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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 June 30, 2000 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
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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 JUNE 30, 2000:
5,524,531 SHARES
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Index
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet --
June 30, 2000 (unaudited) and December 31, 1999................. 3
Condensed Consolidated Statement of Operations --
Three and Six Months Ended June 30, 2000 and 1999 (unaudited)... 4
Condensed Consolidated Statement of Cash Flows --
Six Months Ended June 30, 2000 and 1999(unaudited).............. 5
Notes to Condensed Consolidated Financial Statements................ 6
Management Discussion and Analysis of Financial Condition
and Results of Operations....................................... 7
PART II
Signature Page...................................................... 9
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<TABLE>
HEALTHRITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, 2000 December 31, 1999
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash ................................................................ $ 67,117 $ 154,000
Accounts receivable, net of allowance ............................... 427,294 308,000
Merchandise inventory ............................................... 668,319 549,000
Prepaid expenses and other current assets ........................... 73,743 27,000
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Total Current Assets ........................................... 1,236,473 1,038,000
Property, plant and equipment - net ..................................... 1,003,094 1,010,000
Other assets ............................................................ 154,867 64,000
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TOTAL ASSETS ................................................... $ 2,394,434 $ 2,112,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................... $ 516,193 $ 878,000
Current maturities of obligations under capital lease ............... 28,983 29,000
Subordinated notes payable .......................................... 0 375,000
Current maturities of long-term obligations ......................... 703,075 500,000
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Total Current Liabilities ........................................... 1,248,251 1,782,000
Obligations under capital leases less current maturities ................ 0 51,000
Long-term obligations less current maturities ........................... 313,536 492,000
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Total Liabilities .............................................. 1,561,787 2,325,000
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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 ........... 615,530 605,000
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Stockholders' Equity
Common stock; par value $.001 per share; 10,000,000 authorized;
5,524,531 issued at June 30, 2000 and
5,524,531 issued at December 31, 1999 ............................... 5,525 6,000
Additional paid-in capital .............................................. 8,566,172 8,566,000
Series B redeemable convertible preferred stock; par
value $1.00; 542,957 shares issued .................................. 542,957 0
Accumulated deficit ..................................................... (8,897,537) (9,390,000)
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Total Equity ........................................................ 217,117 (818,000)
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TOTAL LIABILITIES & STOCKHOLDER EQUITY .................................. $ 2,394,434 $ 2,112,000
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</TABLE>
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<TABLE>
<CAPTION>
HEALTHRITE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ........................................... $ 930,877 $1,549,697 $1,905,877 $ 2,896,697
Cost of sales, including warehousing
distribution, and occupancy ................... 440,552 886,125 886,552 1,694,125
---------- ---------- ---------- -----------
Gross Profit ...................................... 490,325 663,572 1,019,325 1,202,572
Selling, general, and administration .............. 501,750 1,060,878 857,750 2,073,878
---------- ---------- ---------- -----------
Income/(Loss) from operations ..................... (11,425) (397,306) 161,575 (871,306)
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Other income/(expenses)
Other income/loss ............................. 269,373 18,320 447,373 31,320
Interest, net ................................. (18,719) (57,341) (81,719) (82,341)
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250,654 (39,021) 365,654 (51,021)
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Net Income/(Loss) from continuing operations ...... 239,229 (436,327) 527,229 (922,327)
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Loss from discontinued operations ................. 0 (496,673) 0 (760,673)
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Net income/(loss) ................................. 239,229 (933,000) 527,229 (1,683,000)
Less: Stock dividend on preferred stock ........ (11,817) (14 ,000) (24,817) (27,000)
Accretion of preferred stock ............. (4,842) (5,000) (9,684) (10,000)
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Net Income (Loss) attributable to common
shareholders .................................... 222,570 (952,000) 492,728 (1,720,000)
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Basic income/(loss) per share:
Income/(Loss) from continuing operations ...... $.04 ($.08) $.09 ($.18)
Loss from discontinued operations ............. .00 (.09) .00 (.14)
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Net income/(loss) ............................. .04 (.17) .09 (.32)
Diluted income/(loss) per share
Income/(Loss) from continuing operations ...... $.04 $.00 $.08 $.00
Loss from discontinued operations ............. .00 .00 .00 .00
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Net income/(loss) ............................. .04 .00 .08 .00
Weighted average shares outstanding-Basic ......... 5,524,531 5,449,290 5,524,531 5,423,145
Weighted average shares outstanding-Diluted ...... 6,384,988 5,766,790 6,384,988 5,740,645
</TABLE>
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<TABLE>
HEALTHRITE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Six Months Ended June 30,
2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Net income/(loss) ................................................ $ 527,229 $(1,684,000)
Depreciation & amortization ................................. 107,327 214,000
Loss on asset sale .......................................... 0 13,000
Changes in assets and liabilities:
(Increase)/Decrease in accounts receivable .................. (119,294) 1,424,000
(Increase)/Decrease in inventory ............................ (119,319) 792,000
(Increase)/Decrease in prepaid expenses &
other current assets ....................................... (46,743) (238,000)
(Increase)/Decrease in other assets ......................... (90,867) 8,000
(Decrease)/Increase in A/P and accrued expenses ............. (386,081) 814,000
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Net Cash provided by and used in Operating Activities ............ (127,748) 1,343,000
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Cash Flow from Investing Activities:
Purchase of equipment ............................................ (100,421) (1,246,000)
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Total Cash Flow from Investing Activities ................... (100,421) (1,246,000)
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Cash Flow from Financing Activities:
Issuance of Series B
Redeemable Convertible Preferred................................. 167,957 2,444,000
Payment of debt .................................................. (26,406) (2,713,000)
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Net Cash provided by and used in Financing Activities: ...... 141,551 (269,000)
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NET (DECREASE) IN CASH ............................................... (86,618) (172,000)
Cash and cash equivalents at beginning of period ..................... 153,735 503,000
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Cash and cash equivalents at end of period ........................... 67,117 331,000
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................................... 95,381 237,000
Income Taxes ................................................ 0 0
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Total ............................................................ $ 95,381 $ 237,000
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Supplemental disclosure of non-cash investing and financial activities:
Conversion of subordinated notes payable to
convertible preferred stock...................................... 375,000 0
</TABLE>
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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, 2000 and 1999 has been reviewed by the independent
auditors and 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. 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,
2000 and 1999. The results are not necessarily indicative of results to be
expected for the year.
2. Restatement of Consolidated Statement of Operations
The information contained herein with respect to the three (3) month and six (6)
month periods ended June 30, 1999 has been restated to effectuate for the
discontinuance of oeprations.
3. Income (Loss) Per Common Share
Basic income (loss) per share is calculated by dividing net income (loss)
attributable to common stockholders by the weighted average number of
outstanding common shares during the year. Basic income (loss) per share
excludes any dilutive effects of options, warrants and other stock-based
compensation. The Company has not included potential common shares in the
diulted per share computation for the three (3) and six (6) month periods ending
June 30, 1999 because the result would be antidilutive.
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MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenues for the first six months of 2000 were $1,905,877. This represented a
decrease of $990,820 (34.2%) from the $2,896,697 reported for the six month
period ending June 30, 1999. This decrease resulted from a decline in Take Shape
retail sales to the Company's large chain customers sold through its
discontinued subsidiary, Montana Naturals Int'l, Inc. ("MTNA"). The Company is
not pursuing sales directly to retail chain stores since MTNA became inactive.
Cost of sales for the first half of 2000 decreased by $807,573 (47.7%) from
1999. Gross profit for the first half of 2000 decreased by $183,247 (15.2%) from
1999. Selling, general and administrative expenses for the first half of 2000 of
$857,750 decreased by $1,216,128 (58.6%) over the same period of 1999 as a
result of decreased marketing and sales expense, improved technology at lower
costs, decreased executive expense and overall better cost controls.
The net profit from operations for the first six months of 2000 is $161,575,
which is $1,032,881 greater than the same period last year. The operating profit
is attributable primarily to a focused sales and marketing strategy using the
Internet and improved digital printing and telephone technology to improve the
quality and profitability of physician sales. Increased sales via Medifast
Direct and the Internet to service medical practitioners and their patients
significantly improved margins to over 50%. Liquidation of the unprofitable MTNA
subsidiary also contributed to profitability. The net profit for the six month
period is $527,229 which is $1,449,556 greater than the $922,327 loss for the
first half of 1999. Management significantly improved the balance sheet and
profitability by negotiating the liquidation of long term debt on favorable
terms to the Company. Interest expense was $81,719 during the six month period
ending June 30, 2000 as compared to $82,341 for the same period in 1999. The
difference was attributable to decreased outstanding borrowings during the
period.
THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Second quarter revenues for 2000 of $930,877 decreased by $618,820 (39.9%) from
$1,549,697 for the three month period ended June 30, 1999. Cost of sales for the
period was $440,552, a decrease of $445,573 (50.3%) from $886,125 during the
same period of 1999. Gross profits of $490,325 for the second quarter of 2000
decreased by $173,247 (26.1%) from $663,572 in the second quarter of 1999.
During the quarter the Company experienced a loss from operations of $11,425
compared to a loss of $397,306 for the second quarter of 1999. The net profit
for the second quarter of 2000 was $239,229 compared to a net loss of $436,327
in the second quarter of 1999.
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SEASONALITY
The Company does not believe that its clinical weight management business is
subject to seasonality.
LIQUIDITY AND CAPITAL RESOURCES
The Company's subsidiary, Jason Pharmaceuticals, Inc., has a loan agreement with
Wells Fargo 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 outstanding balances on the credit line and term loan are limited
to a total of $1,500,000. At June 30, 2000 approximately $795,862 was available
on the line of credit, of which $514,938 had been drawn and the term loan
balance was $189,200.
The Company had working capital of ($11,778) on June 30, 2000 compared with
($744,000) at December 31, 1999. The $732,222 net increase reflects the profits
of $288,000 in the first quarter and second quarter income from operations of
$239,229. The Company has sufficient cash flow from operations to fund its
current business plan.
The Company currently has refinancing proposals for Series "A" secured debt
convertible to common stock. The financing will be secured by the Company's
trademarks and other property not currently secured and will raise approximately
$600,000 of additional working capital that will retire an existing equipment
loan and fund its Internet sales and marketing initiatives.
OTHER
The following specific events and transactions that have a positive
material effect on the Company:
o In January, 2000, the Company initiated a price increase of its
products.
o In January, 2000, the Company implemented a direct sales program to
patients, in conjunction with physicians, on the Internet which has
shown a steady increase of $5,000 per month in sales and has attained
over 850,000 hits on its website since February, 2000.
o In January, 2000, the Company was able to convert $375,000 of secured
short-term debt to preferred stock and raise $168,000 of new capital
in a private placement of Series "B" Convertible Preferred Stock.
o In March, 2000, the Company was able to achieve significant cost
savings in the categories of facilities rental, utilities, computer
and telephone systems, printing and accounting through lease
renegotiation and other right-sizing decisions.
o In June, 2000, the Company negotiated a settlement on a note payable
of over $426,000 for a cash payment of $125,000.
Wooden & Benson, Chartered, Certified Public Accountants, delivered a letter to
the Company as of June 30, 2000:
"The report issued by your previous accountants on the Company's consolidated
financial statements as of and for the year ended December 31, 1999 was modified
because of going concern issues. This was
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primarily due to the consolidated balance sheet disclosing negative working
capital of $744,000 at December 31, 1999 and the consolidated statement of
operations disclosing a net loss of $3,192,000 for the year then ended.
. . . Based upon the scenarios described above and assuming that present sales
trends continue or improve and that cost reductions continue to be realized, it
is our opinion that we will not need to modify our report on the Company's
consolidated financial statements as of and for the year ending December 31,
2000 for going concern issues.
The ultimate responsibility for the decision on the appropriate application of
generally accepted auditing standards rests with us and will be made at the time
we issue our opinion. Our judgment on the appropriate application of generally
accepted auditing standards for the described specific events and transactions
is based solely on the facts provided to us as described above; should these
facts and circumstances differ or other facts and circumstances become relevant,
our conclusion may change."
INFLATION
To date, inflation has not had a material effect on the Company's business.
ITEM 5. OTHER INFORMATION
Litigation: The Company has initiated a lawsuit in U.S. District Court for the
District of Maryland against Universal Worldwide Health, Inc. and Century
Industries, Inc., its successor by merger, and former directors and a former
consultant of the Company associated with Century Industries, Inc. to collect
receivable owed. The Company believes that this litigation will not have a
material impact on the Company.
The Company negotiated a settlement with Direct Focus, Inc., the
licensor of "Nautilus", which provides for payments of $100,000 over 10 years
that can be applied to Direct Focus product purchases at a rate of 20% credit
for each purchase.
Forward Looking Statements: This document contains forward-looking statements
which may involve known and unknown risks, uncertainties and other factors that
may cause the Company's actual results and performance in future periods to be
materially different from any future results or performance suggested by these
statements. The Company cautions investors not to place undue reliance on
forward-looking statements which speak only to management's experience on this
date.
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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)
/s/ BRADLEY T. MACDONALD
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Bradley T. MacDonald
Chairman & CEO
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