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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999 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
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 May 10, 1999:
5,463,198 shares
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1
<PAGE>
Index
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet -
March 31, 1999 (unaudited) and December 31, 1998................ 3
Condensed Consolidated Statement of Operations -
Three Months Ended March 31, 1999 and 1998 (unaudited).......... 4
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1999 and 1998 (unaudited).......... 5
Notes to Condensed Consolidated Financial Statements................ 6
Management Discussion and Analysis of Financial Condition
and Results of Operations....................................... 7
PART II
Other Information .................................................. 8
Signature Page...................................................... 10
2
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 December 31, 1998
(Unaudited)
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ASSETS
Current assets:
<S> <C> <C>
Cash ................................................................ $ 464,000 $ 503,000
Accounts receivable, net of allowance ............................... 2,175,000 3,341,000
Merchandise inventory ............................................... 2,372,000 2,718,000
Prepaid expenses and other current assets ........................... 794,000 416,000
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Total Current Assets ........................................... 5,805,000 6,978,000
Property, plant and equipment - net ..................................... 3,531,000 3,253,000
Other assets ............................................................ 105,000 109,000
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TOTAL ASSETS ................................................... $ 9,441,000 $ 10,340,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................... $ 2,935,000 $ 2,705,000
Current maturities of obligations under capital lease ............... 11,000 22,000
Current maturities of long-term obligations ......................... 807,000 700,000
------------ ------------
Total Current Liabilities ........................................... 3,753,000 3,427,000
Obilgations under capital leases less current maturities ................ 17,000 17,000
Long-term obligations less current maturities ........................... 3,460,000 4,070,000
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Total Liabilities .............................................. 7,230,000 7,514,000
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Commitments and contingencies:
Redeemable convertible 8% preferred stock;
par value $.001; 2,000,000 authorized;
317,500 issued and outstanding, redemption value $635,000 ........... 585,000 679,000
------------ ------------
Stockholders' Equity
Common stock; par value $.001 per share; 10,000,000 authorized; 5,459,198
issued at March 31, 1999 and 5,347,198 issued at December 31, 1998 .. 5,000 5,000
Additional paid-in capital .............................................. 8,537,000 8,313,000
Accumulated deficit ..................................................... (6,916,000) (6,147,000)
Subscription receivable ................................................. 0 (24,000)
Total Equity ........................................................ 1,626,000 2,147,000
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TOTAL LIABILITIES & STOCKHOLDER EQUITY .................................. $ 9,441,000 $ 10,340,000
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</TABLE>
3
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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenue ....................................................... $ 2,892,000 $ 2,941,000
Cost of sales ................................................. 1,733,000 1,846,000
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Gross Profit .................................................. 1,159,000 1,095,000
Selling, general, and administration .......................... 1,807,000 1,724,000
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(Loss) from operations ........................................ (648,000) (629,000)
Other income/(expenses)
Interest, net ............................................. (116,000) (57,000)
Other income (expense) .................................... 13,000 0
Net Loss ...................................................... (751,000) (686,000)
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Less: Stock dividend on preferred stock .................... (13,000) (18,000)
Accretion of preferred stock ......................... (5,000) (6,000)
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Net loss attributable to common shareholders .................. (769,000) (710,000)
Basic and diluted (loss) per share ............................ $ (0.14) $ (.16)
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Weighted average common shares outstanding-
Basic and diluted ............................................. 5,397,000 4,400,000
</TABLE>
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Cash Flow from Operating Activities:
<S> <C> <C>
Net loss ......................................................... $ (769,000) $ (710,000)
Depreciation & amortization ................................. 117,000 114,000
Provision for bad debts ..................................... 23,000 0
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable .................. 1,166,000 (311,000)
(Increase)/decrease in inventory ............................ 346,000 239,000
(Increase)/decrease in prepaid expenses &
other current assets ........................................ (374,000) (284,000)
Increase/(decrease) in other assets ......................... 0 107,000
(Increase)/decrease in A/P and accrued expenses ............. 350,000 670,000
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Net Cash provided by Operating Activities ........................ 859,000 (175,000)
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Cash Flow from Investing Activities:
(Increase)/decrease in plant equipment ...................... (395,000) (247,000)
Purchase of equipment ....................................... 0 (24,000)
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Total Cash Flow from Investing Activities ................... (395,000) (271,000)
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Cash Flow from Financing Activities:
Proceeds from debt ............................................... 0 1,262,000
Payment of debt .................................................. (503,000) (674,000)
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Net Cash provided by Financing Activities: .................. (503,000) 588,000
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NET INCREASE/(DECREASE) IN CASH ...................................... (39,000) 142,000
Cash and cash equivalents at beginning of period ..................... 503,000 255,000
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Cash and cash equivalents at end of period ........................... 464,000 397,000
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Supplemental disclosure of cash flow information: Cash paid during the
period for:
Interest .................................................... 116,000 63,000
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Total ............................................................ $ 116,000 $ 63,000
</TABLE>
The Company converted 50,000 shares of preferred stock into 50,000 shares of
common stock.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The information contained herein with respect to the three month period ended
March 31, 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 ended March 31, 1999 and 1998. The results are not necessarily
indicative of results to be expected for the year.
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 Herbal & Retail Other Consolidated
Control Energy Store
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Quarter ended March 31, 1999
<S> <C> <C> <C> <C> <C>
Total sales $ 1,267,000 $ 1,625,000 -- -- $ 2,892,000
Operating income (loss) (162,000) (486,000) -- -- (648,000)
Depreciation & Amortization 47,000 70,000 -- -- 117,000
Identifiable Assets 3,380,000 6,061,000 -- -- 9,441,000
Capital Expenditures 18,000 377,000 -- -- 395,000
Quarter ended March 31, 1998
Total sales $ 1,144,000 $ 1,770,000 $ 27,000 -- $ 2,941,000
Operating loss (52,000) (560,000) (17,000) -- (629,000)
Depreciation & Amortization 57,000 48,000 9,000 -- 114,000
Identifiable Assets 2,953,000 4,354,000 192,000 -- 7,499,000
Capital Expenditures 0 271,000 0 -- 271,000
</TABLE>
6
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MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
First quarter revenue for 1999 of $2,892,000 decreased by $49,000 (1.7%) from
$2,941,000 for the first quarter of 1998. This occurred due to a decline in
sales to the Company's largest contract manufacturing customer at its
subsidiary, Montana Naturals Int'l, Inc. (MTNA) which offset the increase in
revenues from sales of the Company's Medifast Take Shape (TM) Products. Cost of
sales for the first quarter of 1999 decreased by $113,000 (6%) from 1998
primarily due to the Company instituting better manufacturing controls at each
of its manufacturing facilities. Similarly the cost controls were the most
significant factor in the increase of gross profit by $64,000 (3.7%) for the
first quarter of 1999 over the first quarter of 1998. Selling, general and
administrative expenses for the first quarter of 1999 increased by $83,000
(5.9%) over the same quarter of 1998 resulting from 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 loss from operations for the first quarter of 1999 is $648,000, $19,000 more
than same period last year and is attributable primarily to the cost of the
advertising campaign for the Medifast Take Shape (TM) product launch. Net Loss
for the three month period is $753,000 which is $67,000 greater than the
$686,000 loss for the first quarter of 1998. Flat revenues, the cost of the
Medifast Take Shape (TM) product launch and $61,000 in additional interest
expense due to increased borrowings for most of this period are the basis for
the increase in the loss.
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PART II - OTHER INFORMATION
SEASONALITY
The Company does not believe that its business is subject to seasonality.
LIQUIDITY AND CAPITAL RESOURCES
Jason Pharmaceuticals has a term facility and a revolving facility to finance
raw materials, finished goods and accounts receivable with Century Credit
Corporation. The total of the revolving credit and term loan outstanding was
increased to a total of $1,500,000. At March 31, 1999, $748,000 was available on
the line of credit, of which $460,000 had been drawn and the term loan balance
was $255,000.
The Company's MTMA Subsidiary continued to utilize two of its three lines of
credit with US Bank. During the period approximately $131,000 was advanced on
the equipment line and $147,000 on the real estate line. In mid March, 1999 the
Company paid down approximately $900,000 on its working capital line to be in
compliance with borrowing base requirements for accounts receivable and
inventory.
The Company had working capital of $2,053,000 on March 31, 1999 compared with
$3,551,000 at December 31, 1998. The $1,665,000 decrease reflects the net
reduction in of total debt of the Company of $503,000, the loss from operations
of $753,000 and the increase in deferred advertising expense of $397,000.
The Company's largest contract manufacturing customer cancelled certain existing
orders and indicated it would not be placing orders for additional product for
the foreseeable future because of its inventory over capacity. As a result, the
Company implemented a cost saving plan. If current cost reductions are
insufficient, the company is prepared to seek additional cost reductions. The
Company is exploring strategic alternatives that include seeking additional
capital financing or a strategic partner, which it considers essential to
attaining its goals and maintaining its liquidity. 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.
INFLATION
To date, inflation has not had a material effect on the Company's business.
ITEM 5. OTHER INFORMATION
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Forward Looking Statements: This document contains forwared-looking statements
which may involve known and unknown risks, uncertainties and other factors that
may cause HealthRtie, Inc. actual results and performance in future periods to
be materially different from any future results or performance suggested by
these statements. HealthRtie, Inc. cautions investors not to place undue
reliance on forward-looking statements which speak only to management's
experience on this date.
8
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Year 2000: The Company recently 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 A Year 2000" (Y2K) compliance. It is anticipated that all operating
units will be compliant by June 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.
Related Party Transaction: Universal Worldwide Health, the CEO of which is the
spouse of Beverly Valore, one of the Company's directors, purchased expired and
or near dated product for $323,000 from the Company.
Corporate Strategy: The Company is adhering to its overall strategic plan to:
o Rebuild the Medifast(R) doctor and clinic business to 20% market share or
$20 Million
o Increase sales of Medifast Take Shape(TM) in order to become number two in
the retail meal replacement business, utilizing its unique products-
Medifast Take Shape(TM)
o Participate in the crossover from the health food trade to the mass market
with Pure Energy(R) & Montana Naturals branded products.
o Become a premier contract manufacturer for the nutraceutical industry of
most delivery systems, including powders, hard shell capsules 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 Continue to implement certain cost efficiencies and savings at its MTNA
facility.
Plant Expansion: MTNA started its manufacturing and warehouse facilities
expansion in September, 1998. Because of construction delays it is estimated
that the $1 million expansion will be completed by June 30, 1999 and will add
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.
Bank compliance issue: The Company was out of compliance with certain borrowing
base provisions of its loan with US Bank at March 31, 1999. The Company is
working with the bank to cure this deficiency.
9
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Nutraceutical Industry: In late January, 1999 the company's largest single
customer informed it that it would not be placing orders for 1999. The Company
was able to finish orders already placed and in process for this customer. The
Company is seeking customers to fill its capacity and is concurrently
aggressively reducing expenses at its Montana facility to compensate for the
loss of this revenue. The last half of 1998 had three major pharmaceutical
companies enter the herbal industry market each with substantial resources and
large advertising budgets. The market capitalization of other major natural
products companies plummeted in the 4th Quarter 1998 and 1st quarter 1999
because of these developments and a drive toward consolidation in the industry.
The Company has announced that is evaluating various strategic alternatives.
This has negatively impacted on the Company's existing customers and own branded
products. Management is reducing expense to meet the lower levels of revenue.
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)
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Bradley T. MacDonald
Chairman and CEO
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