<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 QUARTERLY PERIOD ENDED MARCH 31, 1999
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)
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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: No: X
--- ---
SEE NOTE 3 TO THE FINANCIAL STATEMENTS
The number of shares of the registrant's Common Stock, par value $.01 per share,
outstanding as of May 15, 1999 was 28,164,553.
<PAGE>
Irwin Naturals/4Health, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 1999 and December 31, 1998 ....................... 3
Condensed Statements of Operations for Three Months Ended March 31, 1999 and 1998 ......... 4
Condensed Statements of Cash Flows for Three Months Ended
March 31, 1999 and 1998 ................................................................... 5
Notes to Condensed Financial Statements ................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ......................................................................... 12
Item 2. Changes in Securities and Use of Proceeds.................................................. 12
Item 3. Defaults Upon Senior Securities............................................................ 12
Item 6. Exhibits and Reports on Form 8-K .......................................................... 12
SIGNATURES ................................................................................ 13
</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 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
<TABLE>
<CAPTION>
March 31, December 31,
------------ ------------
1999 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 56,000 $ 426,000
Accounts receivable, net 6,476,000 6,023,000
Inventories 2,948,000 2,855,000
Prepaid expenses and other 737,000 290,000
Current portion of receivables from officers and shareholders 504,000 497,000
Current portion of note receivable 109,000 99,000
------------ ------------
Total current assets 10,830,000 10,190,000
Building held for sale 0 1,521,000
Property and equipment, net 529,000 627,000
Intangible assets 16,662,000 519,000
Other assets 178,000 55,000
Receivable from officers and shareholders 132,000 175,000
Notes receivable 447,000 0
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Total assets $ 28,778,000 $ 13,087,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,817,000 $ 2,637,000
Accrued liabilities 1,161,000 942,000
Line of credit 4,088,000 1,000,000
Notes payable 378,000 328,000
Acquisition debt 10,000,000 0
Income and other taxes payable 445,000 438,000
Customer deposits 450,000 450,000
------------ ------------
Total current liabilities 20,339,000 5,795,000
LONG-TERM DEBT, net of current portion 0 1,423,000
STOCKHOLDERS' EQUITY
Common stock 283,000 279,000
Additional paid in capital 16,784,000 14,333,000
Treasury stock (50,000) (50,000)
Accumulated deficit (8,578,000) (8,693,000)
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Total stockholders' equity 8,439,000 5,869,000
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Total liabilities and stockholders' equity $ 28,778,000 $ 13,087,000
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial statements
3
<PAGE>
Irwin Naturals/4Health, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Sales $ 7,921,000 $ 8,746,000
Cost of goods sold 3,777,000 3,639,000
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Gross margin 4,144,000 5,107,000
Operating Expenses
Sales and marketing 1,556,000 1,632,000
General and administrative 2,884,000 1,865,000
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Total operating expenses 4,440,000 3,497,000
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Net income (loss) from operations (296,000) 1,610,000
Other (expense) income, net 411,000 (7,000)
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Net income before income 115,000 1,603,000
taxes
Income tax (benefit) 0 (34,000)
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NET INCOME 115,000 1,637,000
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----------- -----------
Net income per common $ .004 $ .06
share - basic and diluted
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----------- -----------
Weighted average shares 28,040,000 27,728,000
outstanding - basic
----------- -----------
----------- -----------
Weighted average shares 28,273,000 27,868,000
outstanding - diluted
----------- -----------
----------- -----------
</TABLE>
The following unaudited proforma information sets forth the Company's
consolidated revenues, net income (loss) and net earnings (loss) per share
for the three months ended March 31, 1999 and 1998 after giving pro forma
effect to the February 15, 1999 acquisition of Health & Vitamin Express, Inc.
had the acquisition been effected at the beginning of each period presented.
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been
consummated as of the above dates, nor is such information indicative of
future operating results.
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 1998
------- ------
<S> <C> <C>
Revenue $8,044,000 $8,927,000
Net income (loss) (3,000) 1,617,000
Earnings (loss) per share (0) (.06)
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
Irwin Naturals/4Health, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 115,000 1,637,000
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 211,000 78,000
(Gain) Loss on disposal of assets (481,000) 1,000
Issuance of warrants 97,000 97,000
(Increase) decrease in:
Accounts receivable (453,000) 128,000
Inventory (93,000) (168,000)
Prepaid expenses and other assets (1,153,000) (102,000)
Increase (decrease) in:
Accounts payable 1,180,000 (84,000)
Accrued liabilities 219,000 (279,000)
Taxes payable 7,000 (9,000)
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Net cash provided by (used in) operating activities (332,000) 1,299,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (110,000) (61,000)
Purchase of intangible assets (3,385,000) 0
Proceeds from asset dispositions 377,000 0
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Net cash used in investing activities (3,118,000) (61,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 85,000 5,000
Borrowings (repayments) on short-term debt 3,088,000 (300,000)
Repayments on long-term borrowings (74,000) (7,000)
Distributions to shareholders 0 (321,000)
----------- -------------
Net cash (used in) provided by financing activities 3,099,000 (623,000)
----------- -------------
NET INCREASE (DECREASE) IN CASH (370,000) 615,000
CASH AND CASH EQUIVALENTS, at beginning of period 426,000 637,000
----------- -------------
CASH AND CASH EQUIVALENTS, at end of period 56,000 1,252,000
----------- -------------
----------- -------------
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
Irwin Naturals/4Health, Inc.
Notes to Condensed Financial Statements
March 31, 1999
(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 three-month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K.
Note 2. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information", requires disclosure of
business segments in the financial statements of the Company. The Company
expects to adopt SFAS No. 131 in the fourth quarter of fiscal 1999 and
anticipates a change in segment disclosure at the time of adoption.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 established accounting and
reporting standards requiring that every derivative financial instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The company will be
required to adopt SFAS No. 133 no later than January 1, 2000. The Company had
not entered into any derivative financial instruments as of March 31, 1999. As a
result, adoption of SFAS No. 133 would currently have no impact on the Company.
In the future, if the Company were to enter into derivative financial
instruments that are covered by SFAS No. 133, volatility in earnings and other
comprehensive income could be increased.
6
<PAGE>
Note 3. ACQUISITIONS
HEALTH & VITAMIN EXPRESS INC.
On February 15, 1999, the Company acquired Health & Vitamin Express, Inc.
(HVE) by way of merger into, its newly formed wholly owned subsidiary
HealthZone.com. The purchase consideration consisted of the issuance of
363,636 shares of the Company's common stock valued at $2,273,000 ($6.25 per
share) and the assumption of $571,000 of debt. The Company has accounted for
the acquisition as a purchase, and the excess purchase price of $2,880,000
over the fair value of net assets acquired has been allocated to goodwill and
is being amortized over 15 years. The Company is in the process of gathering
the financial statement information for the acquired Company and will file
such information in an amended form 8-K when it is available.
In addition to the 363,636 shares issued upon acquisition, the Company may
contingently issue to the former shareholders of HVE (i) up to 272,727
shares of the Company's common stock based upon certain revenue thresholds
during first 42 months subsequent to February 15, 1999 (the "Revenue"
shares), and (ii) up to 90,909 shares of the Company's common stock based
upon certain profit thresholds during the first seven years subsequent to
February 15, 1999 (the "Profit" shares). The Company has the right to
repurchase up to 65% of the shares issued for a period of one (1) year
following the date of issuance at a purchase price of $13.75 per share (the
"Repurchase Price"). The repurchase price may be adjusted if upon repurchase
the closing bid price of the Company's common stock as quoted on the Nasdaq
National Market System exceeds $20 per share (the "Market Price"), the
Company will pay to the sellers 50% of the difference between the Market
Price and $20 per share. Furthermore, in the event Revenue and Profit shares
are issued because of a funding failure, the repurchase price shall be
reduced to $9.63 per share. The Company has granted to the Sellers certain
"demand registration rights" and "piggyback registration rights" on these
shares, if issued, in the event the Company undertakes a sale of its
securities to the public.
In addition, the Company is obligated to invest or contribute to HVE operations
a minimum of (A) $4,000,000 during the 18 months subsequent to February 15, 1999
and (B) $10,000,000 (inclusive of the $4,000,000 provided in clause (A) above)
during the 36 months subsequent to February 15, 1999. If the Company fails to
make the investments or contributions defined above, the Sellers of HVE will
automatically receive the maximum allowable shares subject to issuance under the
provisions of the Revenue and Profit Shares. The Company is currently prohibited
by its existing credit facility of making such investments or contributions
(Note 5).
INHOLTRA ACQUISITION
On March 10, 1999, the Company purchased for $13,250,000 certain assets and
liabilities of Inholtra Investment Holdings and Trading, N.V., Inholtra,
Inc.,and Inholtra Natural, Ltd. (collectively the Sellers). The purchase
price consisted of the payment of $3,250,000 in cash at closing, and the
issuance of a $10,000,000 90 day promissory note secured by the acquired
assets. The Company has accounted for the acquisition as a purchase. The
purchase price has been allocated to the patents and trademarks associated
with the Inholtra product, and is being amortized over a fifteen-year period.
The Company is in the process of gathering the financial statement
information for the acquired Company and will file such information in an
amended form 8-K when it is available.
7
<PAGE>
The promissory note bears interest at an annual rate of 8 percent per annum, and
is due in full on June 10, 1999. The Company is currently seeking to raise
additional financing to enable it to repay the $10,000,000 promissory note.
There can be no assurance that the Company will be able to secure additional
financing at terms acceptable to the Company, if at all. If the Company is
unable to repay the $10,000,000 promissory note, the Company may lose the
acquired assets and a portion or all of the $3,250,000 initial investment. In
connection with this acquisition, the Company entered into a consulting
agreement with a former employee of the Sellers. The two-year agreement requires
annual consulting fees of $60,000.
Note 4. BUILDING HELD FOR SALE
On March 25, 1999, the Company completed the sale of its former 4Health,Inc.
corporate facility located in Boulder Colorado (the "Property"). The purchase
price for the Property was $2,350,000, which consisted of (i) cash consideration
of $600,000 that was paid at closing, (ii) assumption of a $1,300,000 exiting
first mortgage loan on the Property made by the buyer, and (iii) the receipt of
a $458,000 promissory note secured by a second trust deed in the Property. The
note receivable is to be paid in monthly installments of $3,625, including
principal and interest at a rate of 7 1/2% per annum, until March 1, 2002 when
the note is payable in full. The Company's results of operations for the first
quarter of 1999 include a gain of $481,000 that resulted from the sale of this
Property.
Note 5. LINE OF CREDIT
As of December 31, 1998, the Company had outstanding borrowings of $1,000,000
under a revolving line of credit with a bank. In February 1999, the
outstanding balance was paid in full and the line was closed. On February 1,
1999, the Company obtained a new line of credit with a different bank. The
line of credit agreement was subsequently amended in March 1999, and then
again on May 9, 1999. Maximum borrowings under the amended line of credit are
limited to $5,000,000 based on eligible accounts receivable and inventories.
Borrowings under the line are secured by Company assets, and are also
personally guaranteed by the Company's former Chief Executive Officer up to
$2.5 million. Borrowings under the line bear interest at an annual rate of
either prime plus .25 percent or LIBOR plus 2.0 percent. The amended line of
credit expires on June 30, 1999. As of March 31, 1999, the maximum available
under the borrowing limitations at that date was $4,474,000, of which
$4,088,184 had been borrowed.
The line of credit agreement contains certain financial and other covenants or
restrictions, including the maintenance of certain financial ratios and minimum
tangible net worth, limitations on capital expenditures, restrictions on
acquisitions, limitations on the incurrence of indebtedness and restrictions on
dividends paid by the Company. The acquisitions by the Company of HVE and
Inholtra (Note 3) and the assumption of certain liabilities in connection with
these acquisitions violated certain covenants under the Bank credit line. The
Company requested and received a waiver from the Bank related to certain,
but not all, covenant violations. Although the HVE acquisition did not
require bank funding (since the consideration was paid in Company stock), the
Inholtra acquisition required cash funding at closing under the credit line of
$3.25 million. This funding, combined with the required June 10, 1999 payment
of an additional $10.0 million would exceed the Company's collateral based
credit facility. As a result, the Bank has informed the Company that it does
not intend to extend the maturity date of the loan beyond June 30, 1999.
The Company was not in compliance with certain other covenants under its Bank
credit line as of March 31, 1999, and expects to be out of compliance until
the Company obtains an equity infusion, extinguishes or refinances certain
outstanding debt or further modifies the covenants.
Given the June 30, 1999 expiration date of the Company's credit facility, the
Company is in the process of seeking replacement financing. There can be no
assurances that such financing will be available on terms satisfactory to the
Company, if at all.
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 its 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 March 31, 1999
and 1998.
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 March 31,
(in thousands, except per share amounts)
------------------------------------------------------------
1999 1998
------------------------------------------------------------
Per Per
Income Shares Share Income Shares Share
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $115 28,040 $1,637 27,728
Basic EPS $0.00 $0.06
Effect of diluted securities:
Stock warrants and options outstanding 233 140
------------------------------------------------------------
Net income $115 28,273 $0.00 $1,637 27,868 $0.06
Diluted EPS
</TABLE>
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 FIRST QUARTER 1999 TO 1998
Net sales for the three months ended March 31, 1999, decreased by $825
thousand to $7.921 million from $8.746 million for the same quarterly period
a year ago. These results included a reduction of $852 thousand of a single
opportunistic product launched in 1998 that enjoyed strong first quarter
sales in 1998. During the first quarter of 1999, sales of this product have
stabilized at a lower level. In addition, International Sales decreased by
$371 thousand primarily due to the relatively stagnant economic climate in
the Far East and Russia. Most other sectors remained relatively stable.
Gross profits decreased by $963 thousand, or 18.8%, to $4.14 million
during the first quarter of 1999, down from $5.107 million for the same
quarter of 1998. $547 thousand of this decrease was attributable to single
product previously described as a significant contributor to decreased sales.
The balance of the decrease was primarily related to lower sales levels in
the International division. Gross profit expressed as a percentage of net
sales decreased to 52.3% for the quarter ended March 31, 1999 from 59.07% in
the same period a year ago. The decrease was primarily attributable to Sales
Mix, Pricing concessions offered during the first quarter of 1999 in
conjunction with the launch and early stage sales of several new products,
and lower than normal margins experienced on sales through HVE.
Total operating expenses for the quarter ending March 31, 1999 increased
$943 thousand, or 27%, to $4.44 million from $3.5 million for the same
quarter in 1998. In addition, operating expenses expressed as a percentage
of net sales increased to 56.1% for the first quarter of 1999 an increase
from 40.0% experienced in the same quarter one year ago. Sales and Marketing
expenses decreased by $116 thousand to $1.556 million during the first
quarter of 1999 from $1.672 million for the same period one year earlier
reflecting the elimination of redundant sales and marketing labor related
costs in the newly combined organization. Included in the first quarter 1999
sales and marketing expenses was a non-recurring Co-op Advertising charge of
$150 thousand, and HVE related sales and marketing of $50 thousand. General
and Administrative expenses increased by $1.06 million to $2.884 million
during the three months ended March 31, 1999 when compared to $1.825 million
for the comparable period one year ago. $515 thousand of this increase was
attributable to reserves established for potential bad debts. An additional
$56 thousand of the increase was relative to amortization on the assets
associated with the Inholtra and HVE acquisitions. Other expense increases
included one-time legal expenses of $74 thousand during the first quarter of
1999 coupled with excess insurance and property tax expenses of $65 thousand
associated with redundant facilities that will be eliminated in future
periods. The remainder of the difference was a result of excess consulting,
temporary, audit, and professional fees amounting to $160 thousand associated
with improving infrastructure and with acquisition integration, plus $161
thousand of expenses associated with the HVE operation.
Other Income for the period ending March 31, 1999 included $481 thousand
related to a one-time gain on the sale of the former 4Health corporate
headquarters building located in Boulder, Colorado.
Interest expense increased to $75 thousand in the first quarter 1999
from $4 thousand during the first quarter of 1998. The reason for this
increase was the utilization of the Company's line of credit in 1999.
The Company reported a net income before taxes of $115 thousand, or
$0.004 per share, for the three months ended March 31, 1999 compared to net
income of $1.64 million, or $0.06 per share, for the three months ended March
31, 1998. These results include ($206 thousand) net loss for the quarter
ended March 31, 1999 for HVE.
No provision for income taxes was recorded for the three months ended
March 31, 1999, as the income as stated was offset by a combination of Net
Operating Loss Carryforwards and tax versus book timing differences.
9
<PAGE>
Liquidity and Capital Resources
During the three months ended March 31, 1999, the Company experienced
negative cash flow from operations of $332,000, and utilized another
$3,118,000 for investing activities, of which $3,250,000 was used for an
acquisition. To finance the above, the Company borrowed an additional
$3,088,000 under its existing credit facilities, issued $10,000,000 in a
note payable and 363,363 shares of the Company's common stock.
The company has available a line of credit with a bank that allows a maximum
borrowing to $5,000,000 based on eligible accounts receivable and
inventories. Borrowings under the line are secured by Company assets, and are
also personally guaranteed by the Company's former Chief Executive Officer up
to $2.5 million. Borrowings under the line bear interest at an annual rate of
either prime plus .25 percent or LIBOR plus 2.0 percent. The line of credit
expires on June 30, 1999. As of March 31, 1999, the maximum available under
the borrowing limitations at that date was $4,474,000, of which $4,088,184
had been borrowed. The line of credit agreement contains certain financial
and other covenants or restrictions, including the maintenance of certain
financial ratios and minimum tangible net worth, limitations on capital
expenditures, restrictions on acquisitions, limitations on the incurrence of
indebtedness and restrictions on dividends paid by the Company. The
assumption by the Company of certain notes payable in connection with the HVE
acquisition constituted a violation of the covenants of the line of credit
agreement. The Company requested and received a waiver from the Bank related
to this covenant violation. The Bank also advised the Company that providing
future funding to HVE would further violate the loan agreement, and that the
Bank would not waive any such violation. The Company was not in compliance
with certain other covenants as of March 31, 1999, and expects to be out of
compliance until the Company obtains an equity infusion, extinguishes certain
outstanding debt or further modifies the covenants. The Bank has informed the
Company that it is not intending to extend the maturity date of the loan
beyond June 30, 1999.
The Company is also indebted on a $10,000,000 promissory note incurred in
connection with the acquisition of certain assets and liabilities from Inholtra
that is due and payable in full on June 10, 1999. In addition, the Company is
obligated to invest or contribute to its HVE operations $10,000,000 during the
36 months subsequent to February 15, 1999. The Company is currently prohibited
by its existing credit facility of making such investments or contributions. If
the Company fails to make the investments or contributions, the Company may be
obligated to issue up to 363,636 additional shares of the Company's common stock
to the seller.
The Company is in the process of seeking replacement financing for these notes,
loans and obligations and has engaged an investment-banking firm to seek such
financing. There can be no assurances that such financing will be available on
terms satisfactory to the Company, 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.
The Company has primarily funded its operations to date through internally
generated capital or bank financing. The company's future capital requirements,
beyond the immediate need to obtain replacement financing for its existing debt,
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.
10
<PAGE>
Year 2000 Disclosure
The Company has developed a plan to ensure its systems are compliant with the
requirements to process transactions in the Year 2000 ("Y2K"). The majority
of the Company's internal information systems have been upgraded or are in
the process of being upgraded or replaced with fully compliant new systems.
Most significant Company systems are deemed to be Y2K compliant. Some of the
Company's customers utilize equipment to capture and transmit financial
transactions. The Company is in the process of making the necessary updates
to this equipment to ensure it will be effective in the Y2K. The Company is
also working with its processing banks and network providers to ensure their
systems are year 2000 compliant. All of these costs will be or have been
borne by the processors and network companies. The Company does not rely on
any one significant customer or vendor for its sales or purchases. The
failure of any customer or vendor to comply with Y2K is not expected to have
a material impact on the Company's operations. However, should the Company,
its customers, its vendors or the processing banks fail to resolve Y2K2K
issues, the Company may lose certain financial and operating data. The
Company is in the process of developing a contingency plan, which it expects
to be completed by the end of the fiscal year. The total cost of the software
implementation to bring the Company into Y2K compliance is estimated to be
approximately $20,000.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company had no interest in investments subject to market risk
during the period covered by this report.
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. Changes in Securities and Use of Proceeds
In connection with the acquisition of HVE, on February 15, 1999, the
Company issued 363,636 restricted shares of common stock to three
individuals, who qualified as accredited investors, in a transaction intended
to qualify for the exception from registration under the Securities Act of
1933, as amended, by Sections 4(2) and 3(b) thereof and Regulation D
promulgated thereunder.
Item 3. Defaults Upon Senior Securities
See Part I, Item 2 and Note 5 to the Company's financial statements for
a discussion of the Company's failure to meet certain covenants under its
bank line of credit.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX 27. Financial Data Schedule
(b) A report on Form 8-K was filed March 4, 1999 regarding the acquisition
of the common stock of Health & Vitamin Express, Inc.
A report on Form 8-K was filed March 24, 1999 regarding the
acquisition certain assets and liabilities of Inholtra Investment
Holdings and Trading, N.V., Inholtra, Inc.,and Inholtra Natural, Ltd.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Irwin Naturals/4Health, Inc.
Dated: May 21, 1999 By: /s/ Lindsey Duncan
-------------------------------
Lindsey Duncan
Chairman of the Board
Dated: May 21, 1999 By: /s/ Dan Martin
-------------------------------
Dan Martin
Chief Financial Officer and
Secretary
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