UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10--QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000 Commission File No. 0-23016
HealthRite, Inc.
(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 [ ]
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NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK, AS OF
SEPTEMBER 30, 2000: 5,524,531 SHARES
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INDEX
PART I
FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheet--
September 30, 2000 (unaudited) and December 31, 1999 .............. 3
Condensed Consolidated Statement of Operations--
Three and Nine Months Ended
September 30, 2000 and 1999 (unaudited) ........................... 4
Condensed Consolidated Statement of Cash Flows--
Nine Months Ended September 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 ....................................................... 10
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HEALTHRITE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 December 31, 1999
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................................... $ 103,187 $ 154,000
Accounts receivable, net of allowance ................................... 320,573 308,000
Merchandise inventory ................................................... 535,993 549,000
Prepaid expenses and other current assets ............................... 73,743 27,000
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Total Current Assets .................................................. 1,033,496 1,038,000
Property, plant and equipment - net ....................................... 964,493 1,010,000
Other assets .............................................................. 156,441 64,000
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TOTAL ASSETS .......................................................... $2,154,430 $2,112,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................... $ 571,726 $ 878,000
Current maturities of obligations
under capital lease ................................................... 25,597 29,000
Subordinated notes payable .............................................. 0 375,000
Current maturities of long-term obligations ............................. 329,081 500,000
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Total Current Liabilities ............................................. 926,404 1,782,000
Obligations under capital leases less current maturities .................. 0 51,000
Long--term obligations less current maturities ............................ 249,744 492,000
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Total Liabilities ..................................................... 1,176,140 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 ............... 620,372 605,000
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Stockholders' Equity
Commonstock; par value $.001 per share; 10,000,000
authorized; 5,524,531 issued at September 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; 600,000 authorized; 542,957 shares issued .................. 542,957 0
Accumulated deficit ....................................................... (8,756,743) (9,390,000)
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Total Equity ......................................................... 357,910 (818,000)
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TOTAL LIABILITIES & STOCKHOLDER EQUITY .................................... $2,154,430 $2,112,000
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HEALTHRITE, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
--------------------------- --------------------------
2000 1999 2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue ........................................................... $1,090,189 $ 929,000 $2,996,066 $ 4,935,000
Cost of sales, including warehousing
distribution, and occupancy ..................................... 602,463 683,000 1,489,015 3,137,000
---------- ----------- ---------- -----------
Gross Profit ...................................................... 487,726 246,000 1,507,051 1,798,000
Selling, general, and administration .............................. 448,055 1,800,000 1,305,805 4,394,000
---------- ----------- ---------- -----------
Income/(Loss) from operations ..................................... 39,672 (1,554,000) 201,246 (2,596,000)
---------- ----------- ---------- -----------
Other income/(expenses)
Other income/loss ............................................... 169,623 17,000 616,996 48,000
Interest, net ................................................... (46,649) (32,000) (128,368) (115,000)
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122,974 (15,000) 488,628 (67,000)
Net Income/(Loss) from continuing operations ...................... 162,646 (1,569,000) 689,874 (2,663,000)
---------- ----------- ---------- -----------
Loss from discontinued operations ................................. 0 (178,000) 0 (769,000)
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Net income/(loss) ................................................. 162,646 (1,747,000) 689,874 (3,432,000)
Less: Stock dividend on preferred stock .......................... (21,850) (13,000) (46,667) (40,000)
Accretion of preferred stock ............................... (4,842) (5,000) (14,526) (14,000)
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Net income/(loss) attributable to common shareholders ............. $ 135,954 $(1,765,000) $ 628,681 $(3,486,000)
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Basic income/(loss) per share:
Income/(Loss) from continuing operations ........................ $ .03 $ (.29) $ .12 $ (.50)
Loss from discontinued operations ............................... .00 (.03) .00 (.14)
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Net income/(loss) ............................................... .03 (.32) .12 (.64)
Diluted income/(loss) per share:
Income/(Loss) from continuing operations ........................ $ .02 $ .00 $ .10 $ .00
Loss from discontinued operations ............................... .00 .00 .00 .00
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Net income/(loss) ............................................... .02 .00 .10 .00
Weighted average shares outstanding--Basic ........................ 5,524,531 5,347,198 5,524,531 5,347,198
Weighted average shares outstanding--Diluted ...................... 6,384,988 5,664,698 6,384,988 5,664,698
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HEALTHRITE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
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2000 1999
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash Flow from Operating Activities:
Net income/(loss) .................................................................. $ 689,874 $(3,432,000)
Depreciation & amortization ...................................................... 187,798 151,000
Loss on asset sale ............................................................... 0 178,000
Changes in assets and liabilities:
(Increase)/Decrease in accounts receivable ....................................... (12,573) (15,000)
(Increase)/Decrease in inventory ................................................. 13,007 782,000
(Increase)/Decrease in prepaid expenses & other current assets ................... (46,743) 373,000
(Increase)/Decrease in other assets .............................................. (92,441) 1,156,000
(Decrease)/Increase in A/P and accrued expenses .................................. (353,099) 690,000
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Net Cash provided by and used in Operating Activities .............................. 385,823 (117,000)
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Cash Flow from Investing Activities:
Purchase of equipment .............................................................. (122,870) (31,000)
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Total Cash Flow from Investing Activities ........................................ (122,870) (31,000)
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Cash Flow from Financing Activities:
Issuance of Series B Redeemable Convertible Preferred .............................. 167,957 2,471,000
Payment of debt .................................................................... (481,458) (2,421,000)
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Net Cash provided by and used in Financing Activities: .......................... (313,501) (50,000)
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NET (DECREASE) IN CASH ............................................................... (50,548) (98,000)
Cash and cash equivalents at beginning of period ..................................... 153,735 137,000
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Cash and cash equivalents at end of period ........................................... 103,187 39,000
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................................................... 128,368 115,000
Income Taxes ..................................................................... 0 0
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Total .............................................................................. $ 128,368 $ 115,000
Supplemental disclosure of non-cash investing and financial activities:
Conversion of subordinated notes payable to convertible preferred stock ............ 375,000 0
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
1. Basis of Presentation
The information contained herein with respect to the three (3) month periods and
nine (9) month periods ended September 30, 2000 and 1999 will be briefed to the
Audit Committee 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 (3) month periods and
nine (9) month periods ended September 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 nine
(9) month periods ended September 30, 1999 has been restated to effectuate for
the discontinuance of operations.
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
diluted per share computation for the three (3) and nine (9) month periods
ending September 30, 1999 because the result would be antidilutive.
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MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
NINE (9) MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Revenues for the first nine months of 2000 were $2,996,066. This represented a
decrease of $1,938,934 (39.3%) from the $4,935,000 reported for the nine month
period ending September 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 three quarters of 2000 decreased by $1,647,985
(52.5%) from 1999. Gross profit for the first nine (9) months of 2000 decreased
by $290,949 (16.2%) from 1999. Selling, general and administrative expenses for
the first nine (9) months of 2000 of $1,305,805 decreased by $3,088,195 (70.3%)
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 nine (9) months of 2000 is
$201,246, which is $2,797,246 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 medical practitioner
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 nine (9) month period is $689,874 which is
$3,352,874 greater than the $2,663,000 loss for the first nine (9) months 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 $128,368 during the nine (9) month period ending September
30, 2000 as compared to $115,000 for the same period in 1999. The difference was
attributable to increased outstanding borrowings and interest rates during the
period.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Third quarter revenues for 2000 of $1,090,189 increased by $161,189 (17.4%) from
$929,000 for the three month period ended September 30, 1999. Cost of sales for
the period was $602,463, a decrease of $80,537 (11.8%) from $683,000 during the
same period of 1999. Gross profits of $487,726 for the third quarter of 2000
increased by $241,726 (98.3%) from $246,000 in the third quarter of 1999. During
the quarter the Company experienced a profit from operations of $39,672 compared
to a loss of $1,554,000 for the third quarter of 1999. The net profit for the
third quarter of 2000 was $162,646 compared to a net loss of $1,569,000 in the
third 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 September 30, 2000 approximately $1,058,443 was
available on the line of credit, of which $265,557 had been drawn, and the term
loan balance was $176,000.
The Company had working capital of $107,092 on September 30, 2000 compared with
($744,000) at December 31, 1999. The $851,092 net increase reflects the income
from operations of $288,000 in the first quarter, second quarter income from
operations of $239,229 and third quarter income from operations of $162,646. 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 and has raised $250,000 and intends to raise
approximately $200,000 of additional working capital that will retire an
existing equipment loan and fund its Internet sales and marketing initiatives.
The Company has received a commitment to refinance its equipment from GE
Capital. The Company expects to receive $300,000 at favorable rates once it
renegotiates with its lender or prospective lenders its current receivables and
inventory financing. This financing will give the Company sufficient capital to
fund its operating plan for 2001.
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 support of its medical practitioners, on the Internet which
has shown a steady increase in monthly sales and has attained over
1,500,000 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. The lease renegotiation eliminated a notes
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payable of $135,337.60. Monthly expenses decreased by $20,000 per month
effective April 1, 2000.
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 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 participated with other creditors in an involuntary
petition to put Century Industries, Inc. in Chapter 11 to collect its past due
receivables. Counsel for the creditors negotiated a consent order placing an
independent trustee on Century's Board of Directors to oversee their operations.
Newspaper articles in Atlantic County, New Jersey, report that Century
Industries, Inc. and certain principals are under investigation by various
governmental agencies. The management of HealthRite, Inc. believes the
litigation will not have a material effect on the Company.
STRATEGIC ALLIANCE: The Company is in negotiations with a major nutraceutical
company to form a strategic alliance to sell and market its weight management
products under a co-branding agreement to U.S. and international retail
customers. The Company has also received a vendor number and
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conditional commitment from QVC to feature a proprietary specialty weight
management product on QVC on January 1, 2001. The Company expects to ship the
first order to QVC in December, 2000.
MANAGEMENT ADDITIONS: Linda Spangle, R.N. M.S., has assumed the role of Director
of Lifestyles Programs and Technical Advisor on Medifast(R) programs. Ms.
Spangle has managed the "Winners Program" featuring Medifast(R) products in her
own clinic in Denver, Colorado, for over 12 years. Her clinical background will
be an asset to the Lifestyles Program and its effort to recruit professional
coaches.
FDA INSPECTION: During the period, two (2) investigators from the Food and Drug
Administration (FDA) conducted an unannounced, detailed inspection of the Jason
Pharmaceuticals, Inc. facility at 11445 Cronhill Drive, Owings Mills, Maryland,
to determine if the Company's facility, manufacturing processes, and procedures
conformed with governmental regulations. Upon completion of the inspection, the
FDA provided Jason Pharmaceuticals, Inc. with a letter stating, "The areas
inspected appear to be in compliance with the applicable requirements of the
Federal Food, Drug, and Cosmetic Act and implementing regulations.
Based on these findings, the agency is prepared to endorse export certificates
for products manufactured at your facility that were specifically inspected.
This information is available to Federal agencies when they consider awarding
contracts."
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 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.
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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