<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, 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)
----------------
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 August 1, 1999 was 28,164,555.
<PAGE>
Irwin Naturals/4 Health, Inc.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998............................................... 4
Condensed Consolidated Statements of Operations for Three
and Six Months Ended June 30, 1999 and 1998......................... 5
Condensed Consolidated Statements of Cash Flows for Six
Months Ended June 30, 1999 and 1998................................. 6
Condensed Consolidated Statement of Changes in
Stockholders Equity for Six Months Ended June 30, 1999.............. 7
Notes to Condensed Consolidated Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 13
Item 3. Quantitative and Qualitative Market Risk............................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 17
Item 2. Changes in Securities and Use of Proceeds........................... 17
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Item 6. Exhibits and Reports on Form 8-K.................................... 18
SIGNATURES.......................................................... 18
</TABLE>
2
<PAGE>
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.
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IRWIN NATURALS/4 HEALTH
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
---------------- ---------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 257,000 $ 426,000
Accounts Receivable, net 6,125,000 6,023,000
Inventories 3,588,000 2,855,000
Prepaid Expenses and Other 395,000 290,000
Current portion of Receivables from Officers 503,000 497,000
and Shareholders
Current Portion of Notes Receivable 109,000 99,000
---------------- ---------------
TOTAL CURRENT ASSETS 10,977,000 10,190,000
Building Held for Sale 1,521,000
Property and Equipment, net 661,000 627,000
Trademarks 13,248,000 99,000
Intangibles 2,843,000 420,000
Other Assets 1,087,000 55,000
Receivable from Officers and Shareholders 102,000 175,000
Notes Receivable, net of Current Portion 446,000 -
---------------- ---------------
$29,364,000 $13,087,000
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 4,138,000 $ 2,637,000
Accrued Liabilities 1,694,000 942,000
Line of Credit 3,602,000 1,000,000
Current Portion of Term Loan 1,750,000 -
Current Portion of Notes Payable 305,000 328,000
Income Taxes Payable 303,000 438,000
Customer Deposits 450,000 450,000
---------------- ---------------
Total Current Liabilities 12,242,000 5,795,000
---------------- ---------------
Term Loan, net of Current Portion 11,250,000 -
Notes Payable, net of Current Portion - 1,423,000
STOCKHOLDERS' EQUITY
Common Stock 283,000 279,000
Additional Paid in Capital 16,980,000 14,333,000
Treasury Stock (50,000) (50,000)
Deficit (11,341,000) (8,693,000)
---------------- ---------------
Total Stockholders' Equity 5,872,000 5,869,000
---------------- ---------------
$ 29,364,000 $13,087,000
================ ===============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
IRWIN NATURALS/4 HEALTH
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
------------------------------ --------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Sales $ 8,372,000 $ 7,013,000 $ 15,730,000 $ 15,841,000
Cost of Sales 3,535,000 3,271,000 6,913,000 6,871,000
----------- ----------- ------------ ------------
Gross Profit 4,837,000 3,742,000 8,817,000 8,970,000
----------- ----------- ------------ ------------
Costs and Expenses
Distribution Expenses 491,000 385,000 858,000 607,000
Sales and Marketing 2,486,000 1,587,000 4,079,000 3,219,000
General and Administrative 3,010,000 1,780,000 5,417,000 3,295,000
Depreciation and Amortization 441,000 153,000 650,000 392,000
Write-off of Surgical Technologies 640,000 640,000
Merger Expenses - 1,015,000 - 1,015,000
----------- ----------- ------------ ------------
Total Costs and Expenses 7,068,000 4,920,000 11,644,000 8,528,000
----------- ----------- ------------ ------------
Net Income (Loss) from Operations (2,231,000) (1,178,000) (2,827,000) 442,000
Other Income (Expense)
Interest Income 17,000 4,000 32,000 11,000
Interest Expense (375,000) (18,000) (457,000) (35,000)
Other Income (Expense) (3,000) (27,000) 481,000 (34,000)
----------- ----------- ------------ ------------
Total Other Income (Expense) (361,000) (41,000) 56,000 (58,000)
----------- ----------- ------------ ------------
Net Income (Loss) before Income Taxes (2,592,000) (1,219,000) (2,771,000) 384,000
Income Tax Benefit (129,000) (45,000) (123,000) (79,000)
----------- ----------- ------------ ------------
Net Income (Loss) $(2,463,000) (1,174,000) (2,648,000) 463,000
=========== =========== ============ ============
Net Income (Loss) per Common Share
Basic $ (0.09) $ (0.04) $ (0.09) $ 0.02
Diluted $ (0.09) $ (0.04) $ (0.09) $ 0.02
Weighted Average Shares Outstanding
Basic 28,247,945 27,746,748 28,128,389 27,737,644
Diluted 28,247,945 27,746,748 28,128,389 27,920,347
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
IRWIN NATURALS/4 HEALTH INC.
STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ADDITIONAL TREASURY STOCK
STOCK PAID IN --------------------
SHARES AMOUNT CAPITAL SHARES AMOUNT DEFICIT TOTAL
---------- --------- ------------ -------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1999 27,857,139 $ 279,000 $ 14,333,000 90,890 $ (50,000) $ (8,693,000) $ 5,869,000
Issuance of common stock in
connection with HVE acquisition 363,636 4,000 2,269,000 2,273,000
Issuance of common stock in connection
with exercise of stock options and
for services 34,670 134,000 134,000
Compensation expense in connection
with issuance of warrants and options 244,000 244,000
Net loss for the period (2,648,000) (2,648,000)
----------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 28,255,445 $ 283,000 $16,980,000 90,890 $ (50,000) $ (11,341,000) $ 5,872,000
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
IRWIN NATURALS/4 HEALTH
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
-------------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,648,000) $ 463,000
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities
Depreciation and amortization 650,000 178,000
(Gain) loss on disposal of assets (481,000) 2,000
Write-off of Surgical Technology Assets 640,000
Issuance of warrants and options 293,000 195,000
(Increase) Decrease in
Accounts receivable (102,000) 2,094,000
Inventory (983,000) (415,000)
Prepaid and other (222,000) (1,123,000)
Increase (Decrease) in:
Accounts payable 1,501,000 (352,000)
Accrued Liabilities 181,000 (407,000)
Income Taxes (135,000) 50,000
Deferred income taxes (860,000)
Notes payable 578,000
------------ ------------
Cash provided by (used in) operating activities (1,306,000) 403,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (318,000) 79,000
Purchase of Inholtra and HVE (13,502,000) 1,000
Net proceeds from asset dispositions 386,000
Increase in other assets (46,000)
Collections on notes receivable 1,000 (5,000)
------------ ------------
Cash provided by (used in) investing activities (13,479,000) 75,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 85,000 75,000
Repayments of old line of credit (1,000,000)
Borrowings under line of credit 3,602,000 (725,000)
Borrowings under Term Loan 13,000,000
Repayments on long term borrowings (146,000)
Costs incurred with financing (992,000)
Repayments on capital leases (15,000)
Decrease in notes from Officers 67,000
Distributions to shareholders 321,000
------------ ------------
Cash provided by (used in) financing activities 14,616,000 (344,000)
------------ ------------
Net increase (decrease) in cash (169,000) 134,000
Cash and cash equivalents, beginning of period 426,000 637,000
------------ ------------
Cash and cash equivalents, end of period $ 257,000 $ 771,000
------------ ------------
------------ ------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
In connection with the sale of the Company's facility in Boulder, Colorado,
(i) a note receivable of $458,000 was received from the buyer, and (ii)
$1,300,000 of debt was assumed by the buyer.
In connection with the acquisition of Health and Vitamin Express Inc., the
Company (i) issued 363,636 shares of the Company's common stock valued at
$2,273,000, and (ii) assumed $571,000 of debt.
7
<PAGE>
Irwin Naturals/4 Health, Inc.
Notes to Condensed Consolidated Financial Statements
Six Months Ended June 30, 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 and six-month periods
ended June 30, 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. ACQUISITIONS
HEALTH & VITAMIN EXPRESS INC.
On February 15, 1999, the Company, through its newly formed wholly
owned subsidiary HealthZone.com, acquired by way of merger the issued
and outstanding shares of Health & Vitamin Express, Inc. (HVE). The
merger 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.
In accordance with the purchase agreement, the Company may also
contingently issue to the sellers of HVE (i) up to 272,727 shares of
the Company's common stock based upon certain revenue thresholds
achieved 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 achieved 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 (see below), 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.
8
<PAGE>
In addition, if the Company fails 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, the sellers of HVE will automatically receive the
maximum allowable Revenue and Profit shares. The Company has received a
demand letter from the former shareholders of HVE asserting certain
claims under this agreement (see Note 7).
The following unaudited proforma information sets forth the Company's
consolidated revenues, net income (loss) and net earnings (loss) per
share for the three and six months ended June 30, 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 taken place from the beginning of each
period presented, nor is such information indicative of future
operating results.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 8,372,000 $ 7,161,000 $15,853,000 $16,173,000
Net income (loss) (2,463,000) (1,308,000) (2,800,000) 252,000
Earnings (loss) per share (.09) (.05) (.10) .01
</TABLE>
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, and
the issuance at closing of a $10,000,000 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 promissory note was refinanced on June
10, 1999 in connection with the Company's new banking facility (see
Note 4).
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.
The following unaudited pro forma information sets forth the Company's
consolidated revenues, net loss and net loss per share for the
three and six months ended June 30, 1999 and 1998 after giving pro
forma effect to the March 10, 1999 acquisition of Inholtra 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 taken
place from the beginning of each period presented, nor is such
information indicative of future operating results.
9
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 8,372,000 $ 8,052,000 $ 16,460,000 $ 17,095,000
Net (loss) (2,463,000) (1,066,000) (2,559,000) (13,000)
(Loss) per share (.09) (.04) (.09) .00
</TABLE>
Note 3. 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 existing 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 six months ended 1999 include a gain of $481,000
that resulted from the sale of this Property.
Note 4. CREDIT FACILITY
On June 10, 1999, the Company secured a loan from a lending institution
that will provide up to $20 million dollars of financing. The credit
facility consists of a $13 million term loan ("Term Loan") and up to a
$7 million revolving loan ("Revolving Loan"), subject to borrowing base
availability and compliance with certain financial and other covenants
and agreements. At closing, $4,527,000 of loan proceeds were disbursed
to repay and close the Company's previous existing credit facility, and
$10,000,000 was disbursed to repay the promissory note issued in
connection with the acquisition of the assets of Inholtra Naturals,
Ltd.
The loans under the facility are secured by substantially all the
assets of the Company. Borrowings under the Term Loan bear interest at
an annual rate of either prime plus 2.25 percent or LIBOR plus 3.75
percent and are paid quarterly. Borrowings under the Revolving Loan
currently bear interest at an annual rate of either prime plus 1.75
percent or LIBOR plus 3.0 percent, and is paid quarterly. The rates are
subject to decrease based upon the Company satisfying certain operating
performance levels. The credit facility agreement contains certain
financial and other covenants or restrictions, including the
maintenance of certain financial ratios, limitations on capital
expenditures, restrictions on acquisitions, limitations on the
incurrence of indebtedness and restrictions on dividends paid by the
Company.
The Revolving Loan commitment expires on June 15, 2004, when the loan
is payable in full. As of June 30, 1999, the maximum additional credit
available under the borrowing limitations was $1,920,000.
10
<PAGE>
The $13,000,000 Term Loan is payable in quarterly installments of
$583,333 beginning October 15, 1999, which will increase to $750,000 on
October 15, 2002, until the Loan is paid in full on April 15, 2004. In
addition, the Company shall make a payment of principal on the Term
Loan in addition to the quarterly payments in an amount equal to 50% of
"Excess Cash Flow" (as defined) for each fiscal year. Each Excess Cash
Flow Payment shall be applied to reduce the remaining regularly
scheduled principal installments of the Term Loan in inverse order of
their maturity. Additionally, upon receipt by Borrower of any unapplied
insurance or condemnation proceeds, the proceeds of key-man life
insurance which has been assigned to an Agent, asset sale proceeds or
debt sale proceeds, the Company shall make a mandatory prepayment of
the Term Loan in the amount thereof. Furthermore, upon receipt by
Borrower of any equity sale proceeds, Borrower shall make a mandatory
prepayment of (i) the Revolving Loan to the limited extent necessary to
fully prepay the Revolving Loan or, if less, in such amount so that
borrowing availability after giving effect thereto equals $3,000,000
and (ii) to the extent of any balance of any equity sale proceeds after
the application to the Revolving Loan to the extent provided in the
preceding clause, the Term Loan; provided, however, if at the time of
receipt of such equity sale proceeds, no event of default has occurred
and is continuing and the debt to EBITDA ratio meets certain defined
levels, then the amount of such mandatory prepayment on the Term Loan
shall be 50% of the amount of such equity sale proceeds remaining after
application to the Revolving Loan pursuant to the preceding clause,
and, further, provided, however, if such ratio is less than a defined
amount, then no such prepayment on the Term Loan from equity sale
proceeds need be made.
5. COMPUTATION OF NET INCOME (LOSS) PER SHARE
For the six month period ended June 30, 1998, weighted average shares
outstanding included common stock equivalents of approximately 182,000
related to stock options. For the three and six month periods ended
June 30, 1999, and the three month period ended June 30, 1998, no
common stock equivalents were included because they would have been
anti-dilutive.
6. WRITE-OFF OF SURGICAL TECHNOLOGIES, INC. ASSETS
The Company wrote-off assets related to its Surgical Technologies
product line during the quarter ended June 30, 1999. In so doing, the
Company reserved $250,000 for obsolete and discontinued inventory, and
removed the remaining goodwill on its books relating to the 1996 merger
transaction with Surgical Technologies, Inc. of $390,000, for a total
loss in the quarter of $640,000.
11
<PAGE>
7. CONTINGENCIES
Attorneys for the former shareholders of HVE, the predecessor of
HealthZone.com, a wholly-owned subsidiary of the Company, have sent the
Company a demand letter alleging numerous causes of action against the
Company and Mr. Klee Irwin, the Company's former Chief Executive
Officer, in connection with the negotiation and consummation of the
merger of HVE with and into HealthZone.com, pursuant to which the
Company acquired the business of HVE. The essence of the claims is that
the Company breached a promise to invest $10 million in HealthZone.com
and claimants are entitled to damages of up to $10 million based on
this failure. As of yet, no lawsuit has been filed in connection with
this matter. The Company believes it has meritorious defenses to each
of the claims set forth in claimants' letter, principally that the
merger agreement contained no such covenant and by its terms supercedes
any prior written or oral understandings with respect to the
transaction. Mr. Irwin has indemnified the Company for any losses
attributable to the HVE acquisition.
The Company is presently in discussions with Mr. Klee Irwin concerning
the settlement of certain claims which the Company believes it has
against Mr. Irwin in his capacity as the former Chief Executive Officer
of the Company pursuant to the terms of his terminated employment
agreement, a letter dated April 16, 1999 and an indemnification
agreement dated April 19, 1999. The essence of the claims regard the
Company's claim for indemnification for actual and potential liability
arising from or attributable to the HVE acquisition and certain actions
taken by Mr. Irwin during his tenure as Chief Executive Officer of the
Company.
8. RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to 1999
presentation.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Irwin Naturals/4Health, Inc. (the Company) is a formulator and supplier of
branded natural health, herbal and nutritional supplement products. The
Company's products are sold through mass retail, specialty natural health,
nutrition and food retail stores. On February 15, 1999, the Company acquired
Health & Vitamin Express, Inc. (HVE), an on-line retailer of health products. On
March 10, 1999, the Company acquired certain assets and liabilities of Inholtra
Investment Holdings and Trading, N.V., Inholtra Inc. and Inholtra Natural, Ltd.
RESULTS OF OPERATIONS
OPERATING RESULTS
Consolidated net sales for the three months ended June 30, 1998 were $8,372,000
with an operating loss of $2,231 ,000 and a net loss of $2,463,000, or $.09 per
basic and diluted share. Consolidated net sales for the same period in the prior
year were $7,013,000 with an operating loss of $1,178,000 and a net loss of
$1,174,000, or $.04 per basic and diluted share. The net loss for the three
month period was impacted by a $640,000 loss incurred with the curtailment of
the Company's Surgical Technologies operations; $630,000 of interest costs and
amortization resulting from the Company's acquisition of Inholtra; and a
$280,000 loss in operations from the Company's Internet subsidiary,
Healthzone.com. The Company also incurred $750,000 of costs on an extensive
media campaign, the effects of which are expected to benefit future sales and
brand awareness at the retail level.
Consolidated net sales for the six months ended June 30, 1999 were $15,730,000
with an operating loss of $2,827,000 and a net loss of $2,648,000, or $.09 per
basic and diluted share. Consolidated net sales for the same period in the prior
year were $15,841,000 with operating income of $442,000 and net income of
$463,000, or $.02 per basic and diluted share. The net loss for the three month
period was impacted by a $640,000 loss incurred with the curtailment of the
Company's Surgical Technologies operations; $800,000 of interest costs and
amortization resulting from the Company's acquisition of Inholtra; and a
$500,000 loss in operations from the Company's Internet subsidiary,
Healthzone.com. The Company also incurred $750,000 of costs on an extensive
media campaign, the effects of which are expected to benefit future sales and
brand awareness at the retail level.
SALES
Net sales for the three months ended June 30, 1999, increased by $1,359,000, or
19%, to $8,372,000 from $7,013,000 for the comparable period in 1998. The
increase in sales relates primarily to the introduction of the Company's new
Inholtra pain reliving product, as well as an overall increase in sales from
certain of the Company's base product lines that resulted from a significant
media campaign.
Net sales for the six months ended June 30, 1999, decreased by $111,000 to
$15,730,000 from $15,841,000 for the comparable period in 1998. The increase in
sales that resulted in the second quarter of 1999 from the introduction of the
Company's new Inholtra pain reliving product, as well as an overall increase in
certain of the Company's base product lines resulting from a media campaign, was
mostly offset by a reduction of sales in the first quarter of 1999 as compared
to 1998, which experienced significant sales in the first quarter of 1998 from a
single product.
13
<PAGE>
GROSS PROFIT
Gross profit for the three months ended June 30, 1999 increased by $1,095,000,
or 29%, to $4,837,000, from $3,742,000 for the comparable period in 1998. Gross
profits as a percentage of sales for the three months ended June 30, 1999
increased 58% from 53% in the comparable period in 1998. The majority of the
increase in the margin resulted from a shift in product mix to certain items
which have a slightly higher margin, as well as fewer pricing concessions
granted in the three months ended June 30, 1999 as compared to the 1998 period.
Gross profit for the six months ended June 30, 1999 decreased $153,000 to
$8,817,000 from $8,970,000 for the comparable period in 1998. Gross profits as a
percentage of sales for the six months ended June 30, 1999 decreased to 56 %
from 57% in the comparable period in 1998. The majority of the decrease in the
margin relates to pricing concessions offered during the first quarter of 1999
in conjunction with the launch and early stage sales of several new products and
sales adjustments given to certain customers, as well as a shift in product mix
to certain items which have a slightly lower margin.
SALES AND MARKETING
Sales and marketing expenses for the three months ended June 30, 1999 increased
by $899,000, or 57% to $2,486,000 from $1,587,000 for the comparable period in
1998. The increase primarily relates to wages, advertising and other costs
incurred on marketing and media campaigns to launch the introduction of the
Company's new Inholtra pain relieving product, as well as media and advertising
campaigns to support certain of the Company's other products.
Sales and marketing expenses for the six months ended June 30, 1999, increased
by $860,000, or 27% to $4,079,000 from $3,219,000 for the comparable period in
1998. The increase primarily relates to wages, advertising and other costs
incurred on marketing and media campaigns to launch the introduction of the
Company's new Inholtra pain reliving product, as well as campaigns to support
certain of the Company's other products.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended June 30, 1999,
increased by $1,230,000, or 69% to $3,010,000 from $1,780,000 for the comparable
period in 1998. The increase primarily relates to a $300,000 increase in legal
costs, $290,000 in costs incurred on the Company's HealthZone.com operations,
and $250,000 to re-label certain of the Company's products to conform to current
FDA requirements.
General and administrative expenses for the six months ended June 30, 1999,
increased by $2,122,000, or 64% to $5,417,000 from $3,295,000 for the
comparable period in 1998. The increase primarily relates to a $300,000 increase
in legal costs, $500,000 in costs incurred on the Company's HealthZone.com
operations, $350,000 for costs incurred to re-label certain of the Company's
products to conform to current FDA requirements, and $244,000 relating to the
non-cash cost of issuing warrants and options. The Company also incurred
approximately $350,000 in bad debts during the first quarter of 1999, mostly
relating to international sales. The remainder of the increase relates to
overall increase in operating and overhead costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three months ended June 30, 1999,
increased by $288,000 to $441,000 from $153,000 for the comparable period in
1998. The increase specifically relates to amortization costs relating to the
Inholtra and HVE acquisitions.
14
<PAGE>
Depreciation and amortization for the six months ended June 30, 1999, increased
by $258,000 to $650,000 from $392,000 for the comparable period in 1998. The
increase specifically relates to amortization costs relating to the Inholtra and
HVE acquisitions.
OTHER INCOME (EXPENSE)
Interest expense for the for the three months ending June 30, 1999 increased to
$375,000 from $18,000 for the comparable period in 1998. This increase is
consistent with the increase in the utilization of the Company's line of credit,
and the incurrence of the Inholtra acquisition debt which was paid off and
replaced by a term loan on June 10, 1999.
Interest expense for the six months ending June 30, increased to $457,000 from
$35,000 for the comparable period in 1998. This increase is consistent with the
increase in the utilization of the Company's line of credit , the incurrence of
the Inholtra acquisition debt and the term loan in 1999. Other income included a
$481,000 gain on the sale of the former 4Health corporate headquarters building
located in Boulder, Colorado.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 1999, the Company experienced
negative cash flow from operations of $1,305,000, and utilized another
$13,480,000 for investing activities, of which $13,502,000 was used for
acquisitions. To finance the above, the Company utilized its existing credit
facilities, issued a $10,000,000 promissory note payable, and issued 363,636
shares of the Company's common stock.
On June 10, 1999, the Company secured a loan from a lending institution
that will provide up to $20 million dollars of financing. The credit facility
consists of a $13 million term loan ("Term Loan") and up to a $7 million
revolving loan ("Revolving Loan"), subject to borrowing base availability and
compliance with certain financial and other covenants and agreements. At
closing, $4,527,000 of loan proceeds were disbursed to repay and close the
Company's previous existing credit facility, and $10,000,000 was disbursed to
repay the promissory note incurred in connection with the acquisition of the of
Inholtra assets. The remainder of the available financing will be used to fund
the Company's on-going working capital requirements.
The loans under the facility are secured by substantially all the
assets of the Company. Borrowings under the Term Loan bear interest at an annual
rate of either prime plus 2.25 percent or LIBOR plus 3.75 percent and is paid
quarterly. Borrowings under the Revolving Note currently bear interest at an
annual rate of either prime plus 1.75 percent or LIBOR plus 3.0 percent and is
paid quarterly. The rates are subject to decrease based upon the Company
obtaining certain operating performance levels. The Revolving Loan commitment
expires on June 15, 2004, when the loan is payable in full. As of June 30, 1999,
the maximum additional available credit under the borrowing limitations was
$1,920,000. The $13,000,000 Term Loan is payable in quarterly installments of
$583,333 beginning October 15, 1999, which will increase to $750,000 on October
15, 2002, until the Loan is paid in full on April 15, 2004. In addition, the
Company shall make a payment of principal on the Term Loan in addition to the
quarterly payments in an amount equal to 50% of "Excess Cash Flow" (as defined)
for each fiscal year. Furthermore, the Company would be required to apply
receipt of any equity infusion, loan proceeds or proceeds from other
non-operating activities to reduce the outstanding debt.
15
<PAGE>
The credit facility agreement contains certain financial and other
covenants or restrictions, including the maintenance of certain financial
ratios, limitations on capital expenditures, restrictions on acquisitions,
limitations on the incurrence of indebtedness and restrictions on dividends paid
by the Company. The Company expects to be out of compliance with certain of the
financial ratios at September 30, 1999, and may not have the available funds to
meet its first required payment on October 15, 1999 unless the Company achieves
profitable operations, receives an equity infusion, modifies the covenants, or
obtains waivers from the bank. There can be no assurances that such level of
profitable operations can be achieved, that equity will be available on terms
satisfactory to the Company, that the bank agrees to modify the covenants, or
such waivers will be obtained. Future losses or the inability to complete an
equity placement may result in further renegotiations of such covenants or the
need to seek replacement financing.
If the Company fails to invest or contribute to its HVE operations
$10,000,000 during the 36 months subsequent to February 15, 1999, the Company
may be obligated to issue up to 363,636 additional shares of the Company's
common stock to the sellers. The Company has been notified by the former
shareholders of HVE that they are making certain claims against the Company
regarding an alleged failure by the Company to fund HVE (see Other Information,
Item 1, Legal Proceedings).
The Company has primarily funded its operations to date through
internally generated capital or bank financing. The Company's future capital
requirements will depend on many factors, including the nature and timing of
orders from customers, collection of trade accounts receivable, the expansion of
sales and marketing efforts, costs associated with entering into new channels of
distribution, and the status of competitive products.
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 of the 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 which, to the
knowledge of the Company, is not Y2K compliant. 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 Y2K 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.
16
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Company has debt subject to interest rate fluctuation
during the period covered by this Report. The Company has not entered
into any hedging transactions or acquired any derivative instruments
during the period covered by this Report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Attorneys for the former shareholders of HVE, the predecessor of
HealthZone.com, a wholly-owned subsidiary of the Company, have sent the
Company a demand letter alleging numerous causes of action against the
Company and Mr. Klee Irwin, the Company's former Chief Executive Officer,
in connection with the negotiation and consummation of the merger of HVE
with and into HealthZone.com, pursuant to which the Company acquired the
business of HVE. The essence of the claims is that the Company breached a
promise to invest $10 million in HealthZone.com and claimants are entitled
to damages of up to $10 million based on this failure. As of yet, no
lawsuit has been filed in connection with this matter. The Company believes
it has meritorious defenses to each of the claims set forth in claimants'
letter, principally that the merger agreement contained no such covenant
and by its terms supercedes any prior written or oral understandings with
respect to the transaction. Mr. Irwin has indemnified the Company for any
losses attributable to the HVE acquisition.
The Company is presently in discussions with Mr. Klee Irwin concerning
the settlement of certain claims which the Company believes it has against
Mr. Irwin in his capacity as the former Chief Executive Officer of the
Company pursuant to the terms of his terminated employment agreement, a
letter dated April 16, 1999 and an indemnification agreement dated April
19, 1999. The essence of the claims regard the Company's claim for
indemnification for actual and potential liability arising from or
attributable to the HVE acquisition and certain actions taken by Mr. Irwin
during his tenure as Chief Executive Officer of the Company.
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
(c) On May 10, 1999 the Company issued 15,000 shares of common stock
valued at $3.25 per share to a consultant. The shares were issued
pursuant to the exemption from registration under the Securities Act of
1933, as Amended, afforded by Section 4(c) thereof.
17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On July 9, 1999, the Company filed a Schedule 14C Information
Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934.
The Information Statement was filed in connection with a Written Consent of
Action of Shareholders dated July 11, 1999 executed by the holders of a
majority of the shares of the common stock of the Company issued and
outstanding on July 7, 1999 approving an amendment of the Company's Articles
of Incorporation to change the name of the Company from "Irwin
Naturals/4Health,Inc." to "Omni Nutraceuticals, Inc." The name change will
become effective on or about August 23, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBIT INDEX 27. Financial Data Schedule.
(b) A Current Report on Form 8-K was filed on July 22, 1999
reporting that the Company secured a loan from a lending
institution that will provide up to $20 million dollars of
financing.
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 12, 1999 By: /s/ Lindsey Duncan
---------------------------------------
Lindsey Duncan
Chairman of the Board
18
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