================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999 Commission File No. 0-23016
----------
HEALTHRITE, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
DELAWARE 13-3714405
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11445 CRONHILL DRIVE, OWINGS MILLS, MD 21117
- -------------------------------------- ----------
(Address of principal offices) (Zip Code)
Registrant's telephone number, including Area Code: (410) 581-8042
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK, AS OF AUGUST 4, 1999:
5,524,531 SHARES
- ----------------
================================================================================
<PAGE>
Index
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
June 30, 1999 (unaudited) and December 31, 1998..................... 3
Condensed Consolidated Statement of Operations -
Three and Six Months Ended June 30, 1999 and 1998 (unaudited)....... 4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1999 and 1998 (unaudited)................. 5
Notes to Condensed Consolidated Financial Statements.................... 7
Management Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8
PART II
Signature Page.......................................................... 12
2
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 December 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................ $ 331,000 $ 503,000
Accounts receivable, net of allowance ............................... 1,927,000 3,341,000
Merchandise inventory ............................................... 1,894,000 2,718,000
Prepaid expenses and other current assets ........................... 654,000 416,000
------------ ------------
Total Current Assets ........................................... 4,806,000 6,978,000
Property, plant and equipment - net ..................................... 4,258,000 3,253,000
Other assets ............................................................ 101,000 109,000
------------ ------------
TOTAL ASSETS ................................................... $ 9,165,000 $ 10,340,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................... $ 3,364,000 $ 2,705,000
Current maturities of obligations under capital lease ............... 11,000 22,000
Current maturities of long-term obligations ......................... 697,000 700,000
------------ ------------
Total Current Liabilities ........................................... 4,072,000 3,427,000
Obligations under capital leases less current maturities ................ 0 17,000
Long-term obligations less current maturities ........................... 3,832,000 4,070,000
------------ ------------
Total Liabilities .............................................. 7,904,000 7,514,000
------------ ------------
Commitments and contingencies:
Redeemable convertible 8% preferred stock;
par value $.001; 2,000,000 authorized;
317,500 issued and outstanding, redemption value $635,000 ........... 590,000 679,000
------------ ------------
Stockholders' Equity
Common stock; par value $.001 per share; 10,000,000 authorized; 5,463,198
issued at June 30, 1999 and
5,347,198 issued at December 31, 1998 ............................... 5,000 5,000
Additional paid-in capital .............................................. 8,533,000 8,313,000
Accumulated deficit ..................................................... (7,867,000) (6,147,000)
Subscription receivable ................................................. 0 (24,000)
------------ ------------
Total Equity ................................................... 671,000 2,147,000
------------ ------------
TOTAL LIABILITIES & STOCKHOLDER EQUITY ............................. $ 9,165,000 $ 10,340,000
============ ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ........................................... $ 2,111,000 $ 3,107,000 $ 5,003,000 6,096,000
Cost of sales, including warehousing
distribution, and occupancy ................... 1,289,000 1,810,000 3,022,000 3,699,000
----------- ----------- ----------- ----------
Gross Profit ...................................... 821,000 1,297,000 1,981,000 2,397,000
Selling, general, and administration .............. 1,658,000 1,366,000 3,441,000 3,089,000
----------- ----------- ----------- ----------
Loss from operations .............................. (837,000) (69,000) (1,460,000) (692,000)
----------- ----------- ----------- ----------
Other income/(expenses)
Other income/loss ............................. (3,000) 143,000 10,000 148,000
Interest, net ................................. (93,000) (74,000) (234,000) (136,000)
----------- ----------- ----------- ----------
(96,000) 69,000 (224,000) 12,000
----------- ----------- ----------- ----------
Net Loss .......................................... (933,000) 0 (1,684,000) (680,000)
----------- ----------- ----------- ----------
Less: Stock dividend on preferred stock............ (13,000) (18 ,000) (27,000) (35,000)
Accretion of preferred stock ................ (5,000) (6,000) (10,000) (13,000)
----------- ----------- ----------- ----------
Net loss attributable to common shareholders ...... (951,000) (24,000) (1,720,000) (728,000)
----------- ----------- ----------- ----------
Net income (loss) per share........................ $ (0.17) $ (0.01) $ (0.32) $ (0.16)
=========== =========== =========== ==========
Weighted average shares outstanding ............... 5,449,290 4,400,000 5,423,145 4,438,000
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
----------------------------
1999 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Net loss ......................................................... $(1,684,000) $ (680,000)
Depreciation & amortization ................................. 214,000 214,000
Loss on asset sale .......................................... 13,000 0
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable .................. 1,424,000 (322,000)
Decrease in inventory ....................................... 792,000 38,000
(Increase) in prepaid expenses &
other current assets ........................................ (238,000) (274,000)
Decrease in other assets .................................... 8,000 55,000
Increase in A/P and accrued expenses ........................ 814,000 771,000
----------- -----------
Net Cash provided by and used in Operating Activities ............ 1,343,000 (198,000)
----------- -----------
Cash Flow from Investing Activities:
Purchase of equipment ............................................ (1,246,000) (530,000)
----------- -----------
Total Cash Flow from Investing Activities ................... (1,246,000) (530,000)
----------- -----------
Cash Flow from Financing Activities:
Proceeds from debt ............................................... 2,444,000 2,523,000
Payment of debt .................................................. (2,713,000) (1,818,000)
----------- -----------
Net Cash provided by and used in Financing Activities: ...... (269,000) (705,000)
----------- -----------
NET (DECREASE) IN CASH ............................................... (172,000) (23,000)
Cash and cash equivalents at beginning of period ..................... 503,000 255,000
----------- -----------
Cash and cash equivalents at end of period ........................... 331,000 232,000
=========== ===========
Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest .................................................... 237,000 136,000
Income Taxes ................................................ 0 0
Total ............................................................ $ 237,000 $ 136,000
</TABLE>
During the six month period ending June 30, 1999 the Company converted 50,000
shares of preferred stock into 50,000 shares of common stock.
The Company declared preferred stock dividends in the amount of 26,734 for the
six month period ending June 30, 1999.
5
<PAGE>
Accrued compensation of $150,000 at December 31, 1999 were subsequently settled
during the six month period ending June 30, 1999 with the issuance of 62,000
shares of common stock and settlement of subscriptions receivable of $24,000.
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
1. Basis of Presentation
The information contained herein with respect to the three month periods and six
month periods ended June 30, 1999 and 1998 has not been audited but was prepared
in conformity with generally accepted accounting principles for interim
financial information and instructions for Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, the condensed consolidated financial statements do
not include information and footnotes required by generally accepted accounting
principles for financial statements. Included are the adjustments, which in the
opinion of management are necessary for a fair presentation of the financial
information for the three month periods and six month periods ended June 30,
1999 and 1998. The results are not necessarily indicative of results to be
expected for the year.
Due to inventory over capacity the Company's largest contract manufacturing
customer canceled certain existing orders and indicated it will not be placing
orders for additional product for the foreseeable future. As a result, the
Company implemented a rigorous cost savings plan. If current cost reductions are
insufficient, the Company is prepared to seek additional cost reductions.
2. Preferred Stock
During February 1999, as allowed by the Company's 1996 "Designation of Preferred
Stock" clause, 50,000 shares of preferred stock, was converted to 50,000 shares
of common stock.
3. Segment Information
Information concerning operations by operating segment is as follows:
<TABLE>
<CAPTION>
Diet Control Herbal & Energy Consolidated
------------ --------------- ------------
<S> <C> <C> <C>
Six months ended June 30, 1999
Total sales $3,196,000 $1,807,000 $5,003,000
Operating income (loss) (1,020,000) (440,000) (1,460,000)
Depreciation & Amortization 94,000 120,000 214,000
Identifiable Assets 3,159,000 6,010,000 9,165,000
Capital Expenditures 36,000 1,210,000 1,246,000
Six months ended June 30, 1998
Total sales $2,300,000 $3,796,000 $6,096,000
Operating loss (190,000) (502,000) (692,000)
Depreciation & Amortization 107,000 107,000 214,000
Identifiable Assets 3,128,000 4,612,000 7,740,000
Capital Expenditures 0 530,000 530,000
</TABLE>
4. Litigation
On August 6, 1999 the Company was notified of a complaint filed related to
Medifast Take Share(TM) advertising. The Company is attempting to negotiate an
amicable resolution to this claim.
7
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Revenues for the first six months of 1999 were $5,003,000. This represented a
decrease of $1,093,000 (17.9%) from the $6,096,000 reported for the six month
period ending June 30, 1998. This decrease resulted from a decline in sales to
the Company's largest contract customer at its subsidiary, Montana Naturals
Int'l, Inc. (MTNA) which offset the increase in revenue from sales of the
Company's Jason Pharmaceutical subsidiary. Cost of sales for the first half of
1999 decreased by $677,000 (18.3%) from 1998. Gross profit for the first half of
1999 decreased by $416,000 (17.4%) from 1998. Selling, general and
administrative expenses for the first half of 1999 of $3,441,000 increased by
$352,000 (11.3%) over the same period of 1998 as a result of the initial
advertising campaign for the Medifast Take Shape(TM) product launch, the cost
of shelf space for these consumer weight loss products and the addition of sales
personnel to sell and support the product launch.
The net operating loss for the first six months of 1999 is $1,460,000, which is
$768,000 greater than the same period last year. The operating loss is
attributable primarily to the cost of the advertising campaign for the Medifast
Take Shape (TM) product launch and the reduction in revenue due to the loss of a
major contract customer at its MTNA subsidiary. The net loss for the the six
month period is $1,684,000 which is $1,004,000 greater than the $680,000 loss
for the first half of 1998. Significantly reduced revenues from MTNA, the cost
of the Medifast Take Shape(TM) (product launch, including $1,059,000 in
advertising cost) plus $98,000 in additional interest cost are the basis for the
increased loss.
Interest expense was $237,000 during the six month period ending June 30, 1999
as compared to $136,000 for the same period in 1998. The difference was
attributable to increased outstanding borrowings during the period.
THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Second quarter revenues for 1999 of $2,111,000 decreased by $996,000 (32%) from
$3,107,000 for the three month period ended June 30, 1998. Cost of sales for the
period was $1,289,000, a decrease of $521,000 (28.7%) from $1,810,000 during the
same period of 1998. Gross profits of $821,000 for the second quarter of 1999
decreased by $476,000 (36.7%) from $1,297,000 in the second quarter of 1998.
During the quarter the Company experienced a loss from operations of $837,000
compared to a loss of $69,000 for the second quarter of 1998. The net loss for
the second quarter of 1999 was $933,000 compared to a net loss of zero in the
second quarter of 1998.
8
<PAGE>
SEASONALITY
The Company does not believe that its business is subject to seasonality.
LIQUIDITY AND CAPITAL RESOURCES
Jason Pharmaceuticals has a term credit facility and a revolving facility to
finance raw materials, finished goods and accounts receivable with Century
Credit Corporation. At June 30, 1999, $1,044,000 was available on the line of
credit, of which $214,000 had been drawn on the revolving facility and the term
loan balance was $242,000. The amount of the revolving facility is restricted by
the amount of outstanding inventory and receivables.
The Company's MTNA subsidiary continued to utilize the advance provision of its
construction/refinancing credit arrangement with US Bank. During the period,
approximately $674,000 was advanced under this credit facility to complete the
renovation/expansion of the MTNA facilities. Construction was completed in June,
and the interim loans were converted into term debt effective June 30, 1999.
Upon conversion, US Bank received an 80% guarantee of the outstanding loan
balances from Rural Business-Cooperative Service (US Department of Agriculture)
under the Business and Industry Guarantee Loan Program.
The credit facility includes a real estate loan with a remaining term of 19
years, an equipment loan with a remaining term of 6 years and a working capital
loan with a remaining term of 6 years. The outstanding balance of the working
capital loan is restricted by the amount of the outstanding inventory and
receivables, and on March 17, 1999 the outstanding balance of the loan was
reduced $900,000 because of reduced inventory and receivable levels. MTNA does
not have an operating line of credit at this time.
The Company had working capital of $734,000 on June 30, 1999 compared with
$3,551,000 at December 31, 1998. The $2,817,000 decrease is primarily reflected
in the loss from operations of $1,684,000 and the March payment of $900,000
against a US Bank loan. Government loan guarantees were in place as of June 30,
1999.
The Company requires a significant amount of additional financing in order to
fund its business opportunities. The Company is actively exploring strategic
alternatives that include seeking additional capital financing or a strategic
partner. However, the Company may not be able to raise capital or may not be
able to raise capital on terms reasonably favorable to the Company and its
shareholders. In the event the Company is unable to arrange additional financing
in the near term, the Company may be required to seek alternative methods to
protect the business from creditors or may be forced to cease all or a portion
of its operations.
13D FILING
Dissident shareholders have filed form 13D filings which disclosed confidential
information regarding negotiations with a potential investor and, in the
Company's view, misleading information about the Company and its officers and
directors. These disclosures may have diminished the Company's ability to
negotiate a strategic partnership or investment by a third party on favorable
terms.
9
<PAGE>
INFLATION
To date, inflation has not had a material effect on the Company's business.
ITEM 5. OTHER INFORMATION
Year 2000: The Company has contracted with major software, hardware, and data
communications vendors to obtain computer hardware/software and data
communications equipment and services which will be needed for the Company to
achieve Year 2000" (Y2K) compliance. It is anticipated that all operating units
will be compliant by September 30, 1999. Computer hardware and software upgrade
is financed by existing credit facilities. The Company has received a training
grant from the State of Maryland to partially fund training at Jason. The
Company is assessing the negative effect various potential Y2K problems could
have on operations. The Company is assessing the most reasonably likely worst
case scenario and its negative effect on the business. The Company believes that
the most likely worst case scenario will be the inability of our smaller
customers and vendors to gain Y2K compliance in a timely manner. The Company has
spent $130,000 for these upgrades and estimates additional expenditures of
$80,000 will be required to complete the project. The project has experienced
delays due to frame relay problems and a lack of resources.
Related Party Transaction: Worldwide Universal Health, the CEO of which is the
spouse of Beverly Valore, one of the Company's directors, purchased discontinued
Nautilus product for $323,000 from the Company. At June 30, 1999 a receivable
for this purchase was outstanding in the amount of $323,000. The Company has
issued a "demand" letter and is aggressively pursuing collection of the debt.
Officer/Director Changes: During the second quarter two of the Company's
directors resigned. John W. Galuchie, Jr. and David M. Green resigned in June
1999. Both directors were elected by shareholders on December 17, 1998. Scott
Zion was elected to the Board of Directors as of March 7, 1999, replacing
Charles Walgreen, Jr., who resigned March 1, 1999.
Subsequent to the end of the quarter, to cut costs and streamline operations, on
August 9, 1999 the Chairman of the Board requested and accepted the resignations
of Randall Rueb, Chief Financial Officer, and Reed Vordenberg, President of
Sales and Marketing. Both were elected on December 17, 1998. Mr. Vordenberg has
elected to remain a member of the Board while Mr. Rueb has resigned from the
Board. A limited consulting agreement is being considered by the Board for Mr.
Vordenberg.
Nautilus License: The owner of the Nautilus license, Duckhead, sold the license
rights to Direct focus, a networking and direct marketing company. Direct Focus
notified the company in March that their new marketing strategy may change, and
they want to market all Nautilus products. Subsequently, Nautilus cancelled the
license agreement. Worldwide Universal Health paid all license fees in 1999
equal to $34,000. Jason Pharmaceuticals and Montana Naturals had significant
inventories that had to be sold or the licensor under the agreement could claim
title. Worldwide Universal Health gave HealthRite a
10
<PAGE>
purchase order for all discontinued inventory to be shipped prior to the
cancellation of the license but with extended dating. In accordance with the
terms of the license agreement Worldwide Universal Health as a distributor is
currently liquidating the inventory. HealthRite no longer has a relationship
with Direct Focus and Nautilus.
Plant Expansion: MTNA started its manufacturing and warehouse facilities
expansion in September, 1998. Work on the expansion was completed during the
second quarter and added approximately 16,000 square feet to the existing plant
and warehouse. Financing of the project is a combination of US Bank loan,
proceeds from the Private Placement of July 1998, and working capital.
Government guarantees to the bank were put in place at June 30, 1999.
Bank compliance issue: The Company was out of compliance with certain borrowing
base provisions of its loan with US Bank at June 30, 1999. The company is
negotiating with the bank to cure this deficiency or have certain covenants
waived.
Nutraceutical Industry: The nutraceutical industry is in serious financial
difficulty. The Adams, Harkness & Hill Healthy Living Index indicates that the
market capitalization of major natural products companies plummeted in the 4th
quarter of 1998 and in the 1st quarter of 1999. Part of the reason for the
decline is that retail drug and grocery industry consolidated and the large
national retailers have leveraged their market position to demand additional
discounts and allowances. Manufacturing capacity in the industry is at an all
time high. The industry is experiencing increased competition as retail,
wholesale, distributor and manufacturer inventories of bee and botanical
supplements have far exceeded consumer demand. Further, American Home Products,
Bayer and Warner Lambert entered the herbal business with "imported" product
with clinical studies and large advertising budgets which significantly changed
consumer brand and product preference. This has negatively impacted on the
entire industry and, in particular, on the Company's existing customers and own
branded products. The following is a sample list of like nutraceutical companies
comparing their stock price as of June 30, 1998 to June 11, 1999.
<TABLE>
<CAPTION>
SAMPLE NASDAQ GROUP INDUSTRY COMPARISON OF STOCK PRICES
JUNE 11, 1999 JUNE 30, 1998
COMPANY STOCK PRICE STOCK PRICE CHANGE % CHANGE
------- ------------- ------------- ------ ---------
<S> <C> <C> <C> <C>
HEALTHRITE ....................... .62 1.50 -.88 -58%
NATURAL NUTRITIONALS ............. 3.25 17.75 -14.50 -82%
IRWIN NATURALS/FOR HEALTH ........ 2.38 6.50 -4.13 -63%
NATROL ........................... 8.13 17.19 -9.07 -53%
NBTY ............................. 6.25 17.49 -10.94 -64%
REXALL SUNDOWN ................... 13.63 35.00 -21.38 -61%
TWIN LABS ........................ 8.50 40.50 -32.00 -79%
WEIDER NUTRITION ................. 3.88 15.13 -11.25 -74%
IVC .............................. .81 2.00 -1.19 -59%
</TABLE>
11
<PAGE>
NASDAQ listing requirements: In May the Company was notified by NASDAQ that it
does not currently meet the listing requirements of the Nasdaq exchange with
respect to its net tangible asset balance. The Company is currently working with
vendors to convert debt to equity to meet these requirements, raise capital
through a private placement offering and is agressively seeking a strategic
partner. The Nasdaq has set August 16th as the date for the Company to show it
is complying or to be subject to a hearing to determine if the Company can
maintain the listing requirements.
Subsequent Actions: At the end of June, 1999 Bradley T. MacDonald and Reed
Vordenberg, were compensated in stock in lieu of cash, per their employment
agreement. Mr. Macdonald was issued 33,333 shares and Mr. Vordenberg 28,000
shares.
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
experience on this date.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HealthRite Inc.
(Registrant)
- ------------------------
Bradley T. MacDonald
Chief Executive Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-30-1999
<PERIOD-END> APR-01-1999
<CASH> 331,000
<SECURITIES> 0
<RECEIVABLES> 1,927,000
<ALLOWANCES> 0
<INVENTORY> 1,894,000
<CURRENT-ASSETS> 4,806,000
<PP&E> 4,258,000
<DEPRECIATION> 214,000
<TOTAL-ASSETS> 9,165,000
<CURRENT-LIABILITIES> 4,072,000
<BONDS> 0
0
590,000
<COMMON> 5,000
<OTHER-SE> 671,000
<TOTAL-LIABILITY-AND-EQUITY> 9,165,000
<SALES> 2,111,000
<TOTAL-REVENUES> 2,111,000
<CGS> 1,289,000
<TOTAL-COSTS> 2,947,000
<OTHER-EXPENSES> 3,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,000
<INCOME-PRETAX> (933,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (933,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (951,000)
<EPS-BASIC> (.17)
<EPS-DILUTED> (.17)
</TABLE>
