<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 JUNE 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
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Commission file number 0-18160
IRWIN NATURALS/4HEALTH, INC.
(Exact name of registrant as specified in its charter)
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Utah 87-0468225
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(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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
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The number of shares of the registrant's Common Stock, par value $.01 per share,
outstanding as of August 10, 1998 was 27,753,108.
<PAGE>
Irwin Naturals/4Health, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 1998 and December 31, 1997 . . 3
Condensed Statements of Operations for Three and Six Months Ended
June 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows for Six Months Ended
June 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 2.(c) Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</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>
June 30, December 31,
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1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 770,502 $ 636,620
Accounts receivable, net 2,812,848 4,899,862
Inventories 2,577,702 2,162,415
Deferred tax asset 134,264 109,893
Other assets 1,550,315 437,781
Notes receivable, net 58,615 34,817
------------- -------------
Total current assets 7,904,246 8,281,388
PROPERTY AND EQUIPMENT, NET 2,370,503 2,448,950
OTHER ASSETS, NET 556,628 570,152
DEFERRED TAX ASSET 68,008 -
NOTES RECEIVABLE 58,941 78,063
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Total assets $ 10,958,326 $ 11,378,553
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,702,629 $ 2,054,321
Accrued interest payable 26,915 -
Accrued liabilities 1,333,724 1,766,658
Taxes payable 111,040 60,587
Notes payable 622,965 29,454
Line of credit 15,729 740,797
------------- -------------
Total current liabilities 3,813,002 4,651,817
DEFERRED TAXES - 42,376
NOTES PAYABLE 1,281,869 1,297,629
------------- -------------
Total liabilities 5,094,871 5,991,822
STOCKHOLDERS' EQUITY
Common stock 277,535 278,187
Additional paid in capital - common stock 11,456,390 11,380,668
Additional paid in capital - common warrants 469,118 275,000
Treasury stock (50,000) (50,000)
Distributions (900,000) (579,000)
Accumulated deficit (5,389,588) (5,918,124)
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Total stockholders' equity 5,863,455 5,386,731
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Total liabilities and stockholders' equity $ 10,958,326 $ 11,378,553
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</TABLE>
See notes to condensed financial statements
3
<PAGE>
Irwin Naturals/4Health, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales $ 7,012,822 $ 7,065,621 $15,840,782 $14,340,946
Cost of goods sold 3,572,154 3,291,140 7,292,700 7,097,211
----------- ----------- ----------- -----------
Gross margin 3,440,668 3,774,481 8,548,082 7,243,735
Operating Expenses
Sales and marketing 1,586,831 1,712,644 3,218,736 3,440,569
Research and development 67,956 124,604 140,475 298,407
General and administrative 1,962,996 2,657,321 3,755,538 4,747,436
Merger expenses 1,014,893 - 1,014,893 -
----------- ----------- ----------- -----------
Total operating expenses 4,632,676 4,494,569 8,129,642 8,486,412
----------- ----------- ----------- -----------
Net income from operations (1,192,008) (720,088) 418,440 (1,242,677)
Other (expense) income, net (26,831) (12,211) (34,285) 19,861
----------- ----------- ----------- -----------
Net income (loss) before income
taxes (1,218,839) (732,299) 384,155 (1,222,816)
Income tax benefit 45,192 (118,733) 78,752 (335,342)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,173,647) $ (851,032) $ 462,907 $(1,558,158)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per common
share - basic and diluted $ (0.04) $ (0.03) $ 0.02 $ (0.06)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares
outstanding - basic 27,746,748 27,138,326 27,737,644 27,130,483
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares
outstanding - diluted 27,746,748 27,138,326 27,920,347 27,130,483
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
Irwin Naturals/4Health, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 462,907 $ (1,081,438 )
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 177,505 262,693
Bad debt expense 6,562 263
Loss on disposal of assets 1,571 3,683
Issuance of warrants 194,118 86,507
Increase (decrease) in:
Accounts receivable 2,087,014 (782,037)
Inventory (415,287) 689,385
Prepaid expenses and other assets (1,122,808) (463,672)
Deferred income tax assets (92,379) 85,765
(Increase) decrease in:
Accounts payable (351,692) 1,429,929
Accrued interest payable 26,915 -
Accrued liabilities (432,934) (78,963)
Taxes payable 50,453 (737,717)
Notes payable 577,751 225,089
Deferred income tax liability (767,444) (113,072)
------------- -------------
Net cash provided by (used in) operating activities 402,252 (473,585)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets 78,447 (151,454)
Proceeds from assets dispositions 1,380 -
Proceeds from notes receivable (4,676) 106,258
------------- -------------
Net cash used in investing activities 75,151 (45,196)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 75,070 130,049
Borrowings on short-term debt - -
Borrowings on long-term debt 5,764,570 1,350,000
Repayments on short-term borrowings - -
Repayments on long-term borrowings (6,489,638) (1,305,250)
Repayments on capital leases (14,523) (1,378)
Distributions to shareholders 321,000 -
------------- -------------
Net cash (used in) provided by financing activities (343,521) 173,421
------------- -------------
NET INCREASE (DECREASE) IN CASH 133,882 (345,360)
CASH AND CASH EQUIVALENTS, at beginning of period 636,620 1,367,548
------------- -------------
CASH AND CASH EQUIVALENTS, at end of period $ 770,502 $ 1,022,188
------------- -------------
------------- -------------
</TABLE>
Note: The Net Loss figure included in this Statement of Cash Flows of
($1,081,438) for the six months ended June 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 June 30, 1997 was $467,720. Also see notes
to condensed financial statements.
5
<PAGE>
Irwin Naturals/4Health, Inc.
Notes to Condensed Financial Statements
June 30, 1998
(Unaudited)
Note 1:
Basis of Presentation
The accompanying unaudited condensed financial statements reflect the
results of operations for Irwin Naturals/4Health, 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 six month period ended June 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 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
June 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 three months ended June 30,
1998 and the six months ended June 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 statement of operations for the periods ended June 30, 1998
in the amount of $1,014,893.
Note 5:
Restatement of 4Health
4Health'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 4Health'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, 4Health 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 4Health's cash flow previously reported. The information
herewithin reflects this restatement.
7
<PAGE>
Note 6:
Comprehensive Income
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 June 30, 1998 and 1997 and
the six months ended June 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 stockholders by the weighted-average number
of common stock 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 June 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 $ (1,174) 27,747 $ (851) 27,138
Basic EPS $ (0.04) $ (0.03)
--------- ---------
--------- ---------
Effect of diluted securities:
Stock options outstanding
---------- --------- --------- ---------
Net income (loss) $ (1,174) 27,747 $ (851) 27,138
---------- --------- --------- ---------
---------- --------- --------- ---------
Diluted EPS $ (0.04) $ (0.03)
--------- ---------
--------- ---------
<CAPTION>
Six months ended June 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 $ 463 27,738 $ (1,558 ) 27,130
Basic EPS $ 0.02 $ (0.06)
--------- ---------
--------- ---------
Effect of diluted securities:
Stock options outstanding 182
---------- --------- --------- ---------
Net income (loss) $ 463 27,920 $ (1,558) 27,130
---------- --------- --------- ---------
---------- --------- --------- ---------
Diluted EPS $ 0.02 $ (0.06)
--------- ---------
--------- ---------
</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 June 30, 1998, decreased by $53
thousand, or .7% from $7.066 million to $7.013 million compared to the same
period a year ago. The core business actually increased $820 thousand, or
12.2%, for the three months ended June 30, 1998 when compared to the same period
a year ago when a Sales Reserve adjustment of $352 thousand is excluded from the
quarter ended June 30, 1997, and a one-time Reserve for $387 thousand is
excluded from the quarter ended June 30, 1998. The increase in core business
was due to a new focus in brand promotions, greater market penetration in the
Mass Market, specifically drug and discount chains, a renewed concentration on
International markets, and the effect of new products introduced in the last
half of 1997.
Gross Profit decreased by 8.8%, or $334 thousand to $3.44 million for the
quarter ending June 30, 1998, from $3.77 million for the same period in 1997.
This decrease was due primarily to increased inventory reserves and sales
discounts related to the decision by new management to utilize their unique
expertise and understanding of the mass market and reposition several of 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.. If costs associated with this repositioning were not included in the
quarter ended June 30, 1998, there would have been a net increase in Gross
Profit of $226 thousand, or 6%.
The Gross Profit Margin decreased as a percentage of Net Sales by 4.3% to
49.1%, in the three months ending June 30, 1998 from 53.4% in the same period a
year ago. Management attributes that decrease primarily to the impact of the
repositioning of the 4 health mass market products. Without consideration for
the costs associated with that repositioning, there would have been an increase
of 3.6%, from 53.4% in the same period a year ago, to 57% for the three months
ended June 30, 1998.
Total Operating Expenses for the quarter ending June 30, 1998 increased
$138 thousand, or 3%, from $4.5 million in the same quarter of 1997 to $4.6
million in the current quarter. After excluding costs related to the proposed
merger of $1.015 million for 1998, ongoing operational costs actually decreased
$877 thousand, or 20%. Decreased Sales and Marketing Expenses of $126 thousand,
decreasing from $1.7 million in the second quarter of 1997 to $1.6 million in
the same period in 1998, reflect a 7% reduction in costs. Management attributes
this decrease to a reduction in expenses for national advertising, advertising
agency fees, marketing related travel costs and economies achieved in
anticipation of the elimination of redundant capabilities as a result of the
merger. Research and Development Department decreased spending $57 thousand in
the three months ending June 30, 1998 compared to the same period of 1997 by
cutting R & D
9
<PAGE>
salaries and related expenses. General and Administrative Expenses decreased
$694 thousand, or 26%. This decrease would have been greater by $50 thousand if
full consideration was given to non-recurring expenses related to the merger
that also benefit future operations. This overall decrease in General and
Administrative expenses was due primarily to management's ability in the newly
merged company to exploit synergies, eliminate redundancies, and effectively
lower the ratio of General and Administrative expenses to Net Revenues.
Interest Expense increased 55% to $42 thousand in the second quarter 1998
from $27 thousand in the second quarter 1997. The reason for this increase was
the utilization of the company Line of Credit in 1998. Interest and
Miscellaneous Income increased 200% to $27 thousand in the three months ending
June 30, 1998 from $9 thousand during the same period of 1997. The result was
that the net expense in the Other Income and Expense category increased by $15
thousand, or 120%. Management anticipates that the Interest Expense will
decrease in the merged company.
The Company reported a Net Loss of $1.17 million, or ($ 0.04) per share,
for the three months ended June 30, 1998 compared to a Net Loss of $851
thousand, or ($ 0.03) per share, for the three months ended June 30, 1997.
If the merger related costs of $1.015 million included in the results for the
three month period ending June 30, 1998 were excluded, the Net Loss would be
for the three months ended June 30, 1997 would be $155 thousand, and reflect
an increase over the Net Loss recorded as of June 30, 1997 of $1.006 million.
COMPARISON OF YEAR-TO-DATE 1998 TO 1997
Net Sales for the six months ended June 30, 1998, increased by $1.5
million, or 10.5% from $14.3 million to $15.8 million compared to the same
period a year ago. This was primarily due to extraordinarily strong first
quarter 1998 sales in the Mass Market Division indicating a high level of
acceptance of several major products introduced in the last half of 1997. The
core business actually increased by another $820 thousand, or an additional 5.7%
when consideration is given to the combined impact of a Sales Reserve adjustment
of $352 thousand in the second quarter of 1997, and a one-time Reserve for $387
thousand on the second quarter of 1998. Additional reasons for the core
business increase, was a new focus on brand promotions, greater penetration in
the Mass Market, and a renewed concentration on International markets.
Gross Profit increased by 18%, or $1.3 million to $8.6 million for the six
months ending June 30, 1998, from $7.3 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. The Gross Profit
increase would have been greater by $560 thousand, or and additional 7.7.%, were
it not for the decision to recognize a one-time increase in inventory reserves
and sales discounts as a result of an initiative to utilize the expertise of new
management in the mass market and reposition several of the mass market products
previously sold by 4Health 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 six months ending June 30, 1998 decreased
$357 thousand, or 4.2%, from $8.5 million in the six month period of 1997 to
$8.1 million in the six months ended June 30, 1998. After excluding costs
related to the proposed merger of $1.015 million for 1998, ongoing operational
costs related to the proposed merger, or 16.2%. Decreased Sales and Marketing
Expenses of $222 thousand, decreasing from $3.4 million in June 30, 1997 to $3.2
million in the same period in 1998, reflect an 6.4 % reduction in costs.
Management attributes this decrease to a reduction in expenses for national
advertising, advertising agency fees, marketing related travel costs, and
economies achieved in anticipation of the elimination of redundant capabilities
as a result of the merger. Research and Development Department decreased
spending $158 thousand in the six months ending June 30, 1998 compared to the
same period of 1997 by cutting R & D salaries and related expenses. General and
Administrative Expenses decrease $992 thousand, or 20.9%. This decrease would
have been greater by $50 thousand if full consideration was given to
non-recurring expense related to the merger that also benefit future operations.
This overall decrease in General and Administrative Expenses was due primarily
to management's ability in the newly merged company to exploit synergies,
eliminate redundancies, and effectively lower the ration of General and
Administrative Expenses to Net Revenues.
The Company reported a Net Profit of $463 thousand, or $0.02 per share, for
the six months ended June 30, 1998 compared to a Net Loss of $1.6 million, or
$(6.06) per share, for the six months ended June 30, 1997. If the merger
related costs of $1.015 million included in the results for the six month period
ending June 30, 1998 were excluded, the Net Profit would be $1.5 million, and
reflect an increase over the Net Loss recorded as of June 30, 1997 of $3.1
million.
Interest Expense increase to $81 thousand in the six months ended June 30,
1998 from $27 thousand in the second quarter 1997. The reason for this increase
was the utilization of the Company's line of credit in 1998. Interest and
Miscellaneous Income increase 200% to $27 thousand in the six months ending June
30, 1998 from $9 thousand during the same period in 1997. The result was that
the Other Income and Expense category increased by $54 thousand overall for the
six months ended June 30, 1997 compared to the six months ended June 30, 1998.
Management anticipates that the Interest Expense will decrease in the merger
company.
Liquidity and Capital Resources
The Company's Cash and Cash Equivalents position increased $134 thousand at
June 30, 1998, to $771 thousand compared to $637 thousand at December 31, 1997.
The Company invests its' cash in an interest bearing Money Market Account. As
of June 30, 1998, the Company had Working Capital of $4.1 million with a 2.1 to
1 Working Capital Ratio.
Accounts Receivable totaled $2.8 million at June 30, 1998 as compared to
$4.9 million on December 31, 1997, a reduction of $2.1, or 43%. 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.
11
<PAGE>
Inventories were valued at $2.6 million at June 30, 1998 as compared to
$2.2 million at December 31, 1997, which represents a 19% increase or $ .4
million. Inventory levels at December 31, 1997 were lower than necessary to
support the increasing sales levels, therefore, inventory levels have been
increased to support the level of sales projected for the third quarter of the
year which are expected to exceed the 1997 year end sales levels.
Management placed a temporary hold on any Capital Spending pending the
outcome of the merger.
Other Assets have increased from $438 thousand at December 31, 1997 to
$1.55 million, and increase of $1.11 million
Accounts Payable and Accrued Liabilities decreased $ .839 thousand, or 18%,
to $3.8 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 second quarter 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
June 30, 1998, was $1.648 million.
The Company has generated an overall positive cash flow of $134 thousand
for the first six months of 1998 as compared to a negative cash flow of $345
thousand for the same period in 1997. The majority of this improvement was due
to the successful efforts of management to bring operating and marketing costs
in line with sales levels, and developing more effective, but cost efficient,
advertising promotions, and the effect of the historical positive cash flow of
Irwin Naturals now included in the combined results of operation.
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 2. (c) Changes in Securities
On June 30, 1998, the effective time of the merger of Irwin Naturals with
and into 4Health, all 65,250 shares of Irwin Naturals Common Stock outstanding
were converted into an aggregate of 15,750,000 shares of 4Health Common Stock in
accordance with the conversion ratio which provides that 241.37931 shares of
4Health Common Stock will be issued for each share of Irwin Naturals Common
Stock outstanding at the effective time. The 15,750,000 shares of 4Health
Common Stock were issued on June 30, 1998 to Klee and Margareth Irwin and the
issuance of such securities was intended to qualify for the exemption for
registration under the Securities Act afforded by Section 4(2) of the Act and
Regulation D promulgated thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
On June 30, 1998, the Company held a Special Meeting in lieu of the Annual
Meeting of Shareholders. The following proposals were submitted for shareholder
approval:
1. To approve the merger of (the "Merger") Irwin Naturals, a California
corporation, with and into 4Health, Inc., pursuant to the terms of the Amended
and Restated Agreement and Plan of Merger dated as of May 22, 1998.
<TABLE>
<S> <C>
For: 6,200,259
Against: 1,300
Abstain: 500
</TABLE>
2. Subject to the consummation of the Merger, to elect Messrs. R. Lindsey
Duncan, Klee Irwin, Anthony Robbins, Clarke Keough and Jonathan Diamond, to the
Board of Directors.
<TABLE>
<S> <C>
For All Nominees: 6,199,359
Withhold Authority: 2,700
</TABLE>
3. Subject to the consummation of the Merger, to amend the Articles of
Incorporation and Bylaws of 4Health to change its name to "Irwin
Naturals/4Health, Inc." and increase the authorization of 4Health Common Stock
to 50,000,000.
<TABLE>
<S> <C>
For: 6,085,897
Against: 107,130
Abstain: 9,032
</TABLE>
13
<PAGE>
4. To ratify Arthur Andersen LLP, independent public accountants, as the
Company's independent auditors for the year 1998.
<TABLE>
<S> <C>
For: 6,199,429
Against: 2,130
Abstain: 500
</TABLE>
Item 5. Other Information
The Board of Directors appointed Mr. James Jeffs to the Board of Directors
to fill a vacancy created by Mr. Clarke Keough, who resigned for personal
reasons.
Effective June 29, 1998, the Securities and Exchange Commission adopted
changes to Rule 14a(c)(1) of the Proxy Rules which now limits a registrant's use
if its discretionary proxy voting authority at annual meetings with respect to
matters raised at the meeting (without discussion in the proxy statement), only
to those matters where a proponent has failed to notify the registrant of the
matter at least 45 days prior to the date on which the registrant first mailed
the prior year's proxy statement (or date specified by an advance notice
provision in the registrant's charter or by laws). Such 45 day deadline for the
Company's annual meeting next year will be April 15, 1999.
14
<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 4health, Inc., and Incorporated by
Surgical Technologies, Inc. as amended June 4, 1996 Reference (8)
2.02 2 Asset Purchase Agreement dated November 30, 1995, by and between Microtek Medical, Incorporated by
Inc., and Surgical Technologies, Inc. Reference (7)
2.03 2 Acquisition Agreement dated effective January 1, 1996, by and between Rex Industries Incorporated by
Acquisition Corporation and Rex Industries, Inc. Reference (7)
2.04 2 Amended and Restated Agreement and Plan of Merger dated December 24, 1997, signed Incorporated by
January 7, 1998, by and between 4Health, Inc. and Irwin Naturals as amended April 2, Reference (3)
1998.
2.05 2 Amended and Restated Agreement and Plan of Merger dated December 24, 1997, signed Incorporated by
January 7, 1998, amended April 2, 1998, by and between 4Health, Inc. and Irwin Reference (2)
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 Corporation now known Incorporated by
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 Surgical Incorporated by
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>
15
<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 Bank with Incorporated by
related form of Warrant Reference (8)
4.02 4 Form of Sale Restriction Agreement respecting shareholders of both Surgical Incorporated by
Technologies, Inc., and 4Health, Inc. Reference (8)
4.03 4 Form of Consent, Approval, and Irrevocable Proxy respecting certain Surgical Incorporated by
stockholders with related schedule Reference (8)
4.04 4 Form of Consent, Approval, and Irrevocable Proxy respecting certain 4Health Incorporated by
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 dated April 15, Incorporated by
1997 Reference (12)
Item 5. Other Items
- -----------------------------------------------------------------------------------------------------------------------------------
5.01 5 Summary of Revolving Line of Credit Agreement between 4Health and Norwest Business Incorporated by
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 Medical, Inc., Incorporated by
and Surgical Technologies, Inc., dated February 4, 1993 Reference (10)
10.06 10 Patent Cross-License Agreement between Utah Medical Products, Inc., and Professional Incorporated by
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 Interstate Bank, Incorporated by
dated August 16, 1994 Reference (11)
16
<PAGE>
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, Security Incorporated by
Agreement, and Fixture Filing, dated April 8, 1994, in the principal amount of Reference (10)
$1,000,000 due Standard Insurance Company
10.09 10 Stock Purchase Agreement dated May 6, 1994, between Surgical Technologies, Inc., and Incorporated by
Benitex, A.G. Reference (10)
10.10 10 Real Estate Contract dated February 2, 1994, between Surgical Technologies, Inc. and Incorporated by
Rex Crosland related to the facilities at 2801 South Decker Lake Lane, Salt Lake Reference (10)
City, Utah
10.11 10 Asset Purchase Agreement between Milwaukee Acquisition Company, Insulation Incorporated by
Distributors, Inc., and Surgical Technologies, Inc., effective September 30, 1993 Reference (10)
10.12 10 All-Inclusive Promissory Note and related All-Inclusive Trust Deed, relating to sale Incorporated by
of building and property, dated March 31, 1995, in the principal amount of Reference (11)
$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 employees with Incorporated by
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 Agreement between Incorporated by
4Health and R. Lindsey Duncan Reference (8)
10.18 10 Form of Employment Agreement between the Surviving Corporation and Rockwell D. Incorporated by
Schutjer Reference (8)*
10.19 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Security Incorporated by
Agreement, and Fixture Filing, dated February 20, 1997, in the principal amount of Reference (6)
$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>
- --------------------
(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.
17
<PAGE>
(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: August 18, 1998 By: /s/ Klee Irwin
-------------------------------
Klee Irwin
President and Director
Dated: August 18, 1998 By: /s/ Dan Martin
-------------------------------
Dan Martin
Chief Financial Officer and
Secretary
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000857353
<NAME> IRWIN NATURALS/4HEALTH, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 771
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