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, 1999
Commission File No. 000-23016
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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, 1999 were
$4,651,000.
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 NASD OTC Market on March 27, 2000: $0.50.
Number of shares outstanding of registrant's Common Stock, as of March 27, 2000:
5,524,531 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 one operating subsidiary,
Jason Pharmaceuticals ("Jason"). The Company is engaged in the production,
distribution, and sale of consumable health and diet products. HealthRite's
product lines include meal substitutes and sports nutrition products
manufactured in a modern facility in Owings Mills, Maryland.
During 1999, Montana Naturals Int'l. Inc. ("Montana Naturals") was closed
entirely. Montana Naturals experienced severe liquidity problems during 1999,
resulting in severe cash flow problems for all of HealthRite. The herbal
industry went into recession at the same time we expanded our plant in Montana.
The Company was less competitive because of over capacity and the advent of new
delivery systems in herbals. Lack of contract sales and the burden of $4.5
million of debt forced the Company to redirect its efforts to save its only
potentially profitable asset, Jason and its Medifast brand products.
In September of 1999 the Company dramatically reduced expenses, negotiated
a settlement with the U.S. Bank National Association MT ("U.S. Bank") that
preserved its 80% Federal loan guarantee, discontinued the operations of Montana
Naturals in lieu of debt, reorganized Medifast into a lean and focused clinical,
meal replacement weight management company and raised capital to maintain the
operational integrity and cash flow of Jason, the manufacturer of Medifast.
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 the launch of "Take Shape" to the retail
markets financed by U.S. Bank since it was distributed by Montana Naturals.
With the Company's enthusiastic staff of Medifast professionals and
financial "work out" specialists, it preserved the most valuable asset of
HealthRite and the most valuable to shareholders - Medifast; eliminating the
cash flow problem related to the Montana Naturals debt. Unfortunately, the
foreclosure by U.S. Bank on the assets of Montana Naturals left the Company in
the position of not being able to ship "Take Shape" since U.S. Bank owned the
receivables and there was no guarantee that Jason would be reimbursed or paid
for its cost of goods. This caused the Company to abort its marketing efforts on
retail "Take Shape" and redirect its sales efforts of the Medifast brand through
drug wholesalers and the Internet.
The Company's focus on clinically proven Medifast as the centerpiece of its
return to profitability entails the following actions:
o Introduce Medifastdiet.com Internet strategy;
o Update the Internet umbrella website to our established physician and
medical practitioner network;
o Establish a Medifast corporate wellness program for large
corporations, associations and their health insurance carriers;
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o Create a network marketing division of nurse and nutritionist
practitioners introducing a LifeStyles Counseling Program that will
complement our physician network. An Internet interface is being
developed to support this program; and
o Continue sales development of our Medifast Take Shape program for the
over-the-counter Internet drug wholesale companies.
o Form a strategic partnership with a third party consumer products
company to distribute the Take Shape retail program.
On September 23, 1999 Jason, HealthRite's wholly owned subsidiary, which
manufactures, distributes and sells its Medifast brand of weight loss and weight
management products, completed a private placement of $375,000 in subordinated
secured debt together with HealthRite warrants.
In January, 2000, the Company, with an additional $125K of borrowing,
$500,000 of debt was converted to Series "B" Convertible Preferred Stock and
reduced the operating expenses, thus allowing the Company to grow profitably
again so it can realize the value of its Medifast product line. In 1989 and
1990, Medifast was a $50 million brand. The Company's new five-year goal is to
attain $50 million in revenues.
The Company believes that raising additional capital is an essential
element of its plan. Inability to raise funds will negatively affect the
Company's ability to succeed with its overall plan. There is no assurance that
the Company will be able to raise additional capital.
MARKETS
MEDIFAST
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 a 41 billion
between 1999 through 2002, according to a Marketdata Research study. In 1999, an
estimated 48 million dieting American used 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 is
in the use of meal replacements, with sales expected to reach $1.8 billion,
almost a 10% increase over 1999. Drug store and multi-level sales represent over
50% 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, drug
wholesalers, the Internet, 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 $1.8 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 Institutes of Health
(NIH) classify about 95 million people as overweight or obese. Included in this
group are over 30 million Americans 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 weight management growth
trend in the medical market appears to be in the use of meal replacements versus
drugs. The Company launched its Medifast Take Shape(TM) over-the-counter and
meal replacement
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product in the second quarter of 1998. The Company is also expanding its
physician-based Medifast products to gain a larger share of the clinical meal
replacement market. HealthRite also continues to seek arrangements with weight
loss centers to produce nutritional products as a contract manufacturer.
MEDIFAST(R) - a medically-supervised very-low-calorie diet. Brand awareness
of the Medifast(R) 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, the country's premier physician-recommended meal replacement
supplement, released 4 new products. Medifast high protein meal replacements are
available in drinks and bars. The new products include three yogurt-coated bars
- - Crunchy Lemon Fantasy, Double Berry Delight and Old Fashioned Oatmeal Raisin -
and one new drink, Orange Pineapple. All 4 products are eligible to make the new
"heart healthy" claim recently approved by the Food and Drug Administration
(FDA) that "25 grams of soy protein a day, as part of a diet low in saturated
fat and cholesterol, may reduce the risk of heart disease." To qualify to make
the heart healthy claim, each serving must contain at least 6.25 grams of soy
protein. All the new Medifast flavors (and most of the existing products)
contain more than 6.25 grams of soy protein per serving. The Company is planning
to market Medifast to the adolescent with a "ready-to-drink" weight management
drink to the 10-18 age group. The facility at Owings Mills, MD currently
manufactures only powder. The Company has developed this ready-to-drink product
and is negotiating to subcontract production of the product in juice boxes.
Modified low calorie diets are making a comeback, as consumers search for a
healthy high-protein, low-fat diet that provides quick weight loss. Unlike
popular high-protein, high-fat diets, the Medifast program is low fat and
nutritionally balanced, with approximately equal proportions of protein and
carbohydrates, a soy protein source (as opposed to animal protein), plus vitamin
and mineral fortification. It is very difficult to meet the minimum daily
nutritional requirements on a low calorie diet, but a dieter can meet these
requirements using nutrient dense Medifast meal replacement supplements.
MEDIFAST(R) TAKE SHAPE(TM) - good-tasting, nutritious weight maintenance
products, were launched in the maintenance calorie levels to the retail
over-the-counter trade.
Medifast Take Shape(TM), an over-the-counter weight loss product, is
currently being marketed through the Internet and drug wholesalers. The Company
believes that new products marketed through the Internet under the Medifast(R)
Take Shape(TM) brand will bring sales from a previously untapped market. The
Company is negotiating with major consumer product companies to assume the
marketing and distribution of the Take Shape Program to retail customers. There
is no certainty that an agreement will be reached that is satisfactory to the
Company. The Company will continue to market and sell the product by drug
wholesalers and the Internet if an agreement cannot be reached.
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
with a superior product. The clinic, hospital, and physician brand ranks number
three in the category and competes with Novartis, Health Management Resources
and Bariatrix.
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The Company has a product quality advantage over the competition since it
has used soy as a protein source since 1989. The Medifast brand has been
clinically tested to get results. Lactose-free and Kosher-certified Medifast
Take Shape Shakes provide over 10 grams of soy protein per serving (the most in
its category). On October 20, 1999 the Food and Drug Administration authorized
HealthRite, as a manufacturer, to make the following health claim pertaining to
its Medifast Products:
"25 grams of soy protein a day, as part of a diet low in saturated fat and
cholesterol, may reduce the risk of heart disease. A serving of Medifast
Take Shape Instant Nutritional Drink contains 10.5 grams of soy protein."
Additionally, soy protein become the primary source of protein in the Medifast
line of clinical weight management supplements several years ago and easily
exceeds the clinically significant level of soy protein recognized in the FDA
ruling. Medifast Products for treatment of the seriously overweight patient are
distributed through our nationwide network of physicians, clinics and healthcare
practitioners. We are proud of our line of cutting-edge, great-tasting and
nutritious products that "may reduce the risk of heart disease."
The retail meal replacement market is dominated by one company,
SlimFast(TM), which has an 88% market share. The Company sells its vitamins and
supplements through its physician network and its one health food store. During
the fall of 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 multimillion-dollar advertising
campaign in September, 1998. Exiting the herbal business will benefit the
Company in the long run as we focus on the clinical markets.
PRODUCTS
The Company offers a broad selection of weight management products under
the Medifast brand and for select private label customers.
MEDIFAST(R) - a medically supervised modified low-calorie diet. Brand
awareness of the Medifast(R) 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 medical staff.
Medifast(R) products are being used in clinical studies conducted by the U.S.
government and major hospitals. The Company has restructured its sales and
marketing operations. The Company is planning to market Medifast to the
adolescent market with a "ready-to-drink" weight management drink for the 10-18
age group. The facility at Owings Mills, MD currently manufactures only powder.
The Company has developed this ready-to-drink product and is negotiating to
subcontract production of the product in juice boxes.
MEDIFAST(R) TAKE SHAPE(TM) - good-tasting, nutritious weight maintenance
products, were launched in the maintenance calorie levels to the retail
over-the-counter trade. The Company's Internet site, www.Medifastdiet.com,
PlanetRX.com and drug wholesalers are the primary distributors supplying
Internet and retail drug stores.
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SALES AND MARKETING
The Company has restructured its sales and marketing operations. The
Company has initiated a strategic plan based on research conducted during the
last year and intends to become one of the premier E-commerce
business-to-business Corporate Wellness Weight Management Programs in the
industry. The Medifastdiet.com strategy with a new e-commerce Internet site has
been launched in January 2000, with the help of Michael C. MacDonald, a
corporate officer of Xerox involved in "Teleweb" marketing programs, the Rev.
Donald F. Reilly, OSA, Ph.D., Executive Director of SILOAM and a trustee at
Villanova University, and Scott Zion, formerly an executive of Mead Johnson with
extensive sales and marketing of nutrition products experience, all of whom are
members of the HealthRite Board of Directors. The Company has selected a new
Vice President of Sales and Technical Service, Ms. Susan Feldman, RN, MS, to
lead the Sales Team. She has extensive clinical experience at Johns Hopkins
University and sales and marketing experience in managed-care programs. In
addition, a new Lifestyles(TM) program will be launched in the first Quarter
under the direction of Ms. Mary Jane Cash, Director of Lifestyles who has over
ten years' experience managing weight loss clinics. Based on the new operational
business model, the Company expects to grow revenues and profits in the next
fiscal year. The Company's sole focus on the weight management business, with
our new business model, will result in profitability and revenue growth that
will increase the value of the Company to the shareholders. The Company recently
received permission from the FDA to make the "soy" claim, "Medifast reduces the
risk of heart disease" and it has launched two new Medifast Bars and a new
shake. The Company has developed a clinical "Ready-to-Drink" product, which will
be launched in the second quarter for the clinical market.
Jason solicits sales of Medifast through full-time Teleweb sales people and
a National Sales Manager. Private label products are developed and manufactured
for select diet centers. Medifast Take Shape, the Company's OTC product, is in
the process of being repositioned to drug wholesalers, Internet retailers and
direct to consumer sales via our 800 number and the Company's Website, now
Medifastdiet.com.
ADVERTISING AND PROMOTION
The primary means of advertising and promotion for Medifast is direct mail,
Teleweb sales, the Internet, trade shows, trade press, local community
newspapers, the yellow pages and co-op advertising with our clinical practices.
The Company has leased equipment that gives it the technology to do its own
mailings to stimulate its customer base.
The Company launched Medifast Take Shape with an advertising program in
1999 that included television, radio, print (Parade Magazine) and cooperative
advertising. The liquidity problems of Montana Naturals and the inability to
ship products to the 40,000 outlets because of U.S. Bank owning the receivables,
caused the Company to abort the Take Shape advertising and promotion program.
Medifast Take Shape is one of the leading products in the Company for
Medifast direct sales to customers as a result of the advertising and promotion
tied into the 800 number on the Web and packaging. The Company is aggressively
promoting its new products and reintroducing its supplement line to physicians.
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MANUFACTURING
Alternate sources of supply exist for all components. Jason operates a
20,000 square foot facility in Owings Mills, MD which is leased through the year
2004. The facility is designed to produce diet powders and meets all the
requirements for Kosher certification by the Union of Orthodox Jewish
Congregations of America, Kashruth Division. The Company contract manufactures
tablets, capsules and ready-to-drink weight management products.
FINANCING AND STRATEGIC ALTERNATIVES
The Company is evaluating additional financing and strategic alternatives
including mergers, acquisitions, 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(TM) brands in the clinical markets has
attracted the attention of major consumer product companies. Discussions
regarding 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
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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.
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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 maintains directors and officers liability
insurance in order to attract "high quality and experienced" directors.
EMPLOYEES
At December 31, 1999, the Company employed 25 people, of whom 10 were
engaged in manufacturing, and 15 in marketing, administrative and corporate
support functions. None of the employees are subject to a collective bargaining
agreement with the Company.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases a 20,000 square-foot facility in Owings Mills, Maryland
through the year 2004 for its manufacturing, warehousing and distribution. The
Company's outlet retail store was moved to Owings Mills, Maryland in December
last year with a five year lease that expires in 2003. The leases require the
Company to bear, in addition to the basic rent, the costs of insurance, tax and
certain maintenance costs. This store 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.
Direct Focus, Inc., the successor to Delta Woodside, Inc. the licensor of
Nautilus is in a dispute subject to arbitration concerning the cancellation and
terms of the license, advertising, and royalties owed. Direct Focus, Inc. is
claiming $144,500 and HealthRite, Inc. has made a counter claim for $2,000,000.
The Company believes it has good defenses to the claim against it and a valid
basis for the counter claim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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
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17, 1995 on the Nasdaq Small Cap Stock Market. Effective October 26, 1999, the
common stock moved to the NASD OTC Bulletin Board. The Company has been notified
by the Nasdaq Stock Market that effective October 26, 1999 it no longer meets
the Nasdaq SmallCap maintenance listing requirements. Accordingly, HealthRite,
Inc. common stock (HLRT) is, effective October 26, 1999, no longer listed on the
Nasdaq SmallCap Market. HealthRite, Inc. common stock will now trade on the NASD
OTC Bulletin Board. The following is a list of the low and high bid quotations
by fiscal quarters for 1999 and 1998 as reported by Nasdaq:
1999
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Low High
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Quarter ended March 31, 1999 ............... 1.4375 1.75
Quarter ended June 30, 1999 ................ .625 1.125
Quarter ended September 30, 1999 ........... .1875 1.0625
Quarter ended December 31, 1999 ............ .125 .50
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
(b) The quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
(c) There were 180 record holders of the Company's Common Stock, as of
April 2, 2000.
(d) No dividends on common stock were declared by the Company during 1999
or 1998.
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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.
1999 COMPARISON WITH 1998
OPERATING
Consolidated net sales for 1999 were $4,651,000 as compared to 1998 sales
of $5,963,000, a decrease of $1,312,000, or 22%. The revenue loss for the
Company can be attributed to the following: (1) Take Shape sales decrease caused
by the lack of financial and distribution support by the Montana Naturals
Int'l., Inc. subsidiary which was distributing the product and was foreclosed
upon by the bank; (2) Medifast bars were out of stock for six months because of
insufficient financing and cash flow, in addition to vendor quality problems.
The 1998 Take Shape sales included pipeline distribution to retail stores from
August to December 1998, which accounted for the increase in sales in 1998.
Included in net sales are $1,130,000 and $1,701,000 for the years ended December
31, 1999 and 1998 respectively, relating to Take Shape sold through Montana
Naturals International, Inc directly to retail chain stores. The Company is not
pursuing sales directly to retail chain stores since Montana Naturals
International, Inc. became inactive.
Gross margins decreased to 45% in 1999 from 54% in 1998, partially due to
the higher margins of the Take Shape pipeline distribution orders shipped in the
fall of 1998. Selling, general and administrative (SG&A) expenses of $4,179,000
for 1999 were $378,000 or 9.9% more than the $3,801,000 in 1998, mostly due to
the increased cost of advertising, promotion and distribution of the Take Shape
retail program. SG&A for 1999 included approximately $369,000 of nonrecurring
charges. Other income of $339,000 includes $200,000 from the collection of legal
claims related to Medifast.
Interest expense increased by $30,000 due to the Company's increased
borrowing to fund operations and the Take Shape retail advertising programs.
A preferred stock dividend in the amount of $51,000 was paid in 1999.
The Company experienced a net loss from operations for the year of
$1,848,000. This compares with a net loss of $471,000 in 1998. The net loss from
operations is attributed to sales decreases, increased SG&A expense and
liquidity problems related to not receiving cash compensation for intercompany
receivables for its Take Shape products distributed by its Montana Naturals
Int'l., Inc. subsidiary.
The net loss from discontinued operations of $1,344,000 in 1999 is
attributed to Board of Directors authorizing the orderly liquidation and
classification of Montana Naturals Int'l., Inc. as a discontinued operation,
which was foreclosed upon on October 15, 1999, reducing the debt load of
HealthRite by $4.5 million. The Settlement Agreement provided for a voluntary
surrender of selected
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assets and assured the liquidity and survival of the Jason Pharmaceuticals
subsidiary and the parent HealthRite.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1999, 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 secured debt. In September 1999, the Company completed a placement of a
$375,000 subordinated notes payable. In addition, the Company issued five year
warrants exercisable at $.625 a share in conjunction with this offering.
Proceeds were used as working capital to support the work out of payables at
Jason. In January 2000, subordinated notes payable along with an additional
borrowing of $125,000 and accrued interest were exchanged for 516,707 shares of
Series B Convertible Preferred stock, providing the Company with the working
capital to execute its Teleweb medifastdiet.com and LifeStyles(TM) Counseling
Weight Management Programs. A financial consultant also received 36,050 shares
of Series B convertible preferred stock including 26,250 shares relating to fees
for services in assisting the company's efforts in raising $375,000 in proceeds
in 1999 in the placement of the subordinated notes payable. The Company renewed
negotiations with major nutraceutical companies to explore a joint venture with
"Medifast Take Shape", its soy-based, physician-recommended and clinically
tested over-the-counter product that "reduces the risk of heart disease."
Montana Naturals, HealthRite, Inc.'s wholly-owned subsidiary, has entered
into a Settlement Agreement with U.S. Bank providing for the foreclosure by the
Bank on the majority of its assets and the voluntary surrender of certain other
assets to the Bank. In exchange, Montana Naturals was discharged of all of its
indebtedness to the Bank. Subject only to a $100,000 maximum potential
obligation, HealthRite was also released from its corporate guarantee, which was
entered into as part of the original financing transaction. The Settlement
Agreement was entered into on October 15, 1999. The HealthRite Board of
Directors determined that Montana Naturals was unable to service its debt. The
subsidiary's contract manufacturing business, which represented 70% of the
subsidiary's revenues, collapsed due to the entry of major pharmaceutical
companies into the herbal business in late 1998. In addition, a few of the
subsidiary's major drug chain customers failed to pay for products ordered and
shipped on time and under the terms and conditions of their agreement. The board
therefore concluded that Montana Naturals was no longer a viable enterprise. As
a result of the Bank's takeover of all of the assets of Montana Naturals, the
subsidiary has been closed in its entirety.
The Board of HealthRite believes that the liquidation of the unprofitable
and debt-ridden Montana Naturals subsidiary will allow the Company to cure its
liquidity problems caused substantially by the losses incurred in the operation
of Montana's herbal business. HealthRite will now focus exclusively on the
clinical weight management business operated by Jason featuring its Medifast
brand products.
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 $1,500,000. At
December 31, 1999 approximately $980,000 was available. On January 20, 1998,
Century and Jason agreed to amend the loan agreement to include increasing the
availability under the term loan to $264,000 and the $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
13
<PAGE>
reduction and other cost cutting initiatives at its Jason facility and in 2000
initiated a price increase on branded Medifast products. The Company believes it
can generate funds and implement cost savings in cost of goods, rent, utilities,
information strategies, consulting, legal and administration, to continue in
operation through December 31, 2000, 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, 2000. If during the course of 2000, 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 2001.
SEASONALITY
The Company's weight management/diet control is subject to seasonality.
Traditionally the holiday season in November/December of each are considered
poor for diet control products and services. January and February generally show
increases in sales.
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 that work on a Windows NT retrievable
database which achieved "Year 2000" (Y2K) compliance in December 1999. Computer
hardware and software and data communications hardware and software were
financed by a new equipment lease.
ITEM 7. FINANCIAL STATEMENTS.
See pages F-1 through F-18.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
None
14
<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:
<TABLE>
<CAPTION>
Date First
Name Age Position Became Director
---- --- -------- ---------------
<S> <C> <C> <C>
Bradley T. MacDonald ...... 52 Chairman of the Board, 1996
Chief Executive Officer
and Director
Reed Vordenberg ........... 48 President, HealthRite, Inc., 1998
Secretary and Director
(resigned 3/1/00)
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
Scott Zion ................. 48 Director 1999
</TABLE>
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, Col. 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
15
<PAGE>
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. RESIGNED IN MARCH
2000.
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. RESIGNED IN AUGUST 1999.
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. RESIGNED IN SEPTEMBER 1999.
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
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. RESIGNED IN MARCH 1999.
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. RESIGNED IN MARCH 2000.
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. RESIGNED JUNE 1999.
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
16
<PAGE>
Trustees of Rutgers University. Mr. MacDonald is the brother of Bradley T.
MacDonald, the CEO of the Company.
SCOTT ZION received a Bachelor of Arts Degree from Denison University,
Granville, Ohio. Mr. Zion was formerly employed at Akorn, Inc., an
ophthalmologic distribution company, as Senior Vice President and General
Manager. He also was employed at Pilkington Barnes Hind, in Sunnyvale,
California as Senior Vice President-North American Sales and Senior Vice
President U.S. Sales and Marketing. Prior to that, he was the Sales Director for
Mead Johnson/Bristol Myers Squibb for over 20 years. Mr. Zion, an expert in
nutritional products, was also a Mead Johnson Regional Director for the Pacific
and Southwestern regions of the United States, a District Sales Manager in
Chicago and a Sales Representative, successfully generating sales and profits
from pharmaceutical and nutritional products.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information as to the compensation of the
Chief Executive Officer of the Company and each other executive officer who
received compensation in excess of $100,000 for 1999, 1998 or 1997.
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------ Value of Common Other
Salary(1) Bonus Stock Issued In Option Annual
Name Year ($) ($) Lieu of Cash Awards Compensation
- ---- ---- --------- -------- --------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Bradley T. MacDonald 1999 $125,000 (0) $ 25,000 (1) 15,000 0
Chairman of the Board & CEO......... 1998 $100,000 (0) $ 50,000 (1) (2) 100,000 0
1997 $100,000 (0) 0 0
Mr. Martin Olssen................... 1998 (0) 0
Vice President and General Manager 1999 $100,000 (3)
Montana Naturals International, Inc.
Reed Vordenberg..................... 1999 $ 56,250 (0) $ 23,000 (1) 15,000 0
President of Sales & Marketing, 1998 $ 70,000 (0) $ 50,000 (1) 100,000 0
Director
Charles Walgreen..................... 1999 $ 12,500(0) (0) 0 0
Vice President for Business 1998 $ 55,000 (0) $ 50,000 (1) 0
Development
Director (January & February 1999)
</TABLE>
- --------------
(1) Compensation Committee and Board approved payment in stock in lieu of cash
at average 30-day stock price at fiscal year end 1998 and in June of 1999.
(2) Mr. MacDonald's 1998 and 1997 annual compensation is authorized at
$150,000. Due to cash flow problems, the Board paid his compensation in
1998 at $100,000 cash and 25,000 shares of stock issued in lieu of cash,
and in 1999 at $125,000 in cash with 33,000 shares of stock issued in lieu
of cash.
(3) In 1999, Mr. Martin Olssen was Vice President General Manager of Montana
Naturals at the hourly contract rate of $62.00. As part of settlement with
U.S. Bank, the agreement called for Mr. Olssen to work for U.S. Bank's
subsidiary, FSM, Inc., until the liquidation is complete. Combined
compensation of Montana Naturals and FSM, Inc. would be approximately
$100,000 in 1999.
STOCK OPTIONS.
The Company's 1993 Employee Stock Option Plan (the "Plan"), as amended in
July 1995 and again in December 1997, authorizes the issuance of options for
700,000 shares of Common Stock. The Plan authorizes the Board of Directors or a
Stock Option Committee appointed by the Board to grant incentive stock options
and non-incentive stock options to officers, key employees, directors, and
independent consultants, with directors who are not employees and consultants
eligible only to receive non-incentive stock options.
* The following tables set forth pertinent information as of December 31,
1999 with respect to options granted under the Plan since the inception of the
Plan to the persons set forth under the Summary
17
<PAGE>
Compensation Table, all current executive officers as a group, all current
Directors who are not executive officers as a group of the Company. In addition,
a chart listing option holders, grants made in FY 99, and a list of aggregated
options and the value of these options, is provided.
ALL CURRENT ALL CURRENT
EXECUTIVE INDEPENDENT
BRADLEY T. OFFICERS DIRECTORS
MACDONALD AS A GROUP AS A GROUP
--------- -------------- -------------
Options granted................. 215,000 331,000 120,000
Average exercise price.......... $1.45 $1.40 $1.15
Options exercised............... -- -- --
Average exercise price.......... -- -- --
Shares sold..................... -- -- --
Options unexercised as
of 2/1/00...................... 215,000 331,000 120,000
<TABLE>
<CAPTION>
APPROXIMATE 5 YR
FY 99 GRANTS @ POTENTIAL REALIZABLE AGGREGATED VALUE OF
PRICE & EXPIRATION VALUE AT 10% ANNUAL OPTIONS OPTIONS
LIST OF OPTION HOLDERS MONTH/YEAR STOCK APPRECIATION THROUGH 1999 AS OF 12/31/99
- ---------------------- ------------------ -------------------- ------------ --------------
<S> <C> <C> <C> <C>
Bradley T. MacDonald....... 15,000 @ $.75 7/03 $ 750.00 215,000 0
Rev. Donald Reilly......... 10,000 @ $.75 7/03 $ 500.00 30,000 0
Michael C. MacDonald....... 30,000 @ $.75 6/03 & 7/03 $ 500.00 30,000 0
Scott Zion................. 30,000 @ $.75 6/03 & 7/03 $ 1,500.00 30,000 0
Beverly Valore............. 10,000 @ $.75 7/03 $ 500.00 30,000 0
Reed Vordenberg............ 15,000 @ $.75 7/03 $ 750.00 115,000 0
Paul Warren................ 1,000 0
Randall Reub............... 25,000 @ $.75 7/03 (1) $ 1,250.00 25,000 0
Ronald Hauge............... 10,000 @ $.75 7/03 (1) $ 500.00 10,000 0
</TABLE>
- -----------------
(1) Options were forfeited by December 31, 1999.
The Board will report no changes to the Compensation Committee.
The following table provides information as to the value of the unexercised
options held by the persons named in the Summary Compensation Table who are
optionholders as of December 31, 1999 measured in terms of the closing bid price
of the Company's Common Stock on such date:
18
<PAGE>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN THE MONEY
OPTIONS AS OF 12/31/99 OPTIONS ON 12/31/99
EXERCISABLE/ UNEXERCISABLE EXERCISABLE/ UNEXERCISABLE
-------------------------- --------------------------
Bradley T. MacDonald (1) 215,000/0 $ 0 /$ 0
------------
- ----------
*On February 10, 2000 the closing bid price was $.53 on the NASD OTC.
(1) Mr. MacDonald acquired no shares upon the exercise of options during 1999.
<TABLE>
<CAPTION>
Sample Peer Group Industry Comparison of Stock Prices
---------------------------------------------------------------------
February 10, 2000 February 10, 1999 $ %
Company Stock Price Stock Price Change Change
- ------- ------------------ ----------------- ------ ------
<S> <C> <C> <C> <C>
HealthRite (HLRT)................................ .59 1.875 -1.285 -68.53%
Natural Alternatives International, Inc. (NAII).. 2.0312 5.50 -3.4688 -63.07%
Weider Nutrition (WNI)........................... 4.3125 6.375 -2.0625 -32.35%
Pure World, Inc (PURW)........................... 4.1875 6.50 -2.3125 -35.58%
Twinlab Corporation (TWLB)....................... 7.6875 10.7812 -3.0937 -28.70%
Natures Sunshine Products, Inc. (NATR)........... 8.9062 13.00 -4.0938 -31.50%
</TABLE>
Index Comparison
-------------------------
1997 2000
---- ----
Adams Harkness & Hill Healthy Living Index....... 100(1) 127
HealthRite....................................... 100 25
Source: Adams Harkness & Hill Healthy Living Index
Factual material is obtained from sources believed to be reliable, but the
publisher is not responsible for any errors or omissions contained herein.
(1) $100 dollars invested in 1997 would return $127 in 2000.
COMPENSATION OF DIRECTORS.
The Company is authorized to pay a fee of $300 for each meeting attended by
its Directors who are not executive officers. It reimburses those who are not
employees of the Company for their expenses incurred in attending meetings.
Independent Directors claimed $2,500.00 in Director's fees and/or expenses in
1999. See "Executive Compensation - Stock Options" for stock options granted
under the 1993 Plan to the Directors.
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, 1999 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 Securities 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 March 7, 2000 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.
19
<PAGE>
NUMBER % OF
NAME AND ADDRESS* OF SHARES OUTSTANDING
- ----------------- --------- -----------
Bradley T. MacDonald................ 719,882 (1) 13%
Reed Vordenberg..................... 167,043 (2) 3%
Donald F. Reilly.................... 30,000 (3) .05%
Michael C. MacDonald................ 30,000 .05%
Scott Zion.......................... 230,000 4.2%
Kristina DeSantis................... 0 0
Executive Officers and Directors
as a group (5 persons) .......... 2,151,630 39.6%
* The address is c/o HealthRite, Inc., 11445 Cronhill Drive, Owings Mills,
Maryland 21117
(1) Also, he purchased 140,000 shares in July 1998 from the private placement;
it includes 215,000 shares issuable upon exercise of options, which by
their terms are currently exercisable or become exercisable within 60 days.
In addition, 755,700 shares, not included in this chart, 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. Also
private placement stock.
(3) Includes 30,000 shares issuable upon exercise of options, which by their
terms are currently exercisable or become exercisable within 60 days.
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 $323,000 of near dated
Nautilus inventory from the Company in 1999. The Company lost its right to
market Nautilus product by its new owner, Direct Focus, Inc., who decided to
market its products by infomercial within their own structure. Negotiations
between the Company's legal counsel and Century Industries, the successor by
merger with Worldwide Universal Health, is in progress, and litigation has been
initiated to gain a satisfactory settlement. On March 1, 2000, it was disclosed
to HealthRite that Ms. Valore became associated with Century Industries which
the Company has initiated legal action primarily because of past due
receivables.
Mr. Galuchie, is a Director, and 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 Int'l, Inc. subsidiary purchased raw
material amounting to approximately $20,000 from Pure World, Inc.'s subsidiary
Madis Botanical in 1999. Pure World owns 7% of HealthRite, Inc.'s common stock.
Mr. Reed Vordenberg, 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. On March 1, 2000, it was disclosed to HealthRite that
Mr. Vordenberg became associated with Century Industries which the Company has
initiated legal action primarily because of past due receivables.
Mr. Bill Money, a paid consultant for HealthRite during 1998 and 1999 was
involved in investor relations and merger and acquisition discussions. It was
disclosed in February of 2000 to HealthRite that Mr. Money became associated
with Century Industries which the Company has initiated legal action primarily
because of past due receivables.
20
<PAGE>
RECENT DEVELOPMENTS
HealthRite recently installed two new web sites, Medifastdiet.com and
Lifestylesdiet.com. The site is operational and its Teleweb network counseling
program, LifeStyles, is operational. Susan Feldman, RN, MS, Vice President of
Sales; Cathy Ganssle, Director of Marketing; and Mary Jane Cash, Director of
LifeStyles Counseling Programs, are leading the Company's sales and marketing
efforts.
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****
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.
**** Files as an exhibit to 10KSB, dated April 15, 1999 of the Company, file
No. 000-23016.
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during 1999 as follows:
October 15, 1999 to report Settlement Agreement Concerning Disposition of Assets
of Montana Naturals Int'l, Inc., filed October 29, 1999, dated October 15, 1999,
file no. 000-23016.
21
<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
- ----------------------------
Bradley T. MacDonald
Chairman & CEO
Dated: March 30, 2000
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, March 30, 2000
- ------------------------------- Director, Chief Executive
Bradley T. MacDonald Officer and Chief
Financial Officer
/s/ MICHAEL C. MACDONALD Director March 30, 2000
- -------------------------------
Michael C. MacDonald
/s/ SCOTT ZION Director March 30, 2000
- -------------------------------
Scott Zion
/s/ REV. DONALD F. REILLY, OSA Director March 30, 2000
- -------------------------------
Rev. Donald F. Reilly, OSA
22
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
Contents
Page
----
Consolidated Financial Statements
Independent auditors' report F-2
Balance sheet as of December 31, 1999 F-3
Statements of operations for the years
ended December 31, 1999 and 1998 F-4
Statements of changes in stockholders' equity
(capital deficiency) for the years ended
December 31, 1999 and 1998 F-5
Statements of cash flows for the years ended
December 31, 1999 and 1998 F-6
Notes to financial statements F-7
<PAGE>
EISNER Richard A. Eisner & Company, LLP
Accountants and Consultants
575 Madison Avenue New York, NY
10022-2597 Tel 212.355.1700 Fax
212.355.2414 www.eisnerllp.com
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, 1999, and the related consolidated statements of
operations, changes in stockholders' equity (capital deficiency) and cash flows
for each of the years in the two-year period ended December 31, 1999. 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, 1999, 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, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has experienced net losses, has a negative
working capital position, and a capital deficiency that raises substantial doubt
about the ability of the Company to continue as a going concern. Management's
plans in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
March 10, 2000
F-2
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS (Note H)
Current assets:
Cash $ 154,000
Accounts receivable, net of allowance for doubtful accounts of $357,000 308,000
Merchandise inventory 549,000
Prepaid expenses and other current assets 27,000
-----------
Total current assets 1,038,000
Property, plant and equipment - net 1,010,000
Other assets 64,000
Net assets of discontinued operations 0
-----------
$ 2,112,000
===========
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities:
Current maturities of obligations under capital lease $ 29,000
Current maturities of long-term obligations 500,000
Accounts payable and accrued expenses 878,000
Subordinated notes payable 375,000
-----------
Total current liabilities 1,782,000
Obligations under capital leases 51,000
Long-term obligations 492,000
-----------
Total liabilities 2,325,000
-----------
Commitments, contingencies and other matters
Series A redeemable convertible 8% preferred stock; par value $.001;
2,000,000 shares authorized; 317,500 shares issued and outstanding,
redemption value $635,000 605,000
-----------
Capital deficiency:
Common stock; par value $.001 per share; 10,000,000 shares
authorized; 5,524,531 shares issued and outstanding 6,000
Additional paid-in capital 8,566,000
Accumulated deficit (9,390,000)
-----------
Total capital deficiency (818,000)
-----------
$ 2,112,000
===========
</TABLE>
See notes to financial statements F-3
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales (Note C) $ 4,651,000 $ 5,963,000
Cost of sales, including cost of warehousing, distribution
and occupancy 2,537,000 2,713,000
----------- -----------
Gross profit 2,114,000 3,250,000
Selling, general and administrative expenses 4,179,000 3,801,000
----------- -----------
Loss from continuing operations before other income (expense) (2,065,000) (551,000)
----------- -----------
Other income (expense):
Interest expense (122,000) (92,000)
Other income 339,000 172,000
----------- -----------
217,000 80,000
----------- -----------
Loss from continuing operations (1,848,000) (471,000)
----------- -----------
Discontinued operations (Note C):
Loss from discontinued operations of Herbal and Energy
division (1,291,000) (478,000)
Loss on disposal of Herbal and Energy division including
provision of $70,000 for operating losses during phase
out period (53,000)
----------- -----------
Loss from discontinued operations (1,344,000) (478,000)
----------- -----------
NET LOSS/COMPREHENSIVE LOSS (3,192,000) (949,000)
----------- -----------
Less:
Preferred stock dividend requirement 51,000 69,000
Accretion of difference between carrying amount and
redemption amount of redeemable preferred stock 26,000 35,000
----------- -----------
77,000 104,000
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS - BASIC AND
DILUTED $(3,269,000) $(1,053,000)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $ (.35) $ (.12)
Discontinued operations:
Loss from discontinued operations (.24) (.10)
Loss on disposal (.01)
------ ------
Net loss $ (.60) $ (.22)
====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 5,480,384 4,801,000
========= =========
</TABLE>
See notes to financial statements F-4
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
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, 1998 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
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
Common stock issued to employees and directors 127,333 1,000 178,000 24,000 203,000
Dividend on preferred stock (51,000) (51,000)
Conversion of preferred stock 50,000 100,000 100,000
Accretion of difference between carrying amount
and redemption amount of redeemable preferred stock (26,000) (26,000)
Warrants issued to subordinated note holders 1,000 1,000
Net loss (3,192,000) (3,192,000)
--------- ------ ---------- ----------- -------- ----------
BALANCE, DECEMBER 31, 1999 5,524,531 $6,000 $8,566,000 $(9,390,000) $ 0 $ (818,000)
========= ====== ========== =========== ======== ==========
</TABLE>
See notes to financial statements F-5
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,192,000) $ (949,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities from continuing operations:
Loss from discontinued operations 1,344,000 478,000
Depreciation and amortization 232,000 209,000
Common stock issued for services 54,000
Valuation of warrants for consulting 73,000
Changes in:
Accounts receivable 137,000 (104,000)
Merchandise inventory 762,000 (212,000)
Prepaid expenses 346,000 (214,000)
Other assets (35,000) 27,000
Accounts payable and accrued expenses 410,000 267,000
----------- -----------
Net cash provided by (used in) operating activities 58,000 (425,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 977,000
Repayment of capital lease obligations (16,000) (10,000)
Proceeds of subordinated notes payable 375,000
(Decrease) increase in credit line (net) (67,000) 290,000
Principal repayments of long-term debt (48,000) (87,000)
Dividends on preferred stock (51,000) (65,000)
----------- -----------
Net cash provided by financing activities 193,000 1,105,000
----------- -----------
Cash used in discontinued operations (206,000) (697,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH 17,000 (17,000)
Cash - beginning of the year 137,000 154,000
----------- -----------
Cash - end of the year $ 154,000 $ 137,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 76,000 $ 86,000
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease $ 68,000
Conversion of preferred stock $ 100,000 $ 130,000
Common stock issued for accrued bonus, net of subscription receivable $ 126,000
Warrants issued to subordinated note holders $ 1,000
Common stock issued in lieu of preferred stock dividend $ 4,000
Exchange of note payable for accounts payable $ 404,000
</TABLE>
See notes to financial statements F-6
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE A - BUSINESS
HealthRite, Inc. (the "Company") and its wholly owned operating subsidiary Jason
Pharmaceuticals, Inc. ("Jason") manufacture and distribute health and diet
products. These products are sold primarily through diet centers 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.
As described in Note C, in October 1999, the Company's wholly owned subsidiary
Montana Naturals Int'l., Inc. ("MTNA") entered into a settlement agreement with
its primary lender, providing for the foreclosure on the majority of its assets
and the voluntary surrender of certain other assets to the lender. MTNA
manufactured and distributed herbal and energy products and also distributed
diet products manufactured by Jason. Accordingly, the accompanying financial
statements segregate the herbal and energy product segment within MTNA from
continuing operations and reports it as a discontinued operation. The operations
of MTNA have ceased subsequent to the settlement agreement.
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, 1999, the Company sustained a net loss of $3,192,000, was not
in compliance with the terms of certain loan covenants and had a working capital
deficit of $744,000. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company continues to take a number
of steps to improve its financial prospects including focusing its efforts on
profitable core products, reducing the labor force and cost reductions at the
Jason facility. In January 2000, the Company borrowed an additional $125,000
under subordinated notes payable which together with existing borrowing of
$375,000 at December 31, 1999 was exchanged for Series B convertible preferred
stock. The Company is also seeking additional debt and/or equity financing. As
of December 31, 1999, the Company's financial resources include various unused
term loans and a revolving line of credit of approximately $1,000,000 available
for future expansion, subject to the underlying terms of the loan agreement.
There is no assurance that the Company will obtain adequate additional financing
from other sources or that profitable operations can be obtained. The financial
statements do not include any adjustments relating to the recoverability or
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary as a result of this uncertainty.
The Company has received waivers from the lender for noncompliance of certain
covenants.
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.
[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.
F-7
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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] ADVERTISING:
Advertising costs such as preparation, layout, design and production of
advertising are deferred and are expensed when first shown. There was no
deferral of such expenses at December 31, 1999. Advertising expense for the
years ended December 31, 1999 and 1998 amounted to $1,177,000 and $158,000,
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 the liability
method. 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 allowances.
[7] (LOSS) PER COMMON SHARE:
Basic loss per share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of outstanding common
shares during year. Basic 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 as
the result would be antidilutive.
[8] REVENUE:
Revenue is recognized when the product is shipped to customers or purchased
by retail customers.
F-8
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[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 Company believes that its indebtedness approximates fair value based on
current yields for similar debt instruments with similar 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, clinics, internet medical sales and one company
owned retail store.
[12] STOCK-BASED COMPENSATION:
The Company has 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 - DISCONTINUED OPERATIONS
In October 1999, the Company's wholly owned subsidiary MTNA, entered into a
settlement agreement with U.S. Bank National Association MT ("Bank") providing
for the foreclosure by the Bank on the majority of its assets and the voluntary
surrender of certain other assets to the Bank. In exchange, MTNA was discharged
of all its indebtedness to the Bank. The Company was also released from its
corporate guarantee, subject to liability for $100,000 in connection with
intercompany transactions with MTNA.
MTNA manufactured and distributed herbal and energy products and distributed
diet products manufactured by Jason to retail chain stores. Accordingly, the
operating results of the herbal and energy product segment, including provisions
of $70,000 for operating losses during the phase out period, have been
segregated from continuing operations and reported separately in the statement
of operations for all periods presented.
Accordingly, prior financial statements have been restated to present the
operating results of the herbal and energy product segment as a discontinued
operation.
F-9
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE C - DISCONTINUED OPERATIONS (CONTINUED)
The assets of $70,000 net of liability of $70,000 representing distribution
payable to the Bank have been shown as net assets of discontinued operations.
Operating results prior to the measurement date (exclusive of any corporate
allocations and loss on disposal) from discontinued operations were as follows:
1999 1998
---------- ----------
Net sales $2,216,000 $9,938,000
Cost of sales 1,757,000 7,384,000
Selling, general and administrative
expenses 1,425,000 2,774,000
Operating loss (966,000) (220,000)
Interest and other expense (325,000) (258,000)
Loss before income tax benefits (1,291,000) (478,000)
Loss from operations (1,291,000) (478,000)
Net sales from continuing operations totalling $1,130,000 and $1,701,000 for the
years ended December 31, 1999 and 1998, respectively, relate to the diet
product, Medifast Take Shape, sold by MTNA to retail chain stores. The Company's
marketing directly to retail chain stores is not being pursued since MTNA became
inactive.
NOTE D - INVENTORY
Inventory consists of the following at December 31, 1999:
Raw materials $ 229,000
Work-in-process 1,000
Finished goods 319,000
---------
$ 549,000
=========
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 consist of the following:
Leasehold improvements $ 670,000
Equipment and fixtures 1,208,000
---------
1,878,000
Less accumulated depreciation and
amortization 868,000
---------
Property, plant and equipment - net $1,010,00
=========
At December 31, 1999, property, plant and equipment includes asset held under
capital leases with a net book value of $83,000. Substantially all of the
Company's property, plant and equipment is pledged as collateral for various
loans (see Note H).
F-10
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE F - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at December 31,
1999:
Trade payables $678,000
Accrued expenses 166,000
Accrued payroll and related taxes 34,000
--------
$878,000
========
NOTE G - INCOME TAXES
At December 31, 1999, the principal components of the net deferred tax assets
are as follows:
Current deferred tax assets:
Net operating loss carryforwards $3,093,000
Accounts receivable 13,000
Inventory overhead and writedowns 63,000
Accrued expenses 30,000
----------
Total current deferred tax assets 3,199,000
Fixed assets and intangible assets 334,000
----------
Total deferred tax assets 3,533,000
Less valuation allowance 3,533,000
----------
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. Discontinued operations reflects
no income tax benefit as 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,
-------------------------
1999 1998
----------- ---------
Income tax benefit based on federal
statutory rate $(1,117,000) $(323,000)
State and local tax benefit, net of
federal benefit (128,000) (38,000)
Nondeductible expenses 7,000 5,000
Increase in valuation allowance 1,108,000 344,000
Other 130,000 12,000
----------- ---------
Income tax expense $ 0 $ 0
=========== =========
F-11
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE G - INCOME TAXES (CONTINUED)
The Company has net operating loss carryforwards of approximately $8,100,000
which are available to offset future taxable income. These carryforwards expire
from 2009 to 2019. 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 H - LONG-TERM DEBT
Long-term debt as of December 31, 1999 consists of the following:
Revolving credit and term loan not to exceed $1,500,000
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 2001 $ 445,000
Metro note payable, payable in 60 monthly installments of
$9,000 through December 1, 2004 which includes imputed
interest at 11.5% (1) 412,000
Note payable due in annual installments of $42,000
through March 1, 2002 which includes imputed interest
at 8.75% (2) 135,000
---------
992,000
Less current portion (500,000)
---------
$ 492,000
=========
(1) In September 1999, the Company issued a note in settlement of
advertising services performed by Metro Networks Communications
("Metro") during 1999. The face value of the note of $547,540 less
deferred interest of $135,000 is outstanding at December 31, 1999. The
note calls for payments to begin January 2000.
(2) The Company has not made payment required in 1999, accordingly the
entire balance has been classified as short-term.
Jason's revolving credit and term loans contain various restrictive financial
covenants such as minimum net worth requirement and operating covenants, such as
limitation on capital expenditure and transfer of funds to the parent. The
lender has granted waivers for noncompliance with certain of these covenants.
Future principal payments on long-term debt are as follows:
2000 $ 500,000
2001 246,000
2002 83,000
2003 83,000
2004 80,000
---------
$ 992,000
=========
F-12
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE I - SUBORDINATED NOTES PAYABLE
In September 1999, $375,000 of subordinated notes payable were issued along with
37,500 of 5 year warrants to purchase common shares at an exercise price of
$.625 per share. The notes carried an interest rate of 12% and were payable in
March 2000. In January 2000, the subordinated notes payable along with an
additional borrowing of $125,000 and accrued interest on the notes were
exchanged for 516,707 shares of Series B redeemable convertible preferred stock
("Preferred Stock B") (Note M). In connection with the exchange to Preferred
Stock B, the note holders received 51,670 warrants to purchase common stock at
$.25 per share exercisable within the next three years. A consultant also
received an aggregate of 36,050 shares of Preferred Stock B in January 2000,
including 26,250 shares relating to fees for services in assisting the Company's
efforts in raising $375,000 in proceeds in 1999 in the placement of the
subordinated notes payable. In January 2000, the consultant also received 53,500
3 year warrants exercisable at $.25 per share for services rendered in
connection with the exchange of the subordinated notes payable to preferred
stock and his preferred stock investment.
NOTE J - LEASES
[1] OPERATING LEASES:
The Company has operating leases for office, manufacturing and warehouse
facilities ("Jason Facilities") and a retail outlet store which expires in
February 2005 and December 2003, respectively. Jason Facilities has a
renewal option for an additional five years.
In addition, the Company leases certain office equipment under operating
leases.
Future minimum lease payments under these operating leases as of December
31, 1999 are as follows:
2000 $ 274,000
2001 254,000
2002 260,000
2003 267,000
2004 234,000
Thereafter 33,000
----------
$1,322,000
==========
Rent expense totalled approximately $393,000 and $369,000 for the years
ended December 31, 1999 and 1998, respectively, net of sublease income of
$34,000 and $31,000 in 1999 and 1998.
F-13
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE J - LEASES (CONTINUED)
[2] CAPITAL LEASES:
The Company leases certain equipment under capital leases.
The future minimum lease payments required under these lease obligations
are as follows:
2000 $ 44,000
2001 37,000
2002 26,000
--------
Total minimum lease payments 107,000
Less amount representing interest (27,000)
--------
Present value of minimum lease payments 80,000
Less current portion (29,000)
--------
Long-term portion $ 51,000
========
NOTE K - EMPLOYMENT AGREEMENTS
In 1998, the Company had employment contracts, expiring through December 2000
with four of its officers. The contracts provided for aggregate annual basic
salaries of $292,000 in 1998 and $375,000 in 1999. The agreements also provided
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.
With the discontinuation of the operations of MTNA in 1999, all the employment
contracts were terminated with the exception of the renewal of the employment
contract with Chief Executive Officer of the Company. The latter provides for an
annual basic salary of $150,000 plus discretionary bonus, expiring on December
31, 2001.
NOTE L - 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 1999 and 1998, 50,000 and 65,000 shares of preferred stock were converted
into 50,000 and 65,000 shares of common stock, respectively.
F-14
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE M - SERIES B CONVERTIBLE PREFERRED STOCK
In January 2000, the Company was authorized to issue 600,000 Series B
convertible preferred stock ("Preferred Stock B") par value $.001 per share.
Each share is entitled to a dividend of 10% of liquidation value $1.00 ($.10)
per share and is to be redeemed on January 15, 2005 unless converted prior
thereto. Each holder of Preferred Stock B is entitled to four votes per share in
all matters in which holders of the Company's common stock are entitled to vote.
Each Preferred Stock B is convertible, at the option of the holder within one
year after the issuance date into common stock of the Company. The initial
conversion price will be 75% of the market value of the Company's common stock
on the day prior to conversion with a maximum conversion price of $0.50 per
share subject to adjustment as defined.
The beneficial conversion feature for the 552,757 shares of Series B convertible
stock issued in January 2000, including 36,050 shares issued to a consultant
(Note I), representing the difference between the conversion price and the fair
value of the common stock at the date of issuance was $95,000. Such amount will
be treated as a preferred stock dividend for accounting purposes in January 2000
and reflected in the calculation of the per share results attributable to common
stockholders.
NOTE N - 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.
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,
--------------------------
1999 1998
----------- ---------
Net loss:
As reported $(3,192,000) $(949,000)
Pro forma (3,310,000) (1,375,000)
Net loss per share:
As reported:
Basic and diluted $(.60) $(.22)
===== =====
Pro forma:
Basic and diluted $(.62) $(.31)
===== =====
F-15
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE N - STOCK OPTION PLAN (CONTINUED)
The pro forma effect on net loss for 1999 and 1998 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:
1999 1998
------------- -------------
Dividend yield 0% 0%
Expected volatility 0.40 0.63
Risk-free interest rate 5.67% - 5.85% 4.17% - 5.94%
Expected life in years 1-5 1-5
The weighted average fair value at date of grant for options granted during the
years 1999 and 1998 were $.33 and $0.87, respectively, using the above
assumptions.
The following summarizes the stock option activity for the years ended December
31:
1999 1998
------------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- --------- -------- ---------
Outstanding at beginning of year 603,500 $1.54 512,500 $1.93
Options granted 145,000 0.75 566,000 1.50
Options forfeited or expired (297,500) 1.55 (475,000) 1.93
-------- --------
Outstanding at end of year 451,000 1.32 603,500 1.54
======== ========
Options exercisable at year end 450,667 1.32 495,331 1.50
======== ========
Options available for grant at
end of year 249,000 96,500
======== ========
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1999:
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
- -------- ----------- ---------- -------- ----------- ---------
$0.75 110,000 110,000 $0.75
$1.50 341,000 3.08 $1.50 340,667 1.50
------- -------
451,000 450,667
======= =======
F-16
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE O - WARRANTS
During 1999, the Company issued 37,500 warrants to subordinated note holders.
These are 5 year warrants, to purchase common shares at an exercise price of
$.625 per share. The warrants were valued at $1,000.
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% - 5.90%, dividend
yield 0%, volatility 0.40 - 0.63, expected life three to five years.
The Company has the following warrants outstanding for the purchase of its
common stock as follows:
YEAR ENDED
DECEMBER 31,
EXERCISE -----------------
PRICE EXPIRATION DATE 1999 1998
-------- --------------- ------- -------
$0.625 September 2004 37,500
2.50 August 2001 51,375 51,375
2.00 June 2002 24,000 24,000
1.75 February 2003 25,000 25,000
1.50 July 2003 60,000 60,000
1.75 September 2003 60,000 60,000
1.50 October 2001 10,000 10,000
------- -------
267,875 230,375
======= =======
Weighted average exercise price $1.70 $1.87
===== =====
As of December 31, 1999, the warrants are all exercisable.
NOTE P - 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] 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.
[3] 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 required 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
a distributor) and $89,000 in royalty fees under this agreement during the
years ended December 31, 1998 and 1997. In April 1998, the Company assigned
the distribution rights to an entity under an agreement for $130,000. Such
amount is included in other income.
F-17
<PAGE>
HEALTHRITE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE P - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[4] The Nautilus licensor, Direct Focus, has made a demand for arbitration
against the Company for fees under the license agreement. The amount
claimed by the licensor is $144,500 plus compliance with the termination
procedures, which include the return of packaging and products. The Company
has filed a counterclaim for arbitration alleging breach of the license
agreement and for failure to support the product. An arbitration hearing
has been scheduled in the year 2000 to hear both the claim by the licensor
and the counterclaim by the Company. The Company believes it has good
defenses to the claim against it and a valid basis for their counterclaim.
However, the outcome is not determinable at this time and, accordingly, no
adjustment has been made for this uncertainty.
[5] During the year ended December 31, 1999, Jason sold certain products for
$323,000 to a customer whose chief executive officer is a spouse of one of
the Company's former directors. The Company is negotiating a settlement of
this receivable and has provided a full reserve against it. Subsequent to
the balance sheet date, the director has resigned from the Company's Board
of Directors.
NOTE Q - OTHER INCOME
Included in other income in 1999 is $200,000 received by the Company in an out
of court settlement of a lawsuit initiated by the Company.
NOTE R - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
In connection with the Company's discontinuance of the Herbal and Energy segment
certain sales and expenses were originally classified as continuing operations
that pertain to the discontinued segment. The interim 1999 financial statements
did not reflect the above reclassifications. The effects of such adjustments is
to decrease net sales and loss from continuing operations and increase the loss
from discontinued operations for the three months and nine months ended
September 30, 1999 as follows:
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
---------------------------- ---------------------------
AS ORIGINALLY AS AS ORIGINALLY AS
REPORTED RESTATED REPORTED RESTATED
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales $ 929,000 $ 863,000 $4,935,000 $3,915,000
Cost of sales 683,000 650,000 3,137,000 2,150,000
SGA 1,800,000 1,192,000 4,394,000 3,786,000
Loss from operations before
other income 1,554,000 979,000 2,596,000 2,021,000
Net loss from continuing operations 1,569,000 994,000 2,663,000 2,088,000
Loss from discontinued operations
of Herbal and Energy division 700,000 591,000 1,291,000
Loss on disposal of Herbal and
Energy division 178,000 53,000 178,000 53,000
Net loss 1,747,000 1,747,000 3,432,000 3,432,000
</TABLE>
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 154,000
<SECURITIES> 0
<RECEIVABLES> 308,000
<ALLOWANCES> (357,000)
<INVENTORY> 549,000
<CURRENT-ASSETS> 1,038,000
<PP&E> 1,010,000
<DEPRECIATION> (200,000)
<TOTAL-ASSETS> 2,112,000
<CURRENT-LIABILITIES> 1,781,000
<BONDS> 0
0
605,000
<COMMON> 6,000
<OTHER-SE> (824,000)
<TOTAL-LIABILITY-AND-EQUITY> (818,000)
<SALES> 4,651,000
<TOTAL-REVENUES> 4,651,000
<CGS> 2,537,000
<TOTAL-COSTS> 6,716,000
<OTHER-EXPENSES> 217,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,000
<INCOME-PRETAX> (1,848,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,848,000)
<DISCONTINUED> (1,344,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,269,000)
<EPS-BASIC> (.59)
<EPS-DILUTED> (.60)
</TABLE>
