<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------
Commission file number 0-18160
IRWIN NATURALS/4HEALTH, INC.
(Exact name of registrant as specified in its charter)
----------------
UTAH 87-0468225
(State of incorporation) (I.R.S. Employer Identification No.)
10549 W. Jefferson Blvd.
Culver City, California 90232
(Address of principal executive offices)
Registrant's telephone number: (310) 253-5305
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
----- -----
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of November 13, 1998 was 27,753,484.
<PAGE>
Irwin Naturals/4Health, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997 .................. 3
Condensed Statements of Operations for Three and Nine Months Ended September 30,
1998 and 1997 ............................................................................ 4
Condensed Statements of Cash Flows for Nine Months Ended
September 30, 1998 and 1997 .............................................................. 5
Notes to Condensed Financial Statements .................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 13
Item 6. Exhibits and Reports on Form 8-K ......................................................... 14
SIGNATURES ............................................................................... 17
</TABLE>
THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS
OF HISTORICAL FACTS INCLUDED IN THIS QUARTERLY REPORT, INCLUDING, WITHOUT
LIMITATION, THOSE REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS,
MARKETING AND PRODUCT INTRODUCTION AND DEVELOPMENT PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH
THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS
WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED UNDER "RISKS RELATED TO THE BUSINESS OF 4HEALTH"
AND ELSEWHERE IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A DATED JUNE 19,
1998 AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND ELSEWHERE IN THE ANNUAL REPORT. ALL SUBSEQUENT
WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR
PERSONS ACTING ON BEHALF OF THE COMPANY, ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Irwin Naturals/4Health, Inc.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ---------------
1998 1997
-------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 238,744 $ 636,620
Accounts receivable, net 3,636,032 4,899,862
Inventories 2,742,007 2,162,415
Deferred tax asset -- 109,893
Other assets 452,906 437,781
Notes receivable, net 104,810 34,817
----------- -----------
Total current assets 7,174,499 8,281,388
PROPERTY AND EQUIPMENT, NET 2,343,531 2,448,950
OTHER ASSETS, NET 609,038 570,152
DEFERRED TAX ASSET 193,974 --
NOTES RECEIVABLE -- 78,063
----------- -----------
Total assets $10,321,042 $11,378,553
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,159,334 $ 2,010,043
Accrued interest payable -- --
Accrued liabilities 1,040,161 1,766,658
Taxes payable 269,685 104,864
Notes payable 545,600 29,454
Line of credit -- 740,797
----------- -----------
Total current liabilities 3,014,780 4,651,816
DEFERRED TAXES -- 42,376
NOTES PAYABLE 1,289,806 1,297,629
----------- -----------
Total liabilities $ 4,304,586 $ 5,991,821
STOCKHOLDERS' EQUITY
Common stock 250,535 250,279
Additional paid in capital - common stock 10,681,390 11,408,576
Additional paid in capital - common warrants 566,177 275,000
Treasury stock (50,000) (50,000)
Distributions (900,000) --
Accumulated deficit (4,531,646) (6,497,123)
----------- -----------
Total stockholders' equity 6,016,456 5,386,732
----------- -----------
Total liabilities and stockholders' equity $10,321,042 $11,378,553
----------- -----------
----------- -----------
</TABLE>
See notes to condensed financial statements
3
<PAGE>
Irwin Naturals/4Health, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended June 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 7,225,264 $ 6,508,152 $ 23,066,227 $ 20,849,098
Cost of goods sold 3,089,398 2,849,145 10,174,894 9,946,356
------------ ------------ ------------ ------------
Gross margin 4,135,866 3,659,007 12,891,333 10,902,742
Operating Expenses
Sales and marketing 1,396,302 2,373,001 4,770,161 7,306,624
Research and development 22,581 69,435 163,056 367,841
General and administrative 1,760,956 1,693,970 5,584,004 4,948,353
Merger expenses -- 1,014,893 --
------------ ------------ ------------ ------------
Total operating expenses 3,179,839 4,136,406 11,532,114 12,622,818
------------ ------------ ------------ ------------
Income (loss) from operations 956,027 (477,399) 1,359,219 (1,720,076)
Other (expense) income, net (32,459) (4,387) (64,375) 15,474
------------ ------------ ------------ ------------
Income (loss) before income
taxes 923,568 (481,786) 1,294,844 (1,704,602)
Income tax (provision) benefit (12,706) 64,258 (348,047)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 923,568 $ (494,492) $ 1,359,102 $ (2,052,649)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net income (loss) per common
share - basic and diluted $ 0.03 $ (0.02) $ 0.05 $ (0.08)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares
outstanding - basic 27,753,000 27,178,000 27,753,000 27,146,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares
outstanding - diluted 27,931,409 27,217,331 27,951,947 27,311,727
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
Irwin Naturals/4Health, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,359,102 $ (2,052,649)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 249,579 406,402
Bad debt expense 98,194 198,004
Loss on disposal of assets -- 12,871
Issuance of warrants 291,177 190,316
Increase (decrease) in:
Accounts receivable 1,165,636 (906,108)
Inventory (579,592) 859,710
Prepaid expenses and other assets (54,011) (320,278)
Deferred income tax assets (84,081) 102,853
Increase (decrease) in:
Accounts payable (850,709) 903,532
Accrued interest payable -- --
Accrued liabilities (726,497) 35,184
Taxes payable 164,821 (741,802)
Notes payable 516,146 --
Line of Credit (641,997) --
Deferred income tax liability (42,376) 377,035
------------ ------------
Net cash provided by (used in) operating activities 865,392 (934,930)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (144,162) (107,683)
Proceeds from assets dispositions -- --
Proceeds from notes receivable 8,122 262,673
------------ ------------
Net cash used in investing activities (136,040) 154,990
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 75,070 130,049
Borrowings on short-term debt 7,391,710 --
Borrowings on long-term debt -- 1,350,000
Repayments on short-term borrowings (8,132,507) 96,151
Repayments on long-term borrowings (782,501) (974,483)
Repayments on capital leases -- (2,073)
Distributions to shareholders 321,000 (300,000)
------------ ------------
Net cash (used in) provided by financing activities (1,127,228) 299,644
------------ ------------
NET INCREASE (DECREASE) IN CASH (397,876) (480,296)
CASH AND CASH EQUIVALENTS, at beginning of period 636,620 1,367,548
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 238,744 $ 887,252
------------ ------------
------------ ------------
</TABLE>
Note: The Net Loss figure included in this Statement of Cash Flows of
($1,081,438) for the nine months ended September 30, 1997, is $476,720 less
than the ($1,558,158) for the same period shown in the Condensed Statement of
Operations. The reason for this difference, is that during 1997 a Pro-Forma
Tax Provision to reflect Irwin Naturals results as if they where
C-Corporation was included in the Statement of Operations for comparative
purposes. The amount of this provision for the six months ended September 30,
1997 was $467,720. Also see notes to condensed financial statements.
5
<PAGE>
Irwin Naturals/4Health, Inc.
Notes to Condensed Financial Statements
September 30, 1998
(Unaudited)
Note 1:
Basis of Presentation
The accompanying unaudited condensed financial statements reflect
the results of operations for Irwin Naturals/4 Health, Inc., and have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended September 30, 1998 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the 4Health, Inc. Form 10-K/A dated June 19, 1998.
Note 2:
Merger Agreement
On January 7, 1998 4Health, Inc. entered into a merger agreement
(the "Merger Agreement") with Irwin Naturals, a privately held California
corporation also engaged in the nutritional supplement business. The Merger
Agreement was amended and restated on April 2, 1998. The merger transaction
was completed on June 30, 1998. The surviving company's name was changed to
Irwin Naturals/4Health, Inc..
Note: 3:
Accounting for the Merger
The Merger was accounted for under the "pooling-of-interests" method
of accounting, in accordance with generally accepted accounting principles.
The "pooling-of-interests" method of accounting is intended to present as a
single interest the 4Health and Irwin Naturals common stockholder interests
that were previously independent and the combined rights and risks
represented by those interests. That method shows that the stockholder groups
neither withdraw nor invest assets, but in effect exchange voting common
stock in a ratio that determines their respective interests in the combined
enterprise. The merger results in the shares of common stock, no par value
per share, of Irwin Naturals being converted into 15,750,000 shares of
4Health Common Stock. As a result of this accounting approach, there was a
net increase of $27 thousand in the Consolidated Common Stock Account in the
Balance Sheet, and a corresponding decrease in the Additional Paid-in-Capital
Account as of December 31, 1997 and September 30, 1998.
6
<PAGE>
The "pooling-of-interests" method requires that the comparative
financial information presented assumes the pooling was accomplished at the
beginning of each period. That approach has been utilized for these financial
statements.
The "pooling-of-interests" method also requires that all merger
related expenses be reflected in the first combined statement of operations;
therefore, the merger expenses have been included as a separate line item in
the condensed statements of operations presented herein for the Nine months
ended September 30, 1998.
Note 4:
Expenses of the Merger
Original estimates of the aggregate expenses of the merger were $1
million
The actual identified and qualifying merger expenses consisting of
legal, accounting, consulting and other miscellaneous qualifying fees and
expenses have been included in the condensed statement of operations for the
nine month period ending September 30, 1998 in the amount of $1,014,893.
Note 5:
Restatement of 4Health
4 Health's Balance Sheets as of December 31, 1997 and 1996, and the
related Statements of Operations, Stockholders' Equity, and Cash Flows for
each of the two years in the period ended December 31, 1997 have been
restated effective July 15, 1996. The restatement is a result of the
Securities and Exchange Commission's review of the 4 Health's proxy materials
related to the merger with Irwin Naturals (See Note 3). The restatement
affects the accounting treatment of the purchase price recorded for the
Surgical Technologies acquisition in July 1996. In connection therewith, 4
Health increased the intangible asset values recorded for the Surgical
Technologies acquisition by $3,042,000. The remaining intangible assets of
$3,202,000 were then written down in 1997 because the continuing Surgical
Technologies operations did not generate sufficient revenue to justify
continuing such valuation. The restatement also included an adjustment to
write down inventory by $758,000 in connection with the exchange for barter
credits in 1997. These write downs were considered corrections of errors, and
the affected financial reporting periods were restated. The restatement was a
non-cash charge against earnings, and does not reflect an adverse change in 4
Health's cash flow previously reported. The information herewithin reflects
this restatement.
Note 6:
Comprehensive Income
7
<PAGE>
Effective for fiscal years beginning after December 15, 1997, the
Company implemented Statement for Financial Accounting Standards ("SFAS") No.
130 "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and it's components in a full
set of general-purpose financial statements. Comprehensive Income and Net
Income, as reported, is the same for the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1998 and 1997.
Note 7:
Earnings Per Share
Effective December 15, 1997, the Company has adopted the provisions
of Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." SFAS No. 128 requires entities to present both Basic
Earnings Per Share ("EPS") and Diluted EPS. Basic EPS excludes dilution and
is computed by dividing income available to common shareholders by the
weighted-average number of common stock shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
<TABLE>
<CAPTION>
Three months ended September 30,
(in thousands, except per share amounts)
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
Per Per
Income Shares Share Loss Shares Share
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $924 27,753 $ (494) 27,125
Basic EPS $(0.03) $(0.02)
------- -------
------- -------
Effect of diluted securities:
Stock options outstanding 178 92
-------------------------------------------------------------
Net income (loss) $924 27,931 $ (494) 27,217
------ ------ ------- -------
------ ------ ------- -------
Diluted EPS $(0.03) $(0.02)
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
(in thousands, except per share amounts)
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
Per Per
Income Shares Share Loss Shares Share
------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $1,359 27,739 $(2,053) 27,123
Basic EPS $ 0.05 $(0.08)
------- -------
------- -------
Effect of diluted securities:
Stock options outstanding 213 189
-------------------------------------------------------------
Net income (loss) $1,359 27,952 $(2,053) 27,312
------ ------ ------- -------
------ ------ ------- -------
Diluted EPS $ 0.05 $(0.08)
------- -------
------- -------
</TABLE>
Assumed conversions were not included in the calculation for diluted EPS for
the six months ended June 30, 1997 and the three months ended June 30, 1998
and 1997 as they would have been anti-dilutive.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SEE THE DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS ABOVE.
Results of Operations
COMPARISON OF SECOND QUARTER 1998 TO 1997
Net Sales for the three months ended September 30, 1998, increased
by $0.72 million, or 11% from $6.5 million to $7.2 million compared to the
same period a year ago. The increase was the net result of a 24.5%
improvement, an additional $842 thousand, in Irwin Naturals sales, offset by
a decrease in 4Health sales of $125 thousand, or 4.1% of 4Health Sales. The
Irwin sales rise was primarily due to a substantial increase, 73%, in Mass
Market Sales during the period reflecting the strong acceptance of our Mass
Market products, strengthened sales force in this segment, greater market
penetration, and continued focus on the drug and discount chains. Both Irwin
and 4Health Health Food Store Sales experienced slight downturns due to
continued competitive pressures and an overall weakness in Health Food Store
Sales. International Shipments experienced no substantial change, however an
influx of numerous new international orders promises improvements in this
sector during the fourth quarter.
Gross Profit Margin percentages increased by 1% to 57.2% of Net
Sales for the quarter ending September 30, 1998, up from the 56.2% for the
same period in 1997. The greatest percentage increase within both the Irwin
and 4Health product groups occurred in the Health Food Sales Divisions, with
a smaller percentage evident in the Mass Market. The improvement was due
primarily to an improved product sales mix, and reflective of continued
internal efforts to lower the cost of the core products. Improved margins
were evident in both Irwin Naturals products, a .5% improvement, and in all
of 4Health's product groups, where they enjoyed a net 2% increase. The Margin
percentage increase resulted in overall increases in Gross Profit of 13%, or
$0.48 million, to $4.14 million, in the three months ending September 30,
1998 from $3.66 million in the same period a year ago
Total Operating Expenses for the quarter ending September 30, 1998
decreased $0.96 million, or 23%, from $4.14 million in the same quarter of
1997 to $3.18 million in the current quarter. After excluding non-recurring
costs related to the merger of $0.1 million, operational costs actually
decreased by $1.06 million, or 25.6%. Sales and Marketing Expenses decreased
by $0.98 million, from $2.37 million in the third quarter of 1997 to $1.4
million in the same period in 1998, reflect a 41.2% reduction in costs. Sales
& Marketing Expenses expressed as a percentage of sales, also decreased from
36.5% of Net Sales in the same quarter 1997, to 19.3% in the three months
ended September 30, 1998. Management attributes this decrease to a reduction
in expenses for national advertising, advertising agency fees, marketing
related travel costs and elimination of redundant personnel and their
attendant expenses as a result of the merger. Research and Development
Expenses decreased by $47 thousand from $69 thousand in the third quarter of
1997 to $22 thousand in the three months ending September 30, 1998 as a
result of a consolidation of functions resulting from the merger. General and
Administrative Expenses, excluding the non-recurring merger related costs of
$0.1 million, decreased $20 thousand, or 1%. The increase in General and
Administrative Expenses reflects the costs incurred as the company continues
to build and reinforce infrastructure in anticipation of the need to support
planned growth, while lowering General and Administrative Expenses as a
percentage of Net Sales, from 26% of Net in the same quarter of 1997 to 24.4%
in the three months ended September 30, 1998.
9
<PAGE>
Interest Expense increased to $36 thousand in the third quarter 1998
from $1.4 thousand in the third quarter 1997. The reason for this increase
was increased utilization of the company Line of Credit in 1998. Interest and
Miscellaneous Income decreased to $4 thousand in the three months ending
September 30, 1998 from $12 thousand during the same period of 1997. Other
Income and Expense category decreased by $28 thousand in the three months
ended September 30, 1998 from the same period in the prior year.
The Company reported a Net Profit after Taxes of 13% of Net Sales, or
$0.924 million, $0.03 Per Share, for the three months ended September 30, 1998
compared to a Net Loss of 7.6% of Net Sales, or $0.494 million, $(0.02) Per
Share, for the three months ended September 30, 1997. If the non-recurring
merger related costs of $0.1 million included in the results for the three month
period ending September 30, 1998 were excluded, the Net Profit for the period
would have been 14.2% of Net Sales, or $1.02 million, $0.04 Per Share, and
reflects an increase of over the Net Loss recorded as of September 30, 1997 of
$1.52 million.
No provision for income taxes was recorded for the three months
ended September 30, 1998, as such income will be offset by Net Operating Loss
Carryforwards, whereas for the same nine month period in 1997, the income tax
provision was $13 thousand.
Results of Operations
COMPARISON OF YEAR-TO-DATE 1998 TO 1997
Net Sales for the nine months ended September 30, 1998, rose to
$23.07 million, from $20.85 million, an increase of $2.22 million, or 10.6%
compared to the same period a year ago. This was primarily due to a 21.5%
improvement, an additional $2.4 million, in Irwin Naturals sales, offset by a
slight decline in 4Health sales of (2.2%), or ($214) thousand. The Irwin
increase was due primarily to a substantial increase in the Mass Market
business, with the strong first quarter sales indicative of a high level of
acceptance of several major products introduced in the last half of 1997, a
strengthened sales force, greater market penetration, and a strong focus on
expanding into drug and discount chains in the second and third quarters. The
relatively stable 4Health Sales are a reflection of continued competitive
pressures and an overall weakness in Health Food Store Sales. International
Sales improved over 1997 as the newly installed International Sales Division
Staff expand into new strategic markets and customers.
Gross Profit Margin percentages increased by 3.6% to 55.9% of Net
Sales for the nine month period ending September 30, 1998, up from 52.3% of
Net Sales for the same nine month period in the prior year.
Gross Profit increased by 18.2%, or $1.99 million to $12.89 million
for the nine months ending September 30, 1998, from $10.9 million for the
same period in 1997. This increase was due primarily to a higher than average
margin on several of the new mass market products during the first quarter of
1998, an improved product sales mix, and lower costs on several core products
during the second and third quarters. The Gross Profit increases would have
been greater by $560 thousand, or and additional 5.1%, were it not for
one-time increase in inventory reserves and sales discounts during the second
quarter of 1998 as a result of an initiative to utilize the expertise of new
management in the mass market and reposition several of the the mass market
products previously sold by 4 Health in a manner that will most effectively
communicate their value and maximize their potential. This process will
involve new packaging, collateral materials, advertising, price points, etc.
10
<PAGE>
Total Operating Expenses for the nine months ending September 30,
1998 decreased $1.1 million to $11.5 million, a decrease of 8.6%, from $12.6
million in the same nine month period of 1997. As a percentage of Sales,
Operating Expenses decreased from 60% of Net Sales in the nine month period
ending 1997, to 50% in the same nine month period of the current year. After
excluding costs related to the proposed merger of $1.115 million for 1998,
ongoing operational costs actually decreased $2.115 million for the nine
month period, or 18.4%. Sales and Marketing Expenses of $2.5 million,
decreasing from $7.2 million at September 30, 1997 to $4.8 million for the
same period in 1998, reflect a 34.0% reduction in costs. Management
attributes this decrease to a reduction in expenses for national advertising,
advertising agency fees, marketing related travel costs and elimination of
redundant personnel and related expenses in the second and third quarters as
a result of the merger. Research and Development Department expenses
decreased by $204 thousand in the nine months ending September 30, 1998
compared to the same period of 1997 by cutting R & D salaries, consolidating
functions, and related expenses. General and Administrative Expenses,
excluding the merger related costs of $1.115 million, increased by $0.6
million, or 12%, to $5.6 million in 1998, from $4.94 million for the same
nine month period of 1997. The General and Administrative Expenses were 23.7%
in 1997 v.s. 24.2% of Net Sales in 1998.
Interest Expense increased to $117 thousand for the nine months
ended September 30, 1998 from $30 thousand for the same period of 1997. The
reason for this increase was increased utilization of the company Line of
Credit in 1998. Interest and Miscellaneous Income decreased from $63 thousand
for the nine months ended September 30, 1997, to $30 thousand for the nine
months ended September 30, 1998, a decrease of $33 thousand.
The Company reported a Net Profit after Taxes of 5.9% of Net Sales,
or $1.359 million, $0.05 per share, for the nine months ended September 30,
1998 compared to a Net Loss of $2.05 million, or $(0.08) per share, for the
nine months ended September 30, 1997. If the merger related costs of $1.115
million included in the results for the nine month period ending September
30, 1998 were excluded, the Net Profit for the nine month period ending
September 30, 1998 would be $2.47 million, or $0.09 per share, and reflect an
increase over the Net Loss recorded as of September 30, 1997 of $4.52
million, or 15.7% of Net Sales.
The Effective Tax Rate for the nine months ended September 30, 1998
was 4.9% due to the offsets of a significant portion of the Current Income by
Net Operating Loss Carryforwards.
11
<PAGE>
Liquidity and Capital Resources
The Company's Cash and Cash Equivalents position decreased $398
thousand at September 30, 1998, to $239 thousand compared to $637 thousand at
December 31, 1997. The Company invests its' cash in an interest bearing Money
Market Account. As of September 30, 1998, the Company had Working Capital of
$4.2 million with a 2.4 to 1 Working Capital Ratio.
Accounts Receivable totaled $3.6 million at September 30, 1998 as
compared to $4.9 million on December 31, 1997, a reduction of $1.3, or 25.6%.
This decrease was due primarily an aggressive collections effort to collect
receivables outstanding at December 31, 1997, which included amounts due from
a major customer and was high in relation to corresponding sales for that
period.
Inventories were valued at $2.7 million at September 30, 1998 as
compared to $2.2 million at December 31, 1997, which represents a 26.8%
increase or $ .5 million. Management has concluded that Inventory levels at
December 31, 1997 were lower than necessary to support the increasing sales
levels, therefore, inventory levels, particularly in the Irwin Naturals
products, have grown to support the net sales growth experienced in 1998 and
to support the level of sales projected for the fourth quarter of the year.
Capital Expenditures for the first nine months of 1998 were $144
thousand compared to $108 thousand for the same period in 1997.
Other Assets have increased slightly from $438 thousand at December
31, 1997 to $453 thousand, and increase of $18 thousand, or 4.1%.
Current Liabilities decreased $1.7 million, or 35.2%, to $3.0
million from $4.7 million. The primary reason for the decrease was a
reduction of $715 thousand in the balance of the Company's Line of Credit
with Norwest Business Credit, Inc., the current balance of which is $16
thousand. Increased sales in the first 9 months of 1998 also contributed to
the Company's ability to reduce the Line of Credit balance. Available
borrowing capacity, in addition to the amount outstanding on the combined
Revolving Lines of Credit at September 30, 1998, was $2.25 million.
The Company reduced its cash balance by $398 thousand in the first
nine months of 1998 as compared to a reduction of $480 thousand for the same
period in 1997. The majority of this improvement was due to improved
profitability, lower capital spending, improved collection of Accounts
Receivable, decreased Accounts Payable and other Current Liabilities, offset
slightly by increased Inventory levels.
The company's future capital requirements will depend on many
factors, including the nature and timing of orders from customers, collection
of account on trade sales, the expansion of sales and marketing efforts,
costs associated with entering into new channels of distribution, and the
status of competitive products. Management believes that it's Working Capital
and borrowing capacity will be sufficient to satisfy anticipated sales growth
and operating requirements over the next 12 months. Nevertheless, the Company
continues to explore sources of additional capital for future needs. There
can be no assurance, however, that the Company will not require additional
financing earlier than anticipated, or that any additional financing will be
available at on acceptable terms, or at all. The inability to obtain such
financing could have a material adverse effect on the Company's business,
financial condition, and results of operations.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time the company is a party to legal proceedings that
it considers routine litigation incidental to its business. Management
believes that the likely outcome of such litigation will not have a material
adverse effect on Irwin Naturals/4Health's business or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during
the third quarter ended September 30, 1998.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(b) A report on Form 8-K was filed July 14, 1998 regarding the
consummation of the merger of Irwin Naturals with and into 4Health, Inc.
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Item 2. Plan of Acquisition, Reorganization, Liquidation, or Succession
- -----------------------------------------------------------------------------------------------------------------
2.01 2 Agreement and Plan of Merger dated April 10, 1996, by and between Incorporated by
4health, Inc., and Surgical Technologies, Inc. as amended June 4, 1996 Reference (8)
2.02 2 Asset Purchase Agreement dated November 30, 1995, by and between Incorporated by
Microtek Medical, Inc., and Surgical Technologies, Inc. Reference (7)
2.03 2 Acquisition Agreement dated effective January 1, 1996, by and between Incorporated by
Rex Industries Acquisition Corporation and Rex Industries, Inc. Reference (7)
2.04 2 Amended and Restated Agreement and Plan of Merger dated December 24, Incorporated by
1997, signed January 7, 1998, by and between 4Health, Inc. and Irwin Reference (3)
Naturals as amended April 2, 1998.
2.05 2 Amended and Restated Agreement and Plan of Merger dated December 24, Incorporated by
1997, signed January 7, 1998, amended April 2, 1998, by and between Reference (2)
4Health, Inc. and Irwin Naturals as amended May 22, 1998.
Item 3. Articles of Incorporation and Bylaws
- -----------------------------------------------------------------------------------------------------------------
3.01 3 Articles of Incorporation of Surgical Subsidiary, Inc., a Utah Incorporated by
Corporation now known as Surgical Technologies, Inc. Reference (10)
3.02 3 Articles of Merger and related Plan of Merger Incorporated by
Reference (10)
3.03 3 Bylaws of 4Health, Inc. Incorporated by
Reference (10)
3.04 3 Articles of Merger and related Plan of Merger of 4Health, Inc. and Incorporated by
Surgical Technologies, Inc. Reference (8)
3.05 3 Form of Articles of Merger and related Plan of Merger Incorporated by
Reference (3)
3.06 3 Amended Articles of Incorporation of Irwin Naturals/4Health, Inc. Incorporated by
Reference (1)
3.07 3 Amended Bylaws of Irwin Naturals/4Health, Inc. Incorporated by
Reference (1)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Item 4. Instruments Defining the Rights of Security Holders
- -----------------------------------------------------------------------------------------------------------------
4.01 4 Form of Warrant Agreement between 4Health, Inc. and Zions First National Incorporated by
Bank with related form of Warrant Reference (8)
4.02 4 Form of Sale Restriction Agreement respecting shareholders of both Incorporated by
Surgical Technologies, Inc., and 4Health, Inc. Reference (8)
4.03 4 Form of Consent, Approval, and Irrevocable Proxy respecting certain Incorporated by
Surgical stockholders with related schedule Reference (8)
4.04 4 Form of Consent, Approval, and Irrevocable Proxy respecting certain Incorporated by
4Health stockholders with related schedule Reference (8)
4.05 4 Specimen Common Stock Certificate Incorporated by
Reference (8)
4.06 4 Specimen Warrant Certificate Incorporated by
Reference (8)
4.07 4 Warrant certificates between 4Health and Allen & Company Incorporated Incorporated by
dated April 15, 1997 Reference (12)
Item 5. Other Items
- -----------------------------------------------------------------------------------------------------------------
5.01 5 Summary of Revolving Line of Credit Agreement between 4Health and Incorporated by
Norwest Business Credit, Inc. Reference (4)
Item 10. Material Contracts
- -----------------------------------------------------------------------------------------------------------------
10.01 10 Form of Directors' Options Incorporated by
Reference (7)*
10.02 10 Stock Option and Stock Award Plan Incorporated by
Reference (7)*
10.03 10 1991 Directors' Stock Option Plan Incorporated by
Reference (7)*
10.04 10 Directors' Stock Option Plan Incorporated by
Reference (9)*
10.05 10 Technology Purchase Agreement between Ellis E. Williams, Professional Incorporated by
Medical, Inc., and Surgical Technologies, Inc., dated February 4, 1993 Reference (10)
10.06 10 Patent Cross-License Agreement between Utah Medical Products, Inc., and Incorporated by
Professional Medical, Inc., dated February 9, 1993 Reference (11)
10.07 10 Form of Promissory Note in the amount of $1,000,000 payable to First Incorporated by
Interstate Bank, dated August 16, 1994 Reference (11)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.08 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Incorporated by
Security Agreement, and Fixture Filing, dated April 8, 1994, in the Reference (10)
principal amount of $1,000,000 due Standard Insurance Company
10.09 10 Stock Purchase Agreement dated May 6, 1994, between Surgical Incorporated by
Technologies, Inc., and Benitex, A.G. Reference (10)
10.10 10 Real Estate Contract dated February 2, 1994, between Surgical Incorporated by
Technologies, Inc. and Rex Crosland related to the facilities at 2801 Reference (10)
South Decker Lake Lane, Salt Lake City, Utah
10.11 10 Asset Purchase Agreement between Milwaukee Acquisition Company, Incorporated by
Insulation Distributors, Inc., and Surgical Technologies, Inc., Reference (10)
effective September 30, 1993
10.12 10 All-Inclusive Promissory Note and related All-Inclusive Trust Deed, Incorporated by
relating to sale of building and property, dated March 31, 1995, in the Reference (11)
principal amount of $981,375.32
10.13 10 1996 Long-Term Stock Incentive Plan Incorporated by
Reference (8)
10.14 10 Form of $2.00 option granted to Surgical directors, officers, and Incorporated by
employees with related schedule Reference (8)*
10.15 10 Form of Option granted to Todd B. Crosland Incorporated by
Reference (8)*
10.16 10 Form of Option granted to Rockwell D. Schutjer Incorporated by
Reference (8)*
10.17 10 Form of Proprietary Information, Inventions, and Non-Competition Incorporated by
Agreement between 4Health and R. Lindsey Duncan Reference (8)
10.18 10 Form of Employment Agreement between the Surviving Corporation and Incorporated by
Rockwell D. Schutjer Reference (8)*
10.19 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Incorporated by
Security Agreement, and Fixture Filing, dated February 20, 1997, in the Reference (6)
principal amount of $1,350,000 due Standard Insurance Company
10.20 10 Form of Non-Negotiable Promissory Note Incorporated by
Reference (3)
Item 20. Other Documents or Statements to Security Holders
- -----------------------------------------------------------------------------------------------------------------
20.01 20 Notice of change of transfer and warrant agent. Incorporated by
Reference (5)
Item 27. Financial Data Schedule
- -----------------------------------------------------------------------------------------------------------------
27.01 27 Financial Data Schedule This Filing
</TABLE>
16
<PAGE>
- ----------------------
(1) Incorporated by reference from Irwin Naturals/4Health's report on
Form 8-K dated July 14, 1998.
(2) Incorporated by reference from 4Health's report on Form 10-K/A for the
year ended December 31, 1997.
(3) Incorporated by reference from 4Health's report on Form 10-K for the
year ended December 31, 1997.
(4) Incorporated by reference from 4Health's report on Form 10-Q for the
quarter ended September 30, 1997.
(5) Incorporated by reference from 4Health's report on Form 10-Q for the
quarter ended March 31, 1997.
(6) Incorporated by reference from 4Health's report on Form 10-K for the
year ended December 31, 1996.
(7) Incorporated by reference from Surgical's registration statement on
Form S-1 filed with the Commission, SEC file number 33-31863.
(8) Incorporate by reference from Surgical's registration statement on
Form S-4 filed with the Commission, SEC file number 33-03243.
(9) Incorporated by reference from Surgical's report on Form 10-K for the
year ended March 31, 1992.
(10) Incorporated by reference from Surgical's report on Form 10-K for the
year ended March 31, 1994.
(11) Incorporated by reference from Surgical's report on Form 10-Q for the
quarter ended December 31, 1995.
(12) Incorporated by reference from Schedule 13D filed with the Commission
by Allen & Company Incorporated on April 18, 1997.
* Represents a management contract, compensatory plan, or arrangement
required to be filed as an exhibit.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Irwin Naturals/4Health, Inc.
Dated: November 15, 1998 By: /s/ Klee Irwin
----------------------------
Klee Irwin
C.E.O.
Dated: November 15, 1998 By: /s/ Dan Martin
----------------------------
Dan Martin
Chief Financial Officer and Secretary
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 238,744
<SECURITIES> 0
<RECEIVABLES> 4,597,550
<ALLOWANCES> 856,708
<INVENTORY> 2,742,007
<CURRENT-ASSETS> 7,174,499
<PP&E> 3,091,452
<DEPRECIATION> (747,921)
<TOTAL-ASSETS> 10,321,042
<CURRENT-LIABILITIES> 3,014,780
<BONDS> 0
0
0
<COMMON> 250,535
<OTHER-SE> 5,765,921
<TOTAL-LIABILITY-AND-EQUITY> 10,321,042
<SALES> 7,225,264
<TOTAL-REVENUES> 4,135,866
<CGS> 3,089,398
<TOTAL-COSTS> 3,179,839
<OTHER-EXPENSES> 3,232
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (35,691)
<INCOME-PRETAX> 923,568
<INCOME-TAX> 0
<INCOME-CONTINUING> 923,568
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 923,568
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
