<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 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
OMNI NUTRACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
----------------
UTAH 87-0468225
(State of incorporation) (I.R.S. Employer Identification No.)
5310 Beethoven Street
Los Angeles, California 90066
(Address of principal executive offices)
Registrant's telephone number: (310) 253-5305
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
--- ---
The number of shares of the registrant's Common Stock, par value $.01 per share,
outstanding as of November 1, 1999 was 27,198,141.
<PAGE>
Omni Nutraceuticals, Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.......................................... 4
Condensed Consolidated Statements of Operations for Three
and Nine Months Ended September 30, 1999 and 1998.............. 5
Condensed Consolidated Statements of Cash Flows for Nine
Months Ended September 30, 1999 and 1998....................... 6
Condensed Consolidated Statement of Changes in
Stockholders Equity for Nine Months Ended September 30, 1999... 7
Notes to Condensed Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 15
Item 3. Quantitative and Qualitative Market Risk....................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 20
Item 2. Changes in Securities and Use of Proceeds...................... 21
Item 4. Submission of Matters to a Vote of Security Holders............ 21
Item 5. Other Matters.................................................. 21
Item 6. Exhibits and Reports on Form 8-K............................... 21
SIGNATURES..................................................... 22
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
OMNI NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ - $ 426,000
Accounts Receivable, net 7,578,000 6,023,000
Inventories 4,076,000 2,855,000
Prepaid Expenses and Other 630,000 290,000
Current portion of Receivables from Officers 216,000 497,000
And Shareholders
Current Portion of Notes Receivable 109,000 99,000
----------------- ------------------
TOTAL CURRENT ASSETS 12,609,000 10,190,000
Building Held for Sale - 1,521,000
Property and Equipment, net 1,120,000 627,000
Trademarks 13,023,000 99,000
Intangibles 2,790,000 420,000
Other Assets 1,010,000 55,000
Receivable from Officers and Shareholders 102,000 175,000
Notes Receivable, net of Current Portion 409,000 -
----------------- ------------------
$ 31,063,000 $ 13,087,000
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Cash Overdraft $ 128,000 $ -
Accounts Payable 4,923,000 2,637,000
Accrued Liabilities 1,595,000 942,000
Line of Credit 4,914,000 1,000,000
Current Portion of Term Loan 2,332,000 -
Current Portion of Notes Payable 230,000 328,000
Income Taxes Payable 150,000 438,000
Customer Deposits 450,000 450,000
----------------- ------------------
TOTAL CURRENT LIABILITIES 14,722,000 5,795,000
----------------- ------------------
Term Loan, net of Current Portion 10,668,000 -
Notes Payable, net of Current Portion - 1,423,000
STOCKHOLDERS' EQUITY
Common Stock 284,000 279,000
Additional Paid in Capital 17,241,000 14,333,000
Treasury Stock (50,000) (50,000)
Deficit (11,802,000) (8,693,000)
----------------- ------------------
Total Stockholders' Equity 5,673,000 5,869,000
----------------- ------------------
$ 31,063,000 $ 13,087,000
================= ==================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
OMNI NUTRACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 9,949,000 $ 7,225,000 $ 25,800,000 $ 23,066,000
Cost of Sales 4,729,000 3,041,000 11,708,000 9,968,000
----------------- ---------------- ------------------- -----------------
Gross Profit 5,220,000 4,184,000 14,092,000 13,098,000
----------------- ---------------- ------------------- -----------------
Costs and Expenses
Distribution Expenses 672,000 164,000 1,990,000 523,000
Sales and Marketing 2,406,000 1,396,000 6,993,000 4,770,000
General and Administrative 1,846,000 1,444,000 6,317,000 4,737,000
Depreciation and Amortization 456,000 192,000 1,131,000 583,000
Write-off of Surgical Technology
assets - - 640,000 -
Merger Expenses - - - 1,015,000
----------------- ---------------- ------------------- -----------------
Total Costs and Expenses 5,380,000 3,196,000 17,071,000 11,628,000
----------------- ---------------- ------------------- -----------------
Net Income (Loss) from
Operations (160,000) 988,000 (2,979,000) 1,470,000
Other Income (Expense)
Interest Income (8,000) 4,000 24,000 15,000
Interest Expense (408,000) (36,000) (872,000) (125,000)
Other Income (Expense) 2,000 (32,000) 482,000 (64,000)
----------------- ---------------- ------------------- -----------------
Total Other Income (Expense) (414,000) (64,000) (366,000) (174,000)
----------------- ---------------- ------------------- -----------------
Net Income (Loss) before Income
Taxes (574,000) 924,000 (3,345,000) 1,296,000
Income Tax Benefit (113,000) - (236,000) (64,000)
----------------- ---------------- ------------------- -----------------
Net Income (Loss) $ (461,000) $ 924,000 $ (3,109,000) $ 1,360,000
================= ================ =================== =================
Net Income (Loss) per Common
Share
Basic $ (0.02) $ 0.03 $ (0.11) $ 0.05
Diluted $ (0.02) $ 0.03 $ (0.11) $ 0.05
Weighted Average Shares Outstanding
Basic 28,255,445 27,753,000 28,165,287 27,737,644
Diluted 28,255,445 27,931,409 28,165,287 27,920,347
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
OMNI NUTRACEUTICALS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN TREASURY STOCK
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 67,670 1,000 198,000 199,000
Compensation expense in connection
with issuance of warrants and options 441,000 441,000
Net loss for the period (3,109,000) (3,109,000)
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 28,288,445 $284,000 $ 17,241,000 90,890 $(50,000) $(11,802,000) $ 5,673,000
========================================================================================
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE>
OMNI NUTRACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,109,000) $ 1,359,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities;
Depreciation and amortization 1,131,000 250,000
(Gain) loss on disposal of assets (481,000) -
Write-off of Surgical Technology Assets 640,000 -
Issuance of warrants and options 441,000 291,000
Issuance for shares for services 114,000 -
Amortization of notes from Officers 134,000 -
(Increase) Decrease in;
Accounts receivable (1,555,000) 1,264,000
Inventory (1,471,000) (580,000)
Prepaid and other (496,000) (54,000)
Increase (Decrease) in:
Bank Overdraft 128,000 -
Accounts payable 2,286,000 (851,000)
Accrued Liabilities 82,000 (726,000)
Income Taxes (288,000) 165,000
Deferred income taxes (126,000)
------------ ------------
Cash provided by (used in) operating activities (2,444,000) 992,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of fixed assets (905,000) (144,000)
Purchase of Inholtra and HVE (13,471,000) -
Net proceeds from asset dispositions 386,000 -
Increase in other assets (36,000) -
Decrease in notes receivable 258,000 8,000
------------ ------------
Cash used in investing activities (13,768,000) (136,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 85,000 75,000
Repayments of old line of credit (1,000,000) -
Borrowings under existing line of credit 4,914,000 (1,383,000)
Borrowings under Term Loan 13,000,000 -
Borrowings on long term borrowings 516,000
Repayments on long term borrowings (221,000) (783,000)
Costs incurred with financing (992,000) -
Distributions to shareholders 321,000
------------ ------------
Cash provided by (used in) financing activities 15,786,000 (1,254,000)
------------ ------------
Net decrease in cash (426,000) (398,000)
Cash and cash equivalents, beginning of period 426,000 637,000
------------ ------------
Cash and cash equivalents, end of period $ - $ 239,000
============ ============
</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.
See notes to condensed consolidated financial statements
7
<PAGE>
Omni Nutraceuticals, Inc.
Notes to Condensed Consolidated Financial Statements
Nine Months Ended September 30, 1999
(Unaudited)
Note 1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements reflect the
results of operations for Omni Nutraceuticals, 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 nine-month periods ended September 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.
On August 19, 1999 Irwin Naturals/ 4 Heath Inc. filed an amendment to its
Articles of Incorporation changing its name to Omni Nutraceuticals, Inc.
Note 2. ACQUISITIONS
HEALTH & VITAMIN EXPRESS INC.
On February 15, 1999, the Company, through its newly formed wholly owned
subsidiary HealthZone.com, ("HealthZone") 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
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, 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. See Notes 7 and 9.
8
<PAGE>
The Company has received a demand letter from the former shareholders of
HVE asserting certain claims under this agreement. Subsequent to September
30, 1999, the Company and Mr. Klee Irwin, the Company's majority
stockholder and former Chief Executive Officer, entered into a Settlement
Agreement, that among other terms, resolved certain issues as it related
to HealthZone and the claims made by the former shareholders of HVE. In
accordance with the Agreement, (i) the Company agreed to use its best
efforts to spin-off HealthZone absent adverse tax consequences, (ii) Mr.
Irwin agreed to fund substantially all of the net operating losses of
HealthZone pending its spin-off or sale through the purchase of shares of
common stock of this subsidiary, and (iii) Mr. Irwin agreed to indemnify
the Company for uninsured losses and assume the defense of the claim
asserted by the former shareholders of HVE. See notes 7 and 9.
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 nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenue $ 9,949,000 $ 7,360,000 $ 25,923,000 $ 23,533,000
Net income (loss) (461,000) 732,000 (3,261,000) 957,000
Earnings (loss) per share $ (.02) $ .03 $ (.12) $ .03
</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.
9
<PAGE>
The following unaudited pro forma information sets forth the Company's
consolidated revenues, net loss and net loss per share for the three and
nine months ended September 30, 1999 and 1998 after giving pro forma
effect to the March 10, 1999 acquisition of the Inholtra assets 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 Ended Nine months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 9,949,000 $ 8,271,000 $ 26,530,000 $ 25,366,000
Net Income (loss) (461,000) 1,102,000 (3,020,000) 1,062,000
Income (Loss) per
share $ (.02) $ .04 $ (.11) $ .04
</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 by the buyer of a $1,300,000 existing first mortgage loan
on the Property, and (iii) the receipt of a $458,000 promissory note
secured by a second trust deed on 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 nine
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 $13,000,000 Term Loan is payable in quarterly installments of $583,333
beginning October 15, 1999, and 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, if required, 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,
10
<PAGE>
loan proceeds or proceeds from other non-operating activities to reduce
the outstanding debt. The Revolving Loan commitment expires on June 15,
2004, when the loan is payable in full. As of September 30, 1999, the
maximum additional credit available under the borrowing limitations was
$373,000.
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. As of September 30, 1999, the Company was
either in compliance with, or had obtained waivers for, all covenants,
limitations and restrictions.
5. COMPUTATION OF NET INCOME (LOSS) PER SHARE
For the three and nine month periods ended September 30, 1998, weighted
average shares outstanding included common stock equivalents of
approximately 178,000 and 213,000, respectively, related to stock options.
For the three and nine month periods ended September 30, 1999, no common
stock equivalents were included because they would have been
anti-dilutive.
6. SURGICAL TECHNOLOGIES, INC.
On August 31, 1999, the Company sold its remaining assets from its
Surgical Technologies Inc. ("Surgical") product line for certain
contingent consideration based upon the buyers ability to liquidate such
products. The Company previously reflected a loss of $640,000 in the
quarter ended June 30, 1999 relating to the disposal of these assets
consisting of a charge of $250,000 for obsolete and discontinued
inventory, and a charge of $390,000 relating to the remaining recorded
goodwill from the 1996 merger transaction with Surgical Technologies, Inc.
11
<PAGE>
7. CONTINGENCIES
Attorneys for the former shareholders of HVE have sent the Company a
demand letter alleging numerous causes of action against the Company,
its directors 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. As
part of the Settlement Agreement between the Company and Mr. Irwin, Mr.
Irwin agreed to assume the defense of this claim, and has indemnified the
Company for any uninsured losses attributable to the HVE acquisition. See
Note 9
8. RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform to 1999
presentation.
9. SUBSEQUENT EVENTS
On October 3, 1999 the Company executed a letter of intent with a private
investment fund to sell up to $3 million of convertible preferred stock.
The stock will bear a 5% coupon rate and will be convertible into common
shares of Omni Nutraceuticals at the higher of 110% of the trading price
at the date of closing, or at an average of closing bid prices as defined
existing immediately before the conversion date, up to a defined maximum
number of shares. The sale of the convertible preferred stock is expected
to occur by November 30, 1999, however, such financing is subject to final
negotiation, document preparation, approvals and the completion of
due-diligence by the buyer, and there is no assurance that this facility
will be put in place by such date, or if at all.
On October 8, 1999, the Company and Mr. Klee Irwin entered into a
settlement agreement (the "Settlement Agreement") in order to resolve
certain mutual claims that had arisen between the Company and Mr. Irwin.
Among the principal terms of the settlement were the following:
(a) The Company agreed to provide Mr. Irwin with the following severance
benefits: (a) a monthly payment in the same amount that he received
under his former employment agreement, for the period commencing
October 1, 1999 until the earlier of (i) April 16, 2000 or (ii) the
sale, merger, bankruptcy or other transaction involving HealthZone
which results in HealthZone being capitalized at more than
$1,700,000; (b) continued coverage for Mr. Irwin and members of his
immediate family under the Company's health insurance plans, and (c)
the continued provision of an automobile until November 22, 1999.
12
<PAGE>
(b) Mr. Irwin agreed to assume the defense of a claim asserted by the
former shareholders of HVE, a company acquired by HealthZone in
February 1999, and in connection therewith agreed to indemnify the
Company from any uninsured liability associated therewith except
that at Mr. Irwin's request the Company agreed to issue up to
363,636 shares of common stock to the former HVE shareholders in
settlement of their claim.
(c) Mr. Irwin agreed to reimburse the Company for any excess tax
payments made on his and his wife's behalf since October 17, 1997
attributable to all periods prior to the merger of Irwin Naturals
with and into 4Health, Inc.
(d) Mr. Irwin agreed to fund substantially all the net operating losses
of HealthZone pending its spin-off or sale by means of purchases of
shares of HealthZone common stock at a price per share based upon a
base valuation (as adjusted) for HealthZone of $3,500,000, until at
least $280,000 in aggregate common stock purchases have been made,
after which such price per share shall be based upon the greater of
such base valuation (as adjusted) or HealthZone's then market value.
(e) Mr. Irwin agreed that he would guarantee a market value for the
Company's ownership interest in HealthZone of $2.3 million as of one
year after a spin-off of HealthZone or October 8, 2001, and further
agreed that he would place in escrow 1,022,222 shares of his common
stock as security for such guarantee at such time as the Company
first filed a registration statement with the Securities and
Exchange Commission relating to the proposed spin-off of HealthZone.
(f) The Company, HealthZone and Mr. Irwin entered into a Tax Allocation
and Indemnification Agreement pursuant to which the Company and
HealthZone allocated certain tax liabilities and attributes between
themselves and HealthZone indemnified the Company for any liability
associated with the spin-off not qualifying as a tax free
transaction under Section 355 of the Internal Revenue Code of 1986,
as amended, with Mr. Irwin guaranteeing HealthZone's indemnification
obligation in the event of its bankruptcy.
(g) The Company and Mr. Irwin issued mutual releases and indemnified
each other against certain claims. As security for his
indemnification obligations Mr. Irwin placed in escrow with Wells
Fargo Bank 1,000,000 shares of his common stock, 500,000 shares of
which would be released on December 31, 1999 (in the absence of any
claims for indemnification asserted by the Company) and the balance
would be released on March 31, 2000 (in the absence of any claims
for indemnification asserted by the Company).
(h) The Company granted Mr. Irwin a "call" option on the Company's
shares of HealthZone for the greater of $2.3 million or HealthZone's
market value commencing March 31, 2000 if the spin-off is not
consummated before then.
(i) Mr. Irwin granted the Company a "put" option on its shares of
HealthZone for $2.3 million commencing June 1, 2000 if the spin-off
is not consummated before then or the Company's shares of HealthZone
are not sold for at least $2,300,000.
13
<PAGE>
(j) The Company agreed to bear the first $100,000 in expenses incurred
by the Company attributable to the spin-off and HealthZone agreed to
bear all documented and reasonable costs and expenses incurred by
the Company in excess of such $100,000 payment of such excess costs
to be personally guaranteed by Mr. Irwin.
In connection with the Settlement Agreement, Mr. Irwin and Omni's chairman
R. Lindsey Duncan, who together own approximately 74% of the outstanding
shares of voting capital stock of Omni, each entered into a five-year
voting agreement pursuant to which Mr. Irwin has agreed to certain
stand-still provisions and he and Mr. Duncan have agreed to vote their
respective shares of Omni common stock for their respective nominees for
Class I and II directors and the candidate for Class III director
nominated by the two Class II directors.
On or about October 8, 1999, Mr. Irwin made a capital contribution of
$410,000, and returned 941,436 shares of Omni Nutraceutical common stock
to the Company. The Company has set aside 363,363 of these shares to be
issued, if necessary, to the former owners of HVE, and the remainder will
be reflected as treasury stock.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On August 19, 1999 Irwin Naturals/ 4 Heath Inc. filed an amendment to its
Articles of Incorporation changing its name to Omni Nutraceuticals, Inc. (the
"Company"). 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 September 30, 1999 were
$9,949,000 with an operating loss of $160,000 and a net loss of $461,000, or
$.02 per basic and diluted share. Consolidated net sales for the same period in
the prior year were $7,225,000 with operating income of $988,000 and net income
of $924,000, or $.03 per basic and diluted share. The net loss for the three
month period ended September 30, 1999 was impacted by a charge of $261,000
incurred in connection with the relocation of the Company's corporate and
warehouse facilities and a $160,000 loss from operations from the Company's
wholly-owned Internet subsidiary, HealthZone.com. ("HealthZone").
Consolidated net sales for the nine months ended September 30, 1999 were
$25,800,000 with an operating loss of $2,979,000 and a net loss of $3,109,000,
or $.11 per basic and diluted share. Consolidated net sales for the same period
in the prior year were $23,066,000 with operating income of $1,470,000 and net
income of $1,360,000, or $.05 per basic and diluted share. The net loss for the
nine month period was impacted by; a $640,000 loss incurred with the curtailment
of the Company's Surgical Technologies operations; a charge of $261,000 incurred
with the relocation of the Company's corporate and warehouse facilities; and a
$590,000 loss in operations from HealthZone.
SALES
Net sales for the three months ended September 30, 1999, increased by
$2,724,000, or 38%, to $9,949,000 from $7,225,000 for the comparable period in
1998. The increase in sales relates primarily to the introduction of the
Company's new Inholtra pain relieving product, as well as an overall increase in
sales from certain of the Company's base product lines.
Net sales for the nine months ended September 30, 1999, increased by $2,734,000,
or 12%, to $25,800,000 from $23,066,000 for the comparable period in 1998. The
increase in sales relates primarily to the introduction of the Company's new
Inholtra pain relieving product, as well as an overall increase in certain of
the Company's base product lines.
15
<PAGE>
GROSS PROFIT
Gross profit for the three months ended September 30, 1999 increased by
$1,036,000, or 25%, to $5,220,000, from $4,184,000 for the comparable period in
1998. Gross profits as a percentage of sales for the three months ended June 30,
1999 decreased to 52% from 58% in the comparable period in 1998. The decrease
during the quarter in the gross margin resulted primarily from the recognition
of approximately $450,000 of sales credits and adjustments given to certain
customers in the third quarter of 1999 relating to previous quarter sales. The
remaining decrease in the margin is a result of a shift in product mix to
certain items that have a slightly lower margin.
Gross profit for the nine months ended September 30, 1999 increased $994,000,
or 8%, to $14,092,000 from $13,098,000 for the comparable period in 1998.
Gross profits as a percentage of sales for the nine months ended September
30, 1999 decreased to 55% from 57% in the comparable period in 1998. The
decrease in the margin relates to; (i) pricing concessions offered during the
first quarter of 1999 in conjunction with the launch and early stage sales of
several new products, (ii) sales adjustments given to certain customers, and
(iii) an overall 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 September 30, 1999
increased by $1,010,000, or 72% to $2,406,000 from $1,396,000 for the comparable
period in 1998. The increase primarily relates to wages, advertising and other
costs incurred on marketing and media campaigns to (i) launch the introduction
of Inholtra (ii) launch the Company's new products, Cholestaid and Veromax, for
the fourth quarter 1999 and fiscal 2000, (iii) media and advertising campaigns
to support certain of the Company's other products, and (iv) continual
repackaging and redesign of the Company's core product lines.
Sales and marketing expenses for the nine months ended September 30, 1999,
increased by $2,223,000, or 47% to $6,993,000 from $4,770,000 for the comparable
period in 1998. The increase primarily relates to wages, advertising and other
costs incurred on marketing and media campaigns to (i) launch the introduction
of Inholtra (ii) launch the Company's new products, Cholestaid and Veromax, for
the fourth quarter 1999 and fiscal 2000, (iii) media and advertising campaigns
to support certain of the Company's other products, and (iv) continual
repackaging and redesign of the Company's core product lines.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended September 30,
1999, increased by $402,000, or 28% to $1,846,000 from $1,444,000 for the
comparable period in 1998. The increase primarily relates to a $50,000 increase
in legal costs, $120,000 in costs incurred on the HealthZone operations and the
remainder related to miscellaneous costs incurred with the expansion of the
business.
General and administrative expenses for the nine months ended September 30,
1999, increased by $1,580,000, or 33% to $6,317,000 from $4,737,000 for the
comparable period in 1998. The increase primarily relates to a $335,000 increase
in legal and professional fees, $560,000 in costs incurred on the Company's
HealthZone operations, $225,000 for consulting costs incurred to implement the
Company's acquisition of Inholtra and other products, and approximately $350,000
in bad debts during the first quarter of 1999. The remainder of the increase
relates to overall increase in operating and overhead costs.
16
<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three months ended September 30, 1999,
increased by $264,000 to $456,000 from $192,000 for the comparable period in
1998. The increase specifically relates to amortization costs relating to the
Inholtra and HVE acquisitions.
Depreciation and amortization for the nine months ended September 30, 1999,
increased by $548,000 to $1,131,000 from $583,000 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 three months ending September 30, 1999 increased by
$372,000 to $408,000 from $36,000 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 term loan that the Company entered into on June 10,
1999.
Interest expense for the nine months ending September 30, increased $747,000 to
$872,000 from $125,000 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 nine months ended September 30, 1999, the Company
experienced negative cash flow from operations of $2,444,000 and utilized
another $13,768,000 for investing activities, of which $13,471,000 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
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 September 30,
1999, the maximum additional available credit under the borrowing limitations
was $373,000. 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
17
<PAGE>
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.
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. As of September 30, 1999, the Company was either in compliance
with, or had obtained waivers for, all covenants, limitations and restrictions.
The Company expects to be out of compliance with certain of the financial ratios
at December 31, 1999, and may not have the available funds to meet its next
required payment on January 15, 2000 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.
On October 3, 1999 the Company executed a letter of intent with a
private investment fund to sell up to $3 million of convertible preferred stock.
The stock will bear a 5% coupon rate and will be convertible into common shares
of Omni Nutraceuticals at the higher of 110% of the trading price at the date of
closing, or at an average of closing bid prices as defined existing immediately
before the conversion date, up to a defined maximum number of shares. The sale
of the convertible preferred stock is expected to occur by November 30, 1999,
however, such financing is subject to final negotiation, document preparation,
approvals and the completion of due-diligence by the buyer, and there is no
assurance that this facility will be put in place by such date, or if at all.
The Company has been notified by the Nasdaq Stock Market that the Company
failed to meet the minimum tangible net asset requirement necessary for
continued listing on the Nasdaq National Market. The Company has presented a
specific plan to Nasdaq for achieving compliance with all Nasdaq National Market
listing requirements, including the sale of the convertible preferred stock
described above and a capital contribution of $410,000 made to the Company by
Mr. Klee Irwin on or about October 8, 1999. The Company believes its plan
satisfies all Nasdaq requirements, however, there is no assurance that Nasdaq
will accept the Company's plan or that the Company will be successful in its
attempt to remain listed on the
18
<PAGE>
Nasdaq National Market. If the Company is de-listed from the National Market,
the Company may apply for listing to the Nasdaq Small Cap Market or to the
American Stock Exchange.
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 ensure this equipment will be effective in the Y2K. The
Company is also working with its processing banks and network providers to
ensure their systems are Y2K 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.
19
<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 have sent the Company a
demand letter alleging numerous causes of action against the Company,
its directors 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, 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 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. As part of the Settlement Agreement between the Company
and Mr. Irwin, Mr. Irwin agreed to assume the defense of this claim, and
has indemnified the Company for any uninsured losses attributable to the
HVE acquisition.
On October 8, 1999, the Company entered into a Settlement Agreement
resolving a dispute between itself and co-founder Klee Irwin, who is
currently the CEO of HealthZone, and was previously the CEO of Omni. Among
the principal terms of the settlement, the parties agreed to; a mutually
agreeable severance package for Mr. Irwin; Mr. Irwin agreed to assume the
defense of a claim previously asserted by the former shareholders of HVE
acquired by HealthZone in February 1999; Mr. Irwin agreed to reimburse Omni
for any excess tax payments that may have been made on his behalf and to
fund substantially all of the net operating losses of HealthZone pending
its spin-off or sale; Omni and Mr. Irwin agreed to certain put and call
options with respect to HealthZone in the event it fails to be spun-off by
June 2000; Mr. Irwin guaranteed a minimum value to Omni stockholders for
their interest in HealthZone on the earlier of one year after the spin-off
or October 8, 2001 (assuming no prior exercise of such options to acquire
HealthZone); and Omni and Mr. Irwin indemnified each other against certain
potential claims. In connection with the settlement, Mr. Irwin and Omni's
chairman R. Lindsey Duncan, who together own approximately 74% of the
outstanding shares of voting capital stock of Omni, each entered into a
five-year voting agreement pursuant to which Mr. Irwin has agreed to
certain stand-still provisions and he and Mr. Duncan have agreed to vote
their respective shares of Omni common stock for their respective nominees
for Class I and II directors and the candidate for Class III director
nominated by the two Class II directors. See Note 9 to the Financial
Statements made a part hereof.
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 Omni Nutraceuticals, Inc. business or results of
operations.
20
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the quarter ended September 30, 1999, the Company issued 33,000
shares of common stock valued at prices ranging from $1.43 to $2.37 per
share to consultants and to settle certain obligations. The shares were
issued pursuant to the exemption from registration under the Securities
Act of 1933, as amended, afforded by Section 4(2) thereof.
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 became effective on August 19, 1999.
ITEM 5. OTHER MATTERS
On October 18, 1999, Omni Nutraceuticals, Inc. relocated its
corporate headquarters to 5310 Beethoven Street, Los Angeles, California
90066.
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.
(c) A Current Report on Form 8-K was filed on August 22, 1999 reporting
that the Company changed its name from "Irwin Naturals/4Health,Inc."
to "Omni Nutraceuticals, Inc."
(d) A Current Report on Form 8-K was filed on October 28, 1999 reporting
the Settlement Agreement between the Company and Mr. Klee Irwin, the
Company's majority stockholder and former Chief Executive Officer.
21
<PAGE>
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.
Omni Nutraceuticals, Inc.
Dated: November 12, 1999 By: /s/ Corey E. Fischer
------------------------------
Corey Fischer
Chief Financial Officer
22
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