................... 1998 $65,779 $50,000(2) 100,000(5)
1997
1996
Charles R. Walgreen, Sr.............. 1998 $63,461 $50,000 70,000(5)
1997
1996
Warren H. Haber...................... 1998 (4) (4) (4)
1997 (4) (4) (4)
1996 (4) (4) (4)
John Teeger.......................... 1998 (4) (4) (4)
1997 (4) (4) (4)
1996 (4) (4) (4)
</TABLE>
- ----------
(1) At December 31, 1998 this accrued bonus was paid subsequent to year end and
through the issuance of 25,000 shares of common stock.
10
<PAGE>
(2) At December 31, 1998 amount accrued for bonus was paid subsequent to year
end through issuance of 12,000 shares of common stock and credit of loans
receivable of $24,000 plus interest.
(3) At December 31, 1998 the accrued bonus was paid subsequent to year
end through issuance of 25,000 shares of common stock.
(4) For the years 1998, 1997 and 1996 both Mr. Haber's and Mr. Teeger's
services were provided pursuant to the Company's agreement with Founders
Management Services, Inc. The agreement provided that Founders Management
Services, Inc. would be paid $10,000 per month for consulting services
rendered by Mr. Haber and Mr. Teeger.
(5) Stock options granted under The Company's 1993 Stock Option Plan (the "1993
Plan") as amended by stockholder approval on December 17, 1997 and on
January 9, 1998.
STOCK OPTIONS.
The Company's 1993 Stock Option Plan (the "1993 Plan") as amended by stockholder
approval on December 17, 1997 and on January 9, 1998 increased the outstanding
stock options from 500,000 shares to 700,000 shares of common stock. The 1993
Plan authorizes the Board of Directors or a Stock Option Committee appointed by
the Board to grant incentive stock options and non-qualified stock options to
officers and key employees, directors and independent consultants, with
directors who are not employees and consultants eligible only to receive
non-qualified stock options. All directors with the exception of Messrs. Bradley
MacDonald, Vordenberg, Rueb and Walgreen, were issued 20,000 shares of stock
options. Messrs. Green, Michael MacDonald, and Ms. Valore constitute the
Company's Compensation and Stock Option Committee.
The following table sets forth pertinent information as of December 31, 1998
with respect to options granted under the Plan since the inception of the Plan
to the persons set forth under the Summary Compensation Table, all current
executive officers as a group, all current Directors who are not executive
officers as a group and all employees of the Company.
<TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<CAPTION>
Number of Securities Percent of Total
Underlying Options/SARs Exercise or Base
Options/SARs Granted to Employees Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date
------ -------------------- -------------------- ---------------- -----------
<S> <C> <C> <C> <C>
Bradley T. MacDonald ....... 200,000 .3533 $1.50 (1)
Reed Vordenberg ............ 100,000 .177 $1.50 01/29/03
Charles R. Walgreen, Sr. ... 70,000 .124 $1.50 01/29/03
All Current Executive
Officers As A Group ........ 420,000 .742 $1.50 (2)
All Current Non-Employee
Directors As a Group ....... 80,000 .1413 $1.50 (2)
</TABLE>
- ----------
(1) 100,000 options expire January 29, 2003, and 100,000 options expire March
1, 2003.
(2) All directors options expire 5 years after date of grant.
There was no exercise by any of the named executive officers of stock options
during the 1998 year. The following table provides information as to the value
of the unexercised options as of March 25, 1999 measured in terms of the closing
sale price of the Company's Common Stock on such date:
11
<PAGE>
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<CAPTION>
Number of Securities Value of Unexercised
Shares Underlying Unexercised in-the-Money
Acquired Options/SARs Options/SARs at
on Exercise Value at FY-End (#) FY-End ($)
Name (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Bradley T. MacDonald ...... 200,000 / 0 $100,000 / 0
Reed Vordenberg ........... 100,000 / 0 $50,000 / 0
Charles R. Walgreen, Sr. .. 70,000 / 0 $35,000 / 0
</TABLE>
- ----------
* On December 31, 1998, the closing sales price of $2.00 on the Nasdaq Small
Cap Stock Market was below the option exercise price.
COMPENSATION OF DIRECTORS.
The Company pays fees to its independent directors in the amount of $300 per
meeting. It reimburses those who are not employees of the Company for their
expenses incurred in attending meetings. Messrs. Hauge, Green and Reilly, and
Ms. Valore were granted 20,000 options each under the Plan. Mr. Galuchie and
Michael C. MacDonald were each granted 20,000 options under the Plan subject to
additional options becoming available.
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 December 31, 1998 of the Chief
Executive Officer, each Director, each nominee for Director, each current
executive officer named in the Summary Compensation Table under "Executive
Compensation" and all executive officers and Directors as a group. The number of
shares beneficially owned is determined under the rules of the Security and
Exchange Commission and the information is not necessarily indicative of
beneficial ownership for any other person. Under such rules, " beneficial
ownership" includes shares as to which the undersigned has sole or shared voting
power or investment power and shares which the undersigned has the right to
acquire within 60 days of December 31, 1998 through the exercise of any stock
option or other right. Unless otherwise indicated, the named person has sole
investment and voting power with respect to the shares set forth in the table.
Shares Beneficially % of
Name and Address* Owned as of 12/31/98 Outstanding
- ----------------- -------------------- -----------
Bradley T. MacDonald .................. 1,352,000(1) 22.62%
Reed Vordenberg ....................... 127,043(2) 2.12%
Randall Rueb .......................... 49,500(3) **
Charles R. Walgreen, Sr. .............. 162,398(4) 2.71%
Ronald Hauge .......................... 210,000(5) 3.51%
David M. Green ........................ 132,000(6) 2.21%
Beverly Valore ........................ 44,000(7) **
Donald F. Reilly ...................... 20,000(8) **
John W. Galuchie, Jr. ................. 400,000(9) 6.67%
Executive Officers and Directors as
a group (9 persons) ................... 2,474,941 41.4%
- ----------
* The address is c/o Healthrite, Inc. 11445 Cronhill Drive, Owings Mills,
Maryland 21117
** Less than 1%.
(1) Includes 200,000 shares issuable upon exercise of options, which by their
term are currently exercisable or become exercisable within 60 days and
880,000 shares, sold in a Private Placement by the Company in July, 1998 in
which Bradley T. MacDonald as Chairman of the Board of the Company retains
the voting rights thereof for a period of two years as per the terms of the
Offering.
(2) Includes 100,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
12
<PAGE>
(3) Includes 37,500 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
(4) Includes 70,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
(5) Includes 20,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
(6) Includes 20,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
(7) Includes 20,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
(8) Includes 20,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
(9) These shares are owned by Pure World, Inc., a public Company of which Mr.
Galuchie is executive vice president. They were purchased as part of the
Company's July 24, 1998 private offering. The Company retained the voting
rights to these shares for two years.
13
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The husband of Beverly Valore, a director is the CEO of Universal Worldwide
Health, the company which purchased a total of $130,000 of near dated and/or
expired inventory from the Company in 1998. In addition the Company assigned its
marketing rights to Nautilus to Universal World Wide Health.
Mr. Galuchie, is a director, and is president of T.R. Winston, Inc. a securities
firm that raised capital in the Company's 1998 private placement for which they
received 60,000 warrants to purchase 60,000 shares of common stock at an
exercise price of $1.50 per share and $28,800.
The Company's Montana Naturals International, Inc. subsidiary purchased raw
material amounting to $561,000 from Pure World, Inc.'s subsidiary Madis
Botanical in 1998. Pure World owns 7% of HealthRite, Inc.'s common stock.
Mr. Reed Voldenberg, president, was advanced $25,000 at an interest rate of 8%.
The loan and interest was paid in full from the bonus due and payable to him as
of December 31, 1998.
RECENT DEVELOPMENTS
On February 28, 1999 the one year employment agreement of Charles R. Walgreen,
Sr. a president of MTNA terminated by its terms. Concurrent with the termination
of his employment agreement, Mr. Walgreen resigned as a director of the Company.
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*
10.3 Lease relating to the Company's Owings Mills, Maryland
facility*
10.4 Employment agreement with Bradley T. MacDonald
10.5 Employment agreement of Reed Voldenberg
10.6 Employment agreement of Charles R. Walleen, Sr.
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
The Company filed two reports on Form 8-K during 1998 as follows:
1. July 27, 1998 to report private placement of 880,000 shares of common
stock.
2. August 20, 1998 to report the changes in the company's balance sheet
resulting from the private placement.
14
<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 /s/ REED VORDENBERG /s/ RANDALL RUEB
- ------------------------ ----------------------- ------------------------
Bradley T. MacDonald Reed Vordenberg Randall Rueb
Chairman & CEO President Chief Financial Officer
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.
Name Title Date
---- ----- ----
/s/ BRADLEY T. MACDONALD
- ----------------------------- Chairman of the Board, April 15, 1999
Bradley T. MacDonald Director, Chief
Executive Officer and Chief
Financial Officer
/s/ REED VORDENBERG
- ----------------------------- Secretary, Director and April 15, 1999
Reed Vordenberg President
/s/ RANDALL REUB
- ----------------------------- Chief Financial Officer April 15, 1999
Randall Reub and Director
/s/ DAVID M. GREEN
- ----------------------------- Director April 15, 1999
David M. Green
/s/ RONALD O. HAUGE
- ----------------------------- Director April 15, 1999
Ronald O. Hauge
/s/ DONALD F. REILLY
- ----------------------------- Director April 15, 1999
Donald F. Reilly, O.S.A.
/s/ BEVERLY L. VALORE
- ----------------------------- Director April 15, 1999
Beverly L. Valore, Esq.
/s/ JOHN W. GALUCHIE, JR.
- ----------------------------- Director April 15, 1999
John W. Galuchie, Jr.
/s/ MICHAEL C. MACDONALD
- ----------------------------- Director April 15, 1999
Michael C. MacDonald
15
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONTENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent auditors' report ....................................... F-2
Balance sheet as of December 31, 1998 .............................. F-3
Statements of operations for the years ended
December 31, 1998 and 1997 ....................................... F-4
Statements of changes in stockholders' equity for the years
ended December 31, 1998 and 1997 ................................. F-5
Statements of cash flows for the years ended
December 31, 1998 and 1997 ....................................... F-6
Notes to financial statements ...................................... F-7
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, 1998, 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, 1998. 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 statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of HealthRite, Inc. and
subsidiaries as of December 31, 1998, 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, 1998 in conformity with generally accepted
accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
February 11, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................................... $ 503,000
Accounts receivable, net of allowance for doubtful accounts of $223,000 ............................. 3,341,000
Inventory ........................................................................................... 2,718,000
Prepaid expenses and other current assets ........................................................... 416,000
-----------
Total current assets ............................................................................. 6,978,000
Property, plant and equipment - net .................................................................... 3,253,000
Other assets ........................................................................................... 109,000
-----------
$10,340,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................................................... $ 2,705,000
Current maturities of obligations under capital leases .............................................. 22,000
Current maturities of long-term obligations ......................................................... 700,000
-----------
Total current liabilities ........................................................................ 3,427,000
Obligations under capital leases less current maturities ............................................... 17,000
Long-term obligations less current maturities .......................................................... 4,070,000
-----------
7,514,000
-----------
Redeemable preferred stock; Series A convertible 8%, par value $.001 per share; 2,000,000
shares authorized; 367,500 shares issued and outstanding, redemption value $735,000 ................. 679,000
-----------
Commitments and contingencies
Stockholders' equity:
Common stock; par value $.001 per share; 10,000,000 shares authorized; 5,347,198 shares
issued and outstanding ........................................................................... 5,000
Additional paid-in capital .......................................................................... 8,313,000
Accumulated deficit ................................................................................. (6,147,000)
Subscription receivable ............................................................................. (24,000)
-----------
Total stockholders' equity ....................................................................... 2,147,000
-----------
$10,340,000
===========
</TABLE>
F-3
See notes to financial statements
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales ...................................................... $ 15,901,000 $ 14,361,000
Cost of sales .................................................. 10,097,000 9,670,000
------------ ------------
Gross profit ................................................... 5,804,000 4,691,000
Selling, general and administrative expenses ................... 6,575,000 7,829,000
------------ ------------
Loss from operations before other income (expenses) ............ (771,000) (3,138,000)
------------ ------------
Other income (expenses):
Interest expense, net ....................................... (350,000) (237,000)
Other income ................................................ 172,000 32,000
Loss on sale of assets ...................................... (12,000)
------------ ------------
(178,000) (217,000)
------------ ------------
Loss before provision for income taxes ......................... (949,000) (3,355,000)
------------ ------------
Provision for income taxes:
Current ..................................................... -- 2,000
Deferred .................................................... -- 340,000
------------ ------------
Net provision for income taxes ................................. -- 342,000
------------ ------------
NET LOSS/COMPREHENSIVE LOSS .................................... (949,000) (3,697,000)
------------ ------------
Preferred stock dividend requirement ........................... 69,000 68,000
Accretion of difference between carrying amount and redemption
amount of redeemable preferred stock ........................ 35,000 25,000
------------ ------------
104,000 93,000
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS - BASIC AND DILUTED $ (1,053,000) $ (3,790,000)
============ ============
BASIC AND DILUTED NET LOSS PER SHARE ........................... $ (.22) $ (.88)
============ ============
WEIGHTED AVERAGE SHARES - BASIC AND DILUTED .................... 4,801,000 4,297,000
============ ============
</TABLE>
See notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------
(PAR VALUE ADDITIONAL
NUMBER OF $.001) PAID-IN ACCUMULATED SUBSCRIPTION
SHARES AMOUNT CAPITAL DEFICIT RECEIVABLE TOTAL
--------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 ............... 4,276,472 $ 4,000 $ 6,934,000 $(1,364,000) $ 5,574,000
Common stock issued to employees
in July 1997 ......................... 25,000 66,000 66,000
Common stock issued to employees
in December 1997 ..................... 44,149 66,000 66,000
Common stock issued to consultants
in December 1997 ..................... 36,615 55,000 55,000
Common stock issued to directors
in December 1997 ..................... 17,962 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)
Warrants issued in asset sale .......... 18,000 18,000
Net loss ............................... (3,697,000) (3,697,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 ............. 4,400,198 4,000 7,141,000 (5,129,000) 2,016,000
Private placement offering in July 1998
(net of expenses of $55,000) ......... 880,000 1,000 1,000,000 $ (24,000) 977,000
Common stock issued in lieu of
preferred dividend .................. 2,000 4,000 (4,000) 0
Cash dividend on preferred stock ....... (65,000) (65,000)
Conversion of preferred stock .......... 65,000 130,000 130,000
Accretion of difference between carrying
amount and redemption
amount of redeemable preferred stock (35,000) (35,000)
Warrants issued to consultants ......... 73,000 73,000
Net loss ............................... (949,000) (949,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 ............. 5,347,198 $ 5,000 $ 8,313,000 $(6,147,000) $ (24,000) $ 2,147,000
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements F-5
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (949,000) $(3,697,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................. 431,000 875,000
Write-down of deferred design and distribution costs .......... 378,000
Write-down of impaired assets ................................. 39,000
Common stock issued for services .............................. 214,000
Valuation of warrants for consulting .......................... 73,000
Loss (gain) on sale of assets ................................. (2,000) 12,000
Decrease in deferred taxes, net ............................... 342,000
Changes in:
Accounts receivable ........................................ (2,229,000) 443,000
Inventory .................................................. (321,000) 137,000
Prepaid expenses and other current assets .................. (150,000) 23,000
Other assets ............................................... 120,000 (78,000)
Accounts payable and accrued expenses ...................... 1,001,000 (591,000)
----------- -----------
Net cash used in operating activities ................... (2,026,000) (1,903,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................. (213,000) (155,000)
Net proceeds from sale of assets (see below) ....................... 13,000 2,478,000
---------- -----------
Net cash (used in) provided by investing activities ..... (200,000) 2,323,000
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ............................. 977,000
Repayment of capital lease obligations ............................. (39,000) (149,000)
Proceeds of long-term debt ......................................... 5,261,000 1,638,000
Principal repayments of long-term debt ............................. (3,660,000) (1,872,000)
Dividends paid on preferred stock .................................. (65,000) (68,000)
----------- -----------
Net cash provided by (used in) financing activities ..... 2,474,000 (451,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 248,000 (31,000)
Cash and cash equivalents - beginning of the year ..................... 255,000 286,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF THE YEAR ........................... $ 503,000 $ 255,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ...................................................... $ 314,000 $ 225,000
Taxes paid ......................................................... $ 17,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired with debt ....................................... $ 716,000
Conversion of preferred stock ...................................... $ 130,000
Exchange of inventory for advertising credits ...................... $ 146,000
Common stock issued in lieu of preferred stock dividend ............ $ 4,000
Equipment acquired but not yet paid ................................ $ 81,000
</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-6
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
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 health, energy and diet products. These products are
sold primarily in the United States through various channels of distribution:
diet centers, 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
was 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 wrote off the unamortized
portion of deferred design and distribution costs and wrote down such product
line inventory to its estimated realizable amount (see Note M[4]).
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, 1998, the Company sustained a net loss of $949,000, was not
in compliance with the terms of certain loan covenants and had net cash outflows
from operating activities of $2,026,000. During 1999, sales orders from the
Company's largest customer has declined significantly. The Company is in the
process of taking a number of steps to improve its financial prospects including
focusing its efforts on profitable core products, conducting an aggressive
marketing campaign, reducing the labor force and cost reductions at the MTNA
facility. The Company is also seeking additional equity financing. As of
December 31, 1998, the Company's financial resources include various unused term
loans and a revolving line of credit of approximately $500,000 available for
future expansion. The Company has received waivers from lenders for
noncompliance of certain covenants. The Company believes it can generate funds
and implement lost saving in 1999 to continue in operations through December 31,
1999.
The present management team assumed control of the Company in January 1998.
During the year, the Company completed a private placement of 880,000 shares of
common stock and received net proceeds of $977,000 against subscriptions of
$1,001,000. One of the participants to the private placement was a major vendor
to MTNA (see Note P).
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.
F-7
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 COSTS AND ADVERTISING:
Advertising costs such as preparation, layout, design and production of
advertising are deferred and are expensed when first shown. At December 31,
1998, approximately $244,000 of such costs have been deferred and included
in other current assets. Advertising expense for the years ended December
31, 1998 and 1997 amounted to $706,000 and $628,000, respectively.
[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
The carrying amount of all long-lived assets is evaluated periodically to
determine whether adjustment to the useful life or to the unamortized
balance is warranted. Such evaluation is based principally on the expected
utilization of the long-lived assets and the projected undiscounted cash
flows of the operations in which the long-lived assets are used.
[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-8
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] (LOSS) INCOME PER COMMON SHARE:
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires the reporting
of basic and diluted earnings per share. Basic earnings per share excludes
any dilutive effects of options, warrants and other stock-based
compensation. The Company has not included potential common shares in the
diluted per share computation as the result would be antidilutive.
[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, drugstore chains, combo food drugstore chains and
retail stores. The risk associated with this concentration is described in
Note N.
[12] NEW ACCOUNTING STANDARDS:
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). The provisions of SFAS No. 131 require the
Company to disclose the following information for each reporting segment:
general information about factors used to identify reportable segments, the
basis of organization, and the sources of revenues; information about
reported profit or loss and segment assets; and reconciliations of certain
reported segment information to consolidated amounts. Please refer to Note
Q for further information.
F-9
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[13] 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 No. 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, 1998:
Raw materials ......................... $1,605,000
Work-in-process ....................... 39,000
Finished goods ........................ 1,074,000
----------
$2,718,000
==========
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 consist of the following:
Land ............................................. $ 69,000
Buildings and improvements ....................... 1,451,000
Leasehold improvements ........................... 118,000
Equipment and fixtures ........................... 3,247,000
----------
4,885,000
Less accumulated depreciation and amortization ... (1,943,000)
-----------
2,942,000
Construction in progress ......................... 311,000
-----------
Property, plant and equipment - net .............. $ 3,253,000
===========
At December 31, 1998, property, plant and equipment includes asset held under
capital leases with a net book value of $34,000. Substantially all of the
Company's property, plant and equipment is pledged as collateral for various
loans (see Note G). Interest of approximately $1,000 has been capitalized during
the year ended December 31, 1998.
F-10
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE E - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued
expenses include the following:
Trade payables ................................... $ 1,805,000
Accrued expenses ................................. 703,000
Accrued payroll and related taxes ................ 197,000
-------------
Total ........................................ $ 2,705,000
=============
NOTE F - INCOME TAXES
At December 31, 1998, the principal components of the net deferred tax assets
are as follows:
Current deferred tax assets:
Net operating loss carryforwards .............. $ 1,750,000
Accounts receivable ........................... 85,000
Inventory overhead and writedowns ............. 211,000
Accrued expenses .............................. 28,000
-------------
Total current deferred tax assets .......... 2,074,000
Fixed assets and intangible assets ............... 351,000
-------------
Total deferred tax assets .................. 2,425,000
Less valuation allowance ......................... 2,425,000
-------------
Total deferred tax assets .................. $ 0
=============
The Company has provided a valuation reserve against the full amount of its net
operating loss carryforwards and other temporary differences, since the
likelihood of realization cannot be determined.
A reconciliation of the federal statutory rate to the income tax expense is as
follows:
YEAR ENDED
DECEMBER 31,
------------------------
1998 1997
--------- -----------
Income tax (benefit) based on federal statutory rate . $(323,000) $(1,141,000)
State and local tax (benefit), net of federal benefit. (38,000) (134,000)
Nondeductible expenses ............................... 5,000 (7,000)
Increase in valuation allowance ...................... 344,000 1,624,000
Other ................................................ 12,000
--------- -----------
Income tax expense ................................... $ 0 $ 342,000
========= ===========
F-11
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE F - INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards of approximately $4,606,000
which are available to offset future taxable income. These carryforwards expire
from 2009 to 2018. 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 G - LONG-TERM DEBT
Long-term debt as of December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
MTNA term loans through a bank from USDA, Rural Business Co-operative Services
bearing interest at prime rate plus 1.25% adjusted to US Treasury Obligation
rate through conversion:
Construction term loan not to exceed $1,200,000. Secured by MTNA land and
building, payable in monthly installments through October 2017 (1) ......................... $ 556,000
Equipment term loan not to exceed $800,000. Secured by MTNA all personal
property including fixtures and equipment, payable in monthly
installments through June 2006 (1) ......................................................... 536,000
Term loan not to exceed $2,500,000. Secured by MTNA all accounts
receivable, inventory inventory and intangibles, payable in monthly
installments through June 2006 (1) ......................................................... 2,388,000
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 ...................................................................................... 178,000
CDBG loan, collateralized by MTNA accounts receivable, inventory, property and equipment,
equipment, bearing interest rate at 7.0%, monthly payments of $5,225 through
September 2007 .................................................................................. 418,000
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(2)................................................. 559,000
Note payable due in 7 annual installments of $42,000 through March 1, 2002 which
includes imputed interest at 8.75% .............................................................. 135,000
----------
4,770,000
Less current maturities ............................................................................ (700,000)
----------
$4,070,000
==========
</TABLE>
- ---------
(1) The notes are expected to convert into term loans on June 30, 1999. At
conversion, principal and interest is expected to be 80% guaranteed by
USDA. At conversion, the interest rate is expected to be fixed at a rate
equivalent to the US Treasury rate times 1.2 and the unguaranteed portion
will bear interest at US Treasury rate plus 3.5%.
(2) In January 1999, the revolving credit and term loan availability was
increased to $1,500,000.
F-12
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE G - 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 granted waivers for
noncompliance with certain of these covenants.
Future principal payments on long-term debt are as follows:
1999 ...................................... $ 700,000
2000 ...................................... 523,000
2001 ...................................... 564,000
2002 ...................................... 498,000
2003 ...................................... 486,000
Thereafter ................................ 1,999,000
----------
$4,770,000
==========
NOTE H - LEASES
[1] OPERATING LEASES:
The Company has an operating lease for office, manufacturing and warehouse
facilities ("Jason Facilities") which expires in December 1999 and has a
renewal option for an additional five years.
In addition, the Company leases certain office equipment under operating
leases.
Future minimum lease payments as of December 31, 1998 are as follows:
1999 ................... $321,000
Rent expense totalled approximately $369,000 and $613,000 for the years ended
December 31, 1998 and 1997, respectively, net of sublease income of $31,000 and
$24,000 in 1998 and 1997.
[2] CAPITAL LEASES:The Company leases certain equipment under capital
leases.The future minimum lease payments required under these lease
obligations are as follows:
1999 .......................................... $25,000
2000 .......................................... 13,000
2001 .......................................... 5,000
-------
Total minimum lease payments .................. 43,000
Less amount representing interest ............. (4,000)
-------
Present value of minimum lease payments ....... 39,000
Less current portion .......................... 22,000
-------
Long-term portion ............................. $17,000
=======
F-13
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE I - EMPLOYMENT AND CONSULTING AGREEMENTS
Pursuant to an agreement, certain stockholders (the "Founders") were 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 were paid management fees of $120,000 during
the year ended December 31, 1997. 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.
The Company has employment agreements, as amended, expiring through December
2000 with four of its officers. The contracts provide for aggregate annual basic
salaries of $170,000 in 1997, $292,000 in 1998, $375,000 in 1999 and $200,000 in
2000. The agreements also provide certain incentives of $100,000 plus
discretionary bonuses in 1998 and 320,000 options to purchase shares of common
stock of the Company under the stock option plan. At December 31, 1998, the
Company accrued $150,000 in bonuses which were subsequently settled with the
issuance of 62,000 shares of common stock. A portion of the bonus was used to
settle the subscription receivable.
NOTE J - 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.
During 1998, 130,000 shares of preferred stock were converted into 65,000 shares
of common stock.
NOTE K - 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.
F-14
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE K - STOCK OPTION PLAN (CONTINUED)
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 has elected to continue to account for stock option grants in
accordance with APB 25 and related interpretations. 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.
If compensation expense for the Company's stock-based compensation plans had
been determined consistent with SFAS 123, the Company's net loss and net loss
per share including pro forma results would have been the amounts indicated
below:
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
---------- ----------
Net loss:
As reported ................... $ (949,000) $3,697,000)
Pro forma ..................... (1,375,000) (3,744,000)
Net loss per share:
As reported:
Basic and diluted .......... $(.22) $(.88)
===== =====
Pro forma:
Basic and diluted .......... $(.31) $(.89)
===== =====
The pro forma effect on net loss for 1998 and 1997 may not be representative of
the pro forma effect on net loss 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:
1998 1997
---- ----
Dividend yield ................... 0% 0%
Expected volatility .............. 0.63 0.30
Risk-free interest rate .......... 4.17% - 5.94% 5.79% - 6.12%
Expected life in years ........... 1-5 1-5
The weighted average fair value at date of grant for options granted during the
years 1998 and 1997 were $0.87 and $0.39, respectively, using the above
assumptions.
F-15
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE K - STOCK OPTION PLAN (CONTINUED)
The following summarizes the stock option activity for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year ............... 512,500 $1.93 400,000 $2.05
Options granted ................................ 566,000 1.50 352,500 1.87
Options forfeited or expired ................... (475,000) 1.93 (240,000) 2.03
-------- --------
Outstanding at end of year ..................... 603,500 1.54 512,500 1.93
======== ========
Options exercisable at year end ................ 495,331 1.50 257,500 1.97
======== ========
Options available for grant at end of year ..... 96,500
=======
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- -------------------------
WEIGHTED
AVERAGE
CONTRACTUAL WEIGHTED WEIGHTED
RANGE OF LIFE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
----------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.50-$1.63 566,000 4.22 $1.52 468,666 $1.52
$2.13-$2.65 37,500 2.89 2.52 26,665 2.52
------- -------
603,500 495,331
======= =======
</TABLE>
NOTE L - WARRANTS
During 1998, the Company granted 155,000 warrants to various consultants to
provide financial and administrative services. The issuance has resulted in a
charge to operations of $73,000 in 1998 based on the fair value of the warrants.
The fair value of these warrants was estimated using the Black-Scholes pricing
model with the following assumptions: interest rate 4.15% - 4.56%, dividend
yield 0%, volatility 0.63, expected life three to five years.
F-16
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE L - WARRANTS (CONTINUED)
The Company has the following warrants outstanding for the purchase of its
common stock as follows:
YEAR ENDED
DECEMBER 31,
EXERCISE --------------------
PRICE EXPIRATION DATE 1998 1997
-------- ------------------------------- ------- ------
$2.50 August 2001 (1) .................... 51,375 51,375
2.00 June 2002 (2) ...................... 24,000 24,000
1.75 February 2003 ...................... 25,000
1.50 July 2003 .......................... 60,000
1.75 September 2003 ..................... 60,000
1.50 October 2001 ....................... 10,000
------- ------
230,375 75,375
======= ======
Weighted average exercise price .... $1.87 $2.34
======= ======
As of December 31, 1998 the warrants are all exercisable.
(1) Issued in conjunction with preferred stock (see Note J)
(2) Issued in conjunction with sale of Vitamin Specialties Division
(see Note A)
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.
[2] Jason is a defendant in a 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.
MTNA is a defendant in a wrongful termination suit. The former employee is
seeking damages for loss of earnings and punitive damages. This matter is
in an early stage and the ultimate outcome is presently undeterminable.
[3] The Company had a sponsorship agreement in connection with a product line
which requires payment of $100,000 in 1998. In connection therewith, the
Company paid $50,000 in 1998 and obtained a release under the agreement.
[4] During the year ended December 31, 1996, 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 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. The Company paid $80,000 (including $62,000 reimbursed from
buyer of rights) and $89,000 in royalty fees under this agreement during
the years ended December 31, 1998 and 1997. In April 1998, the Company sold
its rights under the agreement for $130,000. Such amount is included in
other income.
F-17
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE M - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[5] At December 31, 1998, the Company has a commitment of $1,260,000, for the
expansion of its manufacturing facility to be financed through term loans
and internally generated funds.
[6] At December 31, 1998, the Company had a $60,000 standby letter of credit.
NOTE N - MAJOR CUSTOMER
During the years ended December 31, 1998 and 1997, the Company had sales to one
customer which aggregated 45.8% and 22.7%, respectively, of net sales. Such
customer accounted for 50% of net accounts receivable at December 31, 1998.
NOTE O - 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. During 1998, the Company utilized these credits.
NOTE P - 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.
During 1998, the Company bought raw materials from a vendor who participated in
the private placement and is a stockholder. Such purchases aggregated $561,000
during 1998.
NOTE Q - BUSINESS SEGMENT INFORMATION
Information concerning operations by operating segment is as follows:
<TABLE>
<CAPTION>
DIET HERBAL AND RETAIL
CONTROL ENERGY STORES OTHER CONSOLIDATED
------------ ------------- --------- ----------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Total sales ..................... $ 5,871,000 $ 9,938,000 $ 92,000 $15,901,000
Operating loss .................. (139,000) (220,000) (69,000) $ (343,000) (771,000)
Depreciation and amortization ... 209,000 222,000 431,000
Identifiable assets ............. 3,033,000 6,908,000 73,000 326,000 10,340,000
Capital expenditure ............. 1,010,000 1,010,000
YEAR ENDED DECEMBER 31, 1997:
Total sales ..................... 4,212,000 8,351,000 1,798,000 14,361,000
Operating loss .................. (915,000) (1,697,000) (526,000) (3,138,000)
Depreciation and amortization ... 185,000 190,000 500,000 875,000
Identifiable assets ............. 2,757,000 3,884,000 303,000 6,944,000
Capital expenditure ............. 32,000 116,000 7,000 155,000
</TABLE>
F-18
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE Q - BUSINESS SEGMENT INFORMATION (CONTINUED)
Diet Control:
This segment includes medically supervised and over-the-counter weight loss
products sold under the brand name Medifast and Medifast Take Shape. These
products are manufactured at the Company's facilities in Maryland. Medifast
weight loss products are offered through physicians, hospitals, diet centers and
other medical professionals, and the Medifast "take shape" products are marketed
via retail stores with pharmacies.
Herbal and Energy:
This segment manufactures and markets herbal extracts, bee products and energy
products under the trade names: Montana Naturals, Montana Big Sky and Pure
Energy. These products are manufactured at the Company's facilities in Montana.
In addition, the Company develops products and custom-manufactures these
products for a wide variety of customers.
Retail Stores:
The segment sells vitamin and nutritional products through a chain of retail
stores and by direct marketing through catalog sales. Substantially all of the
outlets and catalog were sold during 1997.
Other:
Consists of corporate assets and unallocated corporate expenses. Geographic area
data:
Information concerning operations by principal geographic area is as follows:
YEAR ENDED
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
United States ......................... $ 15,160,000 $ 13,516,000
Canada ................................ 263,000 232,000
Asia/Pacific Rim ...................... 332,000 417,000
Middle East ........................... 133,000 176,000
Other ................................. 13,000 20,000
------------ ------------
$ 15,901,000 $ 14,361,000
============ ============
F-19
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made as of the 24th day of April, 1998,
between HEALTHRITE, INC., a Delaware corporation with its principal office
presently located at 11445 Cronhill Drive, Owings Mills, Maryland 21117
("HealthRite"), and BRADLEY T. MACDONALD, an individual presently residing in
Owings Mills, Maryland (the "Executive").
W I T N E S S E T H:
WHEREAS, HealthRite and the Executive are parties to an employment
agreement dated as of April 24, 1998 ("April 1998 Agreement"); and
WHEREAS, HealthRite and the Executive desire to enter into a new Agreement
regarding, among other things, the employment of the Executive by HealthRite
and, concurrently therewith, to terminate the April 1998 Agreement, all as
hereinafter set forth.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby,
agree as follows:
1. Employment. HealthRite hereby employs the Executive, and the
Executive hereby accepts employment with HealthRite, on the terms and
conditions set forth in this Agreement.
2. Duties of Employee. The Executive will perform and discharge well
and faithfully such duties as an executive officer of HealthRite as may be
assigned to him from time to time by the Board of Directors of HealthRite
("Board"). The Executive will be employed as Chairman and Chief Executive
Officer of HealthRite, and will hold such other titles as may be given to
him from time to time by the Board. The Executive will devote his full
time, attention and energies to the business of HealthRite and will not,
during the Employment Period (as defined in Section 3), be employed or
involved in any other business activity, whether or not such activity is
pursued for gain, profit or other pecuniary advantage; provided, however,
that this section will not be construed as preventing the Executive from
(a) passively investing his personal assets, (b) acting as a member of the
Board of Directors or Trustees of HealthRite or any other entity not in
competition with HealthRite (or an affiliate of HealthRite), or (c) being
involved in any community, civic or similar activity. Except for reasonable
travel requirements consistent with his positions and except as otherwise
provided herein, all duties of the Executive shall be routinely discharged
at HealthRite's facilities located in Owings Mills, Maryland.
3. Term of Employment. The Executive's employment under this Agreement
will be for a period (the "Employment Period")
<PAGE>
commencing upon the date of this Agreement and ending at the end of the
term of this Agreement pursuant to Section 19, unless the Executive's
employment is sooner terminated in accordance with Section 5 or one of the
following provisions:
(a) Termination for Cause. The Executive's employment under this
Agreement may be terminated at any time during the Employment Period
for Cause, by action of the Board, upon giving notice of such
termination to the Executive at least 15 days prior to the date upon
which such termination is to take effect. As used in this Agreement,
"Cause" means any of the following events:
(i) the Executive is convicted of or enters a plea of guilty or
nolo contendere to a felony, a crime of falsehood, or a crime
involving fraud or moral turpitude, or the actual incarceration of the
Executive for a period of 45 consecutive days;
(ii) the Executive willfully and repeatedly fails to follow the
lawful instructions of the Board after the Executive's receipt of
written notice of such instructions, other than a failure resulting
from the Executive's incapacity because of physical or mental illness;
(iii) a government regulatory agency finally recommends or orders
in writing that HealthRite terminate the employment of the Executive;
or
(iv) the Executive violates the covenant not to compete contained
in Section 8 or the confidentiality provisions of Section 9.
Notwithstanding the foregoing, the Executive's employment under this
Agreement will not be deemed to have been terminated for Cause under
Section 3(a)(i) or (ii) if such termination took place solely as a result
of:
(i) questionable judgment on the part of the Executive;
(ii) any act or omission believed by the Executive, in good
faith, to have been in, or not opposed to, the best interests of
HealthRite; or
(iii) any act or omission in respect of which a determination
could properly be made that the Executive met the applicable standard
of conduct prescribed for indemnification or reimbursement or payment
of expenses under the Articles of Incorporation or By-laws of
2
<PAGE>
HealthRite or the directors' and officers' liability insurance of
HealthRite, in each case as in effect at the time of such act or omission.
If the Executive's employment is terminated under the provisions of this
subsection, then all rights of the Executive under Section 4 will cease as
of the effective date of such termination.
(b) Termination Without Cause. The Executive's employment under this
Agreement may be terminated at any time during the Employment Period
without Cause, by action of the Board, upon giving notice of such
termination to the Executive at least 30 days prior to the date upon which
such termination is to take effect. If the Executive's employment is
terminated under the provisions of this subsection, then the Executive will
be entitled to receive the compensation set forth in Section 6.
(c) Voluntary Termination, Retirement or Death. If the Executive
voluntarily terminates employment without "Good Reason" (as defined in
Section 5), retires or dies, the Executive's employment under this
Agreement will be deemed terminated as of the date of the Executive's
voluntary termination, retirement or death, and all rights of the Executive
under Section 4 will cease as of the date of such termination and any
benefits payable to the Executive will be determined in accordance with the
retirement and insurance programs of HealthRite then in effect.
(d) Disability. If the Executive is incapacitated by accident,
sickness, or otherwise so as to render the Executive mentally or physically
incapable of performing the essential duties required of the Executive
under Section 2, notwithstanding reasonable accommodation, for a continuous
period of six months, then, upon the expiration of such period or at any
time thereafter, by action of the Board, the Executive's employment under
this Agreement may be terminated immediately upon giving the Executive
notice to that effect. If the Executive's employment is terminated under
the provisions of this subsection, then all rights of the Executive under
Section 4 will cease as of the last business day of the week in which such
termination occurs, and the Executive will thereafter be entitled to the
benefits to which he is entitled under any disability or other plan of
HealthRite in which he is then a participant.
4. Employment Period Compensation and Related Matters.
(a) Salary. For services performed by the Executive
3
<PAGE>
under this Agreement, HealthRite will pay the Executive a salary, in the
aggregate, during the Employment Period, at the annualized rate of
$150,000, payable at the same times as salaries are payable to other
executive employees of HealthRite. HealthRite may, from time to time,
increase (but not decrease) the Executive's salary, and any and all such
increases will be deemed to constitute amendments to this subsection to
reflect the increased amounts, effective as of the dates established for
such increases by the Board in the resolutions authorizing such increases.
(b) Bonus. For services performed by the Executive under this
Agreement, he shall be entitled to participate in such bonus or similar
award plan or program as may be maintained from time to time by HealthRite
for its executive officers. In addition, HealthRite may, from time to time,
pay such other bonus or bonuses to the Executive as the Board, in its sole
discretion, deems appropriate. The payment of any such bonuses will not
reduce or otherwise affect any other obligation of HealthRite to the
Executive provided for in this Agreement.
(c) Pension and Welfare Benefits. HealthRite will provide the
Executive, during the Employment Period, with pension and welfare benefits
(within the meaning of Section 3 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) in the aggregate not less favorable than
those received by other employees of HealthRite.
(d) Fringe Benefits.
(i) In General. Except as otherwise provided in this subsection,
HealthRite will provide the Executive, during the Employment Period,
with such fringe benefits as may be provided generally from time to
time for its executive officers.
(ii) Vacation. The Executive will be entitled to not less than
four weeks of vacation per calendar year. The right to carry over
unused vacation days will be subject to the executive personnel
policies of HealthRite from time to time in effect.
(e) Expense Reimbursement. The Executive will be entitled to
reimbursement of all expenses incurred by him in the discharge of his
duties hereunder, or otherwise in furtherance of the business of
HealthRite, provided he renders an accounting of such expenses in such
manner as may be required from time to time for employees generally.
(f) Salary Deferral. The Executive may request that
4
<PAGE>
the payment of any portion of his base salary and/or bonus for any calendar
year be deferred. Such request must be made in writing to HealthRite before
the beginning of such calendar year and must include the period of deferral
requested by the Executive (the "Deferral Period"). If the Board approves
such request, the Executive will be entitled to receive, at the end of the
Deferral Period, the deferred portion of his base salary and/or bonus plus
interest at a compounded rate of 6% per annum. Any salary and/or bonus
which is deferred as described herein will be credited to an account on the
books of HealthRite established in the name of the Executive. However, this
account will not be funded, and HealthRite shall not be deemed to be a
trustee for the Executive with respect to any deferred amount. The
Executive will be a general unsecured creditor of HealthRite for any amount
due him under this section. HealthRite will not be required to segregate
any funds representing such deferred amounts, and nothing herein will be
construed as providing for such segregation.
(g) Stock Options. The Executive has been granted and will receive
100,000 options to acquire 100,000 shares of HealthRite common stock
pursuant to the HealthRite 1993 Stock Option Plan.
5. Resignation of the Executive for Good Reason.
(a) Events Giving Right to Terminate for Good Reason. The Executive
may resign for Good Reason at any time during the Employment Period, as
hereinafter set forth. As used in this Agreement, the term "Good Reason"
means any of the following:
(i) any reduction in title or a material adverse change in the
Executive's responsibilities or authority which are inconsistent with,
or the assignment to the Executive of duties inconsistent with, the
Executive's status as Chairman and Chief Executive Officer of
HealthRite;
(ii) any reassignment of the Executive to a principal office
which is more than 15 miles from Owings Mills, Maryland;
(iii) any removal of the Executive from office except for any
termination of the Executive's employment under the provisions of
Section 3(a) or (d);
(iv) any reduction in the Executive's annual base salary as in
effect on the date hereof or as the same may be increased from time to
time;
5
<PAGE>
(v) any failure by HealthRite to provide the Executive with
benefits at least as favorable as those enjoyed by the Executive under
any of the pension or welfare plans (as such terms are defined in
ERISA Section 3) of HealthRite in which the Executive is participating
on the date of this Agreement, or the taking of any action that would
materially reduce any of such benefits, unless the change is part of a
change applicable in any case to employees generally; and
(vi) any material breach of this Agreement by HealthRite, coupled
with the failure to cure the same within 30 days after receipt of a
written notice of such breach from the Executive.
(b) Notice of Termination. At the option of the Executive, exercisable
by the Executive within 90 days after the occurrence of the event
constituting Good Reason, the Executive may resign from employment under
this Agreement by a notice in writing ("Notice of Termination") delivered
to HealthRite and the provisions of Section 6 will thereupon apply.
(c) Special Right of Termination. Notwithstanding anything herein to
the contrary, but subject to the provisions of Section 3(a), within the
one-year period immediately following the occurrence of a "Change in
Control" (as defined in Subsection (d)), the Executive may terminate his
employment for any or no reason by delivering a written notice, similar to
a Notice of Termination, to HealthRite; and such termination will be deemed
for all purposes to constitute a resignation for Good Reason. In such
event, he will be entitled to the payments set forth in Section 6.
(d) Change in Control Defined. For purposes of this Agreement, the
term "Change in Control" means any of the following:
(i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities and Exchange Act of 1934 (the "Exchange
Act")), other than HealthRite, a subsidiary of HealthRite, an employee
benefit plan of HealthRite or a subsidiary of HealthRite (including a
related trust), becomes the beneficial owner (as determined pursuant
to Rule 13d-3 under the Exchange Act), directly or indirectly of
securities of HealthRite representing more than 20% of the combined
voting power of HealthRite's then outstanding securities;
6
<PAGE>
(ii) the occurrence of, or execution of an agreement providing
for, a sale of all or substantially all of the assets of HealthRite to
an entity which is not a direct or indirect subsidiary of HealthRite;
(iii) the occurrence of, or execution of an agreement providing
for, a reorganization, merger, consolidation or similar transaction
involving HealthRite, unless (A) the shareholders of HealthRite
immediately prior to the consummation of any such transaction will
initially own securities representing a majority of the voting power
of the surviving or resulting corporation, and (B) the directors of
HealthRite immediately prior to the consummation of such transaction
will initially represent a majority of the directors of the surviving
or resulting corporation; and
(iv) any other event which is at any time irrevocably designated
as a "Change in Control" for purposes of this Agreement by resolution
adopted by a majority of the then non-employee directors of HealthRite
who were elected other than pursuant to an election contest (subject
to Rule 14a-11 of the Exchange Act) or other proxy contest, in either
case occurring after the date of this Agreement.
6. Rights in Event of Certain Termination of Employment. In the event that
the Executive resigns from employment for Good Reason, by delivery of a Notice
of Termination or other permitted notice to HealthRite, or the Executive's
employment is terminated by HealthRite without Cause, Executive will be entitled
to receive the payments set forth in this section.
(a) Basic Payments. The Executive will be paid an amount equal to two
times the sum of (i) the highest annualized base salary paid to him during
the calendar year of termination or the immediately preceding two calendar
years, and (ii) the highest bonus paid to him with respect to one of the
three calendar years immediately preceding the year of termination. Such
amount will be paid to the Executive in 24 equal monthly installments
(without interest), beginning 30 days following the date of termination of
employment. Notwithstanding the preceding provisions of this subsection to
the contrary, in the event this section becomes applicable following a
Change in Control, the Executive will, within 30 days after his termination
of employment, be paid a lump sum equal to the present value of the amounts
otherwise payable under this subsection. For purposes of the preceding
sentence, present value will be determined by using the short-term
applicable
7
<PAGE>
federal rate under Section 1274 of the Internal Revenue Code of 1986, as
amended (the "Code"), in effect on the date of termination of employment.
For purposes of this subsection, to the extent relevant, base salary and
bonuses with any predecessor of HealthRite or an affiliate thereof shall be
taken into account.
(b) Supplemental Payment in Lieu of Certain Benefits. In lieu of
continued pension, welfare and other benefits, a lump sum cash payment of $
[estimate value of 2 years of benefits] will be paid to the Executive
within 30 days following the date of termination of employment.
(c) Excise Tax Matters. In the event that the amounts and benefits
payable under this section, when added to other amounts and benefits which
may become payable to the Executive by HealthRite, are such that he becomes
subject to the excise tax provisions of Code Section 4999, HealthRite will
pay him such additional amount or amounts as will result in his retention
(after the payment of all federal, state and local excise, employment, and
income taxes on such payments and the value of such benefits) of a net
amount equal to the net amount he would have retained had the initially
calculated payments and benefits been subject only to income and employment
taxation. For purposes of the preceding sentence, the Executive will be
deemed to be subject to the highest marginal federal, state and local tax
rates. All calculations required to be made under this subsection will be
made by HealthRite's independent certified public accountants, subject to
the right of Executive's representative to review the same. All such
amounts required to be paid will be paid at the time any withholding may be
required under applicable law, and any additional amounts to which the
Executive may be entitled will be paid or reimbursed no later than 15 days
following confirmation of such amount by HealthRite's accountants. In the
event any amounts paid hereunder are subsequently determined to be in error
because estimates were required or otherwise, the parties agree to
reimburse each other to correct such error, as appropriate, and to pay
interest thereon at the applicable federal rate (as determined under Code
Section 1274A for the period of time such erroneous amount remained
outstanding and unreimbursed). The parties recognize that the actual
implementation of the provisions of this subsection are complex and agree
to deal with each other in good faith to resolve any questions or
disagreements arising hereunder.
7. Expiration of Agreement. In the event this Agreement expires by its
terms in accordance with the provisions of Section
8
<PAGE>
19(a), no additional amounts or benefits will be paid hereunder.
8. Covenant Not to Compete.
(a) The Executive hereby acknowledges and recognizes the highly
competitive nature of the business of HealthRite and accordingly agrees
that, during and for the applicable period set forth in Subsection (c), the
Executive will not:
(i) be engaged, directly or indirectly, either for his own
account or as agent, consultant, employee, partner, officer, director,
proprietor, investor (except as an investor owning less than 5% of the
stock of a publicly owned company) or otherwise of any person, firm,
corporation, or enterprise engaged, in the continental United States
("Non-Competition Area"), in any business which at the relevant time
during employment or at the date of termination of employment is
competitive to any of the businesses of HealthRite or any of its
subsidiaries; or
(ii) provide financial or other assistance to any person, firm,
corporation, or enterprise engaged in any activity in which HealthRite
or any of its subsidiaries is engaged during the Employment Period, in
the Non-Competition Area.
(b) It is expressly understood and agreed that, although the Executive
and HealthRite consider the restrictions contained in Subsection (a)
reasonable for the purpose of preserving for HealthRite and its
subsidiaries their goodwill and other proprietary rights, if a final
judicial determination is made by a court having jurisdiction that the time
or territory or any other restriction contained in Subsection (a) is an
unreasonable or otherwise unenforceable restriction against the Executive,
the provisions of Subsection (a) will not be rendered void but will be
deemed amended to apply as to such maximum time and territory and to such
other extent as such court may judicially determine or indicate to be
reasonable.
(c) The provisions of this section will be applicable commencing on
the date of this Agreement and ending as follows:
(i) at the termination of the payments and benefits provided
under Section 6; provided, however, that this clause will not apply in
the event Executive's termination of employment occurs following a
Change in Control;
9
<PAGE>
(ii) one year following the termination of Executive's
employment, in the case of a voluntary termination without Good
Reason; or
(iii) in all other cases, the date of Executive's termination of
employment.
9. Confidentiality.
(a) As used in this section, the term "Confidential Information" means
any and all information regarding the organization, business or finances of
HealthRite or any of its subsidiaries and affiliates, including, but not
limited to, any and all business plans and strategies, financial
information, proposals, reports, marketing plans and information, cost
information, customer information, claims history and experience data,
sales volume and other sales statistics, personnel data, pricing
information, concepts and ideas, information respecting existing and
proposed investments and acquisitions, and information regarding customers
and suppliers, but the term Confidential Information will not include
information which prior to the Executive's receipt thereof (i) was
generally publicly available, or (ii) was in the Executive's possession
free of any restrictions on its use or disclosure and from a source other
than HealthRite or any of its subsidiaries or affiliates.
(b) The Executive acknowledges and agrees that his employment by
HealthRite will afford him an opportunity to acquire Confidential
Information and that the misappropriation or disclosure of any Confidential
Information would cause irreparable harm to HealthRite and its subsidiaries
and affiliates.
(c) During the Employment Period and for a period of two years
thereafter, the Executive will not use for the benefit of anyone other than
HealthRite and its subsidiaries and affiliates or disclose any of the
Confidential Information for any reason or purpose whatsoever except to
authorized representatives of such business entities, as directed or
authorized by HealthRite, or as required by law.
(d) With respect to those items of Confidential Information which
constitute trade secrets under applicable law, the Executive's obligations
of confidentiality and nondisclosure as set forth in this section will
continue and survive after the two-year period as provided in Subsection
(c) to the greatest extent permitted by applicable law.
(e) The Executive will not remove any records,
10
<PAGE>
documents or any other tangible items (excluding the Executive's personal
property) from the premises of HealthRite or its subsidiaries or
affiliates, in either original or duplicate form, except as needed in the
ordinary course of performing services hereunder.
(f) Upon termination of this Agreement, the Executive will immediately
surrender to the owner thereof all documents in his possession, custody or
control embodying the Confidential Information or any part thereof and will
not thereafter remove the same from the premises on which it is located.
10. Remedies. Executive acknowledges and agrees that the remedy at law of
HealthRite for a breach or threatened breach of any of the provisions of Section
8 or 9 would be inadequate and, in recognition of this fact, in the event of a
breach or threatened breach by the Executive of any of the provisions of Section
8 or 9, it is agreed that, in addition to the remedy at law, HealthRite will be
entitled to, without posting any bond, and the Executive agrees not to oppose
any request of HealthRite for, equitable relief in the form of specific
performance, a temporary restraining order, a temporary or permanent injunction,
or any other equitable remedy which may then be available. Nothing herein
contained will be construed as prohibiting HealthRite from pursuing any other
remedies available to it for such breach or threatened breach.
11. Arbitration. HealthRite and Executive recognize that in the event a
dispute should arise between them concerning the interpretation or
implementation of this Agreement, lengthy and expensive litigation will not
afford a practical resolution of the issues within a reasonable period of time.
Consequently, except as otherwise provided herein, each party agrees that all
disputes, disagreements and questions of interpretation concerning this
Agreement are to be submitted for resolution to the American Arbitration
Association ("Association") in Baltimore, Maryland, in accordance with the
Individual Employment Dispute Resolution rules of the Association. HealthRite or
the Executive may initiate an arbitration proceeding at any time by giving
notice to the other in accordance with the rules of the Association. The
Association will designate a single arbitrator to conduct the proceeding, but
HealthRite and the Executive may, as a matter of right, require the substitution
of a different arbitrator chosen by the Association. Each such right of
substitution may be exercised only once. The arbitrator will not be bound by the
rules of evidence and procedure of the courts of the State of Maryland, but will
be bound by the substantive law applicable to this Agreement. The decision of
the arbitrator, absent fraud, duress, incompetence or gross and obvious error of
fact, will be final and binding upon the parties and will be
11
<PAGE>
enforceable in courts of proper jurisdiction. Following written notice of a
request for arbitration, HealthRite and the Executive will be entitled to an
injunction restraining all further proceedings in any pending or subsequently
filed litigation concerning this Agreement, except as otherwise provided herein.
12. Legal Expenses. HealthRite will pay to the Executive all reasonable
legal fees and expenses when incurred by the Executive in seeking to obtain or
enforce any right or benefit provided by this Agreement, provided he brings the
action in good faith.
13. Indemnification. HealthRite will indemnify the Executive, to the
fullest extent permitted under Delaware and federal law, with respect to any
threatened, pending or completed legal or regulatory action, suit or proceeding
brought against him by reason of the fact that he is or was a director, officer,
employee or agent of HealthRite, or is or was serving at the request of
HealthRite as a director, officer, employee or agent of another person or
entity. To the fullest extent permitted by Delaware and federal law, HealthRite
will, in advance of final disposition, pay any and all expenses incurred by the
Executive in connection with any threatened, pending or completed legal or
regulatory action, suit or proceeding with respect to which he may be entitled
to indemnification hereunder. HealthRite will use its best efforts to obtain
insurance coverage for the Executive under a policy covering directors and
officers against litigation, arbitrations and other legal and regulatory
proceedings; provided, however, that nothing herein is to be construed as
requiring such action if the Board determines that such insurance coverage
cannot be obtained at commercially reasonable rates.
14. Notices. Any notice required or permitted to be given under this
Agreement will, to be effective hereunder, be given to HealthRite, in the case
of notices given by the Executive, and will, to be effective hereunder, be given
by HealthRite, in the case of notices given to the Executive. Any such notice
will be deemed properly given if in writing and if mailed by registered or
certified mail, postage prepaid with return receipt requested, to the residence
of the Executive, in the case of notices to the Executive, and to the principal
office of HealthRite, in the case of notices to HealthRite.
15. Waiver. No provision of this Agreement may be modified, waived, or
discharged unless such waiver, modification, or discharge is agreed to in
writing and signed by the Executive and an executive officer of HealthRite, each
such officer specifically designated by the Board. No waiver by any party hereto
at any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to
12
<PAGE>
be performed by such other party will be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
16. Assignment. This Agreement is not assignable by any party hereto,
except by HealthRite to any successor in interest to the business of HealthRite.
17. Entire Agreement. This Agreement contains the entire agreement of the
parties relating to the subject matter of this Agreement and, in accordance with
the provisions of Section 25, supersedes any prior agreement of the parties.
18. Successors; Binding Agreement.
(a) HealthRite will require any successor (whether direct or indirect,
by purchase, merger, consolidation, or otherwise) to all or substantially
all of the business and/or assets of HealthRite to expressly assume and
agree to perform this Agreement in the same manner and to the same extent
that HealthRite would be required to perform it if no such succession had
taken place. Failure by HealthRite to obtain such assumption and agreement
prior to the effectiveness of any such succession will constitute a
material breach of this Agreement. As used in this Agreement, "HealthRite"
means HealthRite as hereinbefore defined and any successor to the business
and/or assets of HealthRite, as aforesaid, which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
(b) This Agreement will inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors,
administrators, heirs, distributees, devisees, and legatees. If the
Executive should die while any amount is payable to the Executive under
this Agreement if the Executive had continued to live, all such amounts,
unless otherwise provided herein, will be paid in accordance with the terms
of this Agreement to the Executive's devisee, legatee, or other designee,
or, if there is no such designee, to the Executive's estate.
19. Termination.
(a) Unless the Executive's employment is terminated pursuant to the
provisions of Section 3 or Section 5, the term of this Agreement will be
for a period commencing on the date of this Agreement and ending on
December 31, 2000; provided, however, that this Agreement will be
automatically renewed on January 1, 2000 for the two-year period commencing
on such date and ending on December 31, 2001, unless either party gives
written notice of nonrenewal to
13
<PAGE>
the other party on or before November 1, 1999 (in which case this Agreement
will continue in effect through December 31, 2000); and provided further,
that if this Agreement is renewed on January 1, 2000, it will be
automatically renewed on January 1 of each subsequent year ("Annual Renewal
Date") for a period ending two years from each Annual Renewal Date unless
either party gives written notice of nonrenewal to the other party at least
60 days prior to an Annual Renewal Date (in which case this Agreement will
continue in effect for a term ending one year from the Annual Renewal Date
immediately following such notice).
(b) Any termination of the Executive's employment under this Agreement
or of this Agreement will not affect the benefit, noncompetition and
confidential information provisions of Section 6, 8, 9 or 12, which will,
if relevant, survive any such termination and remain in full force and
effect in accordance with their respective terms.
(c) Except as provided in Section 25, nothing herein will be construed
as limiting, restricting or eliminating any rights the Executive may have
under any plan, contract or arrangement to which he is a party or in which
he is a vested participant; provided, however, that any termination
payments required hereunder will be in lieu of any severance benefits to
which he may be entitled under a severance plan or arrangement of
HealthRite; and provided further, that if the benefits under any such plan
or arrangement may not legally be eliminated, then the payments hereunder
will be correspondingly reduced in such equitable manner as the Board may
determine.
20. No Mitigation or Offset. The Executive will not be required to mitigate
the amount of any payment provided for in this Agreement by seeking employment
or otherwise; nor will any amounts or benefits payable or provided hereunder be
reduced in the event he does secure employment, except as may otherwise be
provided herein.
21. Validity. The invalidity or unenforceability of any provisions of this
Agreement will not affect the validity or enforceability of any other provision
of this Agreement, which will remain in full force and effect.
22. Applicable Law. Except to the extent preempted by federal law, this
Agreement will be governed by and construed in accordance with the domestic
internal law of the State of Delaware.
23. Number. Words used herein in the singular will be construed as being
used in the plural, as the context requires,
14
<PAGE>
and vice versa.
24. Headings. The headings of the sections, subsections and paragraphs of
this Agreement are for convenience only and will not control or affect the
meaning or construction or limit the scope or intent of any of the provisions of
this Agreement.
25. Effective Date; Termination of Prior Agreement. This Agreement will
become effective immediately upon the execution and delivery of this Agreement
by the parties hereto. Upon the execution and delivery of this Agreement, any
prior agreement relating to the subject matter hereof, including without
limitation the April 1998 Agreement, will be deemed automatically terminated and
be of no further force or effect.
27. Withholding For Taxes. All amounts and benefits paid or provided
hereunder will be subject to withholding for taxes as required by law.
28. Individual Agreement. This Agreement is an agreement solely between and
among the parties hereto. It is intended to constitute a nonqualified unfunded
arrangement for the benefit of a key management employee and will be construed
and interpreted in a manner consistent with such intention.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HEALTHRITE, INC.
By /s/ DAVID M. GREELY
-----------------------------------
David M. Greely, Director
(SEAL) Attest:
------------------------------
Randall W. Ruel
(Assistant) Secretary
("HealthRite")
Witness:
BRADLEY T. MACDONALD (SEAL)
- ---------------------------------- -------------------------------------
Linda Kuhn Bradley T. MacDonald
("Executive")
Commission 3/01/00
Expires:
15
EMPLOYMENT AGREEMENT
BETWEEN
HEALTHRITE, INCORPORATED
AND
REED VORDENBERG
AGREEMENT dated as of May 1, 1998 between HealthRite, Incorporated, a
Delaware Corporation, with its principal office located at 11445 Cronhill Drive.
Owings Mills, Maryland 21117, hereinafter called the "Employer," and Reed
Vordenberg, an individual residing at 4228 Chimney Point, Bloomfield Hills,
Michigan 48302, hereinafter called the "Employee," an employee of HealthRite,
Inc.
WHEREAS, Employee and employer now desire to mutually enter into an
Employment relationship as Employee and Employer, and all employment thereunder;
NOW THEREFORE, in consideration of their mutual promises set forth herein,
the TERMS OF EMPLOYMENT as parties hereby agree as follows:
1. EMPLOYMENT. Employer and Employee hereby mutually agree that the
employment of Employee by Employer, is hereby effective immediately.
2. DURATION OF EMPLOYMENT. Employer and Employee enter into an Employment
Agreement until March 1, 2000. This Employment Agreement expires on
March 1, 2000, unless terminated earlier pursuant to the provisions of
paragraph 14.
3. TERMINATION AGREEMENT. Employer and Employee mutually agreed that the
employment of Employee by Employer shall expire on March 1, 2000,
unless a new Employment Agreement is negotiated.
4. PERFORMANCE CRITERIA.
a. Continuation of employment requires that the employee, the
President of HealthRite, Inc., to devote all of his business
time, skill and energy to the affairs and business of the Company
and its subsidiaries.
b. Performing the duties designated by the Board to him as the
President of HealthRite, Inc.
1) Primary Duties: Sales and Marketing development of all
HealthRite products to doctors, clinics, healthfood, drug
stores, grocery stores, and mass merchandisers to include
distributors who service the retailers. As the President of
HealthRite, the Employee will be responsible for the sales
and marketing development strategy in conjunction with CEO
and the President of Montana Naturals Internat'l., Inc.
2) Secondary Duties: Chief Operating Officer of Jason
Pharmaceuticals, Inc.
<PAGE>
3) All personnel, purchasing, information systems and finance
are corporate functions that will report to the Chief
Financial Officer of the Company.
c. Using Employee's best efforts to promote the interests and
welfare of the Company and its subsidiaries. Developing sales and
marketing for all HealthRite products.
d. All functions normally associated with the Chief Financial
Officer (CFO) and Corporate Controller will not report to the
Employee as President of HealthRite, Inc.
e. Employee shall report directly to the Chairman and the Chief
Executive Officer of the Employer, Mr. Bradley T. Mac Donald. 5.
COMPENSATION. Employee will be paid SEVENTY-FIVE THOUSAND DOLLARS
($75,000) annually, which shall be paid in bi-weekly
installments.
6. DEFERRED COMPENSATION. Employee will be paid a deferred compensation
of FIFTY THOUSAND DOLLARS ($50,000) on or before December 31, 1998.
a. This deferred compensation will be paid in cash or stock, at the
Employee's option if the Company meets its sales goals.
b. This deferred compensation will be paid in cash or stock, at the
Employee's option, if the Company meets its sales goals.
7. STOCK OPTIONS. Employee will receive One Hundred Thousand (100,000)
shares of the common stock of HealthRite, Inc., under the HealthRite,
Inc. 1993 Stock Option Plan, to be effective immediately.
8. BENEFITS. Employee shall be entitled to all medical, hospital and
disability benefits made available to the other employees of the
Employer.
9. VACATION. Employee shall be entitled to two (2) weeks paid vacation
per year.
10. PLACE OF EMPLOYMENT
a. The Employee shall perform his duties under this Agreement from
the Employer's principal place of business at 11445 Cronhill
Drive, Owings Mills, Maryland 21117.
b. The Employer agrees that Employee may perform limited duties,
with a temporary office located at 34119 West 12 Mile Road, Suite
365, Farmington Hills, Michigan 48331.
c. The Employee shall spend at least 50% of his time performing his
duties at the Employer's principal place of business d. The
temporary office shall have a dedicated telephone, that is to be
identified to all callers as "HealthRite," to prevent confusion
to callers.
11. DISCLOSURE. Full and complete disclosure made to the Board, of all
employment, association, services performed or otherwise act in any
capacity (including without limitation as an employee, independent
contractor, or consultant) for, or otherwise be engaged by or any
other entity involved in or connected with the business in which the
Employer or any of its subsidiaries has or had been engaged which
currently principally consists of the production
2
<PAGE>
or distribution of nutritional products, dietary supplements, weight
management and related health care products.
12. NON-COMPETITION. During the term of this Agreement and, for an
additional period of one year following the duration of this
Agreement, Employee shall not perform services or otherwise act in any
capacity (including without limitation as an employee, independent
contractor, or consultant) for, or otherwise be engaged by or any
other entity involved in or connected with the business in which the
Employer or any of its subsidiaries has or had been engaged during the
course of the employment of Employee by the Employer, which currently
principally consists of the production or distribution of nutritional
products, dietary supplements, weight management and related health
care products.
13. NON-DISCLOSURE. Employee agrees that during and after the Term of this
Employment Agreement that any confidential information concerning the
Company or their respective businesses which comes to Employee in the
course of Employee's employment and which is not (independent of
disclosure by Employee) public knowledge or general knowledge in the
trade, shall remain confidential and, except as required by legal
process, may not be used or made available for any purpose.
14. TERMINATION.
a. The Employer shall have the right to discharge Employee and
terminate this Agreement for Cause (as hereinafter defined) by
written notice to Employee and this Agreement shall be deemed
terminated as of the date of such notice.
b. For the purpose of this Agreement, "Cause" shall mean:
1) conviction of a felony,
2) gross neglect or gross misconduct (including conflict of
interest) in the carrying out of Employee's duties,
3) repeated or substantial failure, refusal or neglect to
perform Employee's duties in accordance with paragraphs 4
and 10 hereof,
4) the engaging by Employee in a material act or acts of
dishonesty affecting the Company, any affiliate or any
client of the company, or
5) Drunkenness or the illegal use of drugs by Employee
materially and repeatedly interfering with performance of
Employee's obligations under this Agreement.
c. In the event of a termination by the Company pursuant to this
paragraph 14, the Employer shall not be under any further
obligation Employee hereunder except to pay Employee, subject to
the Company's rights and remedies in the circumstances:
1) Salary, prorated deferred compensation and benefits accrued
and payable up to the date of such termination, and
3
<PAGE>
2) Reimbursement for expenses accrued and payable that Employee
was authorized to incur for reasonable and necessary
expenses in connection with the discharge of Employee's
duties and in promoting the business of the Company.
15. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to
contracts entirely made and performed therein.
16. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement
between the parties and any prior understanding or representation of
any kind preceding the date of this agreement shall not be binding
upon either party except ANY PREVIOUS LEGAL REPRESENTATION BINDING ON
THE CORPORATON.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
EMPLOYER:
HEALTHRITE, a Delaware corporation
/s/ BRADLEY T. MAC DONALD
--------------------------------------
Bradley T. Mac Donald
Chairman & CEO
EMPLOYEE:
/s/ REED VORDENBERG
--------------------------------------
Reed Vordenberg
President, HealthRite, Inc.
Date: May 1, 1998
4
EMPLOYMENT AGREEMENT
BETWEEN
HEALTHRITE, INCORPORATED
AND
CHARLES R. WALGREEN SR.
REVISION
REVISED AGREEMENT (transitioning as of July 7, 1998), dated as of August
28, 1998 (as approved by the Board of Directors) between HealthRite,
Incorporated, a Delaware Corporation, hereinafter called the "Employer," and
Charles R. Walgreen Sr., hereinafter called the "Employee," an employee of
HealthRite, Inc.
WHEREAS, Employee and employer now desire to mutually enter into an
Employment relationship as Employee and Employer, and all employment thereunder;
NOW THEREFORE, in consideration of their mutual promises set forth herein,
the TERMS OF EMPLOYMENT as parties hereby agree as follows:
1. EMPLOYMENT. Employer and Employee hereby mutually agree that the
employment of Employee by Employer, is hereby effective immediately.
2. DURATION OF EMPLOYMENT. Employer and Employee enter into an Employment
Agreement until March 1, 1999. This Employment Agreement expires on
March 1, 1999, unless terminated earlier pursuant to the provisions of
paragraph 12.
3. TERMINATION AGREEMENT. Employer and Employee mutually agreed that the
employment of Employee by Employer shall expire on March 1, 1999,
unless a new Employment Agreement is negotiated.
4. PERFORMANCE CRITERIA.
a. Performing the duties designated by the board to him as
Consultant (Chairman of the Compensation Committee, Mr. David
Green authorized the new title of Vice President Buisness
Development in lieu of Consultant) of HealthRite.
1) Duties: Sales and Marketing Consultant (Chairman of the
Compensation Committee, Mr. David Green authorized the new
title of Vice President Buisness Development in lieu of
Consultant) in the development of all HealthRite products in
the chain drug and mass merchandiser category, specifically
Walgreen, Pharmavite, PFI, Inc. and Celestial Seasonings.
The goal of this effort is to insure profitable sales
development.
b. Using Employee's best efforts to promote the interests and
welfare of the Company and its subsidiaries. Developing sales and
marketing for all HealthRite products.
c. All functions normally associated with the Chief Financial
Officer (CFO) and Corporate Controller (CC) will not report to
the Employee as Consultant (Chairman of the Compensation
Committee, Mr. David Green authorized the new title of Vice
President Buisness Development in lieu of Consultant) to
HealthRite. However, both CFO and CC will keep the Employee
informed of pertinent information necessary for the Employee to
make appropriate decisions. The Employee will not be responsible
as the President or as a
<PAGE>
Director for the omissions or errors by the CFO and/or CC, if
determined by an independent committee of the Board that the
Employee did not have the necessary knowledge to prevent such an
error or omission.
d. Authority to enter into discussions of purchase, merger,
acquisition or joint ventures requires prior express
authorization of the Board.
e. Employee shall report directly to the Chairman and the Chief
Executive Officer of the Employer, Mr. Bradley T. Mac Donald, and
in the absence of the Chairman and CEO, the Employee shall report
to the President of the Employer, Mr. Reed Vordenberg.
5. COMPENSATION. Employee will be paid SEVENTY-FIVE THOUSAND DOLLARS
($75,000.00) annually, which shall be paid in bi-weekly installments.
6. DEFERRED COMPENSATION. Employee will be paid a deferred compensation
of FIFTY THOUSAND DOLLARS ($50,000) on or about December 31, 1998.
a. This deferred compensation will be paid in cash or stock, at the
Employee's option, if the Company meets its sales goals.
b. This deferred compensation will be paid in cash or stock, at the
Company's option, if the Company does not meet its sales goals.
c. This Agreement will terminate immediately if deferred
compensation is not paid by January 31, 1999.
7. STOCK OPTIONS. Employee will receive Seventy Thousand (70,000) shares
of the common stock of HealthRite, Inc., under the attached
HealthRite, Inc. 1993 Stock Option Plan. Future compensation and bonus
will depend on development of all HealthRite products.
8. BENEFITS. Employee shall be entitled to all medical, hospital and
disability benefits made available to the other employees of the
Employer.
9. VACATION. Employee shall be entitled to two (2) weeks paid vacation
per year.
10. PLACE OF EMPLOYMENT
a. The Employer agrees that Employee may perform duties, with an
office located at 736 Northwestern Avenue, Suite 245, Lake
Forest, Illinois, 60048.
b. The Employee shall spend at least 100% of his time performing his
duties at the Employer's principal place of business.
c. The office shall have a dedicated telephone that is to be
identified to all callers as Consultant (Chairman of the
Compensation Committee, Mr. David Green authorized the new title
of Vice President Buisness Development in lieu of Consultant) to
HealthRite, Inc. to prevent confusion to callers.
11. DISCLOSURE. Full and complete disclosure made to the Board, of all
employment, association, services performed or otherwise act in any
capacity (including without limitation as an employee, independent
contractor, or consultant) for, or otherwise be engaged by or any
other entity involved in or connected with the business in which the
Employer or any of its subsidiaries has or had been engaged which
currently principally consists of the production or distribution of
nutritional products, dietary supplements, weight management and
related health care products.
12. NON-COMPETITION. During the term of this Agreement and, for an
additional period of one year following the duration of this
Agreement, Employee
2
<PAGE>
shall not perform services or otherwise act in any capacity (including
without limitation as an employee, independent contractor, or
consultant) for, or otherwise be engaged by or any other entity
involved in or connected with the business in which the Employer or
any of its subsidiaries has or had been engaged during the course of
the employment of Employee by the Employer, which currently
principally consists of the production or distribution of energy,
herbal extract, pharmaceutical powders and products manufactured by
the Company. Employee shall not associate the Employer, the Company or
its subsidiaries with the Walgreen asset group.
13. NON-DISCLOSURE. Employee agrees that during and after the Term of this
Employment Agreement that any confidential information concerning the
Company or their respective businesses which comes to Employee in the
course of Employee's employment and which is not (independent of
disclosure by Employee) public knowledge or general knowledge in the
trade, shall remain confidential and, except as required by legal
process, may not be used or made available for any purpose.
14. TERMINATION. The Employer shall have the right to discharge Employee
and terminate this Agreement for Cause (as hereinafter defined) by
written notice to Employee and this Agreement shall be deemed
terminated as of the date of such notice.
a. For the purpose of this Agreement, "Cause" shall mean:
1) conviction of a felony,
2) gross neglect or gross misconduct (including conflict of
interest) in the carrying out of Employee's duties,
3) repeated or substantial failure, refusal or neglect to
perform Employee's duties in accordance with paragraphs 4
and 10 hereof,
4) the engaging by Employee in a material act or acts of
dishonesty affecting the Company, any affiliate or any
client of the company, or
5) Drunkenness or the illegal use of drugs by Employee
materially and repeatedly interfering with performance of
Employee's obligations under this Agreement.
c. In the event of a termination by the Company pursuant to this
paragraph 14, the Employer shall not be under any further
obligation Employee hereunder except to pay Employee, subject to
the Company's rights and remedies in the circumstances:
1) Salary, prorated deferred compensation and benefits accrued
and payable up to the date of such termination, and
2) Reimbursement for expenses accrued and payable that Employee
was authorized to incur for reasonable and necessary
expenses in connection with the discharge of Employee's
duties and in promoting the business of the Company.
15. JURISDICTION. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to
contracts entirely made and performed therein.
3
<PAGE>
16. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement
between the parties and any prior understanding or representation of
any kind preceding the date of this agreement shall not be binding
upon either party except ANY PREVIOUS LEGAL REPRESENTATION BINDING ON
THE CORPORATON.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
EMPLOYER:
HEALTHRITE, a Delaware corporation
Date: July 15, 1998
/s/ BRADLEY T. MAC DONALD
---------------------------------------
Bradley T. Mac Donald
Chairman & CEO
EMPLOYEE:
/s/ CHARLES R. WALGREEN SR.
--------------------------------------
Charles R. Walgreen Sr.
4
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<ARTICLE> 5
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 503,000
<SECURITIES> 0
<RECEIVABLES> 3,341,000
<ALLOWANCES> (223,000)
<INVENTORY> 2,718,000
<CURRENT-ASSETS> 6,978,000
<PP&E> 3,253,000
<DEPRECIATION> (1,943,000)
<TOTAL-ASSETS> 10,340,000
<CURRENT-LIABILITIES> 3,427,000
<BONDS> 0
0
679,000
<COMMON> 5,000
<OTHER-SE> 2,147,000
<TOTAL-LIABILITY-AND-EQUITY> 10,340,000
<SALES> 15,901,000
<TOTAL-REVENUES> 15,901,000
<CGS> 10,097,000
<TOTAL-COSTS> 16,672,000
<OTHER-EXPENSES> 178,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350,000
<INCOME-PRETAX> (949,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (949,000)
<DISCONTINUED> 104,000
<EXTRAORDINARY> 0
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