SURGICAL
TECHNOLOGIES, INC.
2801 South Decker Lake Lane
Salt Lake City, Utah 84119
(801) 974-5555
(801) 974-5511
June 28, 1996
Dear Stockholder:
We are pleased to send you the enclosed Joint Proxy Statement/Prospectus
relating to the proposed merger of Surgical Technologies, Inc. ("Surgical"),
with 4health Inc., a Boulder, Colorado-based supplier and formulator of
nutritional supplements ("4Health").
In the merger, 4Health will be merged with and into Surgical, with the
shares of outstanding common and preferred stock of 4Health converted into an
aggregate of approximately 9,000,000 shares of common stock of the surviving
corporation ("New Common Stock"), subject to certain adjustments, and each four
shares of common stock of Surgical issued and outstanding prior to the Effective
Time of the merger converted into two shares of New Common Stock and one warrant
to purchase a share of New Common Stock exercisable at $11.00 per share. As a
result of these actions, the current shareholders of 4Health will own
approximately 80% of the combined company, while the current shareholders of
Surgical will own the remaining approximately 20%. As part of the merger, five
nominees of 4Health and two current directors of Surgical will be elected to the
board of directors of the combined company, the name of Surgical will be changed
to "4Health, Inc.," and certain amendments to the articles of incorporation of
the surviving corporation will be adopted. In connection with the merger
transaction, you will also be asked to approve a Long-Term Stock Incentive Plan.
The proposed merger with 4Health is the culmination of the program that
Surgical initiated during 1995 to liquidate certain of its operating assets and
operations as a basis for entering into other business opportunities that would
provide the potential for greater value to its stockholders. Pursuant to this
plan, during the last year Surgical has disposed of its disposable surgical pack
and drape manufacturing product lines as well as its specialty metals
fabrication business segment, leaving Surgical with the business and assets
related to its Transflator(R) device, its sole remaining operation, and cash and
other liquid assets.
Completion of the proposed merger and other proposals submitted to the
stockholders depends on approval by the holders of a majority of the issued and
outstanding common stock of Surgical and on the fulfillment of a number of other
terms and conditions set forth in detail in the attached Joint Proxy
Statement/Prospectus. Directors, executive officers, and certain stockholders
of Surgical holding an aggregate of 2,278,329 shares, or approximately 50.2% of
the shares issued and outstanding, have delivered their irrevocable proxies to
vote in favor of the Merger and have committed to voting in favor of the
adoption of the LTSIP, so that the vote of no other stockholders will be
required to approve the proposals.
The board of directors of Surgical has unanimously approved the merger and
other matters to be submitted to the stockholders, and recommends that the
Surgical stockholders vote to approve the merger and each of the matters set
forth in the attached Notice of Special Meeting in Lieu of Annual Meeting to be
submitted to the stockholders for their consideration at the meeting. As
discussed in the enclosed Joint Proxy Statement/Prospectus certain members of
the board of directors are subject to conflicts of interest in connection with
the proposed merger that should be considered by stockholders in connection with
their vote.
The enclosed Joint Proxy Statement/Prospectus sets forth details respecting
the proposed merger and other matters to be submitted to the stockholders for
consideration. We urge you to read and study it carefully. So that your stock
ownership may be represented at the stockholders' meeting, please complete,
sign, date, and return the enclosed form of proxy promptly. By doing so, you
are assured of representation irrespective of whether you attend the meeting.
Subsequent to the merger, the transfer agent will mail a letter of
transmittal to each stockholder of record with specific instructions as to the
procedure for exchanging certificates representing Surgical common stock for
certificates representing New Common Stock and warrants. The name, address, and
telephone number of the transfer agent is Zions First National Bank, N.A.,
Corporate Trust Department, Third Floor, 10 East South Temple, Salt Lake City,
Utah 84111, telephone number (801) 524-4624.
Please complete, sign, date, and return the enclosed form of proxy in the
postage prepaid envelope provided for your convenience. No postage is required
if mailed in the United States.
Sincerely,
Surgical Technologies, Inc.
Rex Crosland, President
4health Inc.
5485 Conestoga Court
Boulder, Colorado 80301
Ph: 303-546-6303
Fax 303-546-0409
June 28, 1996
Dear Stockholder:
We are pleased to send you the enclosed Joint Proxy Statement/Prospectus
relating to the proposed merger of 4health Inc. ("4Health"), with and into
Surgical Technologies, Inc. ("Surgical"), a publicly traded Utah corporation
whose principal assets consist of cash and other current assets and assets
related to its angioplasty device.
In the merger, 4Health will be merged with and into Surgical, with the
shares of outstanding common and preferred stock of 4Health converted into an
aggregate of approximately 9,000,000 shares of common stock of the surviving
corporation ("New Common Stock"), subject to certain adjustments, and each four
shares of common stock of Surgical issued and outstanding prior to the Effective
Time of the merger converted into two shares of New Common Stock and one warrant
to purchase a share of New Common Stock exercisable at $11.00 per share. As
part of the merger, five nominees of 4Health and two of the current directors of
Surgical will be elected to the board of directors of Surgical, and the name of
Surgical will be changed to "4Health, Inc."
The board of directors of 4Health believes that the proposed merger with
Surgical is an important step in obtaining additional capital to fund our
accelerated expansion effort; enhancing 4Health's ability to complete
acquisitions (should one be identified in the future) with stock, thus
conserving cash; gaining access to the equity markets for future capital needs;
and providing long-term liquidity to our stockholders through the ownership of
stock in a publicly traded company.
Completion of the proposed merger depends on approval by the holders of a
majority of the issued and outstanding shares of Common Stock and a majority of
the issued and outstanding Series A Convertible Preferred Stock of 4Health and
on the fulfillment of a number of other terms and conditions set forth in detail
in the attached Joint Proxy Statement/Prospectus. Directors, executive
officers, and certain stockholders of 4Health holding an aggregate of 4,448,833
shares of Common Stock, or approximately 74.4% of the shares issued and
outstanding, and all of the 4Health Series A Convertible Preferred Stock
outstanding, have delivered their irrevocable proxies to vote in favor of the
proposed merger so that the vote of no additional shares of 4Health Common Stock
or 4Health Series A Convertible Preferred Stock will be required to approve the
merger.
The board of directors of 4Health has unanimously approved the merger and
recommends that the 4Health stockholders vote to approve the merger and each of
the matters set forth in the attached Notice of Special Meeting in Lieu of an
Annual Meeting to be submitted to the stockholders for their consideration at
the meeting.
Subsequent to the merger, the transfer agent will mail a letter of
transmittal to each stockholder of record with specific instructions as to the
procedure for exchanging certificates representing 4Health common stock and
preferred stock for certificates representing New Common Stock. The name,
address, and telephone number of the transfer agent is Zions First National
Bank, N.A., Corporate Trust Department, Third Floor, 10 East South Temple, Salt
Lake City, Utah 84111, telephone number (801) 524-4624.
The enclosed Joint Proxy Statement/Prospectus sets forth details respecting
the proposed merger and other matters to be submitted to the stockholders for
consideration. We urge you to read and study it carefully. So that your stock
ownership may be represented at the stockholders' meeting, please complete,
sign, date, and return the enclosed form of proxy promptly. By doing so, you
are assured of representation irrespective of whether you attend the meeting.
Please complete, sign, date, and return the enclosed form of proxy in the
postage prepaid envelope provided for your convenience. No postage is required
if mailed in the United States.
Sincerely
4health Inc.
R. Lindsey Duncan, Chairman and
Chief Executive Officer
SURGICAL
TECHNOLOGIES, INC.
NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of Surgical Technologies, Inc.:
Notice is hereby given that a special meeting in lieu of an annual meeting
of the stockholders of Surgical Technologies, Inc., a Utah corporation
("Surgical"), will be held on July 15, 1996, at 10:00 a.m., Mountain time,
at the Little America Hotel, 500 South Main Street, Salt Lake City, Utah
84101, to consider and take action upon the following matters:
1. Approval of an Agreement and Plan of Merger (the "Merger
Agreement"), between 4health Inc., a California corporation ("4Health") and
Surgical, pursuant to which 4Health will be merged with and into Surgical
(the "Merger") and, in connection therewith, (a) the shares of common
stock, no par value, of 4Health ("4Health Common Stock") and the shares of
Series A Convertible Preferred Stock, par value $1.00 per share, of 4Health
("4Health Series A Stock") issued and outstanding immediately prior to the
Effective Time (as defined in the Merger Agreement) will be converted at
the Effective Time, into the right to receive an aggregate of
approximately 9,000,000 shares of common stock of the surviving corporation
in the Merger ("New Common Stock"), with the effect that each share of
outstanding 4Health Common Stock will be converted into 1.50467 shares of
New Common Stock and each share of 4Health Series A Stock will be converted
into 25.07782 shares of New Common Stock, subject to certain adjustments
and subject to the rights of dissenting holders of such shares of 4Health
Common Stock to seek an appraisal of the fair value thereof as provided in
section 1300 of the General Corporation Law of the State of California, (b)
each four shares of common stock, $0.01 par value per share of Surgical
("Surgical Stock") issued and outstanding immediately prior to the
Effective Time will be converted at the Effective Time into two shares of
New Common Stock and one warrant to purchase a share of New Common Stock
exercisable at $11.00 per share, subject to certain adjustments and subject
to the right of dissenting holders of such shares of Surgical Stock to seek
an appraisal of the fair value thereof as provided in part 13 of the Utah
Revised Business Corporation Act, (c) R. Lindsey Duncan, Richard B.
Carlock, Cheryl M. Wheeler, Henry S. Stone, David A. Melman, Todd B.
Crosland, and Rockwell D. Schutjer shall be elected to the board of
directors of Surgical, as the surviving corporation, and (d) the articles
of incorporation of Surgical will be amended to (i) change its name to
"4Health, Inc.," (ii) increase the authorization of New Common Stock to
30,000,000 shares, (iii) add a "fair price" provision in the event of
certain corporate transactions, and (iv) restrict the use of written
consents of stockholders in lieu of meetings;
2. Adoption of the 1996 Long-Term Stock Incentive Plan;
3. If the transaction contemplated by the Merger Agreement is not
completed for any reason, to elect Todd B. Crosland and Rockwell D.
Schutjer as directors to serve until the 1999 annual meeting and until
their successors are elected and qualified; and
4. Transaction of such other business as may properly come before
the meeting.
Your board of directors unanimously recommends a vote "for" all of the
above proposals. Certain of the Surgical directors have conflicts of interest
in connection with the proposed merger, which are described in more detail in
the accompanying Joint Proxy Statement/Prospectus.
Only stockholders of record as of the close of business on June 5, 1996
(the "Record Date") are entitled to notice of and to vote at the meeting. The
attendance at and/or vote of each stockholder at the meeting is important, and
each stockholder is encouraged to attend.
By Order of the Board of Directors
Jana K. Meyer, Secretary
Salt Lake City, Utah
June 27, 1996
4HEALTH INC.
NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of 4health Inc.:
Notice is hereby given that a special meeting in lieu of an annual meeting
of the stockholders of 4health Inc., a California corporation ("4Health"), will
be held on July 15, 1996, at 9:30 a.m., Mountain time, at the Little America
Hotel, 500 South Main Street, Salt Lake City, Utah 84101, to consider and
take action upon the following matters:
1. Approval of an Agreement and Plan of Merger (the "Merger
Agreement"), between 4Health and Surgical Technologies, Inc., a Utah
corporation ("Surgical"), pursuant to which 4Health will be merged with and
into Surgical (the "Merger") and, pursuant thereto, (a) the shares of
common stock, no par value, of 4Health ("4Health Common Stock") and the
shares of Series A Convertible Preferred Stock, par value $1.00 per share,
of 4Health ("4Health Series A Stock") issued and outstanding immediately
prior to the Effective Time (as defined in the Merger Agreement) will be
converted at the Effective Time, into the right to receive an aggregate of
approximately 9,000,000 shares of common stock of the surviving corporation
in the Merger ("New Common Stock"), with the effect that each share of
outstanding 4Health Common Stock will be converted into 1.50467 shares of
New Common Stock, and each share of 4Health Series A Stock will be
converted into 25.07782 shares of New Common Stock, subject to certain
adjustments and subject to the rights of dissenting holders of such shares
of 4Health Common Stock to seek an appraisal of the fair value thereof as
provided in section 1300 of the General Corporation Law of the State of
California, (b) each four shares of common stock, $0.01 par value per share
of Surgical ("Surgical Stock") issued and outstanding immediately prior to
the Effective Time will be converted at the Effective Time into two shares
of New Common Stock and a warrant to purchase a share of New Common Stock
exercisable at $11.00 per share, subject to certain adjustments and subject
to the right of dissenting holders of such shares of Surgical Stock to seek
an appraisal of the fair value thereof as provided in part 13 of the Utah
Revised Business Corporation Act, (c) R. Lindsey Duncan, Richard B.
Carlock, Cheryl M. Wheeler, Henry S. Stone, David A. Melman, Todd B.
Crosland, and Rockwell D. Schutjer shall be elected to the board of
directors of Surgical, as the surviving corporation, and (d) the articles
of incorporation of Surgical will be amended to (i) change its name to
"4Health, Inc.," (ii) increase the authorization of New Common Stock to
30,000,000 shares, (iii) add a "fair price" provision in the event of
certain corporate transactions, and (iv) restrict the use of written
consents of stockholders in lieu of meetings; and
2. To transact such other business as may properly come before the
meeting.
Your board of directors unanimously recommends a vote "for" all of the
above proposals, which are described in more detail in the accompanying Joint
Proxy Statement/Prospectus.
Only stockholders of record as of the close of business on June 12, 1996
(the "Record Date") are entitled to notice of and to vote at the meeting. The
attendance at and/or vote of each stockholder at the meeting is important, and
each stockholder is encouraged to attend.
By Order of the Board of Directors
Cheryl Wheeler, Secretary
Boulder, Colorado
June 27, 1996
Joint Proxy Statement for
Special Meeting in Lieu of Annual Meetings of Stockholders of
SURGICAL TECHNOLOGIES, INC.
and
4HEALTH INC.
Prospectus for
SURGICAL TECHNOLOGIES, INC.
Common Stock to be Issued in the Acquisition of 4health Inc.,
Common Stock Purchase Warrants to be Issued to Surgical Technologies, Inc.
Stockholders, and Common Stock Issuable on the Exercise of Such Warrants
The stockholders of Surgical and 4Health should consider the matters set
forth under "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE OR OTHER REGULATORY
AUTHORITY, NOR HAS THE COMMISSION OR ANY STATE OR REGULATORY AUTHORITY
PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
IMPORTANT
Regardless of whether you plan to attend the stockholders' meeting in person,
please fill in, sign, date, and return the enclosed proxy promptly in the self-
addressed, stamped envelope provided. No postage is required if mailed in the
United States.
SPECIAL REQUEST
If your shares are held in the name of a brokerage firm, nominee, or other
institution, only it can vote your shares. Please contact promptly the person
responsible for your account and give instructions for your shares to be voted.
The date of this Joint Proxy Statement/Prospectus is June 27, 1996.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
AVAILABLE INFORMATION
Surgical is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, has filed reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other information can
be inspected at the principal offices of the Commission at Room 2104, 450 Fifth
Street, N.W., Washington, D.C., 20549, as well as the regional offices of the
Commission at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661; and 7 World Trade Center (13th Floor), 26 Federal
Plaza, New York, New York 10048. Copies of such material can be obtained from
the public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, on the payment of prescribed rates for reproduction.
Additional information regarding Surgical and the securities offered hereby
is contained in the registration statement, and exhibits thereto, of which this
Joint Proxy Statement/Prospectus forms a part (the "Registration Statement")
filed with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"). This Joint Proxy Statement/Prospectus omits certain
information contained in the Registration Statement. For further information,
reference is made to the Registration Statement and to the exhibits and other
schedules filed therewith. Statements contained in this Joint Proxy
Statement/Prospectus as to the contents of any contract or other document
referred to are not necessarily complete, and where such contract or other
document is an exhibit to the Registration Statement, each such statement is
deemed to be qualified and amplified in all respects by the provisions of the
document. Copies of the complete Registration Statement, including exhibits,
may be examined, or copies obtained from, the offices of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, on the payment of prescribed rates
for reproduction.
No person has been authorized to give any information or to make any
representations in connection with the transactions described in this Joint
Proxy Statement/Prospectus, other than those contained in this Joint Proxy
Statement/Prospectus and, if given or made, such other information or
representations must not be relied upon as having been authorized by Surgical.
The delivery of this Joint Proxy Statement/Prospectus shall not, under any
circumstances, create any implication that there has been no change in the
information set forth herein since the date hereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Surgical's annual report on Form 10-K for the fiscal year ended March 31,
1995, as amended, its current report on form 8-K dated April 10, 1996, and its
quarterly reports on form 10-Q for the fiscal quarters ended June 30, September
30, and December 31, 1995, are hereby incorporated by reference into this Joint
Proxy Statement/Prospectus. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Joint Proxy Statement/Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Joint Proxy Statement/Prospectus.
Surgical will provide, without charge, to each person to whom a copy of
this Joint Proxy Statement/Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
which have been or may be incorporated by reference into this Joint Proxy
Statement/Prospectus, other than certain exhibits to such documents. Requests
for such copies should be directed to Stockholder Relations, Surgical
Technologies, Inc., 2801 South Decker Lake Lane, Salt Lake City, Utah 84119;
telephone (801) 974-5555.
TABLE OF CONTENTS
INTRODUCTION....................................................7
SUMMARY.........................................................6
DEFINITIONS.....................................................9
RISK FACTORS...................................................15
THE MERGER.....................................................30
MARKET PRICE FOR SURGICAL STOCK................................42
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....46
DESCRIPTION OF SECURITIES.......................................1
COMPARISON OF SECURITIES........................................6
BUSINESS OF SURGICAL...........................................21
BUSINESS OF 4HEALTH.............................................8
BUSINESS OF THE SURVIVING CORPORATION FOLLOWING THE MERGER......5
MANAGEMENT......................................................7
EXECUTIVE COMPENSATION..........................................3
CERTAIN TRANSACTIONS............................................1
PRINCIPAL STOCKHOLDERS..........................................7
TAX CONSEQUENCES................................................1
OTHER SURGICAL STOCKHOLDER MATTERS..............................8
EXPERTS........................................................16
VALIDITY OF NEW COMMON STOCK AND WARRANTS......................17
INDEX TO FINANCIAL STATEMENTS..................................18
INDEX TO APPENDICES
A. Agreement and Plan of Merger
B. Form of Warrant Agreement and Form of Warrant
C. Form of Sale Restriction Agreement
D. Form of Articles of Merger with Plan of Merger attached
E. Copy of California Law relating to Dissenting 4Health Stockholders'
dissenters' rights of appraisal
F. Copy of Utah Law relating to Dissenting Surgical Stockholders'
dissenters' rights of appraisal
G. 1996 Long-Term Stock Incentive Plan
JOINT PROXY STATEMENT/PROSPECTUS
SURGICAL TECHNOLOGIES, INC. 4HEALTH INC.
2801 South Decker Lake Lane 5485 Conestoga Court
Salt Lake City, Utah 84119 Boulder, Colorado 80301
Telephone (801) 974-5555 Telephone (303) 546-6306
Telecopy: (801) 974-5511 Telecopy: (303) 546-6416
INTRODUCTION
This Joint Proxy Statement and Prospectus (this "Joint Proxy
Statement/Prospectus") serves as a joint proxy statement for the special
meetings in lieu of annual meetings of the stockholders of Surgical
Technologies, Inc., a Utah corporation ("Surgical"), and 4health Inc., a
California corporation ("4Health"), at which the stockholders of Surgical and
4Health will consider approval of an Agreement and Plan of Merger (the "Merger
Agreement"), between 4Health and Surgical, pursuant to which 4Health will be
merged with and into Surgical (the "Merger") and, in connection therewith, (a)
the shares of common stock, no par value, of 4Health ("4Health Common Stock")
and the shares of Series A Convertible Preferred Stock, par value $1.00 per
share, of 4Health ("4Health Series A Stock") issued and outstanding immediately
prior to the Effective Time (as defined in the Merger Agreement) will be
converted at the Effective Time, into the right to receive an aggregate of
approximately 9,000,000 shares of common stock of the surviving corporation in
the Merger ("New Common Stock"), with the effect that each share of outstanding
4Health Common Stock will be converted into 1.50467 shares of New Common Stock
(the "4Health Common Stock Conversion Ratio"), and each share of 4Health Series
A Stock will be converted into 25.07782 shares of New Common Stock (the "4Health
Series A Conversion Ratio"), subject to certain adjustments and subject to the
rights of certain holders of such shares of 4Health Common Stock (each a
"Dissenting 4Health Common Stockholder") to seek an appraisal of the fair value
thereof as provided in section 1300 of the General Corporation Law of the State
of California ("California Law"), (b) each four shares of common stock, $0.01
par value per share of Surgical ("Surgical Stock") issued and outstanding
immediately prior to the Effective Time will be converted at the Effective Time
into two shares of New Common Stock and a warrant to purchase a share of New
Common Stock exercisable at $11.00 per share, subject to certain adjustments
(the "Surgical Conversion Ratio"), subject to the right of certain holders of
such shares of Surgical Stock (each a "Dissenting Surgical Stockholder") to seek
an appraisal of the fair value thereof as provided in part 13 of the Utah
Revised Business Corporation Act ("Utah Law"), (c) R. Lindsey Duncan, Richard B.
Carlock, Cheryl M. Wheeler, Henry S. Stone, David A. Melman, Todd B. Crosland,
and Rockwell D. Schutjer shall be elected to the board of directors of Surgical,
as the surviving corporation (the "Surviving Corporation"), and (d) the articles
of incorporation of Surgical will be amended to (i) change its name to "4Health,
Inc.," (ii) increase the authorization of New Common Stock to 30,000,000 shares,
(iii) add a "fair price" provision in the event of certain corporate
transactions, and (iv) restrict the use of written consents of stockholders in
lieu of meetings.
The warrants (the "Warrants") to be issued to the holders of Surgical Stock
will entitle the holder of each Warrant to purchase one share of New Common
Stock at any time within 18 months after the completion of the Merger (the
"Closing Date"), exercisable at $11.00 per share. The Warrants may be redeemed
by the Surviving Corporation at $0.01 per Warrant on 30 days' prior written
notice to the Warrant holders, subject to exercise during the notice period;
provided that, the average closing price for the New Common Stock on its
principal trading market for at least 30 consecutive trading days ending within
10 days prior to the notice of redemption is at least $13.75 per share. See
"DESCRIPTION OF SECURITIES."
Pursuant to the Merger, outstanding options to purchase 4Health Common
Stock will be exchanged into options of like tenor to purchase New Common Stock,
appropriately adjusted to give effect to the 4Health Common Stock Conversion
Ratio and outstanding options to purchase Surgical Stock will be adjusted to
give effect to the Surgical Conversion Ratio.
The number of shares of New Common Stock issuable to the holders of 4Health
Common Stock and Series A Stock (collectively, the "4Health Stockholders") shall
be adjusted in the event that the Surviving Corporation does not realize at
least $2,000,000 in earnings, before interest and income taxes ("IDT Earnings"),
within 12 months of the Closing Date from the exploitation of Surgical's
angioplasty inflation device ("Transflator(R)") technology ("ID Technology"),
the sale of products based on its ID Technology, or joint venture income based
on the ID Technology, by increasing the number of shares of New Common Stock
issuable to the former 4Health Stockholders, on a pro rata basis based on the
number of shares of New Common Stock issued to them in the Merger, in an amount
equal to the quotient calculated by dividing (a) the amount by which $2,000,000
exceeds the IDT Earnings by (b) $4.00 (the "Contingent Shares").
In addition to the Merger and the related amendments to the articles of
incorporation, the stockholders of Surgical will consider the proposal to adopt
the 1996 Long-Term Stock Incentive Plan.
The completion of the Merger involves certain risks. See "'RISK FACTORS."
The Surgical Stock is traded in the over-the-counter market and is included
in the Nasdaq National Market ("NNM") under the symbol "SGTI." On June 13,
1996, the closing sales price for the Surgical Stock as reported by NNM was
$6.875. Surgical has applied to have the New Common Stock included, upon
issuance, in the NNM system under the symbol "HHHH," and to have the Warrants
included, upon issuance, under the symbol "HHHHW," but there is no assurance
that such stock and Warrants will be so included.
This Joint Proxy Statement/Prospectus is first being provided to
stockholders of Surgical and 4Health on <mailing date>, 1996.
SUMMARY
The following is a brief summary and is intended merely to highlight
certain information included in this Joint Proxy Statement/Prospectus. The
summary is incomplete and is qualified in its entirety by the more detailed
information contained elsewhere in this Joint Proxy Statement/Prospectus.
Capitalized terms and other words used in the summary have the meanings set
forth elsewhere and under the caption "Definitions."
The Parties
Surgical Surgical was, until 1995, engaged in the manufacture and
marketing of a variety of pre-packaged sterile surgical
products for angiography and angioplasty procedures, medical
devices used in interventional catheterization procedures,
and drapes and similar items for use in various diagnostic,
surgical, and medical procedures. It also engaged in
specialty metals fabrication. Since September 30, 1995,
Surgical has disposed of its disposable surgical pack and
drape manufacturing product lines as well as its specialty
metals fabrication business segment, retaining the technology
and operations related to its angioplasty inflation device
marketed under the name Transflator(R) as its sole remaining
operation. Currently, Surgical's principal assets are the ID
Technology assets and operations and cash and other current
assets. See "BUSINESS OF SURGICAL."
4Health 4Health was organized in February 1993, and formulates and
supplies nutritional supplements which are available
nationwide through an estimated 5,000 health food stores and
health care providers. See "BUSINESS OF 4HEALTH."
The Merger The Merger Agreement between Surgical and 4Health provides
for the merger of 4Health with and into Surgical, pursuant to
which:
(a) the shares of 4Health Common Stock and the shares
of 4Health Series A Stock issued and outstanding
immediately prior to the Effective Time will be converted
at the Effective Time into the right to receive an
aggregate of approximately 9,000,000 shares of New Common
Stock, with the effect that each share of outstanding
4Health Common Stock will be converted into 1.50467
shares of New Common Stock and each share of 4Health
Series A Stock will be converted into 25.07782 shares of
New Common Stock, subject to the possible issuance of
additional Contingent Shares and subject to the right of
Dissenting 4Health Common Stockholders to seek an
appraisal of the fair market value thereof as provided in
section 1300 of the California Law;
(b) each four shares of Surgical Stock issued and
outstanding immediately prior to the Effective Time will
be converted at the Effective Time into two shares of New
Common Stock and one Warrant, subject to the right of
Dissenting Surgical Stockholders to seek an appraisal of
the fair market value thereof as provided in part 13 of
Utah Law;
(c) the board of directors of Surgical, as the
surviving corporation (the "Surviving Corporation"), will
be reconstituted to include five designees of 4Health, R.
Lindsey Duncan, Richard B. Carlock, Cheryl M. Wheeler,
Henry S. Stone, and David A. Melman, and two designees of
Surgical, Todd B. Crosland and Rockwell D. Schutjer; and
(d) the articles of incorporation of Surgical will be
amended to (i) change its name to "4Health, Inc.," (ii)
increase the authorization of New Common Stock to
30,000,000 shares, (iii) add a "fair price" provision in
the event of certain corporate transactions, and (iv)
restrict the use of written consents of stockholders in
lieu of meetings. See "THE MERGER: Special Articles of
Incorporation Provisions."
No fractional shares of New Common Stock or Warrants will be
issued to stockholders of either Surgical or 4Health, but in
lieu thereof the Surviving Corporation will pay the value
thereof in cash.
As part of the Merger, outstanding options to purchase an
aggregate of 121,000 shares of Surgical Stock at a weighted
average price of $3.22 per share will be adjusted in
accordance with the Surgical Conversion Ratio, to options to
purchase an aggregate of 60,500 shares of New Common Stock at
a weighted average price of $6.44 per share, and options to
purchase an aggregate of 265,000 shares of Surgical Stock at
$4.00 per share awarded to two directors of Surgical under
the 1996 Long-Term Stock Incentive Plan (the "LTSIP") will
become effective on the approval of the LTSIP by the Surgical
Stockholders. See "EXECUTIVE COMPENSATION: Surgical-Options
to Executive Officers, Directors, and Others."
As part of the Merger, outstanding options to purchase an
aggregate of 599,999 shares of 4Health Common Stock at a
weighted average price of $6.70 per share will be exchanged
for options to purchase an aggregate of 902,800 shares of New
Common Stock at a weighted average price of $4.45 per share,
after giving effect to the 4Health Common Stock Conversion
Ratio. If the 1996 Long-Term Stock Incentive Plan (the
"LTSIP") is approved by the Surgical Stockholders at the
Stockholders' Meeting, such options will be exchanged for new
options of like tenor issued under the LTSIP ("New LTSIP
Options"). See "EXECUTIVE COMPENSATION: 4Health-Options to
Executive Officers, Directors, and Others."
The number of shares of New Common Stock issuable to the
holders of 4Health Common Stock and Series A Stock shall be
adjusted in the event that the Surviving Corporation, within
a 12 months period following the Closing Date, does not
realize at least $2,000,000 in earnings, before interest and
income taxes, computed in accordance with generally accepted
accounting principles, from exploitation of Surgical's ID
Technology, the sale of products based on its ID Technology,
or joint venture income based on the ID Technology, by
increasing the number of shares of New Common Stock issuable
to the former 4Health Stockholders, on a pro rata basis based
on the number of shares of New Common Stock issued to them in
the Merger, in an amount equal to the quotient calculated by
dividing (a) the amount by which $2,000,000 exceeds the IDT
Earnings by (b) $4.00.
The complete terms and conditions of the Merger are set forth
in the Merger Agreement between Surgical and 4Health dated
April 10, 1996, as amended June 4, 1996, a copy of which is
included as Appendix "A" and incorporated herein by this
reference. See "THE MERGER."
Certificates for
New Common Stock
and Warrants Record Holders of Surgical Stock, 4Health Common Stock, and
4Health Series A Stock will, subsequent to the Effective
Date, receive a transmittal letter from the transfer agent of
the Surviving Corporation, Zions First National Bank, N.A.
(the "Transfer Agent"), providing instructions for submitting
certificates representing the Surgical Stock, the 4Health
Common Stock, or the 4Health Series A Stock, as the case may
be, to be exchanged for certificates representing the New
Common Stock and, if appropriate, Warrants. Stockholders who
would otherwise be entitled to a fractional share of New
Common Stock will also receive cash consideration in lieu of
such fractional share.
Management of the
Surviving
Corporation Following the Merger, the officers of 4Health will become the
officers of the Surviving Corporation and the board of
directors of the Surviving Corporation will consist of five
designees of 4Health and two designees of Surgical. See "THE
MERGER: Management of the Surviving Corporation."
Surgical Stockholders'
Meeting
Record Date
and Time Stockholders of record of Surgical Stock as of the close of
business on June 5, 1996 (the "Surgical Record Date"), are
entitled to notice of, and to vote at, the meeting of the
Surgical Stockholders to be held at 10:00 a.m., local time, on
July 15, 1996, at the Little America Hotel, 500 South Main
Street, Salt Lake City, Utah 84101.
Purpose of
Meeting At the meeting, the Surgical Stockholders will be asked to
consider and take action upon the following:
1. The proposed Merger;
2. Adoption of the 1996 Long-Term Stock Incentive Plan;
3. If the Merger is not completed for any reason, the
election of Todd B. Crosland and Rockwell D.
Schutjer as directors; and
4. The transaction of such other business as may
properly come before meeting;
all as more particularly set forth in the official Notice of
Meeting accompanying this Joint Proxy Statement/Prospectus.
Vote Required The Merger must be approved by the holders of a majority of
the issued and outstanding Surgical Stock. The holders of
2,278,329 shares of Surgical Stock, or approximately 50.2% of
the issued and outstanding Surgical Stock, have delivered
their irrevocable proxies to vote their shares in favor of
the Merger, so no additional votes will be required. The
vote of the holders of a majority of a quorum of the shares
entitled to vote and represented in person or by proxy at the
Surgical Stockholders' Meeting is required to approve the
LTSIP. The holders of the same shares have committed to vote
their shares in favor of such approval, but have not
delivered proxies for this purpose. The vote of a plurality
of the shares represented at the meeting, in person or by
proxy, is required to elect directors. The bylaws of
Surgical require that at least one-half of the issued and
outstanding Surgical Stock be represented in person or by
proxy at the Surgical Stockholders' Meeting in order to
constitute a quorum for conducting business.
Representative
of AccountantsIt is anticipated that a representative of Arthur Andersen
LLP will be in attendance at the Meeting to respond to
appropriate questions from the Surgical Stockholders and, if
so desired, to made a statement.
4Health Stockholders'
Meeting
Record Date
and Time Stockholders of record of 4Health Common Stock and Series A
Stock as of the close of business on June 12, 1996 (the
"4Health Record Date") are entitled to notice of, and to vote
at, the meeting of the 4Health Stockholders to be held at
9:30 a.m., local time, on July 15, 1996, at the Little
America Hotel, 500 South Main Street, Salt Lake City, Utah
84101.
Purpose of
Meeting At the meeting, the 4Health Stockholders will be asked to
consider and take action upon the following:
1. The proposed Merger; and
2. The transaction of such other business as may
properly come before meeting;
all as more particularly set forth in the official Notice of
Meeting accompanying this Joint Proxy Statement/Prospectus.
Vote Required The Merger must be approved by the holders of a majority of
the issued and outstanding 4Health Common Stock and a
majority of the issued and outstanding 4Health Series A
Stock. The holder of all of the 4Health Series A Stock and
the holders of 4,448,833 shares of the 4Health Common Stock,
or approximately 77.6% of the issued and outstanding 4Health
Common Stock, have delivered their irrevocable proxies to
vote their shares in favor of the Merger, so that the vote of
no additional shares will be required. The bylaws of 4Health
require that at least a majority of the issued and
outstanding 4Health Common Stock and 4Health Series A Stock
be represented in person or by proxy at the 4Health
Stockholders' Meeting in order to constitute a quorum for
conducting business.
Representative
of AccountantsIt is anticipated that a representative of Arthur Andersen
LLP will be in attendance at the Meeting to respond to
appropriate questions from the 4Health Stockholders and, if
so desired, to made a statement.
Principal
Conditions The Merger is conditioned upon the approval of the Merger
Agreement by the holders of the majority of the issued and
outstanding Surgical Stock and of a majority of the issued
and outstanding 4Health Common Stock and 4Health Series A
Stock, voting separately as classes; the compliance by each
of the parties with their respective representations,
warranties, and covenants set forth in the Merger Agreement,
unless waived by the other party; the absence of any material
adverse change in the condition of either party; the absence
of material regulatory limitations or prohibitions on the
consummation of the transaction or the continuation of the
business of the combined enterprise thereafter; the receipt
by each of the parties of opinions of their respective
counsel dated as of the Effective Time regarding certain
federal income tax consequences of the Merger to
substantially the same effect as the opinions described under
"TAX CONSEQUENCES"; the receipt of letters from the
independent certified public accountants of both Surgical and
4Health containing certain negative assurances respecting the
financial condition of the respective companies as of the
Effective Time; the continued listing of Surgical Stock on
the NNM, a national securities exchange, or the Nasdaq
SmallCapSM Market; and certain other miscellaneous
conditions. See "THE MERGER: Principal Conditions."
The Merger could be terminated even after approval by the
Surgical Stockholders and 4Health Stockholders if one or more
of the other conditions is not satisfied or waived by the
parties. If the Merger fails to close as a result of either
Surgical or 4Health failing to satisfy certain required
conditions, the party failing to meet such conditions shall
pay the other party a fee of $100,000, which shall include
the other party's costs.
No federal or state regulatory requirements must be met as a
condition to completion of the Merger.
Dissenters' Rights
of Appraisal
Surgical Holders of Surgical Stock have the right to dissent from the
Merger and obtain payment of the fair market value of their
shares on compliance with applicable procedures as provided
in part 13 of the Utah Law. The Merger Agreement provides
that it may be terminated at the election of 4Health if
stockholders of Surgical owning more than 225,000 shares of
the issued and outstanding Surgical Stock perfect their
dissenters' rights. 4Health has the right to waive this
condition. The holders of 2,278,329 shares of Surgical Stock
have delivered their irrevocable proxies to vote their shares
in favor of the Merger and, therefore, will be deemed to have
elected not to exercise their dissenters' rights. See "THE
ACQUISITION: Appraisal Rights of Dissenting Stockholders."
4Health Holders of 4Health Common Stock have the right to dissent
from the Merger and obtain payment of the fair market value
of their shares on compliance with applicable procedures as
provided in section 1300 of the California Law. The Merger
Agreement provides that it may be terminated at the election
of Surgical if stockholders of 4Health owning more than 5% of
the issued and outstanding 4Health Common Stock perfect their
dissenters' rights. The holders of 4Health Series A Stock
and 4,448,833 shares of 4Health Common Stock have delivered
their irrevocable proxies to vote their shares in favor of
the Merger and, therefore, will be deemed to have elected not
to exercise their dissenters' rights. See "THE ACQUISITION:
Appraisal Rights of Dissenting 4Health Stockholders."
Description of
Securities Offered
New Common
Stock Each share of New Common Stock is entitled to one vote,
without cumulative voting rights. Holders of New Common
Stock will have no preemptive rights to acquire additional
shares of New Common Stock, and all holders of New Common
Stock are entitled to share equally in liquidation of the
Surviving Corporation and in dividends, if any, which the
Surviving Corporation may declare. 4Health Stockholders will
have different rights as stockholders of the Surviving
Corporation than they had as 4Health Stockholders, because
Surgical is a Utah corporation while 4Health is a California
corporation, and because of differences in the articles of
incorporation and bylaws of the two companies, including
amendments to the articles of incorporation of Surgical to be
effected in connection with the Merger. See "THE MERGER:
Special Article Provisions." and "COMPARISON OF SECURITIES."
Warrants Each Warrant will entitle the holder to purchase one share of
New Common Stock at any time within 18 months after the
Closing Date of the Merger, exercisable at $11.00 per share,
subject to adjustment to prevent dilution in the event of
certain stock dividends, subdivisions, reclassifications,
conversions, recapitalizations, splits, combinations,
exchanges of shares, or similar events. The Warrants may be
redeemed by the Surviving Corporation at $0.01 per Warrant on
30 days' prior written notice to the Warrant holders,
provided that the average closing price for the New Common
Stock on its principal trading market for at least 30
consecutive days ending within 10 days prior to the notice of
redemption is at least $13.75 per share. The Warrants may be
exercised during the notice period. See "DESCRIPTION OF
SECURITIES."
The complete terms of the Warrants are set forth in the form
of Warrant Agreement and form of Warrant included as Appendix
"B" and incorporated herein by this reference.
Reasons for, Advantages, and
Disadvantages of the Merger
Surgical The principal reason for Surgical to enter into the Merger is
to use its cash and other assets to enter into a business
activity with the potential for long-term growth and
favorable operating margins to contribute to long-term
stockholder value.
As a result of the Merger, the current stockholders of
Surgical will suffer substantial and immediate dilution to
the net book value of their shares and a reduction of their
percentage ownership and control of Surgical. The percentage
ownership by the current stockholders of Surgical and the
current stockholders of 4Health before and after the Merger
is set forth below:
<TABLE>
<CAPTION>
Percentage Percentage
Ownership of Ownership
Surgical of Surviving
Prior to Corporation
Merger(1) Subsequent
--------- to Merger(1)
------------
<S> <C> <C>
Officer, Directors, and
Principal Shareholders
of Surgical 40.1% 8.1%
Nonaffiliated Stockholders
of Surgical 59.9% 12.1%
Officers, Directors, and
Principal Shareholders
of 4Health 0 52.5%
Nonaffiliated Stockholders
of 4Health 0 27.3%
Total 100% 100%
(1) Does not include the potential exercise of options
or Warrants.
</TABLE>
4Health The principal benefits to 4Health in entering into the Merger
are to obtain additional capital to fund an accelerated
expansion effort; enhance 4Health's ability to complete
acquisitions (should one be identified in the future) with
stock, thus conserving cash; gain access to the equity
markets for future capital needs; and provide long-term
liquidity to 4Health's stockholders through owning stock in a
publicly traded company. See "THE MERGER: Reasons for the
Merger-Advantages and Disadvantages."
Conflicts of
Interest Substantial conflicts of interest were involved in the
determination of the terms of the Merger, including the
4Health Common Stock and Series A Conversion Ratios and the
Surgical Conversion Ratio.
The terms of the Merger and such conversion ratios were
negotiated by management of Surgical and 4Health and approved
unanimously by their boards of directors. In connection with
finalizing the Merger terms, 4Health did not object to
Surgical's grant to Rockwell D. Schutjer and Todd B. Crosland
of five-year options to purchase 265,000 shares each (subject
to stockholder approval) of Surgical Stock at $2.00 per share
and the transfer to Rex Crosland, Rockwell D. Schutjer, and
Todd B. Crosland of automobiles owned and maintained by
Surgical for their benefit with an aggregate fair market
value of $107,450. At the Effective Time, the Surviving
Corporation will enter into a new three-year employment
agreement with Rockwell D. Schutjer that provides for an
annual base salary of $80,000. Rockwell D. Schutjer and Todd
B. Crosland will be elected to the board of directors of the
Surviving Corporation. See "THE MERGER: Determination of
Terms" and "Conflicts of Interest."
Comparative
Historical and
Pro Forma Per
Share
Information The following table presents certain comparative per share
data of Surgical and 4Health on a historical and pro forma
basis. The data should be read in conjunction with the
historical and pro forma financial information and the notes
thereto contained elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------------------
Surgical 4Health Pro Forma Pro Forma Equivalent(1)
Historical Historical Combined Surgical(2) 4Health(3)
---------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Book value per share of
Common Stock(4) $1.29 $0.27 $0.81 $0.40 $1.21
Cash dividends per share
of Common Stock, year
ended March 31, 1996 -- -- -- -- --
Income (loss) from
continuing operations
per common share, year
ended March 31, 1996 $(0.57) $0.10 $0.05 $0.03 $0.08
</TABLE>
[FN]
(1) The pro forma information includes an adjustment for the receipt of gross
proceeds of $610,000 and the issuance of shares of Surgical Stock on the
exercise of previously issued options to acquire 305,000 shares of Surgical
Stock on April 10, 1996. See "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS."
(2) The Surgical pro forma equivalent information represents the amount
attributable to one share of Surgical Stock, based on the Surgical Conversion
Ratio of two shares of New Common Stock for each four shares of Surgical
Stock held prior to the Merger, without ascribing any value to the Warrants,
i.e. the "Pro Forma Combined" amount divided by two.
(3) The 4Health pro forma equivalent information represents the amount
attributable to one share of 4Health Common Stock, based on the 4Health
Common Stock Conversion Ratio of 1.50467, i.e. the "Pro Forma Combined"
amount multiplied by 1.50467.
(4) After deducting the preference on liquidation of 4Health Series A Stock of
$1,500,000.
Market Value of
Surgical
Securities The Surgical Stock is traded on NNM under the symbol "SGTI."
The following table sets forth the closing sales price for
the Common Stock, as reported by NNM, as of the date
preceding public announcement of the proposed Merger, April
11, 1996, the date the execution of the Merger Agreement was
announced, and as of June 13, 1996, immediately prior to the
date of this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Surgical Stock 4 Health Pro Forma Equivalent
Closing Sales Price Common Stock(1) Series A Stock(2)
<S> <C> <C> <C>
February 16, 1996 $ 2.00 $ 6.02 $ 100.31
April 11, 1996 $ 4.00 $ 12.04 $ 200.62
June 13, 1996 $ 6.875 $ 20.69 $ 344.82
</TABLE>
[FN]
(1) Equivalent to one share of 4Health Common Stock, based on the issuance
of two shares of New Common Stock for each four shares of Surgical Stock
outstanding and the 4Health Common Stock Conversion Ratio of 1.50467 shares
of New Common Stock for each share of 4Health Common Stock.
(2) Equivalent to one share of 4Health Series A Stock, based on the
issuance of two shares of New Common Stock for each four shares of Surgical
Stock outstanding and the 4Health Series A Conversion Ratio of 25.07782
shares of New Common Stock for each share of 4Health Series A Stock.
Risk Factors Completion of the Merger and the exchange of Surgical Stock,
4Health Common Stock and 4 Health Series A Stock for shares
of New Common Stock and Warrants is subject to certain risks
(see "RISK FACTORS"), including the following:
o Conflicts of interest in the negotiation of the
transaction for certain directors of Surgical.
o No assurance of adequate value for the 4Health Common
Stock and 4Health Series A Stock
o Potential market overhang if the Surviving Corporation
elects to give a notice of redemption with respect to the
Warrants
o No assurance as to the trading market for the New Common
Stock and Warrants
o Lack of an independent opinion regarding the fairness of
the terms of the Merger and the Conversion Ratios
o Substantial and immediate dilution in book value for the
Surgical Stockholders
o Loss of liquidation preference for the holders of 4Health
Series A Stock
o Loss of voting control by Surgical Stockholders
o Potential adverse effect of the Surgical Conversion Ratio
on the market price for Surgical Stock
o The additional dilutive effect of the issuance of the
Contingent Shares
o Risk that no trading market will develop for the Warrants
o Potential redemption of the Warrants
o Negative effects of the proposed amendments to the
articles of incorporation that will govern the Surviving
Corporation
o The potential dilutive effect of the significant number of
shares of New Common Stock that will be subject to existing
options and option plans
o The risks associated with the recent organization of the
business of 4Health in 1993
o Possible adverse consequences of changes in governmental
regulations concerning 4Health's products
o Risks associated with the planned expansion of 4Health's
targeted markets
o The market concentration of 4Health's sales and reliance
on certain major customers
o Reliance of 4Health on a limited number of products
o Competition in 4Health's area of business
o Dependence on certain key members of 4Health's management,
especially R. Lindsey Duncan
o Lack of long-term contracts with 4Health's manufacturers
and distributors
o 4Health's policy with respect to returns and customer
warranties
o Potential trademark infringements
Vote Required for
Approval-Control
by Officers and
Directors
Surgical Completion of the Merger is subject to approval by the
holders of a majority of the issued and outstanding shares of
Surgical Stock. Directors, executive officers, and certain
stockholders of Surgical holding an aggregate of 2,278,329
shares, or approximately 50.2% of the shares issued and
outstanding, have delivered their irrevocable proxies to vote
in favor of the proposals to be submitted to the stockholders
for their consideration, so that the vote of no other
stockholders will be required to approve the proposals,
including the Merger.
4Health Completion of the Merger is subject to approval by the
holders of a majority of the issued and outstanding 4Health
Common Stock and of the 4Health Series A Stock. Directors,
executive officers, and certain stockholders of 4Health
holding an aggregate of 4,448,833 shares of Common Stock, or
approximately 74.4% of the shares of 4Health Common Stock
issued and outstanding, as well as all of the shares of
4Health Series A Stock outstanding have delivered their
irrevocable proxies to vote in favor of the Merger so that
the vote of no other stockholder will be required to approve
the Merger.
Accounting
Treatment The Merger will be accounted for as a purchase of Surgical by
4Health. It is anticipated that the board of directors of
the Surviving Corporation will, as permitted by the bylaws,
change the fiscal year of the Surviving Corporation to a
calendar year to match 4Health's current fiscal year. See
"THE MERGER: Accounting for the Merger."
Tax Consequences Surgical and 4Health will not obtain a private revenue ruling
from the Internal Revenue Service regarding the federal
income tax consequences of the Merger with respect to any
person, but instead will rely on opinions of tax counsel.
Opinions of tax counsel are not binding on the Internal
Revenue Service. See "TAX CONSEQUENCES."
Surgical In the opinion of 4Health's tax counsel, Satterlee Stephens
Burke & Burke LLP, the Merger will, subject to certain
restrictions and qualifications set forth in the tax opinion,
qualify as a tax-free reorganization under section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"),
and Surgical will be party to the reorganization within the
meaning of section 368(b) of the Code. As such, no gain or
loss will be recognized by Surgical on the completion of the
Merger.
In the opinion of Surgical's tax counsel, Kruse, Landa &
Maycock, L.L.C., the exchange of Surgical Stock for New
Common Stock and Warrants by the Surgical Stockholders will
qualify as a tax-free reorganization under section 368(a) of
the Code. Accordingly, no gain or loss will be recognized by
Surgical Stockholders on their exchange of four shares of
Surgical Stock for two shares of New Common Stock and one
Warrant so long as the Warrants have a zero fair market value
and except for any cash payments made in lieu of the receipt
of fractional shares. If the Warrants have a fair market
value, Surgical Stockholders will recognize gain in an amount
equal to the lesser of the gain realized on the exchange or
the fair market value of Warrants received in the exchange.
In the opinion of Surgical tax counsel, Surgical Stockholders
will have a tax basis in the shares of New Common Stock that
they receive equal to their basis in the shares of Surgical
Stock exchanged, after giving appropriate effect to the
Surgical Conversion Ratio, less the fair market value, if
any, of the Warrants received. The Warrants will have a
basis equal to the amount of any gain recognized on the
transaction or, if no gain is recognized, a zero basis. The
holding period for the New Common Stock for tax purposes will
include the period during which the Surgical Stockholders
have held their Surgical Stock. In order to give effect to
the Surgical Conversion Ratio, each share of New Common Stock
received by a Surgical Stockholder will have a basis
equivalent to two shares of Surgical Stock held by them prior
to the Effective Time, assuming the Warrants have no fair
market value and, consequently, no basis is ascribed to the
Warrants.
Surgical Stockholders who exercise and perfect their
dissenters' rights will generally recognize gain or loss on
the transaction as if it constituted a sale of their Surgical
Stock.
4Health In the opinion of 4Health tax counsel, Satterlee Stephens
Burke & Burke LLP, the Merger will, subject to certain
restrictions and qualifications set forth in the tax opinion,
qualify as a "tax-free" reorganization under section 368(a)
of the Code, and 4Health will be a party to the
reorganization within the meaning of section 368(b) of the
Code. As such, no gain or loss will be recognized by 4Health
on the completion of the Merger.
No gain or loss will be recognized by 4Health Stockholders on
completion of the Merger or on their exchange of shares of
4Health Common Stock and 4Health Series A Stock into shares
of New Common Stock (including Contingent Shares) except for
any cash payments made in lieu of the receipt of fractional
shares.
In the opinion of 4Health tax counsel, 4Health Stockholders
will have in the aggregate a tax basis in the shares of New
Common Stock (including Contingent Shares) equal to their
aggregate basis in the shares of 4Health Common Stock or
4Health Series A Stock exchanged, after giving appropriate
effect to the 4Health Common Stock and 4Health Series A Stock
Conversion Ratios. Until the final distribution of
Contingent Shares has been made, the interim basis of each
share of New Common Stock received by the 4Health
Stockholders will be determined as though the maximum number
of Contingent Shares had been issued to the 4Health
Stockholders. The holding period for the New Common Stock
for tax purposes will include the period during which they
held their 4Health Common Stock or 4Health Series A Stock, as
the case may be.
4Health Stockholders who exercise and perfect their
dissenters' rights will generally recognize gain or loss on
the transaction as if it constituted a sale of their 4Health
Common Stock or 4Health Series A Stock.
Restrictions on
Resale of New
Common Stock Except for shares issued to "affiliates" of Surgical and
4Health, as such term is defined in Rule 144 promulgated by
the Commission, all shares of New Common Stock to be issued
to holders of Surgical Stock and 4Health Common Stock and
4Health Series A Stock will be transferable without further
registration under the Securities Act.
In addition to the restrictions on resales by "affiliates"
set forth in Rule 145(d), certain stockholders owning
beneficially 5% or more of the issued and outstanding
Surgical Stock or 4Health Common Stock at the Effective Time
will be precluded contractually from selling New Common Stock
for 180 days following the Effective Time of the Merger and
thereafter limited to selling amounts not exceeding the
lesser of (a) the volume limitation specified in Rule 145(d)
promulgated under the Securities Act, or (b) an amount of
shares equal to 2% of the total number of shares of issued
and outstanding New Common Stock in cumulative sales
effective during the preceding 12 months, except in certain
limited "block transactions." Sales by affiliates of
Surgical or 4Health not owning beneficially 5% or more of the
issued and outstanding Surgical Stock or 4Health Common Stock
at the Effective Time and certain other named 4Health
Stockholders may not sell in excess of the volume limitation
specified in Rule 145(d) promulgated under the Securities
Act, or, in the case of certain other named 4Health
Stockholders, in excess of a specified number of shares. The
foregoing restrictions applicable to certain stockholders of
Surgical and 4Health will remain in effect for a period of 12
months following the Effective Time. See "THE MERGER:
Restrictions on Transfer of New Common Stock and Warrant
Shares."
DEFINITIONS
As used in this Joint Proxy Statement/Prospectus, the following terms have
the meanings indicated below:
Closing-The closing of the Merger, to occur on a date to be selected by
Surgical and 4Health that is within 20 days after the last to occur of: (a) the
requisite approval of the Surgical Stockholders at the Surgical Stockholders'
Meeting and the 4Health Stockholders at the 4Health Stockholders' Meeting; (ii)
the final date prescribed by any state or federal regulatory agency pursuant to
any state or federal law, rule, or regulation prior to which the Merger may not
be effectuated; (iii) the satisfaction of any requirements of the Commission or
any state agency respecting the consummation of the Merger; or (iv) the
satisfaction of certain other conditions precedent to Closing.
Closing Date-The date as of which the Closing occurs.
Code-The Internal Revenue Code of 1986, as amended.
Commission-The United States Securities and Exchange Commission.
Contingent Shares-Shares of New Common Stock that may be issued to the
holders at the Effective Time of 4Health Common Stock and Series A Stock in an
amount equal to the quotient calculated by dividing (a) the amount by which
$2,000,000 exceeds the IDT Earnings by (b) $4.00.
Effective Time-A date to be selected by Surgical and 4Health subsequent to
Closing and the satisfaction or waiver of all the conditions to the Merger set
forth in this Joint Proxy Statement/Prospectus, on which the Merger of 4Health
with and into Surgical will be completed.
Exchange Act-The Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
4Health Common Stock Conversion Ratio-The ratio set forth in the Merger
Agreement pursuant to which each share of 4Health Common Stock outstanding
immediately prior to the Effective Time and not held by a stockholder perfecting
his or her dissenter's rights will be converted into 1.50467 shares of New
Common Stock.
4Health Series A Stock-The issued and outstanding 4Health series of
preferred stock, par value $1.00 per share, with each share; having a
liquidation preference of $100 per share; convertible into 16.67 shares of
4Health Common Stock, subject to adjustment for certain events of dilution; non-
redeemable; with no right to receive dividends, except in certain cases; and
entitled to cast the number of votes equal to the number of shares of 4Health
Common Stock issuable on conversion in addition to certain special class voting
rights.
4Health Series A Stock Conversion Ratio-The ratio set forth in the Merger
Agreement pursuant to which each share of 4Health Series A Stock outstanding
immediately prior to the Effective Time and not held by a stockholder perfecting
his or her dissenter's rights will be converted into 25.07782 shares of New
Common Stock.
4Health Record Date-June 12, 1996, the date set for taking a record of the
4Health Stockholders entitled to notice of and to vote at the 4Health
Stockholders' Meeting.
4Health Stockholders' Meeting-The special meeting in lieu of an annual
meeting of 4Health Stockholders to be held <meeting date>, 1996, for the purpose
of voting on the Merger and other matters.
4Health Stockholders-The stockholders of record of 4Health.
ID Technology-Surgical's proprietary technology related to an angioplasty
inflation device marketed under the name "Transflator(R)," including all
products based thereon.
IDT Earnings-The earnings, before interest and federal and state income
taxes, computed in accordance with generally accepted accounting principles,
from the exploitation of Surgical's Transflator(R) technology, the sale of
products based on its ID Technology, or licensing, royalty, or joint venture
income related to the ID Technology.
LTSIP-The 1996 Long-Term Stock Incentive Plan to be submitted to the
Surgical Stockholders for their approval at the Surgical Stockholders' Meeting
and, if approved, under which options to purchase certain shares of New Common
Stock are to be issued to executive officers and directors of the Surviving
Corporation after the Merger and other persons as provided in the Merger
Agreement.
Merger-The merger of 4Health with and into Surgical, with Surgical as the
Surviving Corporation.
Merger Agreement-The Agreement and Plan of Merger between 4Health and
Surgical, dated April 10, 1996, as amended June 4, 1996.
Nasdaq and NNM-The Nasdaq Stock Market and the Nasdaq National Market,
respectively.
New Common Stock-The common stock of the Surviving Corporation, par value
$0.01 per share, to be issued to the holders of 4Health Common Stock, 4Health
Series A Stock, and Surgical Stock at the Effective Time.
Registration Statement-The registration statement filed on Form S-4 by
Surgical with the Commission, under the Securities Act, of which this Joint
Proxy Statement/Prospectus forms a part.
Securities Act-The Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
Surgical Conversion Ratio-The ratio set forth in the Merger Agreement
pursuant to which each four shares of Surgical Stock outstanding at the
Effective Time and not held by a Surgical Stockholder perfecting his or her
dissenter's rights will be converted into two shares of New Common Stock and one
Warrant.
Surgical Record Date-June 5, 1996, the date set for taking a record of the
Surgical Stockholders entitled to notice of and to vote at the Surgical
Stockholders' Meeting.
Surgical Stockholders' Meeting-The special meeting in lieu of an annual
meeting of Surgical Stockholders to be held July 15, 1996, for the
purpose of voting on the Merger and other matters.
Surgical Stockholders-The stockholders of record of Surgical.
Surviving Corporation-Surgical, as the survivor of the Merger, will
continue in existence subsequent to the Effective Time under the name 4Health,
Inc.
Transfer Agent-Zions First National Bank, N.A., Corporate Trust Department,
Third Floor, 10 East South Temple, Salt Lake City, Utah 84111. The telephone
number of the Transfer Agent is (801) 524-4624.
Warrants-The Warrants to be issued to Surgical Stockholders entitling the
holder of each Warrant to purchase one share of New Common Stock at an exercise
price of $11.00 per share at any time prior to 18 months after the Closing Date.
Each holder of four shares of Surgical Stock as of July 15, 1996, will receive
one Warrant. The Warrants are redeemable by the Surviving Corporation for $0.01
per share on 30 days prior written notice at any time that the closing price for
the New Common Stock on its principal trading market exceeds $13.75 per share
for at least 30 consecutive days. The Warrants are exercisable during the
notice period.
Warrant Shares-The shares of New Common Stock issuable on exercise of the
Warrants.
RISK FACTORS
The Merger involves certain risks to Surgical and 4Health Stockholders, who
should consider the following cautionary statements, in addition to any negative
implications in the materials set forth elsewhere in this Joint Proxy
Statement/Prospectus, in considering the Merger.
Risks Related to the Merger
Conflicts of Interest
The terms of the transaction were determined through negotiations with
4Health by Surgical management, including Rex Crosland, Rockwell D. Schutjer,
and Todd B. Crosland. In connection with finalizing the Merger terms, 4Health
did not object to Surgical's grant to Rockwell D. Schutjer and Todd B. Crosland
of options to purchase 265,000 shares each (subject to stockholder approval, for
which irrevocable proxies representing in excess of 50% of the issued and
outstanding Surgical Stock have been delivered) of Surgical Stock at $2.00 per
share and to the transfer to Rex Crosland, Rockwell D. Schutjer, and Todd B.
Crosland of automobiles currently owned by Surgical and maintained for their
benefit with an aggregate fair market value of $107,450. The Surviving
Corporation will enter into a new three-year employment agreement with Rockwell
D. Schutjer that provides for an annual base salary of $80,000. Rex Crosland is
a principal stockholder of Surgical and is the father of Todd B. Crosland and
the father-in-law of Rockwell D. Schutjer. As a result, these individuals, all
of whom comprise the management of Surgical, were subject to substantial
conflicts of interest in negotiating the terms of the Merger. Therefore, the
determination of the Surgical Conversion Ratio and the other terms of the Merger
were not the result of arm's length negotiation on behalf of Surgical. The
terms of the Merger have been approved unanimously by the board of directors of
Surgical, including the non-employee directors. See "THE MERGER: Determination
of Terms" and "Conflicts of Interest."
4Health Conversion Ratio; No Assurance of Value of New Common Stock
The 4Health Common Stock Conversion Ratio and Series A Stock Conversion
Ratio represent determinations merely for the purpose of calculating the number
of shares of New Common Stock to be issued in exchange for each outstanding
share of 4Health Common Stock and 4Health Series A Stock as of the Effective
Time. Such calculations do not, and are not intended to, represent the price at
which the New Common Stock could be sold by the former stockholders of 4Health
following the Merger; the value of 4Health, either before or after giving effect
to the Merger; or the amount that could be realized following the Merger on the
sale by the former 4Health Stockholders of the New Common Stock received by them
in the Merger. See "THE MERGER: Determination of Terms."
Potential Market Overhang from Notice of Redemption
In the event that the Surviving Corporation elects to redeem the Warrants
and gives the required 30 days' prior written notice of such redemption, the
holders of the Warrants will have the right, during such 30-day period, to
exercise the Warrants. In such circumstances, stockholders may seek to sell
immediately the Warrant Shares being received upon such exercise or other shares
of New Common Stock already held by them in order to raise funds with which to
pay the Warrant exercise price. In such circumstances, the sale or potential
sale of a significant number of shares into the trading market could have a
depressive effect on trading prices, thereby precluding the stockholders from
realizing gain on the exercise of the Warrants and the immediate resale of the
Warrant Shares. In addition, any decline in the market prices for New Common
Stock resulting from the notice of redemption and effort by Warrant holders to
sell shares would correspondingly reduce the liquidity for and price of shares
of New Common Stock held by all stockholders.
Potential Lack of NNM Trading Market for New Common Stock and Warrants
Surgical's Common Stock is traded in the over-the-counter market and
included on NNM under the symbol "SGTI." Surgical has applied to NNM to have
the New Common Stock and Warrants of the Surviving Corporation included on NNM,
as of the Effective Time, under the symbols "HHHH" and "HHHHW," respectively.
There can be no assurance that Surgical's application will be granted. If the
New Common Stock and Warrants are not included on the NNM system, Surgical
believes that they will be included for trading on the Nasdaq SmallCapSM Market.
The lack of inclusion of the New Common Stock on NNM may adversely affect the
price and liquidity of New Common Stock or Warrants, as the case may be.
4Health's obligation to complete the Merger is conditioned on, among other
things, Surgical maintaining the NNM listing for the Surgical Stock or obtaining
a listing on a national securities exchange or the Nasdaq SmallCapSM Market.
Lack of an Independent Opinion Regarding Fairness
Neither Surgical nor 4Health has obtained an opinion from any qualified
independent expert regarding the fairness of the Merger from a financial point
of view to either Surgical or 4Health or their respective stockholders. No such
opinion has been obtained in the absence of a requirement to do so due to the
substantial costs involved in obtaining such an evaluation, including the costs
involved in compensating such an expert for the related liability that would be
incurred by such expert in expressing an opinion, and a reliance by the parties
on the disclosures set forth herein as a basis for the exercise of independent
judgment by each Surgical and 4Health Stockholder regarding approval of the
Merger.
Substantial and Immediate Dilution to Surgical Stockholders
Dilution to the Surgical Stockholders following the Merger will result from
the difference between the net tangible book value of the Surgical Stock prior
to the Merger and the book value of the New Common Stock following the Merger,
after giving effect to the Surgical Conversion Ratio and without considering the
issuance of Contingent Shares or ascribing any value to the Warrants. As of
March 31, 1996, Surgical had a net tangible book value of $4,787,802, or
approximately $1.05 per share. On a pro forma basis after the Merger, assuming
that no Surgical or 4Health Stockholders exercise their dissenters' rights, that
no Contingent Shares are issued, and that no value is ascribed to the Warrants,
the Surviving Corporation would have a net tangible book value of $7,986,834,
or approximately $0.71 per share. See "UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS." Inasmuch as, in accordance with the Surgical Conversion
Ratio, each four shares of Surgical Stock outstanding prior to the Effective
Time will be converted into two shares of New Common Stock at the Effective
Time, Surgical Stockholders will convert four shares that had a combined net
tangible book value as of March 31, 1996, of $4.22 to two shares of New Common
Stock with a pro forma combined net tangible book value per share of $1.42, or a
dilution of approximately 66%, from the interest of such Surgical Stockholders.
Issuance of Contingent Shares of New Common Stock to the 4Health Stockholders
would further dilute the interest of such Surgical Stockholders. See "THE
MERGER: Dilution and Comparative Data."
The 4Health Stockholders following the Merger will benefit from an increase
in the net tangible book value per share of the 4Health Common Stock prior to
the Merger relative to the net tangible book value per share of the New Common
Stock following the Merger, after giving effect to the 4Health Conversion Ratio,
without regard to the issuance of any Contingent Shares. As of March 31, 1996,
after deducting the liquidation preference of $1,500,000 on the outstanding
Series A Stock, 4Health had a net tangible book value attributable to the
4Health Common Stock of $1,525,668, or approximately $0.27 per share. On a pro
forma basis after the Merger, assuming that no Surgical or 4Health Stockholders
exercise their dissenters' rights, that no Contingent Shares are issued, and
that no value is ascribed to the Warrants, the Surviving Corporation would have
a net tangible book value of $7,986,834, or approximately $0.71 per share of New
Common Stock. Inasmuch as, in accordance with the 4Health Common Stock
Conversion Ratio each share of 4Health Common Stock will be converted into
1.50467 shares of New Common Stock, the 4Health Stockholders immediately prior
to the Effective Time will convert shares that had a net tangible book value as
of March 31, 1996, of $0.27 per share to 1.50467 shares of New Common Stock with
a pro forma combined net tangible book value of $1.07 per share, or a benefit of
$0.80 per share, or approximately a 295% increase in the net tangible book value
per share. Issuance of Contingent Shares of New Common Stock to the 4Health
Stockholders at the Effective Time would reduce the increase in net tangible
book value per share of New Common Stock received by such stockholders. See
"THE MERGER: Dilution and Comparative Data."
Loss of Preference on Liquidation to Holders of 4Health Series A Stock
Holders of 4Health Series A Stock are now entitled to a preference on
liquidation of 4Health of $100 per share, or an aggregate of $1,500,000 for the
15,000 shares of 4Health Series A Stock outstanding as of the 4Health Record
Date, as well as certain other special class rights. As a result of the
conversion of such shares of 4Health Series A Stock to New Common Stock in the
Merger, the holders of such shares of 4Health Series A Stock will no longer have
any preference on liquidation of the Surviving Corporation or such other special
class rights. In accordance with the 4Health Series A Conversion Ratio, each
share of 4Health Series A Stock outstanding immediately prior to the Effective
Time will be converted into 25.07782 shares of New Common Stock, with aggregate
pro forma net tangible book value as of March 31, 1996, of $17.77, which will
result in a dilution of $82.23, or approximately 82%, from the liquidation
preference per share of 4Health Series A Stock.
Loss of Voting Control by Surgical Stockholders
The Surgical Stockholders who currently hold all of the issued and
outstanding Surgical Stock and who are entitled to elect directors and to vote
on such other actions presented to the Surgical Stockholders will, upon and as a
result of the Merger and the Surgical and 4Health Conversion Ratios, hold only
approximately 20% of the issued and outstanding New Common Stock of the
Surviving Corporation. The ownership of the Surgical Stockholders will be
reduced even further if the Contingent Shares are issued. Consequently, the
Surgical Stockholders will suffer a substantial dilution to their voting power
and, subsequent to the Merger, will not be able to elect any representatives to
the board of directors of the Surviving Corporation or to control the vote with
respect to any other matter submitted to the shareholders.
Potential Adverse Effect of Surgical Conversion Ratio on Market Price
As a result of the Surgical Conversion Ratio, each four shares of Surgical
Stock issued and outstanding prior to the Effective Time will be converted into
two shares of New Common Stock and one Warrant. This is, in effect, a two-to-
one reverse split of the issued and outstanding Surgical Stock, and there can be
no assurance that the market price at which one share of New Common Stock trades
following the Merger will be equal to or greater than the equivalent value of
two shares of Surgical Stock issued and outstanding prior to the Merger.
Dilutive Effects of Issuance of Contingent Shares
Pursuant to the terms of the merger, Surgical is required to issue up to
500,000 additional shares of New Common Stock to the former stockholders of
record of 4Health immediately prior to the Effective Time in the event that the
Surviving Corporation realizes less than $2,000,000 in IDT Earnings within 12
months after the Closing Date. The issuance of all or a portion of the
Contingent Shares would correspondingly reduce the percentage interests of such
former Surgical Stockholders in the Surviving Corporation and would increase the
dilution to the net tangible book value of the shares held by the Surgical
Stockholders as a result of the Merger.
Risk of Lack of Market for the Warrants
The Warrants to be issued pursuant to the Merger to the current Surgical
Stockholders have a period of exercise and exercise price negotiated as a part
of the Merger. Because of the conflict of interest of principal executive
officers participating in such negotiations on behalf of Surgical, the terms of
the Warrants cannot be deemed the result of arm's length negotiations, although
such terms have been approved unanimously by the board of directors of Surgical,
including non-employee directors. See "THE MERGER: Conflicts of Interest." No
value has been ascribed to the Warrants, which expire 18 months subsequent to
the Closing Date and which have an exercise price of $11.00 per share, and,
while the Warrants will be registered under the Securities Act, there can be no
assurance that a market will develop in the Warrants or that the shares of New
Common Stock will be traded following the Merger at any price that will enable
any Surgical Stockholder to realize any gain on exercise of the Warrants and
reselling the underlying Warrant Shares.
Possible Redemption of Warrants
The Warrants are redeemable by the Surviving Corporation at any time that
the average closing price for the New Common Stock in its principal trading
market for 30 days ending within 10 days of the date of the notice of redemption
exceeds $13.75 per share. It may be in the best interest of the Surviving
Corporation following the Merger to redeem the Warrants at any time that the
trading market for the New Common Stock exceeds such trigger price because such
redemption may promote the exercise of the Warrants to raise additional capital,
may reduce any potential overhang over the trading market, or the Surviving
Corporation may be able to raise additional equity on terms more favorable to it
than provided in the Warrants. If the Surviving Corporation were to redeem the
Warrants, it would preclude the Warrant holders from participating in any
further increases in trading prices for the New Common Stock without paying the
exercise price of the Warrants. There can be no assurance that the trading
price for the New Common Stock will increase.
The Surviving Corporation's right of redemption will enable it to place the
holders of such Warrants in a position in which they must either sell their
Warrants at a possible discount to the spread between the then market price for
the New Common Stock and the $11.00 exercise price (provided a market for such
Warrants then exists) or pay the Surviving Corporation the cash purchase price
for the Warrant Shares to exercise the Warrants and bear the economic risk of
owning the Warrant Shares or have the Warrants redeemed and forego any possible
benefit from any future increases in the price of the Warrant Shares.
Negative Effects of Certain Proposed Amendments to the Articles of
Incorporation
Pursuant to the Merger Agreement, the approval of the Merger will also
effect certain amendments to the articles of incorporation of the Surviving
Corporation (the "Proposed Amendments") that would specify certain procedures
relating to the removal of certain directors, add provisions designed to assure
that all stockholders of the Surviving Corporation will receive substantially
the same price for their shares in transactions in which the Surviving
Corporation is acquired in two or more steps (the "Fair Price Provision"),
restrict the use of written consents of stockholders in lieu of meetings, and
require a 67% majority vote to amend or repeal the foregoing provisions. The
overall effect of these provisions may be to discourage a third party from
making a tender offer for a portion or all of the Surviving Corporation's
securities, hostile or otherwise (including an offer at a substantial premium
over the then prevailing market value of the Surviving Corporation's equity
securities), or otherwise attempting to obtain a substantial position in the
equity securities of the Surviving Corporation in order to commence a proxy
contest or engage in other takeover-related action, even though some or a
majority of the Surviving Corporation's stockholders might believe such actions
to be beneficial. To the extent that any third party potential acquirers are
deterred by the Proposed Amendments, such provisions may have the effect of
preserving the incumbent directors in office. The Proposed Amendments may also
serve to benefit incumbent directors by making it more difficult to remove
directors, even when the only reason for the proposed change of control or
stockholder action may the unsatisfactory performance of the present directors.
Takeovers or changes in the board of directors of the Surviving Corporation that
are proposed and effected without prior consultation and negotiation with the
Surviving Corporation may not necessarily be detrimental to the Surviving
Corporation and its stockholders. Neither 4Health nor Surgical are aware of any
such takeover proposals. See "TERMS OF THE MERGER: Special Article
Provisions."
Additional Shares that May be Offered for Sale
Following completion of the Merger, the Surviving Corporation will have an
authorized capitalization of 5,000,000 shares of Preferred Stock, none of which
will be outstanding, and 30,000,000 shares of Common Stock, of which 11,271,112
shares will be issued and outstanding, 1,228,300 will be reserved for issuance
on the exercise of outstanding options, 1,135,554 shares will be reserved for
issuance on the potential exercise of the Warrants, and 500,000 shares will be
reserved for the potential issuance of Contingent Shares. Accordingly, the
Surviving Corporation will have 5,000,000 shares of Preferred Stock and
15,865,034 shares of Common Stock available for issuance upon such terms and
conditions as the board of directors may determine in accordance with Utah Law.
There is no requirement to obtain stockholder approval for the issuance of
additional shares, except under certain limited circumstances provided in the
rules required to maintain inclusion of the New Common Stock on the NNM, if such
shares are then listed on the NNM. It should be noted that the availability of
additional shares could render more difficult or discourage a takeover attempt.
For example, the issuance of additional common stock or preferred stock
convertible into common stock in a public or private sale, merger, or similar
transaction would increase the number of Surgical's outstanding shares of common
stock and thereby could dilute the proportionate interest of a party attempting
to gain control of Surgical.
Risks Related to the Business of 4Health and the Surviving Corporation
Limited Operating History
Since 4Health was organized in February 1993, it has introduced a number of
its products and established initial marketing outlets through health food
stores and health care providers. These activities, to be conducted by the
Surviving Corporation following the Merger, are anticipated to be expanded
substantially, utilizing the capital provided by Surgical in the Merger to
expand current distribution channels, introduce new products, enter new markets,
and in general to expand its activities and operations. Because of the nature
and extent of any such expansion, the accompanying results of operations for
previous periods may not necessarily be indicative of the results of operations
in the future. While 4Health has been successful in expanding its market and
distributors to date, it has been in operation for a limited amount of time, and
there can be no assurance that it will be able to successfully continue to
expand in the future. See "BUSINESS OF 4HEALTH" and "BUSINESS OF THE SURVIVING
CORPORATION FOLLOWING THE MERGER."
Governmental Regulation
The processing, formulation, packaging, labeling and advertising of
4Health's products are subject to regulation by one or more federal agencies.
Although Congress has recently recognized the potential impact of dietary
supplements in promoting the health of US citizens by enacting the Dietary
Supplemental Health Education Act of 1994 ("DSHEA") which severely limits the
Food and Drug Administration's jurisdiction in regulating dietary supplements,
there is no way to predict the potential effect of DSHEA. Further, because of
the technical requirements imposed by DSHEA, it is difficult for any company
manufacturing or marketing dietary supplements to remain in strict compliance.
The Food and Drug Administration ("FDA") has recently proposed regulations with
the purpose of implementing DSHEA and proposals have been made to modify or
change the provisions of DSHEA. It is impossible to predict whether those
regulations or proposed changes will become law or the effect that such
regulations or proposed changes, if implemented, will have on the business and
operations of 4Health and the Surviving Corporation following the Merger. See
"BUSINESS OF 4HEALTH: Government Regulation."
Expanded 4Health Marketing Effort
4Health is launching an expanded marketing effort to increase the level of
awareness of nutritional supplements in general and 4Health's products in
particular, to increase the number of specialty health food stores and health
care providers that carry its products, and to introduce new products into
additional distribution channels. 4Health and, after the Merger, the Surviving
Corporation, will devote substantial management and financial resources to this
marketing expansion, and there can be no assurance that this marketing effort
will result in sufficient increases in revenues to overcome related costs or
result in a financial return to 4Health. See "BUSINESS OF 4HEALTH" and "BUSINESS
OF THE SURVIVING CORPORATION FOLLOWING THE MERGER."
Concentration of Customers
4Health received approximately 13% of its revenues from a single customer
during 1995, General Nutritional Centers ("GNC"). 4Health does not have any
long-term contractual relationship with GNC or any other customer. The loss of
this customer would have a serious adverse impact on the business of 4Health.
Reliance on Limited Number of Products
4Health currently offers approximately 20 products and derived more than
50% of is revenues during 1995 from the sale of one product, the Ultimate
CleanseTM. As a result of the limited number of products from which it derives
its revenue, the risks associated with 4Health's business increase since a
decline in market demand for one or more products, for any reason, could have a
significant adverse impact on 4Health.
Competition
Competition in the nutritional supplement industry is vigorous with a large
number of businesses engaged in the industry. In connection with an anticipated
expansion into the mass market of drug store and grocery store retail outlets,
4Health will face competition from vitamin and other health related products
that will be competing for the same shelf space. Many of the competitors have
established reputations for successfully developing and marketing nutritional
supplement products. Many of such companies have greater financial, managerial,
and technical resources than 4Health, which may put it at a competitive
disadvantage. For example, such channels of distribution also often require the
expenditure of significant up front capital to capture shelf space, which may
put 4Health at a competitive disadvantage to better capitalized firms. If
4Health is not successful in competing in this market, it may not be able to
recognize its business objectives. See "BUSINESS OF 4HEALTH" and "BUSINESS OF
SURVIVING CORPORATION FOLLOWING THE MERGER."
Dependence on Management
4Health is dependent on its management, particularly R. Lindsey Duncan,
founder and chief executive officer, for all of its business activities,
including the development of new products and the advancement of 4Health's
identity and recognition in the nutritional supplement industry. Except for an
intellectual property and non-compete agreement with Mr. Duncan, 4Health has no
long-term agreement with any executive officer or key employee. 4Health
maintains a key-man life insurance policy on the life of Mr. Duncan in the
amount of $5,000,000. See "MANAGEMENT: 4Health." The loss of the services of
Mr. Duncan could have a material adverse effect on the business of the Surviving
Corporation.
No Long-Term Contracts with Manufacturers or Distributors
4Health purchases all of its products from third-party manufacturers
pursuant to purchase orders issued from time to time by 4Health but without any
long-term manufacturing agreements. In the event that a current manufacturer is
unable to meet 4Health's manufacturing and delivery requirements at some time in
the future, 4Health may suffer interruptions of delivery of certain products
while it establishes an alternative source. The selection of alternative
manufacturing sources may be delayed while 4Health completes a review of the
proposed manufacturer's quality control, raw material sources, and manufacturing
capabilities.
Customer Guaranty of Satisfaction; Right of Return
In an effort to build customer confidence and satisfaction, 4Health
warrants satisfaction and grants to its customers the right to return for full
credit any product that is unsatisfactory to the customer or that is shelf-worn
or stale merchandise. Although 4Health has had this policy since its inception
and experienced product returns of only approximately 2.8% of sales in 1995,
there can be no assurance that such a policy will not result in additional
product returns in the future as 4Health substantially expands and enters new
markets. See "BUSINESS OF 4HEALTH: Product Warranties and Returns."
Potential Trademark Infringement
The conduct of 4Health's business, in common with other sellers of branded
consumer products, may involve from time to time potential liability for
trademark infringement. While 4Health seeks to minimize its exposure to such
liability, there can be no assurance that 4Health will not suffer adverse
financial consequences as a result of legally established third party claims to
first use of trade or service marks used by 4Health. See "BUSINESS OF 4HEALTH:
Trademarks and Service Marks."
THE MERGER
Terms of the Merger
On April 10, 1996, Surgical and 4Health executed the Merger Agreement that
provides for the merger of 4Health with and into Surgical. The Merger Agreement
was negotiated and signed in accordance with the general terms set forth in an
exchange of correspondence culminating in a final letter of intent dated
February 14, 1996, from 4Health and accepted by Surgical on February 15, 1996.
The Merger Agreement was approved by the board of directors of Surgical by their
unanimous consent dated March 29, 1996, and by the board of directors of 4Health
at a special meeting held on April 4, 1996. Effective June 4, 1996, the Merger
Agreement was amended to extend the date by which the Merger must be completed
from June 30, 1996, to September 30, 1996. The full text of the Merger
Agreement, as amended, is attached to this Joint Proxy Statement/Prospectus as
Appendix "A" and incorporated herein by reference. Surgical and 4Health
Stockholders are urged to review that document for detailed information as to
the terms, covenants, and conditions of the Merger. The information set forth
in this Joint Proxy Statement/Prospectus is a summary of the material terms of
the Merger Agreement and is qualified in its entirety by the specific language
of the Merger Agreement.
Under the Merger Agreement, 4Health will be merged with and into Surgical,
with the effect that 4Health, a California corporation, will be dissolved and
Surgical will continue as the surviving corporate entity, with its name changed
to "4Health, Inc."
At the Effective Time, all 5,731,381 shares of 4Health Common Stock and all
15,000 shares of 4Health Series A Stock outstanding will be converted into an
aggregate of approximately 9,000,000 shares of New Common Stock in accordance
with the 4Health Common Stock Conversion Ratio, which provides that 1.50467
shares of New Common Stock will be issued for each share of 4Health Common Stock
outstanding at the Effective Time and the 4Health Series A Conversion Ratio,
which provides that 25.07782 shares of New Common Stock will be issued for each
share of 4Health Series A Stock outstanding at the Effective Time, plus, in each
case, the right to receive a pro rata portion of the Contingent Shares.
At the Effective Time, each four shares of Surgical Stock issued and
outstanding will be converted into two shares of New Common Stock and one
Warrant. See "DESCRIPTION OF SECURITIES."
No fractional shares of New Common Stock or Warrants will be issued to
stockholders of either Surgical or 4Health, but in lieu thereof the Surviving
Corporation will pay the value of such fractional shares in cash.
As part of the Merger, outstanding options to purchase an aggregate of
121,000 shares of Surgical Stock at a weighted average price of $3.22 per share
will be converted, in accordance with the Surgical Conversion Ratio, into
options to purchase an aggregate of 60,500 shares of New Common Stock at an
weighted average price of $6.44 per share, and options to purchase an aggregate
of 265,000 shares of New Common Stock at an exercise price of $4.00 per share
will be granted to two directors of Surgical under the LTSIP. See "EXECUTIVE
COMPENSATION: Surgical-Options to Executive Officers, Directors, and Others."
As part of the Merger, outstanding options to purchase an aggregate of
599,999 shares of 4Health Common Stock at a weighted average price of $6.70 per
share will be converted, in accordance with the 4Health Conversion Ratio, into
options to purchase an aggregate of 902,800 shares of New Common Stock at an
exercise price of $4.45 per share. If the LTSIP is approved by the Surgical
Stockholders at the Stockholders' Meeting, such options will be granted under
the LTSIP as New LTSIP Options. See "OTHER SURGICAL STOCKHOLDER MATTERS."
The number of shares of New Common Stock issuable to the registered holders
of 4Health Common Stock and Series A Stock immediately prior to the Effective
Time shall be adjusted in the event that the Surviving Corporation does not
realize at least $2,000,000 in IDT Earnings within the 12 months subsequent to
the Closing Date by increasing the number of shares of New Common Stock issuable
to the former 4Health Stockholders, on a pro rata basis based on the number of
shares of New Common Stock issued to them in the Merger, in an amount equal to
the quotient calculated by dividing (a) the amount by which $2,000,000 exceeds
the IDT Earnings by (b) $4.00.
As part of the Merger, the articles of incorporation of Surgical will be
amended to (i) change its name to "4Health, Inc.," (ii) increase the
authorization of New Common Stock to 30,000,000 shares, (iii) add a "fair price"
provision in the event of certain corporate transactions, and (iv) restrict the
use of written consents of stockholders in lieu of meetings. See "THE MERGER:
Terms of the Merger-Special Article Provisions."
The board of directors of the Surviving Corporation will consist of five
designees of 4Health and two designees of Surgical.
A description of the New Common Stock and the Warrants is set forth below
under the caption "DESCRIPTION OF SECURITIES."
A discussion of the differences between the rights of holders of New Common
Stock and the rights of holders of 4Health Common Stock and 4Health Series A
Stock is set forth below under the caption "COMPARISON OF SECURITIES."
Following the Merger, the Surviving Corporation will concentrate its
activities on the accelerated expansion of its nutritional supplement
activities, while it pursues the most effective course of action respecting
Surgical's Transflator(R) device. See "BUSINESS OF THE SURVIVING CORPORATION
AFTER THE MERGER."
For a discussion of the principal federal income tax consequences of the
Merger to Surgical, 4Health, and their respective Stockholders, see "TAX
CONSEQUENCES."
Background of the Merger
Surgical
Since entering the medical products business during its fiscal year ended
March 31, 1992, Surgical from time to time reviewed the possibility of
additional acquisitions to complement its existing product lines or to seek
additional products within the medical industry with greater operating margins
than its existing products. In early 1995, Surgical intensified this search for
new products or technologies in development as well as those being marketed by
other companies, including complete operating businesses, focusing on possible
opportunities within the medical products industry that had demonstrated growth
potential, strong marketing presence, and the basis for continuing
profitability. At that time, Surgical concluded that, where warranted in order
to acquire a larger and more profitable business, it would commit its current
liquid assets, leverage its current operations and assets through additional
borrowings, dispose of one or more of its current activities, seek additional
debt or equity financing, or enter into other transactions to fund a desired
acquisition or expansion. As part of that effort, Surgical began an evaluation
of the possible disposition of its prepackaged disposable kits, drape
manufacturing, and ID Technology or Transflator(R) product lines, either
separately or as an entire medical products segment. Management of Surgical
also began to consider the disposition of its specialty metals fabrication
segment if management were to determine that the proceeds from the sale could be
used to fund an acquisition with the potential for greater economic return to
stockholders. Pursuant to that conclusion, Surgical formally engaged a business
broker to sell its specialty metals fabrication segment.
In June 1995, Surgical engaged the Corporate Finance Group of Arthur
Andersen LLP ("Arthur Andersen"), an international accounting and financial
advisory firm, to assist Surgical in completing a strategic acquisition, again
focusing on the medical products industry. In conjunction with Arthur Andersen,
Surgical developed the following factors to which management would give
preference in selecting a possible acquisition (in no particular priority):
. An operating company with historical revenue growth
. Historical profitability
. High gross margins, preferably in excess of 60%
. Principal activities concentrated in a growth industry
. The potential for 20 to 25% annual growth over a period of
approximately five years
. Strong management team
During the last half of 1995 and early 1996, Surgical management reviewed a
number of possible acquisition candidates, most of which were in the medical
products segment, but others of which were in unrelated industries. Surgical
initiated preliminary exploratory discussions with several potential candidates,
but none of these preliminary discussions resulted in either Surgical or the
potential candidates making a firm offer.
As Surgical proceeded with this effort to explore a possible acquisition,
it determined that it would be in the best interests of Surgical and its
stockholders to proceed with the sale or other disposition of its current
operating segments in order to generate cash or assets readily convertible to
cash in order to maximize Surgical's acquisition opportunities. On September
15, 1995, Surgical's board of directors formally concluded that it was in the
best interests of Surgical to discontinue the medical products and specialty
metals fabrications divisions. Pursuant to that plan, in September 1995, a
committee of independent directors of Surgical approved the sale of the
specialty metals fabrication division to Todd B. Crosland, an officer, director,
stockholder, and son of Rex Crosland, Surgical's principal stockholder, for a
sales price of $3.6 million, noting that the business broker engaged several
months earlier had been unable to elicit from any purchaser a firm offer at any
price or sufficient interest to commence serious negotiations. In the sale of
the specialty metals fabrication segment, closed in January 1996, Surgical
received $2,776,000 in cash, $224,000 in the assumption of liabilities, and the
balance of approximately $600,000 in other consideration convertible to cash by
January 1997. As a result of the sale, Surgical's specialty metals fabrication
segment was discontinued.
In separate transactions with unrelated parties completed in November 1995
and February 1996, Surgical disposed of its drape manufacturing and surgical
pack product lines for aggregate consideration of $825,000, retaining its
angioplasty inflation device based on the ID Technology as the only component of
its medical products segment. As a result of these transactions, Surgical's
previous operating assets have been converted principally to cash or cash items
or assets convertible to cash within the current or following fiscal year.
As the above developments were publicly reported, Surgical received a
number of inquiries from third parties respecting a variety of business
transactions, but no specific discussions were initiated. Then, in December
1995, Richard K. Steele, President of Rockefeller, Rothschild & Steele, a
Beverly Hills, California, investment banking firm, telephoned Mr. Todd B.
Crosland to introduce a company formulating and marketing nutritional
supplements that was considering a number of financial alternatives to fund an
accelerated growth program, provide long-term liquidity for its stockholders,
and obtain possible access to the public equity markets. Mr. Steele identified
the company as 4Health, orally provided a financial overview of 4Health, and
invited Surgical to consider a possible transaction with 4Health. Mr. Steele
again contacted Mr. Crosland in early January 1996, and 4Health thereafter
provided Mr. Crosland a copy of the then current version of 4Health's business
plan, historical financial information, and certain other product, marketing,
and financial forecasts.
Based on a review by Surgical management of the 4Health information
initially provided, representatives of Surgical management had a number of
preliminary, general telephone conversations with 4Health management
representatives to explore the parameters of a possible transaction between
Surgical and 4Health, leading to a meeting between them on January 29, 1996, in
Boulder, Colorado, to tour 4Health's offices and facilities, meet additional
members of 4Health's management team, review more detailed information, and
discuss in general the outline of a possible business transaction. This meeting
as well as a number of telephone conversations thereafter led to an exchange of
correspondence constituting a letter of intent concluded on February 14, 1996,
that set forth the general terms and conditions of the Merger. Immediately
following execution of the letter of intent, each of the parties proceeded with
dispatch to complete a legal, financial, and business review of the other party;
the negotiation of a definitive Merger Agreement with related agreements,
schedules, and exhibits; and the preparation of the registration statement of
which this Joint Proxy Statement/Prospectus forms a part.
4Health
In mid-1995, 4Health began to develop a strategic expansion plan, including
launching a new line of products for mass marketing. This strategic planning
process resulted in the development of a budget indicating an anticipated
requirement of approximately $5 million in cash to support the expansion effort.
Management of 4Health considered alternative sources for this required capital,
including an initial public offering. 4Health rejected these alternatives,
however, due to the number of variables involved, particularly the risk that
4Health would be required to incur substantial costs before it could be certain
of the price at which the securities would be sold through an underwriter, the
dilution to be suffered by the existing stockholders, and the other principal
financial terms of an initial public offering that may not have been
advantageous to 4Health and its stockholders. Therefore, management also
reviewed the feasibility of combining with an existing publicly-traded company
that could provide the requisite cash and liquid assets to finance 4Health's
proposed expansion. Management concluded that such a corporate reorganization
could enable 4Health to agree to the principal economic terms of such a
transaction and, therefore, to make a business decision on what it anticipated
to be the net cost of the capital required, before risking the expenditure of
substantial costs associated with the transaction.
Based on these conclusions, on November 6, 1995, 4Health's board of
directors authorized management to initiate a search for a publicly-traded
reorganization candidate that might provide 4Health with the financial resources
required for its proposed growth plans. Thereafter, management indicated
4Health's interest in a possible reorganization to various people in the
investment and business community in connection with management's day-to-day
activities. One such contact during the fourth quarter of 1995, was Richard K.
Steele of Rockefeller, Rothschild & Steele, whom R. Lindsey Duncan, president
and chief executive officer of 4Health, had met in 1994 in connection with
4Health's previous fundraising efforts but with whom 4Health had not completed
any business transactions.
In early January 1996, Mr. Steele telephoned Richard Carlock, chief
financial officer of 4Health, to indicate that Mr. Steele thought he had
identified a potential reorganization candidate and on January 11, 1996, 4Health
and Rockefeller, Rothschild & Steele entered into a finder's agreement,
subsequently amended, pursuant to which the identity of Surgical was revealed to
4Health. Pursuant to such agreement, 4Health has agreed to pay such firm a fee
of $180,000 upon successful consummation of the Merger. During the next
approximately two weeks, Surgical and 4Health exchanged certain business and
financial information, held preliminary telephone conversations regarding each
party's condition and goals, and in general explored the possibility of a
business transaction. On January 29, 1996, 4Health hosted representatives of
Surgical at 4Health's offices in Boulder, Colorado, to tour facilities, meet
management and other personnel, and discuss the details of a possible business
transaction. Following the meeting, the exchange of additional information and
further telephonic conversations culminated in the execution of a letter of
intent dated February 14, 1996, after which the parties proceeded to prepare the
necessary documentation to complete the Merger.
Reasons for the Merger-Advantages and Disadvantages
Surgical
Surgical is entering into the Merger to participate in what its management
and board of directors believe to be 4Health's potential for substantial growth
in sales with favorable operating margins. Management and the board of
directors of Surgical have based this conclusion on 4Health's rate of growth and
its operating margins to date, the distribution channels that it has established
for its products, its acknowledgment of the importance of developing new product
formulations, its program of entering new markets, and other factors. In
addition, management and the board of directors of Surgical believe that the
nutritional supplement industry has the potential for substantial growth based
upon a general societal emphasis on healthy lifestyle and the general need to
improve the diet of people who are impacted by the harmful effects of modern
industrialization, including processed foods, stress, and environmental toxins.
In addition, management and the board of directors of Surgical believe that the
nutritional supplement industry is relatively immature and fragmented, with a
large number of relatively small manufacturers selling a wide variety of
products, which may provide opportunities for substantial growth. Further, on
analysis of the results of operations and trading prices for other publicly-held
nutritional supplement companies, management and the board of directors of
Surgical believe that the potential profitability of such companies is reflected
by the investment community in trading prices for their securities at favorable
price to earnings ratios.
The board of directors of Surgical has determined that the Merger is in the
best interests of Surgical and the Surgical Stockholders. The board of
directors has unanimously approved the adoption of the Merger Agreement and the
transactions contemplated thereby. Management and the board of directors of
Surgical believe that the Surgical Stockholders will realize potential
advantages from the Merger by participating in a company with previous earnings
and with the potential for further growth in revenues and earnings in an
expanding industry.
Disadvantages to the Surgical Stockholders of the Merger include
substantial dilution of the book value of their shares, dilution of their
percentage ownership in the Surviving Corporation and their influence on its
continuing policies, practices, and management; the concentration of control in
the current 4Health management, directors, and principal stockholders; the
potential for further dilution resulting from the possible issuance of the
Contingent Shares; and the business, operating, and regulatory risks associated
with 4Health's business. See "BUSINESS OF 4HEALTH." Management and a majority
of the board of directors of Surgical were subject to certain conflicts of
interest in connection with negotiating the terms of the Merger. See "THE
MERGER: Conflicts of Interest."
4Health
The board of directors of 4Health has determined that the Merger is in the
best interests of 4Health and the 4Health Stockholders. The board of directors
of 4Health has unanimously ratified the approval and adoption of the Merger
Agreement and the transactions contemplated thereby.
In considering the Merger, 4Health's board of directors noted that the
combination of 4Health with Surgical, which has a strong capital position, would
assist 4Health in meeting its short-term capital needs in connection with its
currently planned expansion into new mass market channels of distribution. In
this regard, 4Health's board of directors noted Surgical's existing cash
position and the issuance of the Warrants in connection with the Merger from
which the Surviving Corporation could potentially derive additional gross
proceeds of approximately $12.5 million, if the Warrants are exercised, as to
which no assurance can be given. In addition, 4Health's board of directors
noted that Surgical's status as a company whose securities are publicly traded
would increase the general visibility of its business, which indirectly could be
helpful in marketing its products, and would also afford the Surviving
Corporation the opportunity to utilize authorized but unissued securities to
attempt to acquire other compatible businesses that may be identified, rather
than expend its cash resources for such purposes. 4Health has not identified
any business for possible acquisition as of the date of this Joint Proxy
Statement/Prospectus, and there can be no assurance that any acquisition target
will be identified or that any such acquisition will be attempted or completed.
The potential disadvantages to the 4Health Stockholders include the
dilution in their stock position in the Surviving Corporation, the added
financial and regulatory burdens associated with becoming a publicly traded
company and, for the holders of 4Health Series A Stock, the loss of their
benefits as holders of preferred stock, including the preference on liquidation
of $100 per share, the right to vote on certain corporate matters separately as
a class, the right to elect a member of the board of directors, and certain
other benefits. See "COMPARISON OF SECURITIES."
Determination of Terms
At the time of the negotiations between the parties, 4Health had relatively
recently (August 31, 1995) concluded a private placement of its Series A Stock
for cash consideration of $1,500,000, or $100 per share. This placement was
negotiated at arm's length with a foreign institutional investor. (See
"PRINCIPAL STOCKHOLDERS: 4Health.") Under the terms of the Series A Stock, it
is convertible at any time into shares of 4Health Common Stock at a rate equal
to $100 divided by $6.00, subject to certain adjustments. This transaction in
effect placed a per share valuation on the 4Health Common Stock of $6.00, which,
together with the trading price for the Surgical Stock, became the starting
point for the negotiations between Surgical and 4Health.
Surgical Conversion Ratio
The Surgical Conversion Ratio to be utilized in calculating the number of
shares of New Common Stock and Warrants to be issued to each Surgical
Stockholder in the Merger provides that each four shares of Surgical Stock
outstanding immediately prior to the Effective Time will be converted at the
Effective Time into the right to receive two shares of New Common Stock and one
Warrant. The Surgical Conversion Ratio has been approved unanimously by the
board of directors of Surgical.
In negotiating the Surgical Conversion Ratio with 4Health, Surgical's
management and board of directors considered the net assets of Surgical as
reported on its financial statements, the estimated fair market value of the
retained ID Technology as compared to its carrying value, and the intangible
value attributable to the status of Surgical as a publicly-held and traded
company, all as compared to the book value of 4Health and its profitability to
date, management's evaluation of 4Health's forecasted future growth, the
perceived expansion of the nutritional supplement industry, 4Health's management
team, and other miscellaneous factors. In addition, Surgical considered the
potential impact on the trading market of Surgical Stock from the Surgical
Conversion Ratio which, in effect, is a two-to-one reverse split of Surgical's
issued and outstanding shares. Further, Surgical considered the potential value
of the Warrants based on management's evaluation of the potential for the future
growth and profitability of the Surviving Corporation.
Because of the benefits to be received by Rex Crosland, Rockwell D.
Schutjer, and Todd B. Crosland, executive officers of Surgical engaged in the
negotiation of the Surgical Conversion Ratio with 4Health and a majority
Surgical's board of directors, such persons were subject to substantial
conflicts of interest in negotiating the terms of the Merger, including the
Surgical Conversion Ratio. See "Conflicts of Interest" below.
4Health Conversion Ratios
The 4Health Common Stock Conversion Ratio and the 4Health Series A
Conversion Ratio to be utilized in calculating the number of shares of New
Common Stock to be issued in the Merger to each holder of 4Health Common Stock
and Series A Stock have been approved unanimously by the board of directors of
4Health.
In accordance with the Merger Agreement, the shares of 4Health Common Stock
and the shares of 4Health Series A Stock issued and outstanding immediately
prior to the Effective Time of the Merger will be converted at the Effective
Time into the right to receive an aggregate of approximately 9,000,000 shares of
New Common Stock. Specifically, each share of 4Health Common Stock outstanding
immediately prior to the Effective Time will be converted into the right to
receive 1.50467 shares of New Common Stock, and each share of 4Health Series A
Stock outstanding immediately prior to the Effective Time will be converted into
the right to receive 25.07782 shares of New Common Stock.
The 4Health Common Stock and Series A Stock Conversion Ratios were
determined through negotiations between 4Health and Surgical and were based on
4Health's evaluation of its financial condition and forecasted revenue and
profit growth, the desire to provide to its stockholders liquidity for their
investment, and the advantages of potential access to the equity markets, all as
compared to the amount of Surgical's cash and assets to be converted into cash,
4Health's estimate of the value of Surgical's broad stockholder base with a
history of public trading in its securities, an evaluation of the potential
utilization for federal income tax purposes of a portion of the net operating
loss carryforwards of Surgical, and other miscellaneous factors. After
reviewing the foregoing factors, the board of directors of 4Health concluded
that the effective price of $6.00 per share of 4Health Common Stock in the
recent sale of $1,500,000 of 4Health Series A Stock still fairly reflected the
value of 4Health Common Stock. The anti-dilution formula of the conversion
provisions of the 4Health Series A Preferred Stock requires a reduction in the
conversion price if 4Health sells Common Stock at less than $6.00 per share, the
initial conversion price of the 4Health Series A Stock. Based on 4Health
management's evaluation that the Merger was an effective sale of 4Health Common
Stock at approximately $6.00 per share, management of 4Health informally
proposed to the holder of the outstanding shares of 4Health Series A Stock a
conversion ratio of 25.07782, which was accepted.
Dilution and Comparative Data
The following table sets forth certain information about Surgical and
4Health, their respective net tangible book values, as well as the net tangible
book value of the Surviving Corporation after giving effect to the Merger, the
relative ownership of Surgical and 4Health Stockholders in the Surviving
Corporation, and certain other information, all based upon the historical
financial information of Surgical and 4Health and the pro forma unaudited
consolidated financial information of the Surviving Corporation as of March 31,
1996, without ascribing any value to the Warrants or giving effect to any cash
payments in respect of fractional shares or to the issuance of Contingent Shares
and without giving effect to any changes in the financial condition of either
Surgical or 4Health after such date. See "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
Unaudited
March 31, 1996 Pro Forma
Surgical 4Health Adjustments Combined
<S> <C> <C> <C> <C>
Net tangible book value $4,787,802 $3,025,668 $173,364 $8,291,019
contributed
Percentage gross
contribution without 61.3% 38.7% -- --
adjustments in
consolidation
Shares outstanding prior to 4,542,216 5,981,381(2) -- --
Merger
Net tangible book value
contributed per share $1.05 $0.51 -- --
Net tangible book value
contributed per share,
adjusted to give effect to $2.11 $0.34 -- --
Conversion Ratios
Shares of New Common Stock
held after the Merger 2,271,108 9,000,004 -- 11,271,112
Percentage of Surviving
Corporation ownership 20.1% 79.9% -- 100%
Per share net income (loss)
from continuing operations $(0.57) $0.10 -- $0.05
for 12 months ended March
31, 1996
Per share dividends for 12
months ended March 31, 1996 -- -- -- --
</TABLE>
[FN]
(1) Includes the $1,500,000 liquidation preference for the 4Health Series A
Stock.
(2) Gives effect to the conversion of the 4Health Series A Stock into 250,000
shares of 4Health Common Stock at a conversion ratio of 16.667 shares of
4Health Common Stock for each share of 4Health Series A Stock.
Exercise of Warrants
In accordance with the Surgical Conversion Ratio, the holders of Surgical
Stock will receive an aggregate of 1,135,554 Warrants as a result of the Merger,
assuming no Surgical Stockholder exercises dissenters' rights of appraisal. The
following table illustrates the dilution below the $11.00 Warrant exercise price
that would be suffered by the Warrant holders if all Warrants were exercised,
based on the pro forma combined net tangible book value of the Surviving
Corporation as of March 31, 1996, giving effect to the Merger but without giving
effect to the issuance of any Contingent Shares or any cash payments in respect
of any fractional shares or any changes to the financial condition of the
Surviving Corporation subsequent to such date.
<TABLE>
<CAPTION>
Aggregate(1) Per Share(1)
<S> <C> <C>
Pro forma net tangible book value attributable to New Common Stock
of Surviving Corporation as of March 31, 1996 $ 7,986,834 $ 0.71
Increase in net tangible book value attributable to New Common
Stock of Surviving Corporation after giving effect to exercise of
1,135,554 Warrants at an exercise price of $11.00 per share $12,491,094 $11.00
Net tangible book value attributable to New Common Stock of
Surviving Corporation after giving effect to exercise of
1,135,554 Warrants $20,477,928 $ 1.65
Per share increase to holders of New Common Stock immediately prior
to exercise of Warrants $ 0.94
Per share dilution to holders of New Common Stock issued on
exercise of Warrants below $11.00 per share $ 9.35
</TABLE>
[FN]
(1)Assumes 11,271,112 shares of New Common Stock of the Surviving Corporation
issued and outstanding as if the Merger had been effected March 31, 1996, and
the issuance of an additional 1,135,554 shares of New Common Stock on
exercise of Warrants at an exercise price of $11.00 per share. Does not give
effect to any costs that might be incurred by the Surviving Corporation in
connection with the exercise of the Warrants or to the potential issuance of
Contingent Shares.
Conflicts of Interest
The principal terms of the Merger were negotiated on behalf of Surgical by
Rockwell D. Schutjer and Todd B. Crosland, executive officers and directors of
Surgical, who will also benefit personally from the Merger. In connection with
finalizing the terms of the Merger, 4Health did not object to Surgical's grant
to Rockwell D. Schutjer and Todd B. Crosland of five-year options to purchase
265,000 shares each at $2.00 per share (which, at the Effective Time, will be
adjusted so that they will each have the right to each purchase 132,500 shares
at $4.00 per share) and the transfer to Rex Crosland, Rockwell D. Schutjer, and
Todd Crosland of automobiles with fair market values of $51,150, $24,475, and
$31,825, respectively. In addition, on the effectiveness of the Merger, the
Surviving Corporation will enter into a three-year employment agreement with Mr.
Schutjer at an initial base salary of $80,000 per annum. Under the Merger
Agreement, Rockwell D. Schutjer and Todd B. Crosland will be elected to the
board of directors of the Surviving Corporation for terms expiring at the 1999
annual meeting of the Surviving Corporation's stockholders. See "OTHER MATTERS
TO BE CONSIDERED BY SURGICAL STOCKHOLDERS."
As a result of the foregoing economic benefit to be received by Messrs.
Schutjer, Rex Crosland, and Todd Crosland, if the Merger is completed, such
persons had a substantial conflict of interest in negotiating the terms of the
Merger on behalf of Surgical. The Merger has been approved unanimously by
Surgical's board of directors, including its independent non-employee directors.
Management of Surviving Corporation
Pursuant to the terms of the Merger Agreement, the approval of the Merger
by the Surgical Stockholders shall constitute the election of the following
persons to the board of directors of the Surviving Corporation, each to serve
for the term indicated and thereafter until his or her successor is elected and
qualified:
<TABLE>
<CAPTION>
Term Expires
Name Annual Meeting in
<S> <C>
R. Lindsey Duncan(1)(2) 1999
Richard B. Carlock(2) 1997
Cheryl Wheeler(1)(2) 1998
Henry Stone(1) 1998
David Melman(1) 1997
Rockwell D. Schutjer(3) 1999
Todd B. Crosland(3) 1999
</TABLE>
[FN]
(1) Current director of 4Health.
(2) Current executive officer of 4Health.
(3) Current executive officer and director of Surgical.
For biographical information for each of the above nominees, see
"MANAGEMENT."
The newly constituted board of directors of the Surviving Corporation will
appoint officers to serve at the pleasure of such board. It is anticipated that
the current officers of 4Health will be appointed to corresponding positions in
the Surviving Corporation. See "MANAGEMENT: 4Health." In addition, it is
anticipated that Richard B. Carlock, David Melman, and Todd B. Crosland will be
appointed to serve as the audit committee for the Surviving Corporation.
Special Article Provisions
General Effect
The board of directors of Surgical believes, and the board of directors of
4Health agrees, that in connection with the Merger it would be in the best
interests of the stockholders of the Surviving Corporation that Surgical amend
certain provisions in its articles of incorporation (the "Proposed Amendments")
as set forth in the form of Articles of Merger with related Plan of Merger
attached hereto as Appendix "D" which may have the effect of reducing the
possibility that a third party could effect a sudden or surprise change of
majority control of the Surviving Corporation's board of directors or
successfully complete a takeover of the Surviving Corporation without the
support of the incumbent board of directors. The following discussion of the
Proposed Amendments is qualified in its entirety by the provisions of the
Proposed Amendments attached hereto as Appendix "D."
Certain provisions of the Proposed Amendments may have significant effects
on the ability of the stockholders of the Surviving Corporation to change the
composition of the incumbent board of directors and to benefit from certain
transactions that are opposed by the incumbent board of directors.
In connection with the Merger, Surgical proposes to adopt a number of
provisions in its articles of incorporation that might discourage certain types
of transactions that involve an actual or threatened change of control of the
Surviving Corporation. The Proposed Amendments may make it more difficult and
time-consuming to change majority control of the board of directors, and thus
reduce the possibility of success of an unsolicited offer to acquire the
Surviving Corporation, particularly an offer that does not contemplate the
acquisition of all of the Surviving Corporation's outstanding shares. As more
fully described below, the Surgical and 4Health boards of directors believe
that, as a general rule, such unsolicited offers are not in the best interests
of the Surviving Corporation and its stockholders.
The boards of directors of Surgical and 4Health believe that the threat of
removal of the Surviving Corporation's board, in the case of a takeover bid,
severely curtails the Surviving Corporation's ability to negotiate effectively
with a potential purchaser of the Surviving Corporation or its subsidiaries. In
such a situation, the board is deprived of the time and information necessary to
evaluate the takeover proposal, to study alternative proposals, and to help
ensure that the best transaction involving the Surviving Corporation is
ultimately undertaken. The boards of directors believe that generally the
takeover of the Surviving Corporation without prior negotiation with the
Surviving Corporation's board would be detrimental to the Surviving Corporation
and it stockholders. Consequently, Surgical's and 4Health's boards of directors
have determined that the benefits of protecting the Surviving Corporation's
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to takeover or restructure the Surviving Corporation outweigh the disadvantages
of discouraging such proposals.
However, the changes also limit the ability of the stockholders of the
Surviving Corporation to obtain a premium for their shares in the case of a
takeover bid or tender offer from a third party, and may serve to discourage or
prevent transactions that would benefit stockholders. The Proposed Amendments
make it more difficult for a holder of a substantial block of Common Stock to
acquire control of, or to remove, the incumbent board of directors of the
Surviving Corporation and could thus have the effect of entrenching incumbent
board members. At the same time, the anti-takeover provisions help ensure that
the board of directors of the Surviving Corporation, if confronted by a surprise
proposal from a third party who has recently acquired a block of Common Stock,
will have sufficient time to review the proposal and alternatives to it and seek
potentially better proposals for its stockholders, employees, suppliers,
customers, and others.
Fair Price Provision
The purchaser in corporate takeovers often pays cash to acquire a
controlling equity interest in a corporation and then arranges a transaction to
acquire the balance of the shares for a lower price or less desirable
consideration (frequently securities of the purchaser that do not have an
established trading market at the time of issue) or both. This practice is
known as "two-tier pricing" and tends (and may be designed) to cause
stockholders to accept the initial offer for fear of becoming minority
stockholders in a controlled corporation or being forced to accept a lower price
or less favorable consideration for their shares. To alleviate this problem,
Surgical and 4Health propose to amend the articles of incorporation of the
Surviving Corporation to include a provision (the "Fair Price Provision")
designed to assure that all stockholders of the Surviving Corporation will
receive substantially the same price for their shares in transactions in which
the Surviving Corporation is acquired in two or more steps.
The Fair Price Provision discourages two-step acquisitions of the Surviving
Corporation by requiring that mergers and certain other business combinations
involving the Surviving Corporation and any person who becomes an Interested
Stockholder (as hereinafter defined) after the Effective Time either (1) meet
certain minimum price and procedural requirements, (2) be approved by a majority
of the members of the Surviving Corporation's board of directors who are
unaffiliated with such Interested Stockholder and who were directors before the
Stockholder became an Interested Stockholder, (3) be approved by the favorable
vote of at least 67% of the voting power of the Voting Stock (as hereinafter
defined) and a majority of the outstanding shares of Voting Stock held by
persons who are neither Interested Stockholders nor affiliates of Interested
Stockholders, or (4) be approved by the holders of at least 80% of the
outstanding shares of Voting Stock.
The Fair Price Provision is designed to prevent a purchaser from utilizing
two-tier pricing and similar tactics in an attempted takeover of the Surviving
Corporation. It also has the overall effect of making it more difficult to
acquire and exercise control of the Surviving Corporation and may provide
incumbent officers and directors with enhanced ability to retain their position
in the event of a takeover bid. It is not designed to prevent or discourage all
tender offers for control of the Surviving Corporation. The Fair Price
Provision does not preclude an offeror from making a tender offer for some of
the shares of the Surviving Corporation's stock without proposing a Business
Combination (as defined below) in which the remaining shares of stock are
purchased or from making a tender offer in cash for all the outstanding shares
of the Surviving Corporation. Except for the restrictions on Business
Combinations, the Fair Price Provision will not prevent a holder of a
controlling interest of the Common Stock from exercising control over the
Surviving Corporation or increasing its interest in the Surviving Corporation.
The board of directors of the Surviving Corporation will support or oppose any
future takeover proposal, whether or not the proposal satisfies the fair price
requirements for the Fair Price Provision, if the board of directors determines
that its support or opposition is in the best interests of the Surviving
Corporation's stockholders.
The Fair Price Provision will not limit the ability of a third party to
effect a Business Combination, as long as such third party owns (or can obtain
the affirmative votes of) at least 80% of the Voting Stock.
Certain Definitions Used in the Fair Price Provision
An "Interested Stockholder" is defined in the Fair Price Provision as
anyone who acquires beneficial ownership after the Effective Time of 20% or more
of the issued and outstanding shares of all classes of capital stock of the
Surviving Corporation entitled to vote generally in the election of directors
(the "Voting Stock"), and includes any person who, in a transaction not
involving a public offering, is an assignee of or has succeeded to any shares of
Voting Stock of the Surviving Corporation that were at any time within the prior
two year period beneficially owned by an Interested Stockholder. The term
"beneficial owner" includes persons directly and indirectly owning or having the
right to acquire or vote the stock. The board of directors of the Surviving
Corporation considers that a 20% holding, which is four times the minimum
ownership requirement imposed in connection with various reporting requirements
under the Exchange Act for stockholders of public companies, is appropriate to
define an Interested Stockholder. While Mr. R. Lindsey Duncan will own in
excess of 20% of the Voting Stock upon consummation of the Merger, he will not
be deemed to be an "Interested Stockholder" for purposes of the Fair Price
Provision.
A "Business Combination" includes the following transactions: (1) a merger
or consolidation of the Surviving Corporation or any subsidiary with an
Interested Stockholder or with any other company or entity that is, or after
such merger or consolidation would be, an affiliate of an Interested
Stockholder, (2) the sale or other disposition by the Surviving Corporation or a
subsidiary or assets having an aggregate fair market value equal to 10% or more
of the net assets of the Surviving Corporation if an Interested Stockholder (or
an affiliate thereof) is a party to the transaction, (3) the issuance or
transfer of stock or other securities of the Surviving Corporation or of a
subsidiary to a person or entity that, immediately before such issuance, is an
Interested Stockholder (or an affiliate thereof) in exchange for cash or
property (including stock or other securities) having an aggregate fair market
value equal to 10% or more of the net assets of the Surviving Corporation, (4)
the adoption of any plan or proposal for the liquidation of the Surviving
Corporation proposed by or on behalf of an Interested Stockholder or affiliate;
or (5) any reclassification or recapitalization of outstanding stock (or
securities convertible into stock) of any class of the Surviving Corporation or
any of its subsidiaries owned by an Interested Stockholder or affiliate.
A "Disinterested Director" is a member of the board of directors of the
Surviving Corporation who is not affiliated with or a nominee of an Interested
Stockholder and was a director of the Surviving Corporation immediately before
the time the Interested Stockholder became an Interested Stockholder, and any
successor to such Disinterested Director who is not affiliated with or a nominee
of an Interested Stockholder and was recommended for nomination or election to
the board of directors by a majority of the Disinterested Directors then on the
board of directors.
Requirements for Certain Business Combinations Without the Fair Price
Provision
If the Surviving Corporation's articles of incorporation did not include
the Fair Price Provision, mergers, consolidations, the sale of substantially all
of the assets of the Surviving Corporation, the adoption of a plan of
dissolution of the Surviving Corporation, and reclassification of securities and
recapitalizations of the Surviving Corporation involving amendments to the
articles of incorporation would require approval by the holders of a majority of
the voting power of the Voting Stock. Certain other transactions, such as
sales of less than substantially all of the assets of the Surviving Corporation,
certain mergers involving a wholly-owned subsidiary of the Surviving
Corporation, and recapitalizations and reclassifications not involving
amendments to the articles of incorporation would not require stockholder
approval.
Requirements for Certain Business Combinations Under the Fair Price
Provision
Under the Fair Price Provision, it will be a condition to a Business
Combination with an Interested Stockholder that the transaction either (1) meet
certain price criteria and procedural requirements (discussed below), (2) be
approved by a majority of the Disinterested Directors, or (3) be approved by the
favorable vote of at least 67% of the voting power of the Voting Stock and a
majority of the outstanding shares of Voting Stock held by persons who are
neither Interested Stockholders nor affiliates of Interested Stockholders, or
(4) be approved by the favorable vote of at least 80% of the voting power of the
Voting Stock. If the minimum price criteria and procedural requirements are not
met and the requisite approval of the Disinterested Directors is not obtained,
and the requisite vote of stockholders not affiliated with the Interested
Stockholder is not obtained, then a Business Combination with an Interested
Stockholder will require an 80% stockholder vote. One consequence of the Fair
Price Provision, therefore, is that additional time and expense would be
required to effect certain Business Combinations due to the need to hold a
special stockholders' meeting.
Exceptions to Higher Vote Requirements under the Fair Price Provision
The 80% affirmative stockholder vote contemplated by the Fair Price
Provision will be required only if (1) the minimum price criteria and procedural
requirements described under (a) and (b) below are not satisfied, and (2) the
transaction is not approved by a majority of the Disinterested Directors, and
(3) the requisite vote of stockholders not affiliated with the Interested
Stockholder is not obtained.
(a) Minimum Price Criteria. In a Business Combination involving cash or
other consideration paid to the Surviving Corporation's stockholders, the
consideration must be either cash or the same type of consideration used by the
Interested Stockholder in acquiring the largest portion of its Voting Stock
before the first public announcement of the terms of the proposed Business
Combination (the "Announcement Date"). In addition, the fair market value
(calculated in accordance with the Fair Price Provision) of the consideration to
be paid on the date the Business Combination was consummated (the "Consummation
Date") must meet certain minimum price criteria described herein.
In the case of payments to holders of Common Stock and the Surviving
Corporation's Preferred Stock, the fair market value per share of such payments
must be at least equal in value to the higher of (1) the highest price per share
(including brokerage commissions, transfer taxes, and soliciting dealers' fees)
paid by the Interested Stockholder in acquiring any shares of such class or
series of stock during the two years before the Announcement Date (even if the
Interested Stockholder was not an Interested Stockholder at the time of any such
acquisitions) or in the transaction in which it became an Interested Stockholder
(whichever is higher), or (2) the fair market value per share of such class or
series of stock on the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (the "Determination Date"),
whichever is higher; provided, however, the holders of Preferred Stock shall be
entitled to receive an amount at least equal to the highest preferential amount
payable upon dissolution, liquidation, or winding-up of the Surviving
Corporation applicable thereto if the Interested Stockholder has not previously
purchased shares of Preferred Stock or such price paid for Preferred Stock is
lower than such preferential amount. If the Interested Stockholder purchased any
shares of Common Stock during the two-year period before the Announcement Date,
then the minimum price could be set as of such earlier date. If the Interested
Stockholder did not purchase any shares of Common Stock during the two-year
period before the Announcement Date or in the transaction on the Determination
Date in which it became an Interested Stockholder (e.g., if it became an
Interested Stockholder through the acquisition of shares of another class of
Voting Stock), the minimum price would be as determined under (2) above.
For example, if the acquisition by an Interested Stockholder of its Common
Stock interest was by cash purchases in open market transactions and the highest
price paid per share of Common Stock during the previous two years (including
the transaction in which it became an Interested Stockholder) was $2, and
assuming that the fair market values per share of Common Stock on the
Determination Date and on the Announcement Date were $1 and $1.50, respectively,
the amount required to be paid to the holders of Common Stock would be the
amount per share in cash equal to the higher of (1) $2 (the highest price paid),
or (2) $1.50 (fair market value on the Announcement Date). Accordingly, in
order to comply with the Fair Price Provision's minimum price criteria, the
Interested Stockholder would be required to pay at least $2 per share in cash to
holders of Common Stock in the Business Combination. If the Interested
Stockholder previously acquired shares for other than cash consideration, the
form of consideration to be paid would be cash or the form of consideration
previously used to acquire the largest block of stock. All such prices shall be
subject to an appropriate adjustment in the event of any stock dividend, stock
split, subdivision, combination of shares, or similar event.
In the case of payments to holders of any class or series of the Surviving
Corporation's Voting Stock other than Common Stock, the fair market value per
share of such payments must be at least equal to the higher of (a) the highest
price per share determined with respect to such class or series or stock in the
same manner as described in clauses (1) and (2) of the preceding paragraph, or
(b) the highest preferential amount per share to which the holders of such class
or series of Voting Stock are entitled in the event of a voluntary or
involuntary liquidation of the Surviving Corporation.
Under the minimum price requirements, the fair market value of non-cash
consideration to be received by holders of shares of any class of Voting Stock
in a Business Combination is to be determined in good faith by the board of
directors of the Surviving Corporation.
Under the Fair Price Provision, the Interested Stockholder is required to
meet the minimum price with respect to each class of stock before proposing the
Business Combination. If the minimum price criteria and the procedural
requirements (discussed below) are not met with respect to each class of Voting
Stock, then an 80% vote of stockholders will be required to approve the Business
Combination unless the transaction is approved by the favorable vote of at least
67% of the voting power of the Voting Stock and a majority of the outstanding
shares of Voting Stock held by persons who are neither Interested Stockholders
nor affiliates of Interested Stockholders, or by a majority of the Disinterested
Directors.
If the proposed Business Combination does not involve receipt by the other
stockholders of the Surviving Corporation of cash or other property, such as a
sale of assets or an issuance of the Surviving Corporation's securities to an
Interested Stockholder, then the price criteria discussed above will not apply
and an 80% vote of stockholders will be required unless the transaction is
approved by the favorable vote of at least 67% of the voting power of the Voting
Stock and a majority of the outstanding shares of Voting Stock held by persons
who are neither Interested Stockholders nor affiliates of Interested
Stockholders, or by a majority of the Disinterested Directors.
(b) Procedural Requirements. Under the Fair Price Provision, unless the
Business Combination is approved by a majority of the Disinterested Directors,
the Business Combination will be subject to the 80% stockholder vote
requirement, even if it satisfies the minimum price criteria, in each of the
following situations:
(1) if the Surviving Corporation, after the Interested Stockholder
became an Interested Stockholder, (i) reduced the rate of dividends paid on
the Common Stock (unless such reduction was necessary to reflect any
subdivision of the Common Stock), or (ii) failed to increase the rate of
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization, or any similar
transaction which has the effect of reducing the number of outstanding
shares of Common Stock, unless such reduction was approved by a majority of
the Disinterested Directors. This provision is designed to prevent an
Interested Stockholder from attempting to depress the market price of the
Common Stock before proposing a Business Combination by reducing dividends
on the Common Stock, and thereby reducing the consideration required to be
paid pursuant to the minimum price provisions of the Fair Price Provision.
(2) if the Interested Stockholder acquired any additional shares of
Voting Stock except in the transaction pursuant to which it became an
Interested Stockholder. This provision is intended to prevent an
Interested Stockholder from purchasing additional shares of Voting Stock
without compliance with the provisions of the Fair Price Provision.
(3) if the Interested Stockholder, at any time after it became an
Interested Stockholder, whether in connection with the proposed Business
Combination or otherwise, received the benefits of any loss or other
financial assistance or tax advantage provided by the Surviving Corporation
(other than proportionately as a stockholder). This provision is intended
to deter an Interested Stockholder from self-dealing or otherwise taking
advantage of its equity position in the Surviving Corporation by using the
Surviving Corporation's resources to finance the proposed Business
Combination or otherwise for its own purposes in a manner not
proportionately available to all stockholders.
Under the Fair Price Provision, unless the business Combination is approved
by a majority of the Disinterested Directors, to avoid the 80% stockholder vote
requirement even if the other conditions described above are met, a proxy or
information statement disclosing the terms and conditions of the proposed
Business Combination and complying with the requirements of the proxy rules
promulgated under the Exchange Act would have to be mailed to all stockholders
of the Surviving Corporation at least 30 days before the consummation of a
Business Combination. This provision is intended to ensure that the Surviving
Corporation's stockholders will be fully informed of the terms and conditions of
the proposed Business Combination even if the Interested Stockholder is not
otherwise legally required to disclose such information to stockholders.
NONE OF THE MINIMUM PRICE OR PROCEDURAL REQUIREMENTS DESCRIBED ABOVE WILL
APPLY IN THE CASE OF A BUSINESS COMBINATION APPROVED BY A MAJORITY OF THE
DISINTERESTED DIRECTORS OR THE FAVORABLE VOTE OF 67% OF THE OUTSTANDING SHARES
AND A MAJORITY OF THE SHARES HELD BY PERSONS WHO ARE NEITHER THE INTERESTED
STOCKHOLDER NOR AFFILIATES OF THE INTERESTED STOCKHOLDER, AND, IN THE ABSENCE OF
SUCH APPROVAL, ALL OF SUCH REQUIREMENTS WILL HAVE TO BE SATISFIED TO AVOID THE
80% STOCKHOLDER VOTE REQUIREMENT.
Classified Board
While Surgical's current articles of incorporation provide for a classified
board divided into three classes of directors, each of whom can be removed by
stockholders with or without cause, serving staggered three-year terms, with one
class of directors to be elected at each annual meeting of stockholders to hold
office until the end of their term or until their successors have been elected
and qualified, the proposed articles of incorporation provide that the directors
whose term expires at the 1999 annual meeting of the Surviving Corporation
Stockholders may not be removed without cause except upon the affirmative vote
of the holders of 67% of the outstanding shares of Voting Stock. This provision
makes it more difficult to remove Rockwell D. Schutjer and Todd B. Crosland, the
two incumbent Surgical directors who will continue to serve on the board of the
Surviving Corporation, thus providing continuing representation of the Surgical
Stockholders.
No Cumulative Voting
The articles of incorporation will not permit cumulative voting. Thus, a
purchaser of a block of New Common Stock representing less than a majority of
the outstanding shares will have no assurance of proportional representation on
the board of directors.
No Action by Stockholder Consent
Utah law provides that, unless a corporation's certificate of incorporation
denies the right, stockholders may act by a written consent executed by the
holders of a majority of the outstanding shares of voting stock without holding
a special or annual meeting of stockholders. The Surviving Corporation's
articles of incorporation will prohibit action that is required or permitted to
be taken at any annual or special meeting of stockholders of the Surviving
Corporation from being taken by the written consent of stockholders without a
meeting, except with respect to the removal, with or without cause, of no more
than up to three directors in any fiscal year of the Surviving Corporation or
unless authorized by a majority of the Disinterested Directors. The intent of
this provision is to provide an open forum at a stockholders meeting for all
stockholders to have a chance to attend and be heard. This provision could have
an anti-takeover effect and tend to entrench management by forcing the holder or
holders of a majority of the outstanding stock to exercise their prerogatives of
majority ownership only by voting at a stockholders meeting rather than by
written consent.
Supermajority Voting
The Fair Price Provision may be altered, amended, or repealed only if the
holders of 80% or more of the outstanding shares of Voting Stock entitled to
vote thereon or 67% or more of the outstanding shares voting together with a
majority of the outstanding shares held by persons other than the Interested
Stockholder and its affiliates, vote in favor of such action. The other anti-
takeover provisions in the articles of incorporation may be altered, changed,
amended, or repealed only if the holders of 67% or more of the outstanding
shares of voting stock of the Surviving Corporation entitled to vote thereon
vote in favor of such action. Without this supermajority voting, the beneficial
effects of the provisions requiring such greater percentage of vote could be
nullified by subsequent amendments approved by a vote of the holders of only a
majority of Common Stock.
Voting and Revocation of Proxy
Surgical
Shares of Surgical Stock that are represented by a proxy properly executed
and received prior to the vote at the Surgical Stockholders' Meeting will be
voted at the Stockholders' Meeting in the manner directed on the proxy card,
unless such proxy is revoked in advance of such vote. If the proxy is returned
to Surgical without a specific direction, the proxy will be voted in favor of
all the proposals of management submitted to the Surgical Stockholders,
including the Merger, thereby waiving dissenters' rights.
Inasmuch as the Merger requires the affirmative vote of a majority of all
outstanding shares of Surgical Stock entitled to vote, failure to return a
properly executed proxy card or to vote in person at the Surgical Stockholders'
Meeting will have the practical effect of a vote against the Merger. Similarly,
an abstention will have the same legal effect as a vote against the Merger.
Under the rules of the New York Stock Exchange, which are generally
observed by brokers that are not members of such Exchange as well as those that
are, brokers that hold shares in street or nominee names for a customer do not
have the authority to vote on items such as the Merger when they have not
received instructions from beneficial owners. Therefore, brokers that do not
receive instruction from beneficial owners are not entitled to vote on the
Merger. Accordingly, under Utah Law, a broker non-vote, while effective to
establish a quorum, will have the same effect as a vote against the Merger.
Any Surgical Stockholder giving a proxy may revoke it at any time prior to
the call for the vote at the Surgical Stockholders' Meeting by delivering to
Surgical, to the attention of the corporate secretary, 2801 South Decker Lake
Lane, Salt Lake City, Utah 84119, a written notice of revocation bearing a later
date than the proxy or a later dated proxy relating to the same shares, or by
attending the Surgical Stockholders' Meeting and voting in person. Attendance
at the Surgical Stockholders' Meeting will not in itself constitute the
revocation of a proxy.
4Health
Shares of 4Health Common Stock and Series A Stock that are represented by a
proxy properly executed and received prior to the vote at the 4Health
Stockholders' Meeting will be voted at the Stockholders' Meeting in the manner
directed on the proxy card, unless such proxy is revoked in advance of such
vote. If the proxy is returned to 4Health without a specific direction, the
proxy will be voted in favor of all proposals submitted to the 4Health
Stockholders, including the Merger, thereby waiving dissenters' rights.
Inasmuch as the Merger requires the affirmative vote of a majority of all
outstanding shares of 4Health Common Stock and 4Health Series A Stock entitled
to vote, voting as separate classes, failure to return a properly executed proxy
card or to vote in person at the 4Health Stockholders' Meeting will have the
practical effect of a vote against the Merger. Similarly, an abstention will
have the same legal effect as a vote against the Merger.
Any 4Health Stockholder giving a proxy may revoke it at any time prior to
the call for the vote at the 4Health Stockholders' Meeting by delivering to
4Health, to the attention of the corporate secretary, 5485 Conestoga Court,
Boulder, Colorado 80301, a written notice of revocation bearing a later date
than the proxy or a later dated proxy relating to the same shares, or by
attending the 4Health Stockholders' Meeting and voting in person. Attendance at
the 4Health Stockholders' Meeting will not in itself constitute the revocation
of a proxy.
Solicitation of Proxies
Surgical
Surgical will bear its own costs of soliciting proxies. Proxies will
initially be solicited by mail, but executive officers, directors, and selected
other employees of Surgical may also solicit proxies in person or by telephone
or facsimile. Such persons who solicit proxies will not be specially
compensated for such services. Nominees, fiduciaries, and other custodians will
be requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy materials to
beneficial owners.
Holders of Surgical Stock are requested to complete, date, and sign the
accompanying Surgical Stockholders' proxy card and return it promptly in the
enclosed envelope to Surgical at 2801 South Decker Lake Lane, Salt Lake City,
Utah 84119. No postage is required if mailed within the United States.
4Health
4Health will bear its own costs of soliciting proxies. Proxies will
initially be solicited by mail, but executive officers, directors, and selected
other employees of 4Health may also solicit proxies in person or by telephone or
facsimile. Such persons who solicit proxies will not be specially compensated
for such services. Nominees, fiduciaries, and other custodians will be
requested to forward soliciting materials to beneficial owners and will be
reimbursed for their reasonable expenses incurred in sending proxy materials to
beneficial owners.
Holders of 4Health Common Stock are requested to complete, date, and sign
the accompanying proxy card and return it promptly in the enclosed envelope to
4Health at, 5485 Conestoga Court, Boulder, Colorado 80301. No postage is
required if mailed within the United States.
Vote Required
Surgical
Pursuant to Utah Law, the Merger must be approved by holders of a majority
of the shares of Surgical Stock outstanding on the Surgical Record Date. The
adoption of the LTSIP must be approved by a majority of a quorum in attendance
at the Surgical Stockholders' Meeting, either in person or by proxy. The
election of directors requires a plurality of the votes at a meeting at which a
quorum is present. The bylaws of Surgical require that at least one-half of the
Surgical Stock issued and outstanding as of the Surgical Record Date be
represented, in person or by proxy, at the Surgical Stockholders' Meeting in
order to constitute a quorum for the conducting of business.
Directors, executive officers, and certain stockholders of Surgical holding
an aggregate of 2,278,329 shares of Surgical Stock, or approximately 50.2% of
the shares of Surgical Stock issued and outstanding, have delivered their
irrevocable proxies to vote in favor of the Merger and have committed to vote in
favor of adopting the LTSIP.
4Health
Pursuant to California Law, the Merger must be approved by the holders of a
majority of the 4Health Common Stock outstanding on the 4Health Record Date as
well as the holders of a majority of the 4Health Series A Stock outstanding on
the 4Health Record Date.
Directors, executive officers, and certain stockholders of 4Health holding
an aggregate of 4,448,833 shares, or approximately 74.4% of the 4Health Common
Stock issued and outstanding, and all shares of 4Health Series A Stock issued
and outstanding, have delivered their irrevocable proxies to vote in favor of
the proposals to be submitted to the stockholders for their consideration, so
that the vote of no additional shares of 4Health Common or Series A Stock will
be required to approve the Merger.
Attendance of Representative of Accountants
It is anticipated that a representative of Arthur Andersen LLP will be in
attendance at both the Surgical and the 4Health Stockholder' Meetings in order
to answer appropriate questions from the Stockholders and, if they so desire, to
make a statement to the Stockholders.
Stockholder Proposals
If the Merger is completed, it is anticipated that the board of directors
of the Surviving Corporation will adopt the calendar year as the fiscal year of
the corporation as permitted by the bylaws. In such event, it is anticipated
that the next annual meeting of stockholders will be held in late May or June
1997. Stockholders may present proposals for inclusion in the proxy statement
to be mailed in connection with the next annual meeting of stockholders;
provided that, such proposals are received by the Surviving Corporation no later
than February 28, 1997, and are otherwise in compliance with applicable laws and
regulations and the governing provisions of the articles of incorporation and
bylaws of the Surviving Corporation.
If for any reason the Merger is not completed, it is anticipated that the
next annual meeting of Surgical Stockholders will be held during August 1997.
Stockholders may present proposals for inclusion in the proxy statement to be
mailed in connection with the 1997 annual meeting of stockholders if such
proposals are received by Surgical no later than April 15, 1997, and are
otherwise in compliance with applicable laws and regulations and the governing
provisions of the articles of incorporation and bylaws of Surgical.
Rights of Dissenting Stockholders
Surgical
Dissenting Surgical Stockholders who oppose the proposed Merger will have
the right to receive payment for the value of their shares of Surgical Stock
held as set forth in part 13 of the Utah Law ("Part 13"), a copy of which is
attached as Appendix "F." Any obligations that Surgical may have to Dissenting
Surgical Stockholders as set forth below will continue as obligations of the
Surviving Corporation subsequent to the Merger. The following summary is
qualified in its entirety by the more detailed referenced provisions of the Utah
Law that are attached; in the event of any inconsistency, such provisions of the
Utah Law shall prevail.
Under Part 13, a Dissenting Surgical Stockholder wishing to assert
dissenters' rights:
(a) must cause Surgical to receive, before the vote of the Surgical
Stockholders in regard to the proposed Merger is taken at the Surgical
Stockholders' Meeting, written notice of his or her intent to demand
payment for shares of Surgical Stock held if the Merger is approved and
effected; and
(b) may not vote any of the shares of Surgical Stock held in favor of
the Merger.
In order for a Dissenting Surgical Stockholder to be entitled to payment
for shares of Surgical Stock held, such stockholder must have been a stockholder
of Surgical with respect to the shares of Surgical Stock for which payment is
demanded as of the date the Merger Agreement is approved by the Surgical
Stockholders at the Surgical Stockholders' Meeting. A Dissenting Surgical
Stockholder who does not satisfy the above conditions is not entitled to demand
payment for his or her shares of Surgical Stock. As used herein, a "Dissenting
Surgical Stockholder" means a record holder of the dissenting shares of Surgical
Stock and any appropriate transferee of record.
If the Merger is approved by a majority of the shares of Surgical Stock
issued and outstanding at the Surgical Record Date and any Dissenting Surgical
Stockholders have caused Surgical to receive the written notice indicated above
and did not vote his or her shares of Surgical Stock held in favor of the
Merger, Surgical shall provide written notice to all such Dissenting Surgical
Stockholders who satisfy the foregoing conditions and who, therefore, are
entitled to demand payment for their shares of Surgical Stock. Such written
dissenters' notice from Surgical shall be sent no later than ten (10) days after
the Effective Time and shall:
(a) state that the Merger was authorized and approved by holders of a
majority of the outstanding shares of Surgical Stock and give notice of the
proposed Effective Time of the Merger;
(b) state the address at which Surgical will receive payment demands
and the address at which certificates for shares of Surgical Stock must be
deposited;
(c) supply a form for Dissenting Surgical Stockholders to demand
payment, which form requests a Dissenting Surgical Stockholder to state an
address to which payment is to be made;
(d) set a date by which Surgical must receive the payment demand and
by which certificates for dissenting shares must be deposited at the
address indicated, which dates may not be fewer than 30 nor more than 70
days after the date the dissenters' notice is given; and
(e) be accompanied by a copy of Part 13.
A Dissenting Surgical Stockholder who is given dissenters' notice as
provided above and wishes to assert dissenters' rights must, in accordance with
the terms of the dissenters' notice, cause Surgical to receive a payment demand
in the same form referred to above or in another writing and must timely deposit
certificates for dissenting shares of Surgical Stock as provided above. A
Dissenting Surgical Stockholder who demands payment in accordance with this
paragraph retains all rights as a stockholder of Surgical except the right to
transfer the shares until the Effective Time and thereafter has only the right
to receive payments for such shares. A Dissenting Surgical Stockholder who does
not meet the provisions of this paragraph is not entitled to payment for shares
pursuant to dissenters' rights.
Upon compliance by the Dissenting Surgical Stockholder with all the
requirements described above and in Part 13, Surgical shall pay the amount
Surgical estimates to be the fair value of the Dissenting Surgical Stockholders'
shares of Surgical Stock, except for any shares acquired by the Dissenting
Surgical Stockholder after the date of the notice of the Surgical Stockholders'
Meeting, to which special provisions not summarized here apply, accompanied by
Surgical's balance sheet as of the end of the most recent fiscal year; an income
statement for that year; statements of changes in stockholders' equity and cash
flows for that year; and the latest available interim financial statements, if
any. Such financial statements need not be audited. Payment shall also be
accompanied by a statement of Surgical's estimate of the fair value of the
dissenting shares of Surgical Stock and the amount of interest payable with
respect to such shares, a statement of a dissatisfied dissenters' right to
demand payment, as discussed below, and a copy of Part 13.
If the Merger Agreement is not effected, or is not effected within 60 days
after the date set by Surgical as the date by which Surgical must receive
payment demands, notwithstanding approval by the Surgical Stockholders holding a
majority of the issued and outstanding shares of Surgical Stock, Surgical is
required to return to all Dissenting Surgical Stockholders the deposited stock
certificates, and the Dissenting Surgical Stockholders shall thereafter have all
rights of a stockholder of Surgical as if no demand for payment had been made.
If the Effective Time occurs more than 60 days after the date set by
Surgical as the date by which Surgical must receive payment demands, then
Surgical shall send a new dissenters' notice and the provisions of Part 13 shall
again be applicable.
A Dissenting Surgical Stockholder may notify Surgical of his or her own
estimate of the value of his or her shares of Surgical Stock held and demand
that Surgical pay such amount if the dissenter believes that the amount paid by
Surgical is less than the fair value of the shares; if Surgical fails to make
payment within 60 days after the date set by it as the date by which it must
receive the payment demand; or if Surgical, having not effected the Merger
Agreement, fails to return timely the Dissenting Surgical Stockholder's shares
of Surgical Stock. A dissenter waives the right to demand payment according to
this paragraph unless such Dissenting Surgical Stockholder causes Surgical to
receive notice of his or her estimate within 30 days after Surgical has made
payment for the shares of Surgical Stock.
If a demand for payment by the dissenter remains unresolved, Surgical shall
commence a proceeding in the Third District Court of Salt Lake County, Utah,
within 60 days after receiving the payment demand from the dissenter and
petition the court to determine the fair value of the shares. If Surgical fails
to commence such proceeding within such 60 days, it shall pay to each dissenter
whose demand remains unresolved the amount demanded. Each such Dissenting
Surgical Stockholder is entitled to judgment for the amount, if any, by which
the court finds that the fair value of his or her shares, plus interest, exceeds
the amount paid by Surgical or the amount Surgical elected to withhold payment
under special provisions applicable to shares acquired after the date of the
notice of the Surgical Stockholders Meeting of Surgical's Stockholders. The
court is required to assess court costs, counsel fees, and appraisal costs
against Surgical, unless the court determines that the Dissenting Surgical
Stockholder acted arbitrarily, vexatiously, or not in good faith.
4Health
Dissenting 4Health Common Stockholders who oppose the proposed Merger
Agreement will have the right to receive payment for the value of the shares of
4Health Common Stock held as set forth in chapter 13 of California Law ("Chapter
13"), a copy of which is attached as Appendix "E". Any obligations that 4Health
may have to Dissenting 4Health Common Stockholders as set forth below, will be
assumed by the Surviving Corporation as a result of the Merger. The following
summary is qualified in its entirety by the more detailed referenced provisions
of the California Law that are attached; in the event of any inconsistency, the
provisions of the California Law shall prevail.
Under Chapter 13, a Dissenting 4Health Common Stockholder wishing to assert
dissenters' rights may require 4Health to purchase for cash, at fair market
value, the shares of 4Health Common Stock held by such Dissenting 4Health
Stockholder. The fair market value of such shares shall be determined as of the
day before the first announcement of the Merger, excluding any appreciation or
depreciation in consequence of the Merger, but adjusted for any stock split,
reverse stock split, or share dividend which becomes effective after such
announcement. Holders of all of the issued and outstanding shares of 4Health
Series A Stock have delivered their irrevocable proxies to vote the shares in
favor of the Merger and, therefore, will be deemed to have elected not to
exercise their dissenters' rights.
In order for a Dissenting 4Health Common Stockholder to be entitled to
payment for shares of 4Health Common Stock held by him or her, the Dissenting
4Health Common Stockholder's shares must have been outstanding as of the 4Health
Record Date for determining the shares entitled to vote at the 4Health
Stockholders' Meeting and must not have been voted in favor of the Merger. In
addition, a Dissenting 4Health Common Stockholder must properly demand 4Health
to purchase the shares held and submit such shares for endorsement as described
below, all in accordance with Chapter 13. As used herein, a Dissenting 4Health
Common Stockholder means a record holder of dissenting shares of 4Health Common
Stock and any appropriate transferee of record.
If the Merger is approved by the 4Health Common Stockholders at the 4Health
Stockholders' Meeting in the manner described in this Joint Proxy
Statement/Prospectus but such approval is not unanimously voted for by all
outstanding shares of 4Health Common Stock, 4Health shall provide to the holders
of all such shares that were not voted in favor of the Merger and who are
therefore entitled to dissenters' rights a written notice stating that the
Merger has been approved by holders of a majority of the shares of 4Health's
Common Stock and by the holders of all of the shares of 4Health's Series A
Stock. This notice shall be mailed by 4Health no later than ten (10) days after
the date the Merger is approved by the 4Health stockholders and shall be
accompanied by:
(a) a copy of sections 1300-1304 of Chapter 13;
(b) a statement of the price determined by 4Health to represent the
fair market value of the dissenting shares which such statement of price
shall constitute an offer by 4Health to purchase at such price any
dissenting shares of 4Health Common Stock, so long as such shares maintain
their status as dissenting shares; and
(c) a brief description of the procedure to be followed by any
4Health Common Stockholders who wish to exercise their dissenter's rights
under Chapter 13.
In order to make proper demand for payment, any 4Health Common Stockholder
that receives the dissenters' notice as provided above and who wishes to assert
dissenters' rights must provide 4Health with a written demand that 4Health
purchase the dissenting shares held by paying cash for such shares at their fair
market value as of the day before the announcement of the proposed Merger. The
demand must state the number and class of the shares of 4Health held of record
by the Dissenting 4Health Common Stockholder with respect to which such
stockholder is exercising dissenters' rights and shall contain a statement of
what such stockholder claims to be the fair market value of those shares as of
the day before the announcement of the proposed Merger. This statement of fair
market value shall constitute an offer by the Dissenting 4Health Common
Stockholder to sell the dissenting shares at such price. In order for such
written demand to be effective for any purpose, it must be received by 4Health
or its transfer agent within 30 days from the date that 4Health mails the
dissenters' notice described above.
Within 30 days after the dissenters' notice is mailed by 4Health, a
Dissenting 4Health Common Stockholder must also submit to 4Health at its
principal office or at the office of any transfer agent of 4Health (a) if the
dissenting shares are represented by certificates, the Dissenting 4Health Common
Stockholder's certificates representing any dissenting shares which such
stockholder demands that 4Health purchase, which such certificates must be
stamped or endorsed with a statement that the shares are dissenting shares or
exchanged for certificates of appropriate denomination so stamped or endorsed;
or (b) if the shares are not represented by certificates, a written notice of
the number of shares which the Dissenting 4Health Common Stockholder demands
that 4Health purchase. Upon subsequent transfers of any dissenting shares on the
books of 4Health, the new certificates, initial transaction statement, and other
written statements issued therefor shall bear a like statement, together with
the name of the original Dissenting 4Health Common Stockholder of the shares.
If 4Health and a Dissenting 4Health Common Stockholder agree that the
shares held by such stockholder are dissenting shares and agree upon the price
to be paid by 4Health for such shares, the Dissenting 4Health Common Stockholder
is thereafter entitled to receive the agreed price with interest thereon at the
legal rate on judgments, as specified by California Law, from the date that
4Health and the Dissenting 4Health Common Stockholder agree on the fair market
value of the dissenting shares. Any agreements fixing the fair market value of
any dissenting shares as between the corporation and the holders thereof shall
be filed with the secretary of 4Health. Unless prohibited by certain provisions
of California Law designed to protect creditors and certain classes of
stockholders, 4Health shall pay to any Dissenting 4Health Common Stockholder the
fair market value of his or her dissenting shares within 30 days after the
amount to be paid therefor has been agreed or within 30 days after any statutory
or contractual conditions to the Merger are satisfied, whichever is later, and,
in the case of certificated securities, subject to surrender of the certificates
therefor as described in the immediately preceding paragraph, unless provided
otherwise by agreement.
If 4Health denies that shares held by a Dissenting 4Health Common
Stockholder are dissenting shares, or 4Health and a Dissenting 4Health Common
Stockholder do not agree upon the fair market value of the shares, then the
Dissenting 4Health Common Stockholder demanding purchase of such shares as
dissenting shares or any interested corporation (i.e., 4Health, Surgical, or the
Surviving Corporation), within six months after the date on which the original
dissenters' notice was mailed to 4Health Common Stockholders entitled to
dissenters' rights, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint. Two or more Dissenting
4Health Common Stockholders may join as plaintiffs or be joined as defendants in
any such action and two or more such actions may be consolidated.
In any such proceeding, the court shall determine first, if at issue, the
status of the subject shares as dissenting shares. If the fair market value of
the dissenting shares is at issue, the court shall determine, or shall appoint
one or more impartial appraisers to determine, the fair market value of the
shares. If the court appoints an appraiser or appraisers, such appraisers shall
proceed forthwith to determine the fair market value per dissenting share.
Within the time fixed by the court, the appraisers, or a majority of them, shall
make and file a report in the office of the clerk of the court. Thereupon, on
the motion of any party, the report shall be submitted to the court and
considered on such evidence as the court considers relevant. If the court finds
the report reasonable, the court may confirm it. If a majority of the
appraisers appointed fail to make and file a report within 10 days from the date
of their appointment or within such further time as may be allowed by the court
or the report is not confirmed by the court, the court shall determine the fair
market value of the dissenting shares. The court shall then enter judgment for
payment by 4Health of an amount equal to the fair market value of each
dissenting share multiplied by the number of dissenting shares held by any
Dissenting 4Health Common Stockholder which is a party to, or who has intervened
in, the proceeding and is entitled to payment, with interest thereon to accrue
from the date on which such judgment is entered. Any party may appeal from the
judgment of the court.
Subject to the provisions of the California Law that protect creditors and
certain classes of stockholders of a corporation, each Dissenting 4Health Common
Stockholder will thereafter be entitled to forthwith receive payment for the
dissenting shares held, provided, that in the case of dissenting shares
represented by certificates, that the Dissenting 4Health Common Stockholder has
properly endorsed and delivered to the Surviving Corporation the certificates
representing the dissenting shares held by such stockholder.
The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but if the value awarded by the court for the shares
is more than 125% of the price originally offered by 4Health, the Surviving
Corporation shall pay the costs (including, in the discretion of the court,
attorneys' fees, fees of expert witnesses, and interest at the legal rate on
judgments) from the date of compliance by the Dissenting 4Health Common
Stockholder with the provisions of Chapter 13.
To the extent that provisions of California Law prevent the payment to any
holders of dissenting shares of the fair market value of such shares, they shall
become creditors of the Surviving Corporation for the amount thereof together
with interest at the legal rate on judgments until the date of payment, but
subordinate to all other creditors in any liquidation proceeding, such debt to
be payable when permissible under the provisions of Chapter 5 of California Law.
Cash dividends declared and paid by 4Health upon the dissenting shares
after the date of approval of the Merger by the 4Health Stockholders and prior
to payment for such dissenting shares by 4Health shall be credited against the
total amount to be paid by the Surviving Corporation therefor.
Except as expressly limited by Chapter 13, Dissenting 4Health Common
Stockholders will continue to have all the rights and privileges incident to
their shares held until the fair market value of such shares is agreed upon or
determined and paid. A Dissenting 4Health Common Stockholder may not withdraw a
demand for payment once such demand has been made unless 4Health consents to
such withdrawal. Dissenting shares lose their status as dissenting shares and
the holder thereof ceases to be a Dissenting 4Health Common Stockholder upon the
happening of any of one the following:
(a) 4Health abandons the Merger. Upon abandonment of the Merger,
4Health shall pay on demand to any Dissenting 4Health Common Stockholder
who has initiated proceedings in good faith under Chapter 13 all necessary
expenses incurred in such proceedings, including reasonable attorneys'
fees;
(b) The dissenting shares are transferred prior to their submission
for endorsement in accordance with Chapter 13;
(c) The Dissenting 4Health Common Stockholders and 4Health do not
agree upon the status of the shares as dissenting shares or upon the fair
market value of the shares, and neither files a complaint or intervenes in
a pending action as described above within six months after the date on
which the dissenters' notice was first mailed to the stockholders entitled
to receive such notice; or
(d) The Dissenting 4Health Common Stockholder, with the consent of
4Health, withdraws his or her demand for purchase of the dissenting shares.
If litigation is instituted to test the sufficiency or regularity of the
votes of the 4Health Stockholders in authorizing and approving the Merger, any
proceedings brought under Chapter 13 to identify dissenting shares or determine
the fair market value of dissenting shares shall be suspended until final
determination of such litigation. No 4Health Stockholder who has a right under
Chapter 13 to demand payment of cash for the shares held shall have any right at
law or in equity to attack the validity of the Merger, or to have the Merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the Merger have been legally voted in favor
thereof.
Accounting for the Merger
The Merger will be accounted for under the "purchase" method of accounting,
in accordance with generally accepted accounting principles. The Merger will be
treated for accounting purposes as a "reverse merger" wherein 4Health will be
treated as the acquiring company because on consummation of the Merger, the
4Health Stockholders will own more than 50% of the issued and outstanding
capital stock of the Surviving Corporation. Accordingly, the transaction will
be treated for accounting and financial reporting purposes as an issuance of
shares by 4Health for cash, receivables, and other assets of Surgical.
The Merger will be recorded on the books of the Surviving Corporation at
the fair market value of the Surgical Stock which will be allocated to the net
assets of Surgical, consisting primarily of cash, cash equivalents, and
receivables. The retained earnings of 4Health will be carried forward after the
Merger. The historical stockholders' equity of 4Health prior to the Merger will
be retroactively restated for the equivalent number of shares received in the
Merger. Results of operations prior to the Merger will be those of 4Health.
Delivery of Certificates for New Common Stock and Warrants
It is anticipated that certificates for New Common Stock and Warrants will
be available to exchange for Surgical Stock, 4Health Common Stock and 4Health
Series A Stock within ten days following the Effective Time. Certificates
representing shares of Surgical and 4Health Common and Series A Stock to be
exchanged must be delivered to the Transfer Agent prior to the issuance of
certificates representing the shares of New Common Stock and Warrants to be
exchanged therefor. Stockholders of record will receive a letter of transmittal
from the Transfer Agent subsequent to the Effective Time with specific
instructions regarding the delivery of existing certificates in exchange for the
issuance of certificates representing the New Common Stock and Warrants. The
Transfer Agent can be contracted at Zions First National Bank, N.A., Corporation
Trust Department, Third Floor, 10 East South Temple, Salt Lake City, Utah 84111,
telephone number (801) 524-4624.
Certificates for Surgical Stock and 4Health Common Stock and 4Health Series
A Stock shall remain valid and shall be considered to represent shares of the
Surviving Corporation after giving effect to the Surgical Conversion Ratio or
4Health Common Stock or Series A Conversion Ratio, as the case may be.
Payment in Lieu of Issuing Fractional Shares and Warrants
No fractional shares of New Common Stock or Warrants will be issued in
connection with the Merger. In lieu thereof, a person otherwise entitled to
receive a fractional share or Warrant shall be paid in cash the value of such
fractional share (without ascribing any value to the fractional Warrant) based
on the closing sales price, rounded to the nearest cent, for Surgical Stock as
reported by Nasdaq for the last trading day immediately preceding the Closing
Date.
Principal Conditions
Both Surgical and 4Health
Completion of the Merger is subject, pursuant to the Merger Agreement, to
the satisfaction of certain conditions, including the following:
(a) The registration statement of which this Joint Proxy
Statement/Prospectus forms a part shall have been declared effective by the
Commission and Surgical shall have received all permits and other
authorizations required under state securities laws to consummate the
Merger;
(b) The Merger shall have been approved and adopted by the requisite
vote of the stockholders of both Surgical and 4Health; and
(c) No governmental agency or authority shall have taken any action
with the effect of making the Merger illegal or otherwise prohibited.
The foregoing conditions cannot be waived.
Surgical
In addition to the foregoing, the obligations of Surgical to effect the
Merger are subject to certain further conditions, including the following:
(a) The perfection of dissenters' rights by 4Health Common
Stockholders holding less than 5% of the outstanding 4Health Common Stock;
(b) The satisfaction by 4Health of the representations, warranties,
covenants, and conditions of 4Health in the Merger Agreement;
(c) The satisfaction of Surgical's review of the business and
financial condition of 4Health;
(d) Surgical shall have received an opinion of Surgical's counsel
with respect to certain tax matters as discussed under "TAX CONSEQUENCES";
(e) Surgical shall have received an opinion of 4Health's counsel with
respect to certain matters;
(f) Surgical shall have received a letter from the independent public
accountants for 4Health with respect to certain matters; and
(g) Compliance with miscellaneous other terms, covenants, and
conditions.
Any of the above conditions may be waived by Surgical; however, it has not
indicated that it intends to so do.
4Health
The obligations of 4Health to effect the Merger are subject to certain
further conditions, including the following:
(a) The perfection of dissenters' rights by Surgical Stockholders
holding less than 225,000 shares of the outstanding Surgical Stock;
(b) The satisfaction by Surgical of the representations, warranties,
covenants, and conditions of Surgical in the Merger Agreement;
(c) The satisfaction of 4Health's review of the business and
financial condition of Surgical;
(d) 4Health shall have received an opinion of 4Health's counsel with
respect to certain tax matters as discussed under "TAX CONSEQUENCES";
(e) 4Health shall have received an opinion of Surgical's counsel with
respect to certain matters;
(f) 4Health shall have received a letter from the independent public
accountants for Surgical with respect to certain matters;
(g) Surgical shall have maintained its listing for the Surgical Stock
on the NNM or obtained a listing on a national securities exchange or the
Nasdaq SmallCapSM Market; and
(h) Compliance with miscellaneous other terms, covenants, and
conditions.
Any of the above conditions may be waived by 4Health; however, it has not
indicated that it intends to do so.
Expenses of the Merger
Surgical and 4Health will each bear its own expenses incurred in connection
with effecting the Merger, unless the Merger is terminated due to a party's
willful breach of any representation, warranty, or covenant, the failure of such
party's stockholders to approve the Merger in the required manner, (if such
party's board of directors withdraws its recommendation that its stockholders
approve the Merger or recommends a competing transaction), or if Surgical fails
to maintain the listing of the Surgical Stock on NNM, the Nasdaq SmallCapSM
Market, or a national securities exchange, in which case such party is obligated
to pay the other party $100,000 toward the other party's expenses. Surgical
will pay Arthur Andersen $102,500 for financial advisory services in connection
with the Merger, and 4Health will pay Rockefeller, Rothschild & Steele $180,000
for investment banking services rendered in connection with the Merger. In
addition, Surgical will bear the expenses incurred by it in preparing and filing
the registration statement of which this Joint Proxy Statement/Prospectus is a
part. Surgical and 4Health estimate that the foregoing items plus printing
expenses, accounting, legal, and filing fees, solicitation costs, and
miscellaneous costs associated with the Merger will aggregate approximately
$582,500.
Restrictions on Transfer of New Common Stock and Warrant Shares
The New Common Stock and Warrants to be issued in the Merger will be issued
pursuant to a registration statement filed under the Securities Act.
Notwithstanding such registration, certain persons receiving shares of New
Common Stock and Warrants will be subject to restrictions on the resale of such
securities.
The sale of shares of New Common Stock issued to affiliates of 4Health and
Surgical will be subject to restrictions on transfer under Rule 145 promulgated
pursuant to the Securities Act. In general, under Rule 145, sales of securities
are permitted only (a) after the issuer has been subject to the reporting
requirements of the Exchange Act and has filed all required reports thereunder
for a period of at least 90 days preceding the sale, and (b) if the sales are
made in compliance with the limitations on volume and manner of sale contained
in rule 144. Surgical is, and has been in excess of 90 days, subject to such
reporting requirements, so that Rule 145 would be available immediately upon
consummation of the Merger, subject to the limitations on volume and manner of
sale. Alternatively, New Common Stock may be sold by 4Health Stockholders
without compliance with such limitations on volume and manner of sale if the
holder, at the time of sale, (a) is not, and has not been for at least three
months, an affiliate of either Surgical, 4Health, or the Surviving Corporation,
and has held the securities for at least three years, or (b) is not an affiliate
of the issuer and has held the securities for at least two years, and for the
preceding 12 months the issuer has filed all required reports under the Exchange
Act.
In addition, the resale of the New Common Stock issued to certain persons
who, prior to the Merger, were executive officers or directors of either
Surgical or 4Health, who owned, directly or indirectly, beneficially or of
record, certain blocks of stock of either of such corporations will be subject
to further contractual restrictions set forth in the Sale Restriction Agreement
to be entered into with each of such persons as a condition precedent to the
Closing. Pursuant to the terms of such Sale Restriction Agreements, Rex
Crosland and R. Lindsey Duncan, who will own 702,502 and 5,767,901 shares,
respectively, of New Common Stock after giving effect to the Merger, will agree
not to effect any sales of New Common Stock for a period of 180 days after the
Effective Time, and thereafter, until 12 months after the Effective Time, not to
effect sales of such stock in excess of the lesser of (a) the volume limitations
imposed by Rule 145(d) under the Securities Act or (b) an amount number of
shares equal to 2% of the total issued and outstanding shares of New Common
Stock of the Surviving Corporation in cumulative sales during the preceding 12
months. In addition, 4Health Stockholders that will own an aggregate of 395,131
shares of New Common Stock after giving effect to the Merger, will each agree
not to effect sales of such stock in excess of certain amounts as specified in
the schedule to the form of Sale Restriction Agreement included as Appendix "C,"
subject to the same block transaction exemption. The foregoing summary is
qualified in its entirety by the provisions of the form of Sale Restriction
Agreement, a copy of which is included as Appendix "C" to this Joint Proxy
Statement/Prospectus and incorporated herein by reference. Persons to which it
applies as described above are urged to read the Sale Restriction Agreement
carefully.
MARKET PRICE AND DIVIDEND POLICY FOR SURGICAL STOCK
Surgical's Common Stock is traded on the National Association of Securities
Dealers Nasdaq National Market ("NNM") under the trading symbol "SGTI." The
following table sets forth high and low closing sale prices for Surgical's
Common Stock as reported on NNM for the periods indicated, based on interdealer
bid quotations without monthly statistical reports. Such quotations do not
include retail markups, markdowns, commissions, or other adjustments and may not
represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1995 High Low
-------------------------------- ------------ ---------
<S> <C> <C>
First Quarter $ 5.375 $ 3.813
Second Quarter $ 5.375 $ 4.125
Third Quarter $ 4.875 $ 2.75
Fourth Quarter $ 3.375 $ 1.75
Fiscal Year Ended March 31, 1996 High Low
-------------------------------- ------------ ---------
First Quarter $ 2.375 $ 1.25
Second Quarter $ 2.937 $ 1.625
Third Quarter $ 2.375 $ 1.25
Fourth Quarter $ 3.125 $ 1.25
</TABLE>
On June 13, 1996, the last reported sales price for Surgical's Common Stock
as reported by NNM was $6.875.
On June 5, 1996, Surgical had approximately 1,000 stockholders.
Surgical has not paid dividends with respect to the Surgical Stock. There
are no restrictions on the declaration or payment of dividends in the articles
of incorporation or bylaws of Surgical or in any of its contractual agreements,
other than the Merger Agreement during the period the Merger is pending.
However, it is anticipated that any potential earnings of Surgical and,
subsequent to the Merger, the Surviving Corporation, will be retained for
working capital and investment in growth and expansion of the business.
Consequently, it is not anticipated that Surgical or the Surviving Corporation
will pay dividends in the foreseeable future.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On April 10, 1996, Surgical and 4Health executed the Merger Agreement that
provides for the Merger of 4Health with and into Surgical. See "The Merger."
The following unaudited pro forma condensed combined balance sheet is based on
the March 31, 1996, historical consolidated balance sheets of Surgical and its
subsidiaries and 4Health contained elsewhere herein. The unaudited pro forma
condensed statement of operations is based only on 4Health's historical
statements of operations for the 12 months ended March 31, 1996, because the
majority of Surgical's operations have been sold. The unaudited pro forma
condensed combined financial statements give effect to the transaction using the
purchase method of accounting, with 4Health treated as the acquiring entity for
financial reporting purposes. The unaudited pro forma condensed combined
balance sheet presenting the financial position of the Surviving Corporation
assumes the purchase occurred as of March 31, 1996. The unaudited pro forma
condensed combined statement of operations presents the results of operations of
the Surviving Corporation, assuming the Merger was completed on April 1, 1995.
The unaudited pro forma condensed combined financial statements have been
prepared by management of Surgical and 4Health based on the financial statements
included elsewhere herein. The pro forma adjustments include certain
assumptions and preliminary estimates as discussed in the accompanying notes and
are subject to change. These pro forma statements may not be indicative of the
results that actually would have occurred if the combination had been in effect
on the dates indicated or which may be obtained in the future. These pro forma
financial statements should be read in conjunction with the accompanying notes
and with historical financial information of both Surgical and 4Health
(including the notes thereto) included in this Joint Proxy Statement/Prospectus.
See "FINANCIAL STATEMENTS."
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
Pro Forma
Surgical Pro Forma Combined
Technologies 4Health Adjustments Balance
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,168,826 $ 1,097,303 $ (532,500) (A)
610,000 (B) $ 4,343,629
Marketable securities 650,256 -- -- 650,256
Accounts receivable, net 145,535 1,072,787 -- 1,218,322
Inventories 285,398 912,945 -- 1,198,343
Current portion of notes receivable 270,925 -- -- (C) 270,925
Other current assets 83,344 218,460 -- 301,804
Total current assets 4,604,284 3,301,495 77,500 7,983,279
Net fixed assets 313,574 2,254,264 -- 2,567,838
Notes receivable, less current portion 1,063,070 -- -- 1,063,070
Intangible and other assets 687,477 29,199 (108,640) (A)
201,464 (C) 809,500
Total assets $ 6,668,405 $ 5,584,958 $ 170,324 $12,423,687
LIABILITIES AND STOCKHOLDERS' EQUITY:
Note payable $ 961,050 $ 1,296,271 $ -- $ 2,257,321
Accounts payable 77,228 905,400 (58,640) (A) 923,988
Accrued liabilities 154,848 291,196 -- 446,044
Total current liabilities 1,193,126 2,492,867 (58,640) 3,627,353
Obligations under capital lease -- 4,766 -- 4,766
Other liabilities -- 32,458 -- 32,458
Preferred stock -- 15,000 (15,000) (D)
Common stock 42,345 1,071,305 (1,000,939) (D) 112,711
Capital in excess of par value 10,197,760 1,397,771 (2,596,014)
(582,500) (A) 8,417,017
Retained earnings (4,423,417) 570,791 4,423,417 (D) 570,791
Stockholder receivables (341,409) -- -- (341,409)
Total stockholders' equity 5,475,279 3,054,867 228,964 8,796,334
Total liabilities and
stockholders' equity $ 6,668,405 $ 5,584,958 $ 170,324 $12,423,687
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
4Health Adjustments Balance
<S> <C> <C> <C>
Revenues $12,358,414 $ -- $12,358,414
Cost of revenues 4,511,585 -- 4,511,585
Gross margin 7,846,829 -- 7,846,829
Selling, general, and administrative
costs 6,875,039 13,430 (A) 6,888,469
Other expense, net 62,372 -- 62,372
Income before income taxes 909,418 (13,430) 895,988
Provision for income taxes (312,510) -- (312,510)
Net Income $ 596,908 $ (13,430) $ 583,478
Net income per common share $ .10 $ .065
Weighted average shares outstanding 5,934,143 11,271,112
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. General
In the Merger, 4Health will be merged with and into Surgical, with the
shares of outstanding 4Health Common Stock and 4Health Series A Stock converted
into an aggregate of approximately 9,000,000 shares, or approximately 80% of the
New Common Stock outstanding subsequent to the Merger, subject to certain
adjustments, and each four shares of Surgical Stock issued and outstanding prior
to the Effective Time will be converted into two shares of New Common Stock for
an aggregate of 2,271,108 shares of New Common Stock, or approximately 20% of
the New Common Stock outstanding subsequent to the Merger. Surgical
Stockholders will also receive one Warrant to purchase one share of New Common
Stock exercisable at $11.00 per share for every two shares of New Common Stock
owned subsequent to the Merger, or an aggregate of 1,135,554 shares of New
Common Stock. As part of the Merger, the name of Surgical will be changed to
4Health, Inc. Surgical has not yet performed a detailed evaluation and
appraisal of the fair market value of the net assets sold in order to allocate
the purchase price among the assets sold. For purposes of preparing these pro
forma financial statements, certain assumptions as set forth in the notes to the
pro forma adjustments have been made in allocating the sales price to the net
assets sold. As such, the pro forma adjustments discussed below are subject to
change based on final determination of the fair market value of the assets and
liabilities of Surgical.
2. Fiscal Year Ends
The unaudited pro forma condensed statements of operations for the year
ended March 31, 1996, include 4Health's operations on a March 31 fiscal year.
The financial statements of 4Health have been conformed to the fiscal year ended
March 31, 1996, by including the operating results of 4Health for the three
months ended March 31, 1996, and excluding such results for the three months
ended March 31, 1995.
3. Pro Forma Adjustments
The adjustments to the accompanying unaudited pro forma condensed combined
balance sheet as of March 31, 1996, are described below:
(A) Payment of estimated merger costs.
(B) Adjustment to reflect the receipt of proceeds during April 1996
from the exercise of options to acquire 305,000 shares of Surgical Stock at
$2.00 per share pursuant to previously outstanding stock option agreements.
The exercise of these options has been reflected due to their connection
with the Merger Agreement.
(C) Adjustment to reflect goodwill, calculated based on the closing
bid price of Surgical Stock for the 20 day period prior to the announcement
of the signing of the letter of intent with 4Health, less the estimated
fair market value of the net assets of Surgical to be acquired in the
Merger. Since the majority of the net assets of Surgical consist of cash,
marketable securities, and short-term receivables, all of which approximate
current fair value, the excess purchase price has been recorded as goodwill
which will be amortized over 15 years.
(D) Record Merger by converting 4Health Common Stock, 4Health Series
A Stock, and Surgical Stock to newly issued shares of New Common Stock, par
value $0.01 per share.
As a result of the sale of Surgical's specialty metals fabrication business
segment and its disposable surgical pack and drape manufacturing product lines,
the continuing operations of Surgical subsequent to the Merger will be
relatively insignificant compared to the continuing operations of 4Health.
Accordingly, the accompanying unaudited pro forma condensed statement of
operations reflects only the historical operations of 4Health, adjusted for the
impact of the Merger. Had the continuing operations of Surgical (related to its
ID Technology) been combined into the accompanying unaudited pro forma condensed
statement of operations, revenues and gross margin for the year ended March 31,
1996, would have been approximately $208,000 higher and $64,000 lower,
respectively.
The adjustment to the accompanying unaudited pro forma condensed statement
of operations is described below:
(A) To reflect an additional $13,430 amortization of goodwill related
to the Merger, based upon 15 a year estimated life.
Historical and Pro Forma Equivalent Per Share Information
Surgical
The following table presents certain historical data respecting Surgical
Stock as well as comparative equivalent data after giving effect to the Merger,
based on the Surgical Conversion Ratio, without ascribing any value to the
Warrants.
<TABLE>
<CAPTION>
Year Ended March 31, 1996
Equivalent
Historical Pro Forma(1)
<S> <C> <C>
Net income (loss) per common share
before extraordinary items and
discontinued operations $ (0.57) $0.03
Cash dividends per share of common 0 0
stock
Book value per share of common stock $ 1.29 $0.40
</TABLE>
[FN]
(1) Pro forma information is presented as if the Merger had taken place at
the beginning of the period for which information is presented. The
Surgical pro forma value represents the equivalent of one share of
Surgical Stock and assumes the Surgical Conversion Ratio and does not
ascribe any value to the Warrants or give effect to any cash payments
in lieu of fractional shares or to the issuance of any Contingent Shares.
4Health
The following table presents certain per share data respecting 4Health
Common Stock as well as comparative data after giving pro forma effect to the
Merger, based on the 4Health Conversion Ratio.
<TABLE>
<CAPTION>
Twelve Months Ended
March 31, 1996
Equivalent
Historical Pro Forma(1)
<S> <C> <C>
Net income (loss) per common share
before extraordinary items $ 0.10 $ 0.08
Cash dividends per share of common 0 0
stock
Book value per share of common stock $ 0.27(2) $ 1.21
</TABLE>
[FN]
(1) Pro forma information is presented as if the Merger had taken place at
the beginning of the period for which information is presented. The
equivalent pro forma value represents the equivalent of one share of
4Health Common Stock and assumes a 4Health Common Stock Conversion Ratio
and does not ascribe any value to the Warrants or give effect to any
cash payments in lieu of fractional shares or to the issuance of any
Contingent Shares.
(2) The book value per share of 4Health Common Stock reflects the
deduction of the $1,500,000 liquidation preference of the 4Health
Series A Stock.
DESCRIPTION OF SECURITIES
Preferred Stock
The Surviving Corporation's articles of incorporation authorizes the board
of directors, without further stockholder approval, to issue up to 5,000,000
shares of preferred stock, par value $0.01 per share, for any proper corporate
purpose. In approving any issuance of preferred stock, the board of directors
has broad authority to determine the rights, privileges, and preferences of the
preferred stock, which may be issued as one or more classes or series. The
rights, privileges, and preferences may include voting, dividend, conversion,
and liquidation rights that may be senior to New Common Stock. At the Effective
Time, no shares of preferred stock of any class or series will be issued and
outstanding or reserved for issuance.
New Common Stock
Following the Merger, the Surviving Corporation will be authorized to issue
30,000,000 shares of New Common Stock, par value $0.01 per share, of which
11,271,112 shares will be outstanding, 1,625,000 will be reserved for the
exercise of options and awards granted or to be granted under the LTSIP, of
which 1,167,800 will be issued on approval of the LTSIP, 60,500 shares will be
reserved for the exercise of outstanding options granted outside the LTSIP,
1,135,554 shares will be reserved for issuance on the potential exercise of the
Warrants, and 500,000 will be reserved for the potential issuance of the
Contingent Shares. Holders of New Common Stock will be entitled to one vote per
share on each matter submitted to a vote at any meeting of stockholders. Shares
of New Common Stock will not carry cumulative voting rights, and therefore, a
majority of the shares of outstanding New Common Stock will be able to elect the
entire board of directors of the Surviving Corporation, and if they do so,
minority stockholders would not be able to elect any person to the board of
directors. Utah law provides that a majority of the issued and outstanding
shares of New Common Stock will constitute a quorum for a stockholders' meeting.
Stockholders of the Surviving Corporation will have no preemptive right to
acquire additional shares of New Common Stock or other securities. The New
Common Stock will not be subject to redemption and carries no subscription or
conversion rights. In the event of liquidation of the Surviving Corporation,
the shares of New Common Stock will be entitled to share equally in corporate
assets after satisfaction of all liabilities. The shares of New Common Stock,
when issued, will be fully paid and non-assessable.
Holders of New Common Stock will be entitled to receive such dividends as
the board of directors may, from time to time, declare out of funds legally
available for the payment of dividends. The Surviving Corporation will seek
growth and expansion of its business through the reinvestment of profits, if
any, and does not anticipate that it will pay dividends in the foreseeable
future.
The board of directors has the authority to issue the authorized but
unissued shares without action by the stockholders. The issuance of such shares
would reduce the percentage ownership held by persons receiving shares of New
Common Stock in this offering and may dilute the book value of the then existing
stockholders.
Warrants
The complete terms and conditions of the Warrants are set forth in the form
of Warrant and form of Warrant certificate included as Appendix "B" and
incorporated herein by this reference. The following summary is qualified in
its entirety by the terms of these documents.
Each Warrant will entitle the holder to acquire one share of New Common
Stock at an exercise price of $11.00 per share for a period of 18 months
following the Effective Time. The Warrants are exercisable at the election of
the holder at any time during the exercise period by delivering to the Surviving
Corporation the original Warrant certificate together with cash, bank or
cashier's check, other immediately available funds, or a personal check, if
acceptable to the Surviving Corporation, in the amount of the exercise price
multiplied by the number of shares to be acquired.
The Surviving Corporation may call the Warrants for redemption at $0.01 per
Warrant on 30 days' prior written notice to the Warrant holders, subject to
exercise by such Warrant holders during the redemption period, provided that the
average closing price for the New Common Stock on its principal trading market
for at least 30 consecutive trading days immediately preceding the notice of
redemption is at least $13.75 per share.
Holders of Warrants, as such, are not stockholders of the Surviving
Corporation except to the extent of the shares of New Common Stock for which the
Warrant has been exercised and the Surviving Corporation has received full
payment. Holders of Warrants are not entitled to vote with respect to matters
submitted to the stockholders of the Surviving Corporation, are not entitled to
participate in dividends, if any, and do not have ownership rights on
termination or liquidation of the Surviving Corporation.
Each of the Warrants contains provisions that offer certain protections to
the holders thereof against dilution by adjustment in the number of shares of
New Common Stock purchasable on exercise of the Warrants in certain events,
including the declaration of a stock dividend on the New Common Stock or a stock
split or stock consolidation with respect to the New Common Stock. In the event
the number of Warrant Shares purchasable on exercise of the Warrant is increased
through the operation of the anti-dilution provisions, the per-share exercise
price will be reduced proportionately. Conversely, if the number of Warrant
Shares purchasable is decreased, the exercise price will be increased
proportionately. Further, if the Surviving Corporation issues to all of the
Surviving Corporation Stockholders New Common Stock or options, warrants, or
other rights to purchase New Common Stock at prices below the market price for
the New Common Stock as of the date of issuance, the exercise price of the
Warrants will be adjusted to increase the number of shares of New Common Stock
issuable on exercise and to reduce the exercise price to the price at which
such, below-market options, warrants, or similar rights to purchase common stock
were issued to all of its stockholders. The board of directors determinations
with respect to any changes to the exercise price will, absent demonstrable
error, be binding on the holders of the Warrants.
At the discretion of the Surviving Corporation, the Warrant exercise period
may be extended or the exercise price reduced. In the event of any such
extension or reduction, record holders of Warrants will be notified promptly.
Transfer Agent and Warrant Agent
Zions First National Bank, N.A., is the Transfer Agent for the Surgical
Stock and will continue subsequent to the Merger as the Transfer Agent for the
New Common Stock. In addition, Zions First National Bank, N.A., will serve as
the warrant agent for the Warrants subsequent to the Merger. Zions First
National Bank, N.A., can be reached at Corporate Trust Department, Third Floor,
10 East South Temple, Salt Lake City, Utah 84111, telephone number (801) 524-
4624.
COMPARISON OF SECURITIES
Although the holders of 4Health Common Stock now own common stock of
4Health and will receive New Common Stock of the Surviving Corporation in the
Merger, there are material differences between the common stock of the two
companies resulting from the fact that 4Health is a California corporation with
articles of incorporation and bylaws adopted pursuant to California Law, while
Surgical is a Utah corporation with articles of incorporation and by laws
adopted under Utah Law. Similarly, holders of 4Health Series A Stock now
governed by California Law and 4Health's articles of incorporation will receive
New Common Stock governed by Utah Law and articles of incorporation and bylaws
promulgated thereunder.
Comparison of California Law and Utah Law-Articles of Incorporation and Bylaws
Upon completion of the Merger, the Surviving Corporation will be a Utah
corporation and therefore subject to the Utah Law. The California Law and Utah
Law differ in many respects. The following discussion is a summary of certain
significant differences in such laws that may affect the rights and interest of
the 4Health Stockholders as a result of the Merger. Since upon consummation of
the Merger, Surgical's articles of incorporation and bylaws, as amended, will,
by operation of law, become the articles of incorporation and bylaws of the
Surviving Corporation, any reference herein to Surgical's articles of
incorporation or bylaws should be deemed to also mean the articles of
incorporation or bylaws of the Surviving Corporation. The following is only a
summary of those provisions of Utah Law and California Law that the directors of
Surgical and 4Health have deemed to be significant to the changes in the rights
and interests of the 4Health Stockholders and does not purport to be complete.
The summary is qualified in its entirety by this reference to the complete
provisions of the Utah Law and the California Law.
Board of Directors
California Law and Utah Law contain similar provisions governing the
election and authority of the directors of a corporation. Under Utah Law, a
board of directors must consist of at least three individuals. Under both
California and Utah Law, a director may be removed with or without cause by the
stockholders. See "THE MERGER: Certain Articles of Incorporation Provisions."
In taking any action, both laws specify that a majority of the directors
constitutes a quorum, a majority of such quorum can approve corporate action,
and an action may be taken without meeting if all directors sign a resolution to
that effect. Both California and Utah Law permit the board of directors to be
divided into classes. However, California Law permits a classified board only
if the corporation is a "listed corporation," defined generally as a corporation
that has shares listed on the New York Stock Exchange or the American Stock
Exchange, or is a corporation with outstanding securities designated as
qualified for trading as a national market system security on the Nasdaq system
if such corporation has 800 or more stockholders. Presently, the articles of
incorporation of 4Health do not provide for a classified board; however,
Surgical's articles provide, and upon completion of the Merger, the Surviving
Corporation's articles of incorporation will provide, for the board of directors
to be divided into three classes and the term for each director to be three
years.
Under Utah Law, directors are elected by a plurality of the votes cast by
the shares entitled to vote for such election at a meeting of the stockholders
at which a quorum is present. Utah Law does not permit cumulative voting in the
election of directors unless the articles of incorporation so provide.
Surgical's articles of incorporation do not permit cumulative voting. A
director may be removed by the stockholders of a Utah corporation at a meeting
called for such purpose. If cumulative voting is not in effect, a director may
be removed only if the number of votes cast to remove the director exceeds the
votes cast against removal.
California Law provides for cumulative voting, except in limited
circumstances. Cumulative voting can be eliminated in the election of directors
if the board is divided into classes and the corporation is a "listed
corporation." A director on a nonclassified board may be removed by a majority
of the stockholders of a California corporation provided that, unless the whole
board is removed, the votes cast against the proposal, or not consenting in
writing to, are not sufficient to elect the director if voted cumulatively at an
election at which the same total number of votes were cast (or, if the action is
taken by written consent, all shares entitled to vote were voted) and the entire
number of directors authorized at the time of the directors' most recent
election were then being elected. Under 4Health's bylaws, no stockholder is
entitled to exercise cumulative voting unless the name(s) of the candidate(s)
has been nominated prior to voting and the stockholder has given notice of
his/her intent to cumulate votes. If any one stockholder has given such notice,
all stockholders may cumulate their votes for such candidate. Since Surgical's
articles do not allow cumulative voting, 4Health Stockholders receiving shares
of New Common Stock will lose any rights to cumulatively vote shares of stock
previously held.
Stockholder Approval of Certain Matters
Both Utah and California Law require that a corporation obtain stockholder
approval before engaging in certain transactions, specifically those
transactions that result in a merger or reorganization of a corporation or the
disposition of substantially all assets held by a corporation.
Utah Law relating to mergers and other corporate reorganizations differs
from California Law in a number of respects. Generally, California Law requires
a stockholder vote in more situations than does Utah Law. Both California and
Utah Law provide for a stockholder vote (except as indicated below and for
certain "short-form mergers" between a parent corporation and its 90%-owned
subsidiaries) of both the acquiring and acquired corporations to approve mergers
and of the selling corporation for the sale by a corporation of all or
substantially all of its assets. Both California and Utah Law provide for a
stockholder vote to approve the dissolution of a corporation. A class vote is
also required by both Utah and California Law in the foregoing circumstances.
In addition to the foregoing circumstances, California Law requires the
affirmative vote of a majority of the outstanding shares of (a) an acquiring
corporation in share-for-share exchanges (except as noted below), (b) the
acquiring and acquired corporation in sale-of-assets reorganizations, and (c)
any parent corporation whose equity securities are being issued or transferred
in connection with a corporate reorganization, and provides appraisal rights to
stockholders in such situations. California Law generally requires a class vote
when a vote is required in connection with these transactions. With certain
exceptions, California Law requires that a merger or reorganization and certain
sales of assets or similar transaction be approved by a majority vote of each
class of shares outstanding that are entitled to vote, and provides for separate
series vote in certain circumstances.
Utah Law requires stockholder approval of a corporation being acquired but
only requires approval of the surviving corporation's stockholders in certain
circumstances.
Under California Law, a sale of all or substantially all of a corporation's
assets to a buyer in control of or under common control with the selling
corporation requires the approval of at least 90% of the voting power of the
selling corporation, unless the sale is to a domestic or foreign corporation in
consideration of the nonredeemable common shares of the buying corporation, or
its parent, or unless the selling corporation obtains the approval of the
Commissioner of Corporations (or, as applicable, the Insurance Commissioner,
Public Utilities Commissioner, or the Superintendent of Banks). Utah Law
contains no parallel provision.
California Law provides that, except in a short-form merger and in the
merger of a corporation into its subsidiary in which it owns at least 90% of the
outstanding shares of each class, the nonredeemable common shares of a
constituent corporation may be converted only into nonredeemable shares of the
surviving corporation or a parent entity if a constituent corporation or a
parent owns shares of another constituent corporation representing more than 50%
of the voting power of the other constituent corporation prior to the merger,
unless all of the stockholders of the class consent (and except with respect to
fractional shares). Utah Law contains no parallel provision.
Voting by Written Ballot
California Law grants to each stockholder the right to require a vote by
written ballot for the election of directors at a stockholder meeting. Utah Law
has no such provision. It may be more difficult for a stockholder to contest
the outcome of a vote which has not been conducted by written ballot.
Inspection of Stockholder Lists and Other Records
California Law grants an absolute right of inspection of the stockholder
list to any stockholder holding 5% or more of a corporation's outstanding voting
shares or to any stockholder holding 1% or more of a corporation's outstanding
voting shares who has filed a Schedule 14-A (now repealed) with the Commission
reasonably related to the requesting stockholder's interest as a stockholder.
Utah Law provides that a stockholder's list prepared in relation to a meeting of
the stockholders must be available for inspection by any stockholder during a
period beginning the earlier of 10 days before the meeting for which the list
was prepared or two business days after notice of the meeting is given, and
continuing through the meeting and any adjournments, at the corporation's
principal office or at a place identified in the stockholder's notice of the
meeting in the city where the meeting is to be held. During this period, a
stockholder is entitled to inspect and copy the list during the regular business
hours of the corporation on written demand to the corporation provided that the
stockholder's demand is in good faith and for a proper purpose which is
described by the stockholder with reasonable particularity and the list is
directly connected with such purpose. Utah Law also provides that a stockholder
may inspect and copy a record of the corporation's stockholders and certain
other records during the corporation's regular business hours or at any other
time provided that the stockholder gives written notice of his or her demand for
inspection at least five business days prior to the date the stockholder wishes
to inspect and copy the records.
Proposals for Reorganizations
Section 1203 of California Law ("Section 1203") provides that if a proposal
for a merger or other reorganization (including a share-exchange tender offer)
or for certain sales of assets (a "Proposal") is made by a party controlling,
either directly or indirectly, the target corporation or involved in the
management or direction of the management of that corporation, a report of an
independent appraiser attesting that the value of the Proposal is just and
reasonable to the stockholders of the target corporation must be delivered to
the stockholders. The fairness opinion requirement does not apply if the
subject company does not have shares held of record by 100 or more persons or if
the transaction has been qualified under the California securities laws. If any
other proposal for reorganization or a short-form merger (the "Later Offer") is
received at least 10 days prior to the date for acceptance of the tender offer
or vote on the reorganization, the directors must inform the stockholders of the
Later Offer, and must forward any Later Offer written material to the
stockholders. The stockholders must be given a reasonable opportunity to
withdraw any shares tendered or any vote, consent, or proxy given in connection
with the Proposal. Utah Law contains no parallel provision with regard to such
proposals.
Utah Control Shares Acquisition Act
In 1987, Utah adopted the Utah Control Shares Acquisition Act in response
to perceived potential abuses related to tender offers and other transactions
that result in a change in control of a corporation. The effect of the statute
is to deprive a person acquiring "control shares" in an issuing public
corporation from voting such shares unless approved by the holders of a majority
of the shares that are not "interested shares." The Utah Control Shares
Acquisition Act provides that corporations may elect not to be governed by the
Act by adopting a provision in their articles of incorporation or bylaws to the
foregoing effect prior to the control shares acquisition. Surgical's articles
of incorporation provide that Surgical is, and therefore the Surviving
Corporation will be, exempt from the operation of the Utah Control Shares
Acquisition Act.
Written Consent by Stockholders
Both California and Utah Law permit the stockholders of a corporation to
take action without a stockholder meeting by written consent of the holders of
outstanding shares having not less than the minimum number of votes necessary to
approve the action at a meeting of stockholders at which all the outstanding
stock is represented and voted. In connection with the Merger, the Surviving
Corporation will adopt Proposed Amendments that will, among other things,
prohibit action by the written consent of stockholders as provided above unless
such action is also approved by Disinterested Directors, except for the removal
of up to three directors in each fiscal year of the Surviving Corporation, with
or without cause.
Dividends
California Law provides that a corporation may not effect any distribution,
including dividends, unless (a) the corporation's retained earnings immediately
prior to the proposed distribution equals or exceeds the amount of the proposed
distribution, or (b) immediately after giving effect to the distribution, the
corporation's assets (exclusive of goodwill, capital research, and development
expenses and deferred charges) would be at least equal to 1.25 times its current
liabilities (not including deferred taxes, deferred income, and other deferred
credits) and the corporation's current assets would be at least equal to its
current liabilities (or 1.25 times its current liabilities if the average pre-
tax and pre-interest earnings for the preceding two fiscal years were less than
the average interest expenses for those years). In addition, California Law
provides that a corporation may not make any such distribution if, after the
distribution, the excess of the corporation's assets over its liabilities would
be less than the liquidation preference of all shares having a preference with
respect to liquidation over the class or series to which the distribution is
made.
Utah Law has a somewhat less stringent standard, providing generally that a
Utah corporation may not effect a distribution if, after giving effect to such
distribution, the corporation would not be able to pay its debts as they become
due or if the corporation's total assets would be less than the sum of its total
liabilities plus the amount that would be needed to satisfy the preferential
rights upon dissolution of stockholders whose preferential rights are superior
to those receiving the distribution.
Appraisal Rights
Under both California and Utah Law, a dissenting stockholder of a
corporation participating in certain transactions may, in certain circumstances,
receive cash in the amount of the fair value of his or her shares (as determined
by negotiation or a court) in lieu of the consideration otherwise receivable in
any cash transaction. For a more complete discussion of such provisions, see
"THE MERGER: Rights of Dissenting Surgical Stockholders" and "THE MERGER:
Rights of Dissenting 4Health Stockholders."
Limitation on Liabilities of Directors
Both Utah and California Law allow a corporation to include in its articles
of incorporation a provision which eliminates, in certain circumstances, a
director's personal liability for breach of fiduciary duties. 4Health's
articles do not presently contain such a provision. Surgical's articles contain
a provision providing that, to the full extent permitted by Utah Law, a director
shall have no personal liability for monetary damages for any action taken or
any failure to take action as a director. No officer or director of Surgical or
4Health has been involved in any litigation that would be affected by such
provision. However, such provision would clearly be in the interest of the
directors of the Surviving Corporation as it would limit their personal
liability in certain circumstances at the potential expense of the Surviving
Corporation and its stockholders.
Neither Utah Law nor the pertinent provision in Surgical's articles limit
the liability of officers of Surgical who are not directors or of a director
while acting in his capacity as an officer. The articles, in conformity with
Utah Law, eliminate each director's liability to stockholders or to Surgical for
monetary damages arising out of the director's breach of his fiduciary duty of
care. The duty of care refers to the fiduciary duty of directors to be
sufficiently diligent and careful in considering a transaction or taking or
refusing to take some corporate action. A breach of the duty of care by a
director would give rise to liability for monetary damages caused to Surgical or
Surgical Stockholders in the absence of a limiting provision. The provision in
Surgical's articles does not eliminate the duty of care and only eliminates
monetary damage awards occasioned by a breach of that duty. Thus, a breach of
the duty of care would remain a valid basis for a suit seeking injunctive relief
or rescission.
The articles do not eliminate director liability for (a) the amount of a
financial benefit received by a director to which he is not entitled; (b) an
intentional infliction of harm on Surgical or Surgical Stockholders; (c) a
violation of the law relating to the unlawful distribution of dividends or other
amounts to its stockholders; and (d) an intentional violation of criminal law.
Thus, liability for monetary damages still exists under the provision if
liability is based on one of the foregoing grounds.
California Law expressly prohibits elimination of liability for acts or
omissions that show a reckless disregard for the director's duty to the
corporation or its stockholders in circumstances in which the director was aware
or should have been aware of a serious risk of injury to the corporation or the
stockholders and for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its stockholders. Utah Law does not expressly prohibit
limitation of liability in such circumstances.
To the extent that California Law would permit recovering against directors
in situations in which no recovery is available either under the general
provisions of Utah Law or the limitations of Surgical's articles of
incorporation, the 4Health Stockholders will be deprived of a cause of action as
a result of the Merger. There has not been any claim of this nature asserted or
threatened against the directors of 4Health.
The board of directors of Surgical and 4Health each believes that
provisions limiting the liability of directors for monetary damages are in the
best interest of the stockholders of the Surviving Corporation by enhancing its
ability to attract and retain qualified individuals to serve as directors of the
Surviving Corporation by assuring directors (and potential directors) that their
good faith decisions will not be second-guessed by a court evaluating decisions
with the benefit of hindsight.
The board of directors believes that the diligence exercised by directors
stems primarily from their desire to act in the best interests of the
corporation which they serve and not from a fear of monetary damage awards.
Consequently, the board believes that the level of scrutiny and care exercised
by directors is not lessened by this provision in Surgical's articles of
incorporation.
The stockholders should note that since the members of the board of
directors will be beneficiaries of Utah Law and the limitation of liability, the
board members may be viewed as having a personal interest in the approval of the
Merger at the potential expense of the stockholders.
Indemnification of Officers, Directors, and Others
California Law permits indemnification of directors in most circumstances
and allows corporations to extend the scope of indemnification through bylaw
provisions, agreements, or other corporate action. This extension of
indemnification protection under California Law must be authorized in the
corporation's articles of incorporation. 4Health's articles and bylaws do not
contain such authorization; therefore, 4Health currently may not be able to
provide indemnification in limited circumstances.
Utah Law permits indemnification of directors if the director acted in good
faith and believed his conduct was in, and not opposed to, the corporation's
best interests and, in the case of any criminal proceeding, such director had no
reasonable cause to believe his conduct was unlawful. Utah Law provides for
mandatory indemnification and court-ordered indemnification to directors and
officers in certain circumstances. Further, under Utah Law, a corporation may
indemnify an officer, employee, fiduciary, or agent who is not a director to a
greater extent than directors, provided such indemnification is not contrary to
public policy. Surgical's articles of incorporation and bylaws provide for such
indemnification to the fullest extent permitted by law. Under the terms of the
Merger Agreement, the parties have agreed that the Surviving Corporation will
not modify such provisions for a period of six years subsequent to the Effective
Time.
California Law restricts a corporation from providing indemnification in
certain situations in which indemnification may be permitted under Utah Law.
For example, California Law expressly prohibits indemnification for amounts paid
in settling or otherwise disposing of a pending derivative action without court
approval, or for expenses incurred in defending a pending derivative action
which is settled or otherwise disposed of without court approval, or in
circumstances in which indemnification would be inconsistent with a provision of
the corporation's articles of incorporation, bylaws, resolution of the
stockholders, agreement, or any condition expressly imposed by a court in
approving a settlement. Further, California Law expressly prohibits
indemnification of directors for liability resulting from acts or omissions that
show a reckless disregard for the director's duty to the corporation or its
stockholders in circumstances in which the director was aware or should have
been aware of a serious risk of injury to the corporation or the stockholders,
or for liability resulting from act or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's duty to
the corporation or its stockholders.
Neither Surgical nor 4Health has experienced any difficulty in recruiting
qualified directors. Moreover, no claim has been threatened or asserted against
any director, officer or employee of Surgical or 4Health in his or her capacity
as such. Surgical and 4Health believe, however, that it is important to provide
the Surviving Corporation's directors with protection from the risk of
litigation and personal liability, and thereby ensure that the Surviving
Corporation can continue to attract and retain experienced individuals to serve
as directors and officers and that the directors will continue to consider all
possible alternatives when making business decisions. Accordingly, the board of
directors of both Surgical and 4Health have determined that it is in the best
interests of the Surviving Corporation and its stockholders that its articles
include provisions indemnifying its officers and directors.
Loans to Officers and Employees; Interested Transactions
Under California Law, a majority of disinterested stockholders may approve
loans and guaranties to officers and directors of the corporation or its parent,
or the stockholders may approve a bylaw providing that a disinterested majority
of the board of directors may approve such loans and guaranties without
stockholder approval if the corporation has more than 100 stockholders at the
time of the board approval and if the board determines that such loans or
guaranties may reasonably be expected to benefit the corporation. Utah Law
provides that a corporation may enter into a transaction in which a director has
a conflicting interest provided that it is approved by a majority of the
disinterested directors or a duly empowered committee of the board and there has
been full disclosure of the conflicting interest and of all facts known to the
interested director that an ordinarily prudent person would reasonably believe
to be material to a judgment as to whether to proceed with a transaction.
4Health Series A Stock
Holders of 4Health Series A Stock will receive New Common Stock in the
Merger and will, therefore, no longer have the rights, privileges, and
preferences attributable their preferred stock as provided in the Statement of
Designation of the Series A Convertible Preferred Stock under which the 4Health
Series A Stock was issued. Specifically, such holders will lose the right to
preference on liquidation of $100 per share, the right to vote on certain
matters separately as a class, the right to elect a member of the board of
directors, and certain other benefits.
BUSINESS OF SURGICAL
General
Surgical was, until 1995, engaged in the manufacture and marketing of a
variety of pre-packaged sterile surgical products for angiography and
angioplasty procedures, medical devices used in interventional catheterization
procedures and drapes and similar items for use in various diagnostic, surgical,
and medical procedures. It also engaged in special metals fabrication. Since
September 30, 1995, Surgical has disposed of its disposable surgical pack and
drape manufacturing product lines as well as its specialty metals fabrication
business segment, retaining the technology and operations related to its
angioplasty inflation device marketed under the name Transflator(R), as its sole
remaining operation. Currently, Surgical's principal assets are cash and assets
convertible into cash by January 1997 and the ID Technology assets and
operations. Prior to 1993, Surgical was also engaged in the asbestos abatement
industry.
During the fiscal year ended March 31, 1995, and during the current year
through the third fiscal quarter ending December 31, 1995, Surgical operated in
two industry segments consisting of medical products and specialty metals
fabrication. With the disposition of the specialty metals fabrication segment
effective January 1, 1996, Surgical operates only in the medical products
segment. See "CERTAIN TRANSACTIONS: Surgical."
Medical Products
Beginning in 1993, Surgical's medical products segment included the
manufacture and sale of prepackaged, sterilized supply kits, disposable towels,
operating table drapes, and other sterile medical products as well as a product
based on the ID Technology. The prepackaged disposable kits included operating
table drapes and other items manufactured by Surgical.
Sale of Drape Manufacturing Assets
Effective November 30, 1995, Surgical sold to an unrelated third party the
assets and operations consisting of its disposable drape manufacturing facility
and product line for an aggregate of $375,000 in cash, of which $325,000 was
paid at closing and $50,000 was retained as a reserve against certain contingent
liabilities relating to the items transferred.
Sale of Prepackaged Surgical Kit Assets
On February 16, 1996, Surgical sold substantially all the assets related to
its disposable surgical kits and related products, including its finished goods
inventory and raw materials inventory and work-in process, to an unrelated third
party in exchange for $100,000 in cash paid at the closing, a three-year note in
the principal amount of $150,000 and a one-year note in the amount of $300,000.
The one-year note will be offset by the amount that $469,000 exceeds the amount
that the purchaser recognizes from the sale of inventory held at the time of the
closing of the transaction. As a result of this potential offset, Surgical has
reserved the entire amount of this note and does not expect to collect a
significant portion of the principal balance. Any proceeds received by the
purchaser from the sale of the purchased assets, including the inventory, during
the three-year period subsequent to the closing date, will be delivered 75% to
Surgical and 25% to the purchaser. Any of such amounts delivered to Surgical
will be applied to the obligations due under the three-year note in the
principal amount of $150,000. The purchaser is a limited liability corporation
formed by two former employees of Surgical, neither of whom was an officer or
director of Surgical, for the purpose of effecting this transaction.
ID Technology
In July 1993, Surgical began introducing to the market on a test basis a
preliminary design of a medical device based on the ID Technology that is used
in interventional catheterization procedures. With the results from this test
marketing and subsequent product design and performance improvements, an
expanded marketing effort was launched in late fiscal 1994, continuing into
fiscal 1995. As a result of customer input during this marketing effort,
Surgical incorporated certain design changes into the device. This device,
marketed under the name "Transflator(R)," is used to inflate the angioplasty
balloon catheter, with important additional features, including audio
announcement of the balloon pressure and inflation time, chart recorder
interface, manual operation of timing function, and real time communication
between the hand unit and remote display panel. The principal advance of the
device is its use of infrared technology to transmit balloon inflation data to a
remote LED display on a real time basis while the procedure is being performed.
Surgical believes that quality assurance is an important component of
customer satisfaction. Surgical employs a number of measures to improve
consistent product quality in accordance with Surgical policies designed to meet
or exceed governmental requirements, to survey customer satisfaction, to monitor
customer comments and criticisms and to implement appropriate curative measures,
and to emphasize employee awareness of the importance of the overall quality of
products and procedures and Surgical's commitment to quality.
The ID Technology incorporated into the Transflator(R) device manufactured
by Surgical include features described in four patents owned by Surgical as well
as three patents used under licenses from a third party.
Surgical maintains finished goods and work-in-process inventories.
Products are assembled by personnel and through a manufacturing arrangement with
an unrelated third party.
The Transflator(R) is now marketed through distributors principally in
Australia and Europe.
Surgical is exploring the possible expansion of this product line through
joint venture, licensing, or other strategic arrangements with other medical
firms with established angioplasty laboratory distribution channels.
Governmental Regulation
Governmental regulation is a significant factor in the development and
marketing of products based on the ID Technology. Surgical and its products are
regulated by the Food and Drug Administration ("FDA") under a number of
statutes, including the Food and Drug and Cosmetic Act (the "FDC Act"), which
provides review procedures for medical devices. Certain products may qualify
for a submission authorized by Section 510(k) of the FDC Act, in which the
manufacturer gives the FDA a premarket notification of the manufacturer's
intention to commence marketing the product. The manufacturer must, among other
things, establish that the product to be marketed is substantially equivalent to
another legally marketed product. In some cases, the manufacturer must include
data respecting the individual components of the items obtained from the
producer of that item to meet the substantial equivalency requirement. Surgical
has received 510(k) marketing clearance letters respecting its disposable supply
kits as well as the Transflator(R) device.
If a medical device does not qualify for the 510(k) procedure, the
manufacturer must file a pre marketing approval ("PMA") which requires more
extensive pre-filing testing than the 510(k) procedure and involves a
significantly longer FDA review process. FDA approval of a PMA application
occurs after the applicant has established the safety and efficacy to the
satisfaction of the FDA under an investigational device exemption ("IDE")
procedure requiring pre-clinical laboratory and animal and human clinical
studies. Approval of a PMA application includes specific requirements for
labeling of the device regarding appropriate indications for use.
Manufacturers of items relying on 510(k) marketing clearance must meet
quality control and manufacturing procedures set forth in FDA regulations
respecting current good manufacturing practices ("GMP"). The FDA monitors
compliance with these regulations by requiring manufacturers to register with
the FDA, which subjects them to periodic FDA inspections of manufacturing
facilities. In addition, inspection of manufacturing facilities and a
determination that they comply with all applicable regulatory requirements,
including GMP, is usually a precondition of PMA approval. In order to assure
compliance with these requirements, manufacturers must continue to expend time,
resources, and effort in the areas of production and quality control to ensure
full technical compliance. Surgical believes that it currently meets all
material GMP requirements respecting the manufacture of its products. If
violations of applicable regulations are noted during FDA inspections, the
continued marketing of any products manufactured by Surgical may be adversely
affected.
The process of obtaining necessary governmental approvals can be time
consuming and expensive.
In addition to regulations enforced by the FDA, Surgical's medical products
segment is also subject to regulation under the Occupational Safety and Health
Act, the Environmental Protection Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, and other present and potential future
federal, state, and local regulations.
Backlog
Surgical had no material backlog of orders as of March 31, 1996.
Insurance
General
Surgical maintains comprehensive general liability insurance.
All of Surgical's activities are subject to federal, state, and local laws
respecting safe employee working conditions, the protection of the environment,
and similar matters.
Products Liability Insurance
Surgical maintains occurrence based product liability insurance on its
medical products division in the amount of $2,000,000 per occurrence.
Asbestos Abatement/Insulation
The now discontinued asbestos abatement operations conducted through
separate subsidiaries prior to 1993 may have exposed Surgical to liability risk
related to the exposure of persons to asbestos.
Competition
Surgical is not a principal factor in any market in which any of its
segments operates and competes with a number of large concerns with greater
financial, managerial, and technical resources. There are no substantial
barriers to the entry of new competitors in any of Surgical's markets.
Surgical believes that the principal competitive factors in marketing its
Transflator(R) device are both the difficulty of introducing a new, untried
product and obtaining initial customer acceptance and price. In addition, the
syringe that activates the angioplasty balloon device is a relatively
inexpensive (less than $75) component of the relatively more expensive total
number of items used in catheterization procedures that typically cost $1200 to
$1400. Therefore, manufacturers of the relatively higher priced components,
many of which also market syringes, frequently dominate the market for all items
for catheterization procedures and sometimes include a syringe as a low cost
addition to more expensive angioplasty devices such as catheterization
guidewires.
With the growing concern regarding health care costs, price is an
increasingly important competitive factor in marketing all medical items.
Employees
As of March 31, 1996, Surgical had five employees, consisting of three
executive officers and directors, one administrative employee, and one
production employee.
Surgical's employees are not represented by a collective bargaining
organization, and Surgical is not aware of any efforts to organize any such
collective bargaining unit. Surgical considers its relations with its employees
to be good and has not experienced any work stoppages or slow-downs.
Properties
Surgical currently rents its corporate offices and facilities at 2801 South
Decker Lake Lane, Salt Lake City, Utah, from an unrelated party pursuant to
monthly arrangement at a monthly rental of $1,918. The offices and facilities
are located in a building previously owned by Surgical and sold effective March
31, 1995. See "CERTAIN TRANSACTIONS: Surgical." These facilities are adequate
for the current needs of Surgical.
Legal Proceedings
From time to time Surgical is a party to legal proceedings that it
considers routine litigation incidental to its business. Management believes
that the potential outcome of such litigation will not have a material adverse
effect on Surgical's business or results of operations.
Selected Financial Data
The financial data set forth in the following table has been selected by
Surgical and has been derived from the financial statements for the periods
indicated. The financial statements as of March 31, 1996 and 1995, and for each
of the years in the three-year period ended March 31, 1996, have been audited by
Arthur Andersen LLP, independent public accountants.
The selected financial data should be read in conjunction with the
accompanying consolidated financial statements of Surgical and the notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations." All amounts below are in thousands, except per-share data.
SELECTED FINANCIAL DATA
(All Amounts in Thousands, Except Per-Share Data)
<TABLE>
<CAPTION>
Year Ended March 31,(1)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues: $1,396 $1,980 $4,802 $6,562 $2,517
Income (loss) from
continuing operations (2,388) (3,110) (1,210) (373) (192)
Income from discontinued
operations 332 207 312 277 29
Net loss $(2,056) $(2,903) $(898) $(96) $(163)
Net loss per common
shares from continuing
operations $(0.57) $(0.78) $(0.36) $(0.11) $0.07
Net income (loss) per
common share from
discontinued operations (0.08) 0.05 0.09 0.08 (0.01)
Net income (loss) per
common share $(0.49) $(0.73) $(0.27) $(0.03) $(0.06)
Weighted average
common shares
outstanding 4,225,546 3,960,344 3,363,969 3,308,869 2,922,033
Balance Sheet Data:
Working capital $3,411 $1,667 $700 $2,470 $890
Property and equipment,
net 314 1,050 5,000 2,219 2,306
Total assets 6,668 9,988 12,324 12,054 12,561
Long-term obligations,
less current maturities -- -- 1,025 939 1,018
Stockholders' equity 5,475 7,847 9,108 9,437 9,126
Cash dividends declared
per common share -- -- -- -- --
</TABLE>
[FN]
(1) Surgical's income statement data for the years ended March 31, 1996,
1995, 1994, 1993, and 1992, include all acquired businesses presented
in a common fiscal year and segregated results of operations for all
discontinued divisions.
Management's Discussion And Analysis of Financial Condition And Results Of
Operations
General
The following discusses the financial position and results of operations of
Surgical and its consolidated subsidiaries. Surgical acquired Professional
Medical, Inc., and Professional Drape Corporation, the medical product segment,
on November 27, 1991, and Rex Industries and Insulation Distributors the
specialty metals fabrication and insulation products distributor segments,
respectively, on May 18, 1990. Professional Medical, Inc., Professional Drape
Corporation, and Surgical Technologies, Inc., were merged during fiscal year
1994 with Surgical Technologies, Inc., as the surviving corporation. Effective
January 1, 1996, and September 30, 1993, Surgical completed the withdrawal from
the specialty metals fabrication segment and the insulation products distributor
segments, by selling substantially all of the assets of Rex Industries
Incorporated and Insulation Distributors, Inc., respectively. During fiscal
1996, Surgical sold substantially all of the assets and operations of its
disposable surgical pack and drape manufacturing product lines, retaining the
technology and operations related to its angioplasty inflation device marketed
under the name Transflator(R) as its sole remaining operation.
Where appropriate, the financial statements reflect the operating results
and balance sheet items of the discontinued segments' operations separately from
continuing operations. Financial results for periods prior to the date of
discontinuation have been restated to reflect continuing operations.
Results of Operations
1996 Compared to 1995
During fiscal year 1996, Surgical sold essentially all of the assets and
operations of the disposable surgical pack and drape manufacturing product lines
of its medical segment. The decrease in gross revenue of approximately 29%, or
$584,000, as compared to the previous year is primarily attributable to the
partial year of operations of the disposable surgical pack and drape
manufacturing product lines as well as Surgical concentrating efforts to dispose
of certain of its other medical product lines and its specialty metals
fabrication segment. Cost of revenues decreased to 106% of sales versus 122% in
the previous year. The decrease in cost of revenues as a percent of revenues is
primarily attributable to the write-off of obsolete inventory from the EnviroPak
division in the prior year. Surgical has attempted to eliminate some fixed
costs in an effort to increase efficiency based on the current level of sales.
During the nine months that Surgical operated the specialty metals fabrication
segment, revenues and gross margins remained relatively constant with the prior
year.
The net loss from continuing operations for the year ended March 31, 1996,
included loss from the sale of property and equipment of approximately $434,000
compared to loss of $533,000 in the prior year. Utilizing the proceeds from the
sale of property and equipment, Surgical was able to reduce outstanding
obligations and thus decrease interest expense by approximately $99,000 as well
as invest the remaining proceeds in order to increase interest income $182,000.
In addition, the net loss reflects the elimination of the deferred tax asset
previously reflected on the financial statements of Surgical at a value of
$825,176. This asset was eliminated due to certain provisions of the Code
limiting the utilization of tax benefits in situations involving a change of
control, such as the Merger, and the uncertainties with respect to the ultimate
utilization of the deferred tax asset.
1995 Compared to 1994
For the year ended March 31, 1995, gross revenue declined by $2,823,000, or
approximately 59% as compared to the previous year. The revenues of the now
discontinued medical products segment, increased $825,000, or 37% over the prior
year. Gross margins declined from 7% for the year ended March 31, 1994, to a
negative 22% for the year ended March 31, 1995, reflecting substantially lower
margins in the medical products segment due to relatively high manufacturing
costs as Surgical maintained a larger than required manufacturing capability in
anticipation of substantial increases in non-Cordis sales that did not
materialize and an inventory write-down relating to the Cordis contract
termination. As the 1995 fiscal year progressed, Surgical implemented a number
of cost-cutting measures that were intended to reduce the costs of revenues in
the medical products segment.
The amount of selling, general, and administrative expenses for the year
ended March 31, 1995, declined somewhat as compared to the previous year, but
due to the substantial decline in revenues during the year ended March 31, 1995,
increased as a percentage of gross revenues from 44% during 1994 to 90% during
1995. The increase in selling, general, and administrative expenses as a
percentage of revenue in 1995 as compared to the preceding fiscal year is
attributable to costs associated with the substantial marketing efforts to
rebuild sales following termination of the Cordis marketing agreement during
fiscal year 1994, occupancy costs for Surgical's South Decker Lake Lane
manufacturing and office facilities that were sold at the end of the 1995 fiscal
year, the write-off of an account receivable from Cordis, and expenses incurred
in connection with a dispute with a former employee. Continuing rental payments
for the portion of the building that Surgical continues to occupy are less than
occupancy costs associated with ownership of the entire facility during the
fiscal year ended March 31, 1995.
During the fourth quarter of fiscal year 1995, Surgical determined that the
carrying value of the goodwill associated with the medical products segment was
no longer warranted, based on projected future cash flow of that division, and
wrote off the remaining $1,217,364 of unamortized goodwill related to this
segment.
As a result of the foregoing, Surgical's loss from operations for the year
ended March 31, 1995, increased approximately 91% over the loss from the
preceding fiscal year. The increase in other income (expense) during fiscal
year 1995 as compared to the preceding fiscal year consisted of $533,000 loss on
the disposition of Surgical's Decker Lake Lane manufacturing and office facility
and the North Salt Lake real estate and improvements no longer required in its
operations.
Inflation and Environmental Regulation
Surgical's operations have not been, and in the near term are not expected
to be, materially affected by inflation or changing prices.
Surgical does not believe that any recently enacted or presently pending
proposed environmental legislation will have a material adverse effect on its
results of operations.
Liquidity and Capital Resources
Surgical's financial condition continued to be strong during the 1996
fiscal year. Comparing fiscal 1996 to fiscal 1995, even though stockholders'
equity decreased from $7,847,000 to $5,475,000, working capital increased from
$1,670,000 to $3,411,000. The increase in working capital is primarily a result
of the substantial reduction in the long-term obligations from the proceeds of
the sale of the specialty metals fabrication segment and the sale of the assets
and operations of Surgical's disposable surgical pack and drape product lines.
Surgical requires working capital principally to fund its work in progress.
Generally, Surgical has adequate funds for its activities, although from time to
time in the past Surgical has relied on short-term borrowing to fund work under
specific major contracts. Surgical has a revolving line of credit with a bank
for a total of $500,000. The outstanding amount against the line of credit at
March 31, 1996, was $0. There are no other formal commitments from banks or
other lending sources for lines of credit or similar short-term borrowing.
Surgical's statements of cash flows in the financial statements contained
herein have not been restated to reflect the discontinued operations of its
specialty metals fabrication segment.
Surgical generates and uses cash flows through three activities:
operating, investing, and financing. During the year ended March 31, 1996,
operating activities used net cash of $1,221,000, as compared to the use of net
cash of $1,293,000 for 1995 and $585,000 for 1994. The minor change in net cash
used in operating activities in 1996 as compared to 1995 is due primarily to the
use of cash to decrease liabilities. The increase in net cash used by operating
activities in 1995 as compared to 1994 is due principally to increases in
deferred income tax asset and the increase in the net loss for the year. In
1994, cash was required to fund the increases in receivables of $354,000, and
inventories of $180,000, which more than offset the $430,000 in depreciation and
amortization.
In fiscal 1996, investing activities provided $4,875,000. The principal
source of the cash was from the proceeds from the sale of divisions and payments
received on notes receivable. During 1995, investing activities provided cash
of $990,000. Principal payments on notes receivable provided $182,000, proceeds
from the sale of property and equipment provided $1,010,000. Cash flows from
investing activities during 1994 provided cash of $1,432,000 primarily from the
proceed from sale of divisions.
In fiscal 1996, financing activities used $670,000 principally to pay off
the revolving bank loan. For fiscal 1995, financing activities provided net
cash of $449,000. Proceeds from the sale of common stock provided $1,621,000
while the proceeds were used to pay down long-term debt and the revolving bank
loan. In fiscal 1994, financing activities used $1,111,000. Surgical purchased
$446,000 of treasury stock and paid $1,312,000 towards long-term obligations
while receiving $645,000 in proceeds from short-term financing arrangements.
Surgical has no material commitments for capital expenditures.
Surgical's current cash, funds available under its credit facility and
future cash flow from operations should be sufficient to meet capital
requirements and short-term working capital needs in fiscal year ending March
31, 1997.
Other Items
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. This statement defines a fair-
value based method of accounting for stock-based compensation, including grants
of stock, stock options, and other equity instruments to employees, and
encourages adoption of the method. The statement also requires that an
employer's financial statements include certain disclosures about stock-based
compensation arrangements, regardless of the method used to account for them.
The statement is effective for financial statements for fiscal years that begin
after December 15, 1995. Surgical has not determined how it will account for
stock options when the standard is adopted, nor has it estimated what impact
such options will have on its financial statements. If Surgical continues to
apply the current stock based compensation methods pursuant to APB 25, it will
be required by SFAS No. 123 to furnish additional disclosures.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Surgical is required to adopt SFAS No. 121 in fiscal
1997. SFAS No. 121 addresses the accounting for (i) impairment of long-lived
assets, certain identifiable intangibles and goodwill related to assets to be
held and used, and (ii) long-lived assets and certain identified intangibles to
be disposed of. SFAS requires that long-lived assets held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows from the use of the asset and its eventual
disposition (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized. Surgical does
not expect that the adoption of SFAS No. 121 will have a material impact on
Surgical's consolidated financial statements.
BUSINESS OF 4HEALTH
General
4Health, Inc., a California corporation formed in February 1993 by R.
Lindsey Duncan, is a supplier and formulator of vitamins and nutritional
supplements which are designed and formulated to address the dietary needs of
the general public. 4Health's products that are sold through health food stores
under the proprietary brand name "Nature's Secret(R)" account for approximately
94% of 4Health's 1995 total sales.
4Health's products are produced solely from natural ingredients and are
formulated for the purpose of achieving specific dietary or nutritional goals.
4Health also has a proprietary line of products that it sells to health
care practitioners under the Harmony Formulas(R) label. Sales of Harmony
Formulas(R) comprised approximately 6% of 4Health's 1995 total sales.
4Health is of the opinion that its product formulas are proprietary and
cannot be duplicated without the master recipe, which is secured in safekeeping.
4Health attempts to protect its products and formulas with, among other things,
"non-disclosure/noncompetition" agreements with its manufacturers and employees
and with trademark protection. The formulations were developed by 4Health's
founder and chief executive officer, R. Lindsey Duncan, a nutritionist certified
by the National Institute of Nutritional Education.
4Health plans to launch a new label of products for international
distribution in the fall of 1996 and is currently designing its marketing
strategy. 4Health anticipates that a portion of its working capital, including
additional amounts resulting from the Merger, will be applied to this endeavor.
Certain of 4Health's products have seasonal popularity, with somewhat
increased appeal in the first two quarters of each calendar year with some
decline in volume in the fourth quarter of the calendar year. 4Health believes
that the impact of this seasonality can be at least partially offset by the
introduction of new products and through marketing programs promoting public
awareness of the need for year-round health products.
Manufacturing and Supply Sources
All of 4Health's products are manufactured by third party suppliers
pursuant to 4Health's specifications and proprietary recipes. Prior to
selecting a manufacturer to produce its products, 4Health reviews the
manufacturer's raw material sources, quality assurance procedures, and
reliability to assure that the proposed manufacturer meets 4Health's criteria.
All of the companies that manufacture for 4Health are required to meet strict
manufacturing standards required by the FDA, and 4Health believes that it
benefits from such regulation in the overall quality of the products
manufactured by such regulated entities for 4Health. To date, 4Health has
relied exclusively on domestic manufacturers in order to facilitate 4Health's
quality assurance monitoring function.
4Health places purchase orders with its suppliers for individual product
manufacturing lots for delivery of packaged and labeled product to 4Health's
warehouse in Broomfield, Colorado, for distribution. 4Health has no long-term
manufacturing agreements with any of its suppliers, but purchases manufactured
lots pursuant to individual purchase orders. Currently, 4Health utilizes five
separate manufacturers and believes that there are other qualified manufacturers
that would meet 4Health's quality assurance requirements if alternative
manufacturing sources were required. 4Health maintains an inventory of
approximately 60 to 90 days of anticipated demand and to date has not
experienced material shortages of manufactured products for delivery. All
ingredients in 4Health's products are generally available from a number of
alternative sources, although certain of the ingredients, such as those based on
agricultural products, are subject to seasonable availability to a limited
degree.
Marketing and Sales
To date, 4Health has marketed its products principally through retail
health food stores, including vitamin and full line grocery stores with vitamin
aisles, and alternative health care providers such as chiropractors and
nutritionists. Products are introduced to retail outlets through advertising of
4Health products in national nutrition magazines, trade magazines, and through
4Health's telemarketing staff and outside sales force which contacts retail
outlet representatives, customarily the vitamin-aisle expert, to introduce
4Health's products and to provide continuing product education and sales
support. Through product incentives, 4Health encourages retail outlet
employees-vitamin-aisle experts-to utilize 4Health's products personally in
order to become familiar with their use and benefits as a basis for recommending
the products to customers.
Currently, 4Health products are marketed to approximately 5,400 health food
stores, including the stores of General Nutrition Corporation ("GNC"), which
owns and operates approximately 1,600 stores. Current arrangements with GNC
allow for distribution of 4Health's products to the franchise stores through GNC
distribution centers. In 1995, 4Health directly solicited such franchise
owners, of whom approximately 42% are current customers. Sales to health food
stores accounted for approximately 94% of sales for the year ended December 31,
1995. Sales through GNC, which commenced in March 1995, represented
approximately 12.8% of revenues of 4Health for the year ended December 31, 1995.
During 1995, only one of 4Health's products was marketed through GNC. Recently,
4Health received a purchase order expanding the number of products carried by
GNC to a majority of the products offered by 4Health.
4Health also markets its products through alternative health care
practitioners such as non-traditionally oriented medical practitioners,
chiropractors, acupuncturists, and nutritionists, and directly to consumers.
4Health has recently developed a new line of products which it plans to
market through traditional grocery stores and pharmacies under a different and
distinct label and is in the early stages of developing products and a marketing
strategy for international distribution.
To date, all of 4Health's products have emphasized quality rather than
price. 4Health's new products being designed for the new markets will have
different formulations than those currently being offered and will be priced for
the more value-conscious buyer.
Competition
Competition in the nutritional supplement industry is vigorous,
characterized by a relatively large number of companies (estimated at
approximately 200), most of which have relatively small sales. Industry sources
estimate that there are less than 20 companies in the industry that have annual
sales of $50 million or more. Based on its 1995 sales, 4Health believes that it
is within the approximately top one-third of the approximately 200 nutritional
supplement companies, based on sales. However, since many of the companies in
this industry are privately-held, little reliable financial data is available.
Many of the companies have established reputations for successfully developing
and marketing nutritional supplement products, with a variety of well-
established marketing outlets. Many of such companies have greater financial,
managerial, and technical resources than 4Health. Principal competitors include
American Cyanamid, Smith-Kline-Beecham, American Home Products, Rexall Sundown,
Inc., and Nature's Sunshine Products, although not all of these companies
produce natural supplements. Included in that group of competitors are Herbal
Life International, Sun Rider Corporation, and Shakley. Many of these companies
rely exclusively on multi-level marketing or network marketing as opposed to
retail sales.
Products and Development
4Health, principally through the efforts of its founder and chief executive
officer, R. Lindsey Duncan, maintains an ongoing effort to develop new products.
This effort is supported by 4Health's three person technical staff, which
assists through the research of available ingredients and their combination and
effects, and its five person sales and marketing staff, which assists with the
identification of potential new consumer demands. An important part of this
effort is the development of different products with different formulations for
marketing through different outlets or intended markets.
Current Products
All of 4Health's products are produced from what it considers to be non-
artificial herbs, botanicals, and nutrients, and are formulated by 4Health with
the goal of producing specific sets of effects. 4Health's current product
offering, marketed under the Nature's Secret(R) label includes, but is not
limited to: Nature's Secret(R) Internal Cleansers: Ultimate CleanseTM, Super
CleanseTM, Ultimate Fiber(R), and Ultimate Oil(R); Nature's Secret(R) Vitality
Builders: Ultimate Multi PlusTM, Ultimate MultiTM, Ultimate BTM, Ultimate
Iron(R), and The Ultimate Green(R); and Nature's Secret(R) Weight Control
Program: Take ChargeTM; Burn MoreTM, Crave LessTM, and FulfillTM.
In addition to the above products, 4Health has a proprietary line of
comparable products which it sells to health care practitioners under the
Harmony Formulas(R) label. Sales of Harmony Formulas(R) comprise approximately
6% of 1995 total 4Health sales.
In March 1996, 4Health announced a new line of products to be marketed to
traditional grocery stores and pharmacies, under the Home NutritionTM label.
4Health is of the opinion that the formulas for its products are
proprietary and cannot be duplicated without the master recipes which are
secured in safekeeping. 4Health attempts to protect its products and formulas
with, among other things, "nondisclosure/noncompete" agreements with its
manufacturers and employees, and with trademark protection. The formulations
were developed by 4Health's founder and CEO, R. Lindsey Duncan, a nutritionist
certified by the National Institute of Nutritional Education.
Product Warranties and Returns
4Health product warranties and its policy regarding returns of products are
similar to those of other companies in the industry. If a consumer of any of
4Health's products is not satisfied with the product, he or she may return it to
the distributor from whom such consumer purchased it at any time within 30 days
of purchase. The distributor is required to refund the purchase price to the
customer, in which event the distributor may return the product received from
the customer for an exchange of equal value.
All products are warranted against defect by the manufacturers of those
products. Most products returned to 4Health, however, are not found to be
defective in manufacture. As a result, most products returned to 4Health are
replaced by it at its cost.
In addition, 4Health has an open return policy for retail outlets that
grants the right to such outlets to return any unsold merchandise. 4Health
received returns under its warranty and return policies equal to approximately
2.8% of total sales in the year ended December 31, 1995.
Trademarks and Service Marks
As a company selling branded consumer products nationwide, 4Health believes
that establishing trade and service marks and copyrights for brand names and
associated advertising and labeling materials is important in maintaining
company and product identification and integrity. Accordingly, 4Health is
engaged on a continuing basis in developing brand names and such associated
materials for its new products, securing trade and service mark protection for
such brand names and copyright protection for such associated materials,
policing its existing marks, and enforcing its legal rights in cases of
potential infringement by third parties of its legally protected marks and
copyrights. Prior to commencing advertising and sales of products under a newly
developed brand name, 4Health seeks to minimize the risks of potentially
infringing the rights of third parties by conducting trade and service mark
searches and other inquiries in addition to filing publicly for trademark
protection of the brand name and copyright protection for associated advertising
materials and labeling. 4Health registers trademarks for its principal product
lines, including Nature's Secret(R) and Harmony Formulas(R), as well as its
principal products, and copyrights all product labeling. Notwithstanding such
efforts, such newly developed marks may, nevertheless, conflict with the local
common law rights of senior users of the same or similar marks, which may be
unregistered or which may not be disclosed in a search of public records. Upon
being apprised of any such potential infringement and after due investigation to
establish the validity of any such competing claims, 4Health may seek to secure
appropriate licenses for the continued use of its marks or commence legal
proceedings to establish its right to use its marks. The unsuccessful
resolution of these efforts may, however, result in significant adverse
financial consequences to 4Health.
Facilities
4Health's executive office, sales, and product development functions are
located in an approximately 30,000 square foot facility located at 5846
Conestoga Court in Boulder, Colorado, that 4Health purchased in 1994. See
"CERTAIN TRANSACTIONS: 4Health."
Commencing on January 15, 1996, 4Health began to warehouse its products at
a 22,600 square foot facility in Broomfield, Colorado, near Boulder. This
facility is leased under a three-year lease expiring January 1999, at a monthly
rental of $7,062.50 for the first and second years and $8,000 in the third year.
4Health believes that the foregoing facilities are adequate for its
foreseeable needs.
Employees
4Health has 101 employees, including 5 executive officers, 19 general
administrative, 51 in sales and marketing, 23 in operations, and three in
research and development.
4Health's employees are not represented by a collective bargaining
organization, and 4Health is not aware of any efforts to organize any such
collective bargaining unit. 4Health considers its relations with its employees
to be good and has not experienced any work stoppages or slow-downs.
Legal Proceedings
From time to time 4Health 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
4Health's business or results of operations.
Governmental Regulation
General
The processing, formulation, packaging, labeling and advertising of
4Health's products are subject to regulation by one or more federal agencies
including the FDA, the Federal Trade Commission, the Consumer Products Safety
Commission, the Department of Agriculture, the Postal Service, and the
Environmental Protection Agency. 4Health's activities are also subject to
regulation by various agencies of the states and localities in which 4Health
products are sold. The FDA has been the main agency regulating the types of
products sold by nutritional supplement firms such as 4Health, but much of that
authority stemmed from the FDA's treatment of dietary supplements as food
additives and drugs. The FDA's jurisdiction in this regard has been somewhat
eroded and its role has been reduced to mainly policing the activities of makers
of dietary supplements by the enactment of the Dietary Supplement Health and
Education Act of 1994 ("DSHEA") in October 1994, as discussed below. The DSHEA
amends and modifies the application of certain provisions of the FDC Act as they
relate to dietary supplements. The DSHEA established an Office of Dietary
Supplements at the National Institutes of Health in order to coordinate and
conduct scientific research into the health benefits of dietary supplements and
also established a presidential commission to study and make recommendations on
the regulation of label claims and statements for dietary supplements. This
commission is scheduled to meet during early 1996 to make recommendations to the
FDA. The FDA is required to promulgate regulations that are consistent with the
DSHEA and the recommendations of the commission.
Before enactment of the DSHEA, the FDA had adopted regulations concerning
the labeling of dietary supplements, including the making of health claims.
These regulations required nutrition labeling on all dietary supplements and
prohibited the making of any health claim on a dietary supplement unless the
supplement was consumed as a food, its components were demonstrated to be safe,
and the health claim was supported by significant scientific agreement and
approved by the FDA. Part of the enactment of the DSHEA curbed the FDA's
adopted regulations, and the FDA agreed that it would not seek to enact further
regulations until after the end of 1996.
During the years preceding passage of the DSHEA, members of Congress were
under intense pressure from various sources, including the dietary supplement
industry, to reduce the regulatory burdens on dietary supplements imposed or
threatened by the FDA through its broad interpretation and application of the
FDC Act and its regulatory authority. Recognizing the importance of improving
the health of United States citizens and the role of dietary supplements in
promoting such improvement, Congress enacted the DSHEA to allow consumers to
have wider access to dietary supplements that are not unsafe, toxic, unsanitary,
or adulterated and to increase the access of consumers to truthful information
about such products. Passage of the DSHEA impacted the FDA's ability to issue
and implement any regulations with respect to dietary supplements through its
exemption of such products from being considered "food additives" or, in most
circumstances, "drugs." Although the DSHEA is generally viewed as a positive
development for companies that sell dietary supplements such as vitamins,
minerals, herbs, botanicals, amino acids, and similar substances, the
legislation imposed significant requirements that must be adhered to in order
for a product to qualify for the safe harbors established by the DSHEA.
The DSHEA broadly defines a dietary supplement to include any product
intended to supplement the diet that bears or contains a vitamin, mineral, herb
or other botanical, an amino acid, a dietary substance for use by man to
supplement the diet by increasing the total dietary intake, or a concentrate,
metabolic constituent, extract, or combination of any such ingredient, provided
that such product is either intended for ingestion in tablet, capsule, powder,
softgel, gelcap, or liquid droplet form or, if not intended to be ingested in
such a form, is not represented for use as a conventional food or as a sole item
of a meal or the diet and, in any case, is not represented for use as a
conventional food or as a sole item of a meal or the diet and is labeled as a
dietary supplement. The definition also includes highly technical provisions
dealing with a dietary supplement that contains an ingredient that also has been
approved by the FDA as a drug. The practical effect of such an expansive
definition is to ensure that the new protections and requirements of the DSHEA
will apply to a wide class of products.
Exemption from "Food Additive" Status
One important provision of the DSHEA exempts the dietary ingredients in
dietary supplements from being treated as "food additives." Any substance that
is added to a food product that is not "generally recognized as safe" by experts
whose opinion is based on published scientific literature is subject to being
regulated as a food additive by the FDA. Under the FDC Act, a substance that is
a food additive may not be added to food products unless explicitly permitted by
the FDA by issuance of a regulation. In petitioning the FDA for such a
regulation, a process that often takes five years or more, a petitioner might be
required to spend several hundreds of thousands of dollars or more to test a
product and participate in any ensuing proceedings. Prior to enactment of the
DSHEA, dietary supplement ingredients were often alleged to have "food additive"
status and, unless approved by the FDA, were treated as illegal foods by such
agency, although many contended that this represented overreaching on the part
of the FDA in light of its permitted powers. This clearly posed a substantial
negative impact on the industry's business and operations because of the risk
that the FDA could choose to treat any product offered by any company as
containing food additives. The DSHEA removed this potential problem and any
ambiguity related thereto by exempting dietary ingredients in dietary
supplements from being treated as food additives.
DSHEA Safety Standards
Although dietary supplements are now exempted from treatment as food
additives by the FDA, the DSHEA imposed significant new safety standards
regulating dietary supplements to prevent the sale of dietary supplements that
are unsafe, toxic, unsanitary, or adulterated. These standards are summarized
below.
First, the DSHEA provides that a dietary supplement will be deemed to be an
adulterated food if it presents a significant or unreasonable risk of illness or
injury when used in accordance with its labeling or, if no conditions of use are
suggested or recommended in the labeling, under ordinary conditions of use.
Generally, the FDC Act prohibits the introduction or delivery of adulterated
food into interstate commerce so a dietary supplement that is deemed adulterated
may not be sold or distributed through interstate commerce. The FDA has the
burden of proof in establishing that a dietary supplement is adulterated under
such a standard, thereby reducing the FDA's role from one of preapproval of
dietary supplements to that of policing those substances that present a
significant or unreasonable risk of illness or injury.
Second, the DSHEA imposes additional requirements that must be adhered to
for those dietary supplements containing a "new" dietary ingredient which, under
the DSHEA, is an ingredient that was not marketed in the United States before
October 15, 1994. A dietary supplement that contains such a new dietary
ingredient will be deemed to be adulterated unless either (a) all ingredients
contained in the dietary supplement have been present in the food supply as an
article used for food in a form in which the food has not been chemically
altered, or (b) there is a history of use of other evidence of safety
establishing that the new dietary ingredient, when used under the conditions
recommended or suggested in the labeling, will reasonably be expected to be
safe. In order to qualify for the safe harbor under the second condition, a
manufacturer/distributor of the new dietary ingredient or supplement must
provide, at least 75 days before introducing or delivering for introduction such
substance into interstate commerce, information to the FDA that forms the basis
on which the manufacturer/distributor has concluded that a dietary supplement
containing the new dietary ingredient will reasonably be expected to be safe.
Finally, the DSHEA provided non-delegable authority to the Secretary of the
Department of Health and Human Services to declare a dietary supplement as
posing an imminent hazard to public health or safety. Following such
declaration, it is immediately illegal to market such a product, although the
Secretary must thereafter promptly hold a formal hearing in order to determine
whether to affirm or withdraw the declaration.
The effect of these new safety standards is that, although the authority of
the FDA to regulate dietary supplements has been limited, it and the Secretary
of the Department of Health and Human Services have been granted substantial new
policing authority to stop the distribution of a dietary supplement if
government personnel believe they can show that the product is not safe.
4Health is not able to predict with certainty the impact of the new regulatory
scheme on its activities.
Labeling/Publications
The DSHEA increases the ability of sellers of dietary supplements to
provide information about their products. The intent of Congress in promoting
such information is to empower consumers to make more informed choices about
preventive health care programs based on available scientific data about the
health benefits of diet supplements. Prior to the enactment of the DSHEA, the
FDA asserted that any publication used in connection with the sale of a dietary
supplement could be regulated by the FDA as "labeling." Further, if the
publication in question contained information claiming or suggesting that an
ingredient present in a dietary supplement might be used in the cure,
mitigation, treatment, or prevention of any disease, such supplement would be
subject to regulation under the FDC Act as a drug. Under the DSHEA, however, a
publication, including an article, a book or chapter in a book, or an official
abstract of a peer reviewed scientific publication that appears in an article
and was prepared by the authors or the editors of a publication, is not defined
as a labeling and may be used in connection with the sale of a dietary
supplement to consumers if such publication is reprinted and it (i) is not
false or misleading; (ii) does not promote a particular manufacture or brand
of a dietary supplement; (iii) is displayed or presented with other items on
the same subject matter so as to present a balanced view of the available
scientific information; (iv) is physically separate from dietary supplements if
displayed in an establishment where such products are sold; and (v) does not
have appended to it any information by sticker or any other method. The United
States has the burden of proof to establish that a publication is false or
misleading if a proceeding is established to prevent a publication. The DSHEA
specifically provides that it does not restrict a retailer or wholesaler of
dietary supplements in any way whatsoever from selling books or other
publications as part of its business These provisions of the DSHEA may
indirectly affect 4Health because they will make it easier for retailers and
wholesalers that sell 4Health's products to display and sell publications that
are related to 4Health's business and discuss the benefits of dietary
supplements such as the ones that 4Health manufactures and distributes.
FDA regulations published prior to the enactment of the DSHEA and pursuant
to the Nutrition Labeling and Education Act ("NLEA") prohibit the use of any
health claim in the labeling of any food products, including brochures), unless
the claim of such labeling is first approved by the FDA by regulation. The
DSHEA carves out an exception to this regulation that allows companies that
manufacture and distribute dietary supplements to make any of the following four
types of statements with regard to nutritional support on labeling without FDA
approval: (1) a statement that claims a benefit related to a classical
nutrient deficiency disease and discloses the prevalence of such disease in the
United States; (2) a statement that describes the role of a nutrient or
dietary ingredient intended to affect structure or function in humans; (3) a
statement that characterizes the documented mechanism by which a nutrient or
dietary ingredient acts to maintain such structure or function; or (4) a
statement that "describes general well-being" from consumption of a nutrient or
dietary ingredient. In addition to making sure that a statement meets one of
the four criteria, a manufacturer of the dietary supplement must have
substantiation that such statement is truthful and not misleading, must not
claim to diagnose, mitigate, treat, cure, or prevent a specific disease or class
of diseases, and must contain the following disclaimer, prominently displayed in
boldface type: "This statement has not been evaluated by the Food and Drug
Administration. This product is not intended to diagnose, treat, cure, or
prevent any disease." Additionally, the manufacturer must notify the Secretary
of Health and Human Services no later than 30 days after the first marketing of
the dietary supplement to which such statement relates.
In addition to the above statements that are allowed to be made by
manufacturers, a dietary supplement must be properly labeled. To be properly
labeled, a dietary supplement must list the name and quantity of each ingredient
and the total weight of a proprietary blend, be identified as a "dietary
supplement," and identify the part of a plant from which any herb or botanical
ingredient is derived. In addition, there are special rules for branding a
supplement if there is an official compendium covering the dietary supplement.
Manufacturing
The DSHEA did not limit the FDA's ability to regulate manufacturing but
authorized the FDA to prescribe good manufacturing practice regulations for
dietary supplements which are to be modeled after current good manufacturing
practice regulations for food. 4Health cannot predict the impact that such
regulations could have on those suppliers that manufacture its products.
However, since most of these manufacturers also produce a number of over-the-
counter medications that are already subject to manufacturing standards of the
FDA, it is unlikely that any new regulations regarding manufacture of dietary
supplements would adversely affect 4Health or its suppliers.
Summary
Neither Surgical nor 4Health can determine or predict the final effects
that the DSHEA will ultimately have on the regulatory scheme of dietary
supplements. Further, neither Surgical nor 4Health can predict what
recommendations will be made by the presidential commission established to study
this subject and make recommendations. Although the DSHEA seems to be generally
beneficial to manufacturers of dietary supplements because it limits the FDA's
authority to regulate supplements as drugs or food additives, there is no real
indication of its ultimate effect. The FDA has recently proposed regulations
that are intended to become effective January 1, 1997, for the purpose of
implementing the DSHEA. There is no way to predict what form the final
regulations will take or what effect such regulations will have on the business
activities of 4Health and to be engaged in the by the Surviving Corporation.
Selected Historical Financial Data of 4Health
The following selected historical financial data should be read in
conjunction with the financial statements of 4Health and the notes thereto and
"Management's Discussion and Analysis of Financial Condition or Plan of
Operations" appearing elsewhere in this Joint Proxy Statement/Prospectus. The
selected financial data of 4Health has been derived from the financial
statements of 4Health which (other than as of and for the three month periods
ended March 31, 1996 and March 31, 1995) have been audited by Arthur Andersen
LLP, independent public accountants. The financial statements of 4Health at
December 31, 1995 and 1994 and for the fiscal years ended December 31, 1995, and
1994, the period from inception to December 31, 1993, together with the report
of Arthur Andersen LLP thereon, appear elsewhere in this Joint Proxy
Statement/Prospectus. The selected financial data of 4Health as of March 31,
1996, and for the three month periods ended March 31, 1996 and 1995 is unaudited
but gives effect to all adjustments (all of which were normal recurring
accruals) necessary in the opinion of management of 4Health to present fairly
this information. The results of operations for the interim period should not
be taken as indicative of results for the full year.
<TABLE>
<CAPTION>
Period from
inception
Three Months Ended Fiscal years (2/17/93) to
Statement of Operations Data March 31, ended December 31, December 31,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net sales $ 3,473,400 $ 1,549,008 $10,434,022 $ 2,076,902 $ 269,742
Cost of sales 1,257,456 548,751 3,802,877 744,584 87,461
Gross profit 2,215,944 1,000,257 6,631,145 1,332,318 182,281
Operating expenses 2,181,691 806,465 5,499,818 1,463,009 189,804
Income (loss) from
operations 34,253 193,792 1,131,327 (130,691) (7,523)
Other expenses (net) (10,429) (10,990) (62,925) (4,746) (5,789)
Net income (loss) before
provision for income taxes 23,824 182,802 1,068,402 (135,437) (13,312)
Provision for income taxes (12,162) (59,375) (359,723) (2,183) 1,383
Net income (loss) 11,662 123,427 708,679 (137,620) (11,929)
Net income (loss) per common
share $ 0.00 $ 0.02 $ 0.12 $ (0.28) (0.00)
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data December 31,
March 31, 1996 1995 1994
<S> <C> <C> <C>
Total assets $ 5,584,958 $ 5,227,628 $ 2,669,872
Long-term debt and obligations
under capital leases 37,224 1,305,519 1,308,932
Total liabilities 2,530,091 2,184,422 1,778,116
Working capital 808,628 2,236,211 598,674
Stockholders' equity 3,054,867 3,043,206 891,756
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the "Selected
Financial Data" and the financial Statements and related Notes thereto contained
elsewhere in this document.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales represented by each line item in 4Health's statement of operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Fiscal Year Ended December 31,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Sales 36.2 35.4 36.4 35.9 32.4
Gross Profit 63.8 64.6 63.6 64.1 67.6
General and administrative expenses 17.2 17.6 14.2 29.3 55.3
Sales and marketing expenses 43.9 32.8 37.1 39.4 15.1
Research and development 1.7 1.7 1.5 1.7 0.0
Income (loss) from operations 1.0 12.5 10.8 (6.3) (2.8)
Other income (expense), net (0.2) (0.7) (0.6) (0.2) (2.1)
Income (loss) before income taxes 0.8 11.8 10.2 (6.5) (4.9)
(Provision) benefit for income taxes (0.4) (3.8) (3.4) (0.1) 0.5
Net income (loss) 0.4% 8.0% 6.8% (6.6)% (4.4)%
</TABLE>
1995 Compared to 1994
Net sales, for the fiscal year ended December 31, 1995 ("fiscal 1995")
increased 402% to $10.4 million from $2.1 million for the fiscal year ended
December 31, 1994 ("fiscal 1994"). This increase in net sales was primarily due
to a significant market penetration of health food stores from approximately
2,000 in 1994 to 5,400 active accounts by December 1995. Included in these
5,400 stores is a large chain of approximately 1,600 health food stores to its
customer list, however, that chain carries only one of 4Health's products.
Sales to this customer accounted for 12.8% of total revenues in fiscal 1995. An
additional contributor to 4Health's revenue growth was the launch of its
Ultimate MultiTM product in July of 1995 which accounted for 7.5% of total sales
to health food stores.
Gross profit for fiscal 1995 increased 398% to $6.6 million from $1.3
million in fiscal 1994. Gross margin declined 0.5% to 63.6% in fiscal 1995 from
64.1% in fiscal 1994. Management attributes this decline to its automation and
building up of infrastructure, primarily in its distribution center, to prepare
for higher volumes. Most customer orders are fulfilled and shipped within 24
hours of receipt.
General and administrative expenses increased 143% in fiscal 1995 compared
to fiscal 1994, however, as a percentage of sales, general and administrative
expenses declined to 14.2% in fiscal 1995 compared to 29.3% in fiscal 1994.
Management attributes its increase in spending to building infrastructure to
remain competitive and to provide superior customer service. Sales and
marketing expenses increased 374% in fiscal 1995 to $3.9 million up from $.8
million in fiscal 1994, however, as a percentage of sales, this spending
declined to 37.1% in 1995 from 39.4% in 1994. 4Health incurred $1.4 million in
advertising expenditures in fiscal 1995 compared to $.15 million in fiscal 1994
and increased its staffing and infrastructure of the sales and marketing
departments by increasing its outside sales force and adding other supporting
activities. 4Health's research and development spending increased $.1 million.
Only one new product was launched in 1995. Management expects this department
to increase its expenditures again in 1996 as it intends to release several new
products.
Interest expense results from the $1.3 million loan on 4Health's building
which was outstanding for 12 months in fiscal 1995 at 7.5% interest compared to
only seven months in fiscal 1994 at an interest rate of 3.5%.
Fiscal 1994 Compared to the Period From Inception (February 17, 1993) to
December 31, 1993 ("fiscal 1993")
Net sales increased 670% in fiscal 1994 to $2.1 million from $.3 million in
fiscal 1993. 4Health attributes its growth in fiscal 1994 to rapid penetration
in health food stores, an increase in new products offered and rapid acceptance
of its primary product, Ultimate CleanseTM. 4Health accomplished this through
increasing its inside sales force.
Gross profits increased 631% in fiscal 1994 to $1.3 million from $.2
million in fiscal 1993. Profit margins declined to 64.1% in fiscal 1994 from
67.6% in fiscal 1993 as a natural result of a change in product mix when new
products were added in fiscal 1994.
General and administrative costs, sales, and marketing costs, and research
and development costs all increased significantly in fiscal 1994 versus fiscal
1993 primarily as a result of building infrastructure to accommodate supporting
activities to sales growth. Such fiscal 1994 activities include moving to a
larger facility in the spring of 1994; increasing advertising expenditures,
increasing the sales force, and the accounting department, and increasing
4Health's computer and telephone facilities.
Interest expense increased in fiscal 1994 as a result of adding the
mortgage loan to 4Health's balance sheet in the spring of fiscal 1994, which
bore interest at 3.5%.
4Health does not believe that any recently enacted or presently pending
proposed environmental legislation will have a material adverse effect on its
results of operations.
Liquidity and Capital Resources
Since 4Health's inception on February 17, 1993, it has financed its
business growth primarily through common stock sales and short-term borrowings
from stockholders. In November 1995, 4Health secured a $1 million line of
credit available for working capital purposes which has not been used. The
credit line requires the bank's consent upon consummation of the Merger
contemplated herein. Additionally, in 1994, 4Health borrowed $1.3 million for
the purchase of land and its corporate headquarters building. The principal and
any unpaid interest will be due March 25, 1997; management intends to refinance
the mortgage on a long-term basis prior to its maturity.
Including its $1.1 million of cash reserves at March 31, 1996, 4Health has
working capital of $.8 million and a working capital ratio of 1.3-to-1. As of
March 31, 1996, 4Health reclassified the $1.3 million note due March 25, 1997,
on its building from long-term to current, since it is due within one year.
Management intends to refinance this debt on a long-term basis when its maturity
nears and believes 4Health qualifies to do so, which would cause the note to
again be classified as long-term for financial reporting purposes. With the
consummation of the Merger, the combined entities are expected to have $4.7
million in working capital which includes approximately $5 million in cash, cash
equivalents, and marketable securities. The Surviving Corporation intends to
enter into discussions with its bank upon consummation of the Merger to renew
and, if appropriate, increase its working capital line. 1,135,554 Warrants
issued to Surgical Stockholders pursuant to the Merger, if exercised, could
generate $12.5 million in cash for the Surviving Corporation. The likelihood of
the exercise occurring before expiration of the Warrants, 18 months from
issuance, is primarily dependent upon the performance of the Surviving
Corporation's underlying Common Stock, and to the extent the Common Stock market
price exceeds $11.00 per share such likelihood increases.
The Surviving Corporation's future capital requirements will depend upon
many factors, including the nature and timing of orders from customers, the
collection of accounts on trade sales, the expansion of the sales and marketing
efforts, costs associated with entering into new channels of distribution,
possible trade promotions and allowances, and the status of competitive
products.
Management believes that its working capital upon completion of the Merger,
together with cash estimated to be generated from existing operations, will be
sufficient to satisfy anticipated sales growth and investment in facilities and
equipment for at least 12 months. There can be no assurance, however, that the
Surviving Corporation will not require additional financing prior to such date.
There can be no assurance that any additional financing will be available on
acceptable terms, or at all. The inability to obtain such financing could have
a material adverse effect on the Surviving Corporation's business, financial
condition, and results of operations.
BUSINESS OF THE SURVIVING CORPORATION
FOLLOWING THE MERGER
Nutritional Supplements
4Health intends to continue its business as defined previously (see
"Business of 4Health"). 4Health plans to expand its business in its current
health food stores and practitioner markets by the introduction of new products
and through broader distribution of all of its products to health food stores.
In addition, 4Health expects to expand its sales to foreign markets, the mass
retail market, and certain specialty niche markets using new brand names and
labels for each new market. (For further details see "BUSINESS OF 4HEALTH.")
Medical Products-ID Technology
In July 1993, Surgical began introducing to the market on a test basis a
preliminary design of a medical device used in interventional catheterization
procedures. With the results from this test marketing and subsequent design and
performance improvements, an expended marketing effort was launched in late
fiscal 1994, continuing into fiscal 1995. As a result of the customer input
during this marketing effort, Surgical incorporated certain design changes into
the device. This device, marketed under the name Transflator(R), is used to
inflate the angioplasty balloon, with important additional features, including
audio announcement of the balloon pressure and inflation time, chart recorder
interface, manual operation of the timing function, and real time communication
between the hand unit and remote display. The principal advance of the device
is its use of infrared technology to transmit balloon inflation data to a remote
LED display on a real time basis while the procedure is being performed.
Surgical has decided that it will seek a joint venture partner to market
and further develop its Transflator(R) medical device business. To date, the
Transflator(R) has principally been marketed and sold in selected foreign
countries. Surgical believes that a partnership with a larger multi-national
medical device manufacturer could prove advantageous in entering new
geographical markets. Such a strategic partner would potentially provide
immediate access to existing customers and eliminate the need to organize
separate new distribution channels as additional territory is added.
Surgical recognizes the importance of developing new products and
enhancements to its inflation device product line. Accordingly, Surgical
believes that a strategic alliance with a larger partner could enhance its
research and development capabilities and increase manufacturing capacity.
Surgical owns four patents and two trademarks associated with the Transflator(R)
and the remote transmission of patient data via infra-red technology. One
additional patent covering a slide manifold is included in Surgical's
intellectual ownership.
MANAGEMENT
Surgical
Surgical's articles of incorporation provide that the board of directors
shall be divided into three classes, with each class as equal in number as
practicable. One class is elected each year for a three-year term. The
officers of Surgical are elected at the annual meeting of the stockholders to
hold office at the pleasure of the board of directors. The following table sets
forth the name, age, and position of each executive officer and director of
Surgical:
<TABLE>
<CAPTION>
Service
Name Age Position Since
<S> <C> <C> <C>
Rex Crosland 72 Chairman, President, and 1989
Chief Executive Officer
Rockwell D. Schutjer 49 Vice-President-Operations, 1989
Treasurer, and Director
Todd B. Crosland 36 Vice-President-Finance, and 1992
Director
Reed Fogg 58 Director 1992
Donald A. Spring 58 Director 1992
</TABLE>
Each of the foregoing directors and executive officers of Surgical will
resign in connection with the completion of the Merger. Rockwell D. Schutjer
and Todd B. Crosland have been nominated to serve on the board of the Surviving
Corporation and, if elected, will serve until the 1999 meeting of stockholders
and until their successors are elected and qualified.
Rex Crosland, a co-founder of Surgical, has served as chairman, chief
executive officer, and president of Surgical since its inception. Mr. Crosland
was also founder and chairman of Mountain States Insulation & Supply Company and
Rocmont Industrial Corporation, two of Surgical's subsidiaries that discontinued
operations in early 1992. Mr. Crosland has also been the chairman and president
of R.C. Enterprises, a real estate investment company since 1975.
Rockwell D. Schutjer, a co-founder of Surgical, has served as an officer
and director of Surgical since its inception. Mr. Schutjer currently serves as
vice-president-operations, director, and treasurer. From 1983 until January
1992, Mr. Schutjer was co-founder and president of Rocmont Industrial
Corporation. Mr. Schutjer received his B.S. degree in business finance from the
University of Utah.
Todd B. Crosland, a co-founder of Surgical, served as executive vice-
president-operations of Surgical from inception until December 1989. In
December 1989, Mr. Crosland was appointed to vice-president-finance and in
December 1992, became a director of Surgical. Mr. Crosland is currently the
chairman of the board and president of Rex Industries, Inc., which operates the
specialty metals fabrication business acquired from Surgical. From 1984 through
1988 he owned an auto import dealership, Autobahn Imports, of Salt Lake City,
Utah. Mr. Crosland received a B.A. degree in business finance from the
University of Utah.
Donald A. Spring was elected a director in September 1992. Dr. Spring is
president and medical director of Sierra Heart Institute at Washoe Medical
Center, Reno, Nevada, and director of the cardiac laboratory at Sparks Family
Hospital, Sparks, Nevada.
Reed Fogg became a director of Surgical at the 1992 annual meeting held in
August 1992. Dr. Fogg specializes in orthopedics related to the lumbar spine.
For in excess of the past five years he has served as the chairman of the
Department of Orthopedic Surgery at Cottonwood Hospital and Medical Director of
the Intermountain Spine Institute, both in Salt Lake City, Utah. Dr. Fogg
graduated from the University of Utah School of Medicine in 1962.
Rex Crosland is the father of Todd B. Crosland and the father-in-law of
Rockwell D. Schutjer.
Board Meetings and Committees
The board of directors had two formal meetings during the 1996 fiscal year
ending March 31, 1996, at which all of the directors were in attendance. The
directors also met informally on several occasions during these periods and
discussed the business and affairs of Surgical. Additionally, the board of
directors took several actions through unanimous written consent in lieu of a
meeting. Directors who are not employees received $1,000 for each of the
meetings they attended, plus reimbursement of direct expenses incurred in
attending the meetings. Directors who are employees of Surgical receive no
compensation for service as directors.
The board of directors has standing audit, compensation, and option
committees.
Members of the audit committee for the 1996 and 1995 fiscal years are
Rockwell D. Schutjer, Reed Fogg, and Donald A. Spring. The audit committee met
once during the fiscal year ended March 31, 1995, and during the fiscal year
ending March 31, 1996. The audit committee is responsible for assuring that, in
all material respects, management shall cause Surgical's financial statements to
comply with applicable laws and regulations and to make fair and accurate
disclosure of Surgical's financial position and its results of operations. The
audit committee meets with Surgical's financial officers and employees to review
Surgical's financial statements and reporting practices, the system of internal
accounting controls, the management suggestions from Surgical's independent
auditors, and the scope, results, and fees associated with services performed by
the independent auditors.
Members of the compensation committee for the 1996 and 1995 fiscal years
were Rex Crosland and Reed Fogg. The compensation committee met once during the
fiscal year ended March 31, 1995, and once during the fiscal year ending March
31, 1996. The compensation committee recommends to the board of directors
compensation of the officers of Surgical and the members of the board of
directors and its committees, except the compensation committee.
Surgical also has an option committee which determines the number, if any,
and terms of any options granted by Surgical, except to members of such
committee. Members of the option committee for the 1996 and 1995 fiscal years
are Reed Fogg and Donald A. Spring. The option committee met once during the
fiscal year ended March 31, 1995, and once during the fiscal year ending March
31, 1996.
Compliance With Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3, 4, and 5 and amendments thereto,
furnished to Surgical during or respecting its last fiscal year, no director,
officer, beneficial owner of more than 10% of any class of equity securities of
Surgical or any other person known to be subject to Section 16 of the Exchange
Act failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act for the current fiscal year or prior fiscal years.
4Health
4Health's articles of incorporation provide that members of the board of
directors are elected annually to serve until the next annual meeting of
stockholders and thereafter until such director's successor is elected and
qualified. The holders of 4Health Series A Stock have the right to elect one
director. Officers are elected at the annual meeting of directors and serve at
the pleasure of the board of directors.
The following table sets forth the name, age, and position of each director
and executive officer of 4Health.
<TABLE>
<CAPTION>
Elected/ Term
Name Age Position Appointed Expires
<S> <C> <C> <C> <C>
R. Lindsey Duncan 33 Chairman, Chief Executive Officer, 1993 1996
and Director
Richard B. Carlock 44 Chief Financial Officer and Treasurer 1995 N/A
Cheryl M. Wheeler 35 Secretary and Director 1993 1996
Henry S. Stone 49 Vice-President of Operations, General 1993 1996
Counsel, and Director
David A. Melman 53 Director 1995 1996
Rick L. Swetman 42 Vice-President Sales 1996 N/A
</TABLE>
Mr. Melman was elected by the holders of the 4Health Series A Stock.
R. Lindsey Duncan, the founder of 4Health, is a nutritionist certified by
the National Institute of Nutritional Education, an industry accrediting body.
Since the mid-1980s, he has owned, operated, and been the principal nutritionist
of Home Nutrition Clinic, Santa Monica, California. In January 1988, Mr. Duncan
began formulating his own nutritional supplements. In 1993, he organized
4Health, and contributed the nutritional supplement formulations to it in
exchange for common stock. Mr. Duncan currently sits on the editorial board of
Healthy & Natural, a nationally distributed health publication, and acts as the
nutritional consultant to the publication, which also features one of his
articles each month. Mr. Duncan is a member of the National Nutritional Foods
Association, the American Herbal Products Association, and the Herb Research
Foundation.
Richard B. Carlock, has served as 4Health's chief financial officer and
treasurer since March 1995. Prior to joining 4Health, he served as chief
financial officer, treasurer, and vice-president of Electromedics, Inc., Parker,
Colorado, a medical device manufacturer, for the period from 1989 to 1994.
Previously, Mr. Carlock served as chief financial officer and corporate
secretary of Evans Bio Control, Inc., Broomfield, Colorado, a biotechnology firm
specializing in entomology research development (1987 to 1989) and as vice-
president of technical services and vice-president of finance at Information
Solutions, Inc., Englewood, Colorado, a software sales and development company,
from 1983 to 1987. Mr. Carlock is a certified public accountant who practiced
with Price Waterhouse & Company and Main La Frentz & Company prior to his
financial experience in industry. He received a bachelor of arts degree in
psychology in 1973 and a master of science degree in accounting from New York
University's Stern Business School in 1976.
Cheryl M. Wheeler coordinates Mr. Duncan's industry seminars, speeches, and
other public appearances and related marketing activities. For in excess of
five years prior to her joining 4Health, Ms. Wheeler was a nutritionist, a
professional stuntwoman, and martial arts expert. Ms. Wheeler is a nutritionist
certified by the National Institute of Nutritional Education.
Henry S. Stone, associated with Henry Stone A.P.C., a member of Stone &
Bender, A.P.C., since 1984, has practiced business and real estate law in Los
Angeles, California, for approximately 25 years. He has served as a director of
4Health since its inception and assumed the full-time position of general
counsel and vice-president of operations in June 1996. Mr. Stone earned a
bachelor of science degree in accounting from the University of Florida, a juris
doctorate from Pepperdine University School of Law, and an LLM in taxation from
New York University.
David A. Melman, was appointed to 4Health's board of directors in September
1995. Since 1984, Mr. Melman has been executive vice-president, general
counsel, secretary, and a member of the board of directors of XCL, Ltd., a
Lafayette, Louisiana, based oil and gas exploration and production company with
activities concentrated in China. Mr. Melman also serves on the board of
directors of Sheffield Exploration Company, Inc., a Denver, Colorado, based
diversified energy company. Mr. Melman received a bachelor of science degree in
economics from Queens College, a juris doctorate from Brooklyn Law School, and
an LLM in taxation from New York University Graduate School of Law.
Rick L. Swetman, joined 4Health as vice-president of sales in March 1996.
Prior to joining 4Health, Mr. Swetman was an owner of Sanford Rose Consultants
from August 1995 through March 1996, served as general manager for Pure-Gar, a
division of Basic Vegetable Products, from 1994 to 1995 and served as director
of marketing and sales at Pure-Gar from 1992 to 1993. From 1990 to 1992, Mr.
Swetman was vice-president of sales for Earthwise, Inc. (Boulder, Colorado ),
and from 1988 to 1990, served as national sales manager for Nestle Foods
(Purchase, New York). From 1982 to 1988, he served in various sales management
positions for Tembrands. Mr. Swetman was a unit manager for Proctor and Gamble
from 1980 to 1982. Mr. Swetman holds four bachelor of science degrees from the
United States Military Academy, West Point, in math, chemistry, electrical
engineering and mechanical engineering.
EXECUTIVE COMPENSATION
Surgical
Summary Compensation
The following table sets forth the annual and long-term compensation
awarded to, earned by, or paid to the chief executive officer of Surgical, Rex
Crosland, for the periods indicated. None of Surgical's other four most highly
compensated executive officers as of the end of the last fiscal year received a
total annual salary and bonuses in excess of $100,000 for all services rendered
in all capacities to Surgical, including its subsidiaries.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Year Compen- Stock Options/ LTIP Compen-
Name and Ended Salary Bonus sation Award(s) SARs Payouts sation
Principal Position Mar. 31 ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rex Crosland 1996 $50,000 -- $3,698(1) -- -- -- --
Chief Executive Officer 1995 $50,000 -- $3,698(1) -- -- -- --
1994 $50,000 -- $3,698(1) -- 50,000 -- --
</TABLE>
[FN]
(1) Consists of reimbursement of automobile expenses.
Option/SAR Grants in Last Fiscal Year
The following table sets forth information respecting all individual grants
of options and stock appreciation rights ("SARs") made during the last completed
fiscal year to the chief executive officer of 4Health.
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Annual Rates of Stock
Appreciation for
Individual Grants Option Term
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees During Base Price Expiration
Name Granted (#) Fiscal Year ($/share) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Rex Crosland 105,000(1) 10.4% $2.00 6/30/98 $24,419 $50,400
Chief Executive
Officer
</TABLE>
[FN]
(1) These options were exercised by Mr. Crosland for a cash payment to Surgical
of $210,000 on April 10, 1996. The last reported price for the Surgical
Stock as of that date was $3.625, resulting in an aggregate value realized
by Mr. Crosland of $170,625.
Ten Year Option/SAR Repricings
Inasmuch as Surgical has adjusted or amended the exercise price of stock
options or SARs previously awarded, the following table sets forth certain
information respecting all such repricings of options or SARs held by any
executive officer during the last 10 completed fiscal years.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g)
Length of
Number of Market Price Original
Securities of Stock at Exercise Price Option Term
Underlying Time of at Time of Remaining at
Options/SARs Repricing or Repricing or New Date of
Repriced or Amendment Amendment Exercise Repricing or
Name Date Amended ($) ($) Price Amendment
<S> <C> <C> <C> <C> <C> <C>
Rex Crosland 3/18/96 55,000/-- $2.00 $8.25 $2.00 15 months
3/18/96 50,000/-- $2.00 $4.675 $2.00 28 months
Rockwell D Schutjer 3/18/96 20,000/-- $2.00 $7.50 $2.00 15 months
3/18/96 30,000/-- $2.00 $4.25 $2.00 28 months
3/18/96 38,500/-- $2.00 $1.75 $2.00 53 months
Todd B. Crosland 3/18/96 22,000/-- $2.00 $8.25 $2.00 15 months
3/18/96 33,000/-- $2.00 $4.675 $2.00 28 months
3/18/96 38,500/-- $2.00 $1.92 $2.00 53 months
</TABLE>
Executive Compensation
Surgical has no employment agreement with Rex Crosland or any other
executive officer. The executive officers are compensated under oral
arrangements at the following annual salaries: Rex Crosland, $50,000, Rockwell
D. Schutjer, $76,500, and Todd B. Crosland, $76,500. Surgical reimburses
certain persons specified automobile expenses and provides medical insurance.
Compensation to Rex and Todd Crosland will terminate at the Effective Time of
the Merger, except that as a director of the Surviving Corporation Todd B.
Crosland will receive compensation for meetings of its board of directors that
he attends. Rockwell D. Schutjer will continue as a member of the board of
directors and employee to the Surviving Corporation.
In connection with the completion of the Merger, Mr. Schutjer will enter
into a three-year employment agreement with the Surviving Corporation pursuant
to which Mr. Schutjer will serve as the general manager of the Transflator(R)
business unit. The employment agreement provides for an annual salary of
$80,000 and health, vacation, and similar benefits consistent with the general
policies of the Surviving Corporation for employees at a like level. The annual
salary of Mr. Schutjer can be increased or bonuses paid to Mr. Schutjer at the
discretion of the board of directors. Mr. Schutjer's employment agreement
cannot be terminated by the Surviving Corporation without penalty for any reason
other than cause, which is defined as gross negligence in the performance of his
duties or a conviction for fraud or dishonesty against the Surviving
Corporation.
Options to Executive Officers, Directors, and Others
The following table shows all options to purchase Surgical Stock as
currently outstanding and as to be adjusted to give effect to the Surgical
Conversion Ratio in the Merger.
<TABLE>
<CAPTION>
Before Merge After Merger(1)
Name of Person Date Number of Exercise Number of Exercise
or Group Expires Shares Price Shares Price
<S> <C> <C> <C> <C> <C>
Rockwell D. Schutjer(2) 6/30/98 18,000 2.00 9,000 4.00
3/18/01 265,000 2.00 132,500 4.00
Todd B. Crosland(2) 6/30/98 3,000 2.00 1,500 4.00
3/18/01 265,000 2.00 132,500 4.00
Non-affiliate employees
and others 6/30/98 45,000 2.00 22,500 4.00
8/24/97 15,000 6.75 7,500 13.50
10/29/97 10,000 5.25 5,000 10.50
8/10/98 10,000 4.25 5,000 8.50
9/24/99 10,000 4.375 5,000 8.75
9/6/00 10,000 1.75 5,000 3.50
Total 651,000 2.23 325,500 4.45
</TABLE>
[FN]
(1) Adjusted to give effect to the Surgical Conversion Ratio. Holders of
options not exercised prior to the Effective Time of the Merger will not
receive Warrants in the Merger for shares of Surgical Stock issuable on
exercise of such options.
(2) Options for both Mr. Schutjer and Mr. Crosland include options to purchase
265,000 shares of Surgical Stock each which are conditioned on approval of
the LTSIP by the Surgical Stockholders. The Surviving Corporation can
require exercise of these options if the Surgical Stock trades at or above
$4.00 per share for a 30 day period.
The above options are exercisable by paying cash, delivering a promissory
note, or delivering shares of common stock that have been held for more than six
months or options to purchase Common Stock.
4Health
Summary Compensation
The following table sets forth for each of the last three fiscal years the
annual and long term compensation earned by, awarded to, or paid to each person
who served as the chief executive officer of 4Health during the last fiscal
year.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Underlying All Other
Year Compen- Stock Options/ LTIP Compen-
Name and Principal Ended Salary Bonus sation Award(s) SARs Payouts sation
Position Dec. 31 ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Lindsey Duncan 1995 $84,880 -- $4,076 -- 70,000 -- --
(CEO) 1994 $27,023 -- -- -- -- --
1993 -- -- -- -- -- --
</TABLE>
Option/SAR Grants in Fiscal 1995
The following table sets forth information respecting all individual grants
of options and stock appreciation rights ("SARs") made during fiscal 1995 to the
chief executive officer of 4Health.
<TABLE>
<CAPTION>
Potential Realized
Value at Assumed
Annual Rates of Stock
Appreciation for
Individual Grants Option Term
(a) (b) (c) (d) (e) (f) (g)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees During Base Price Expiration
Name Granted (#) Fiscal Year ($/share) Date 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
R. Lindsey Duncan 23,333 12.5% $5.00 04/20/2000 $8,999 $47,892
(CEO) 23,333 12.5% $7.50 04/20/2000 -- $12,893
23,333 12.6% $8.75 04/20/2000 -- --
Total 70,000 37.6% $8,999 $60,785
</TABLE>
Aggregate Option/SAR Exercises in Fiscal 1995 and FY-End Option/SAR Values
The following table sets forth information respecting the exercise of
options and SARs during the 1995 fiscal year by the chief executive officer of
4Health and the fiscal year end values of unexercised options and SARs.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at FY Options/SARs at FY
End (#) End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C>
R. Lindsey Duncan
(CEO) -- -- 70,000 $23,333
</TABLE>
Options to Executive Officers, Directors, and Others
The following table shows all outstanding options to purchase 4Health
Common Stock.
<TABLE>
<CAPTION>
Before Merger After Merger(1)
Name of Person Date Number of Exercise Number of Exercise
or Group Expires Shares Price Shares Price
<S> <C> <C> <C> <C> <C>
R. Lindsey Duncan 4/20/00 23,333 $5.00 35,109 $3.32
4/20/00 23,333 7.50 35,109 4.98
4/20/00 23,334 8.75 35,111 5.82
3/31/01 220,000 6.00 331,034 3.99
Richard B. Carlock 4/20/00 16,667 $5.00 25,079 $3.32
4/20/00 16,667 7.50 25,079 4.98
4/20/00 16,666 8.75 25,077 5.82
4/25/01 7,500 6.00 11,285 3.99
Cheryl M. Wheeler 4/20/00 6,667 $5.00 10,032 $3.32
4/20/00 6,667 7.50 10,032 4.98
4/20/00 6,666 8.75 10,030 5.82
6/10/01 5,250 $6.25 7,900 4.15
Henry S. Stone 4/15/01 5,000 $6.00 7,523 $3.99
6/10/01 11,111 $6.25 16,718 $4.15
6/10/01 11,111 $7.50 16,718 $4.98
6/10/01 11,111 $8.75 16,718 $5.82
David A. Melman 4/15/01 5,000 $6.00 7,523 $3.99
Rick L. Swetman 3/25/01 4,000 $6.25 6,019 $4.15
3/25/01 5,000 $7.50 7,524 $4.98
3/25/01 6,000 $8.75 9,028 $5.82
Non-affiliate (2) 168,916 $6.25-$12.00 254,163 $4.15 - $5.82
employees
Total 599,999 $6.70(3) 902,800 $4.45(3)
</TABLE>
[FN]
(1) Adjusted to give effect to the 4Health Common Stock Conversion Ratio.
Holders of options not exercised on or before the Effective Time will not
have the right to receive Contingent Shares.
(2) Various dates between April 2000 and June 2001.
(3) Weighted average exercise price.
All outstanding options to purchase 4Health Common Stock vest as follows:
(i) all options exercisable at $5.00 and $6.00 have already vested; (ii) all
options exercisable at $6.25 vest one year from the date of grant; (iii) all
options exercisable at $7.50 vest two years from the date of grant; and (iv) all
options exercisable at $8.75 vest three years from the date of grant. Since all
such options have five-year terms, in each case the date of grant is five years
prior to the expiration date set forth in the table immediately above.
If the LTSIP is approved by the Surgical Stockholders at the Stockholders'
Meeting, the above options will be exchanged for new options to be issued under
such newly adopted plan. See "OTHER SURGICAL STOCKHOLDER MATTERS."
CERTAIN TRANSACTIONS
Surgical
South Decker Lake Lane Facilities
In May 1993, Surgical's president, Rex Crosland, purchased an approximately
43,000 square foot office, manufacturing, research, and warehouse facility,
including certain office and manufacturing equipment, located at 2801 South
Decker Lake Lane, Salt Lake City, Utah, from an unrelated seller at a purchase
price of $2,200,000. Surgical subsequently leased the property from Mr. Crosland
and incurred total rental expenses during the fiscal year ended March 31, 1994,
of approximately $25,500. In February 1994, Surgical purchased the facilities
and related machinery and equipment from Mr. Crosland in consideration of a
$1,570,600 promissory note and $1,076,000 paid by issuing 400,000 shares of its
restricted common stock. The 400,000 shares were valued at $2.69 per share, an
approximate 14% discount from the market price of $3.124 on the date the
transaction was approved by the board of directors. This discount was based on
the restricted status of the securities and the fact that such a large block of
thinly traded stock could not be readily sold. The promissory note was issued
bearing interest at 7.25% per annum with monthly payments through July 1, 1994.
At the time of completing the purchase of the facility, Surgical also purchased
certain office equipment from Mr. Crosland for $71,600, the approximate fair
market value of such items as of the date of purchase.
On April 22, 1994, Surgical refinanced its $1,576,000 note to Mr. Crosland
by issuing a long-term note payable in the amount of $1,000,000 to an insurance
company and a short-term note payable in the amount of $576,000 to a bank. The
$1,000,000 note payable bears interest at 8.25% with monthly principal and
interest payments of $8,521 through May 1, 1999, at which time the remaining
balance is due, and is secured by the property and building. This note is
currently subject to acceleration by the holder based on a "due-on-sale" clause
and will become subject to acceleration based on the completion of the Merger.
The holder has not indicated to Surgical that it intends to exercise this right.
The $570,600 note payable was paid in full by Surgical in August 1994 from
proceeds from the sale of common stock and the refinancing of Surgical's
revolving line of credit.
Effective March 31, 1995, Surgical sold the facilities and related
machinery and equipment, excluding 5.3 acres of contiguous unimproved property
(see below), to an unrelated purchaser for $2,100,000 paid by issuing to
Surgical a promissory note in the amount of $981,375 on the same terms as
Surgical's long-term note payable, and paying the remaining purchase price in
cash to Surgical in April 1995. Surgical rents a portion of the facilities for
its offices and operations for monthly payments of approximately $1,900.
On May 8, 1995, Surgical sold approximately 5.3 acres of contiguous
unimproved property previously purchased from Mr. Crosland, but excluded in the
sale referred to in the preceding paragraph, for $397,350 in cash.
The foregoing transactions between Surgical and Mr. Crosland were not the
result of arm's length negotiations, but in the opinion of management, are on
terms as favorable to Surgical as could be obtained in arm's length
transactions.
Sale of Specialty Metals Fabrication Segment
Surgical sold substantially all of the assets and operations comprising its
specialty metals fabrication division operated under the name Rex Industries
("Rex) pursuant to an Acquisition Agreement closed January 4, 1996, effective
January 1, 1996, with Rex Industries Acquisition Corporation, owned and operated
by Todd B. Crosland, an officer and director of Surgical (the "Acquiring
Company"). Under the terms of the Acquisition Agreement, the Acquiring Company
acquired substantially all of the assets and operations of Rex for consideration
of $3.6 million, consisting of a cash payment of $2,775,543, the assumption of
$224,456 in liabilities, and the balance in other consideration convertible into
cash by January 1997. At the closing, the Acquiring Company withheld $100,000
in cash from the purchase price as security for Rex's guaranty of payment on its
accounts receivable and indemnification against certain liabilities. Upon the
expiration of twelve months after the effective date, the Acquiring Company will
pay to Rex the amount withheld, less any uncollected accounts receivable and
liabilities or expenses indemnified for by Rex under the agreement. In
addition, in connection with the sale of its assets, Rex transferred to the
Acquiring Company the right to the use of the name "Rex Industries, Inc."
The assets sold included all tangible personal property; real property and
buildings; all inventory; accounts receivable and cash and cash equivalents
received therefor; contract rights; cash, bank deposits, and cash equivalents;
customer and supplier lists; warranties; insurance contracts; and other tangible
and intangible assets, but specifically excluding the note payable by Surgical
to Rex with an outstanding principal balance of $179,268.80 as of the date of
the Acquisition Agreement; certain of Rex's rights, claims, or causes of action
relating to the assets sold, all corporate books and records not relating to the
assets sold; and Rex's employee benefit agreements, plans, or similar
arrangements. The principle followed in determining the amount of consideration
to be paid for the acquired assets is discussed in the accompanying pro forma
financial information.
Todd B. Crosland, a director of Surgical, is also an executive officer,
director, and principal owner of the Acquiring Company. Because of such, the
board of directors of Surgical appointed Donald A. Spring and Reed Fogg, two
disinterested members of Surgical's board of directors, to serve as a special
committee with the purpose of evaluating the proposed transaction (the "Asset
Disposition Committee"). The remaining directors agreed to concur in the
decision of the disinterested Asset Disposition Committee. The Asset
Disposition Committee, after reviewing the terms of the offer and a valuation of
Rex prepared by outside certified public accountants, determined that it was in
the best interests of Surgical to accept the terms of the offer and dispose of
the assets and operations of Rex for the agreed terms. This transaction was not
the result of arm's length negotiation.
As a result of this sale, the Surgical's specialty metals fabrication
division was terminated.
4Health
Sale of 4Health Common Stock
In connection with the organization of 4Health on February 17, 1993,
4Health issued to R. Lindsey Duncan 4,000,000 shares of 4Health Common Stock in
consideration of his transfer of the Nature's Secret(R) nutritional supplement
product formulas and related items. This transaction was not the result of
arm's length negotiation. During 1995, 4Health issued 7,500 shares of 4Health
Common Stock for services valued at $30,000.
During 1994, 4Health sold an aggregate of 1,784,286 shares of 4Health
Common Stock for $958,533 in cash and services valued at $52,772.
Sale of Preferred Stock
During 1995, 4Health sold 15,000 shares of 4Health Series A Stock, par
value $1.00 per share, for an aggregate price of $1,500,000, or $100 per share,
to a foreign institutional investor. 4Health used the proceeds from the sale of
the 4Health Series A Stock for working capital and investment purposes.
Loans to and from Stockholders
Initially, 4Health borrowed funds from R. Lindsey Duncan, its principal
stockholder, to fund its short-term working capital requirements. The
outstanding principal balance due Mr. Duncan was $71,198 and $71,198 as of
December 31, 1995 and 1994, respectively. 4Health recorded interest expense of
$4,983 and $11,750 for the fiscal years ended December 31, 1995, and 1994,
respectively.
In order to fund the downpayment of 4Health's principal executive offices
at 5485 Conestoga Court in Boulder, Colorado, purchased for an aggregate of
$1,350,000, Mr. Duncan loaned 4Health $200,000 for the purchase price and
related costs on March 31, 1994. The loan was repayable in annual reduction
payments of $50,000 due on or before December 31 of each year, with all unpaid
principal and interest on the unpaid principal balance at 7% per annum due on
March 31, 1997, except that the loan was to be repaid earlier out of proceeds
from the 1994 sales of 4Health securities, so long as the maximum number of
shares in that offering had been subscribed. As of December 31, 1995, $82,675
remained due and payable to Mr. Duncan on this loan.
In January 1995, 4Health loaned $50,000 to a stockholder of 4Health which
was repaid in April 1996 by the cancellation of 10,000 shares of 4Health Common
Stock previously held by such stockholder.
PRINCIPAL STOCKHOLDERS
Surgical
The table below sets forth information as to each person owning of record
or who was known by Surgical to own beneficially more than 5% of the 4,542,216
shares of issued and outstanding Surgical Stock as of June 5, 1996, and
information as to the ownership of Surgical's Common Stock by each of its
directors and by the directors and executive officers as a group. Except as
otherwise indicated, all shares are owned directly, and the persons named in the
table have sole voting and investment power with respect to shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address Nature of Number of
of Beneficial Owners Ownership Shares Owned Percent
<S> <C> <C> <C>
Principal Stockholder
Rex Crosland(1) Common Stock 1,405,003 31.0%
2801 South Decker Lake Lane
Salt Lake City, Utah 84119
Directors
Rex Crosland - - - - - - - - - See Above - - - - - - -
Rockwell D. Schutjer(1)(2) Common Stock 193,724 4.3%
Options(4) 283,000 5.9%
Total 476,724 9.9%
Todd B. Crosland(1) Common Stock(3) 223,439 4.9%
Options(4) 268,000 5.6%
Total 491,439 10.2%
Reed Fogg Options(5) 25,000 0.5%
Donald A. Spring Options(5) 25,000 0.5%
All Executive Officers and Common Stock 1,822,166 40.1%
Directors as a Group (five Options 601,000 11.7%
persons) Total 2,423,166 47.1%
</TABLE>
[FN]
(1) Todd B. Crosland is the adult son and Rockwell D. Schutjer is the son-in-
law of Rex Crosland. Rex Crosland disclaims any beneficial ownership in
the shares held by such persons.
(2) Includes shares held in the name of spouse of which the person is deemed a
beneficial owner.
(3) Includes shares held by TBC Limited, a family partnership of which Todd B.
Crosland is the general partner.
(4) Options for both Mr. Schutjer and Mr. Crosland include options to purchase
265,000 shares of Surgical Stock, each of which are conditioned on approval
of the LTSIP by the Surgical Stockholders. Surgical Stockholders owning
greater than a majority of the outstanding Surgical Stock have committed to
vote to approve the LTSIP. Since approval of the LTSIP is assured, such
options are included in the foregoing table. The Surviving Corporation can
require the exercise of these options if the Surgical Stock trades at or
above $4.00 per share for a 30 day period.
(5) See "EXECUTIVE COMPENSATION: Options Executive Officers, Directors, and
Others."
4Health
The table below sets forth information as to each person owning of record
or who was known by 4Health to own beneficially more than 5% of the 5,731,381
shares of issued and outstanding 4Health Common Stock as of June 12, 1996, and
information as to the ownership of 4Health Common Stock by each of its directors
and by all directors and executive officers as a group. Except as otherwise
indicated, all shares are owned directly, and the persons named in the table
have sole voting and investment power with respect to shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Name and Address Nature of Number of
of Beneficial Owners Ownership Shares Owned Percent
<S> <C> <C> <C>
Principal Stockholder
R. Lindsey Duncan Common Stock 3,833,333 66.9%
5485 Conestoga Court Options 290,000 4.8%
Boulder, CO 80301 Total 4,123,333 68.5%
Directors and Executive Officers
R. Lindsey Duncan - - - - - -- - - See Above - - -- - - - - -
Richard B. Carlock Common Stock 40,000 0.7%
Options 57,500 1.0%
Total 97,500 1.7%
Cheryl M. Wheeler Options 25,250 0.4%
Henry S. Stone Common Stock 30,000 0.5%
Options 38,333 0.7%
Total 68,333 1.2%
David A. Melman Common Stock 24,500 0.4%
Options 5,000 0.1%
Total 29,500 0.5%
Total 29,500 0.5%
Rick L. Swetman Options 15,000 0.3%
All Executive Officers and Common Stock 3,927,833 68.5%
Directors as a Group (seven Options 431,083 7.0%
persons) Total 4,358,916 70.7%
</TABLE>
In addition to the foregoing holders of 4Health Common Stock, all of the
15,000 shares of 4Health Series A Stock is held by Ivory & Sime Enterprises
Capital PLC, 1 Charlotte Square, Edinburgh, EH2 4DZ, Scotland. If such shares
were converted into shares of 4Health Common Stock at the rate of 16.667 shares-
to-1 as set forth in the designation for the 4Health Series A Stock, the issued
and outstanding shares of 4Health Common Stock would increase to 5,981,381 of
which Ivory & Sime Enterprises Capital PLC would hold 250,000 shares, or
approximately 4.2% of the then issued and outstanding 4Health Common Stock.
Pro Forma after the Merger
After completion of the Merger, there will be approximately 11,271,112
shares of Surviving Corporation New Common Stock issued and outstanding, without
giving effect to the exercise of any dissenters' rights, the issuance of any
Contingent Shares, or the exercise of any Warrants. The table below sets forth
information as to the number of securities in the Surviving Corporation that
will be held by each person known by either Surgical or 4Health to be the record
or beneficial owner of more than 5% of the Surviving Corporation's Common Stock,
by each director and executive officer, and by the directors and executive
officers as a group. The numbers of shares of New Common Stock, options, and
Warrants has been adjusted to give effect to the application of the Surgical
Conversion Ratio, the 4Health Common Stock Conversion Ratio, and the 4Health
Series A Conversion Ratio, in connection with the Merger, and the exchange of
4Health options outstanding into New LTSIP Options. See "OTHER SURGICAL
STOCKHOLDER MATTERS."
<TABLE>
<CAPTION>
Name and Address Nature of Number of
of Beneficial Owners Ownership Shares Owned Percent
<S> <C> <C> <C>
Principal Stockholders
R. Lindsey Duncan Common Stock 5,767,901 51.2%
Options 436,354 3.7%
Total 6,204,255 53.0%
Rex Crosland Common Stock 702,502 6.2%
Warrants 351,251 3.0%
Total 1,053,753 9.1%
Directors and Executive Officers
R. Lindsey Duncan - - - - -- -- -- See Above - - - - -- - - -
Richard B. Carlock Common Stock 60,186 0.5%
Options 86,518 0.8%
Total 146,704 1.3%
Cheryl Wheeler Options 37,993 0.3%
Henry S. Stone Common Stock 45,140 0.4%
Options 57,678 0.5%
Total 102,818 0.9%
David Melman Common Stock 36,864 0.3%
Options 7,523 0.1%
Total 44,387 0.4%
Rockwell D. Schutjer Common Stock 96,862 0.9%
Options 141,500 1.2%
Warrants 48,431 0.4%
Total 286,793 2.5%
Todd B. Crosland Common Stock 111,720 1.0%
Options 134,000 1.2%
Warrants 55,860 0.5%
Total 301,580 2.6%
Rick L. Swetman Options 22,570 0.2%
All Executive Officers and Common Stock 6,118,673 54.3%
Directors as a Group (seven Options 924,136 7.6%
persons) Warrants 104,291 0.9%
Total 7,147,100 58.1%
</TABLE>
TAX CONSEQUENCES
General
The following discussion summarizes the principal United States federal
income tax consequences of the proposed Merger and the related recapitalization
of Surgical (the "Recapitalization") under the Internal Revenue Code of 1986, as
amended (the "Code"). It is not feasible to comment on all of the federal
income tax consequences of the Merger and the Recapitalization. The following
summary does not include any discussion with respect to the consequences of the
Merger or the Recapitalization under foreign, state or local taxation laws and
regulations. Each holder of Surgical Stock, 4Health Common Stock or 4Health
Series A Stock should consult his or her own tax advisor regarding the tax
consequences of the proposed Merger and Recapitalization in light of such
holder's own situation, including the application and effect of any state, local
or foreign income and other laws.
Special tax consequences not described below may be applicable to
particular classes of taxpayers, including financial institutions, broker-
dealers, persons who are not citizens of the United States or which are foreign
corporations, foreign partnerships or foreign estates or trusts as to the United
States, and the holders who acquired their Surgical Stock, 4Health Common Stock
or 4Health Series A Stock through the exercise of an employee stock option or
otherwise as compensation.
The Merger has been structured to qualify as a tax-free reorganization
under the provisions of section 368(a) of the Code and the Recapitalization has
been structured to qualify as a tax-free reorganization under the provisions of
section 368(a) of the Code. NO RULINGS FROM THE IRS AS TO THE TAX CONSEQUENCES
OF THE MERGER, THE RECAPITALIZATION OR ANY OTHER MATTER DISCUSSED HEREIN HAS
BEEN OR WILL BE REQUESTED. Instead, the obligation of both 4Health and Surgical
to consummate the Merger and Recapitalization is conditioned upon their receipt
of tax opinions from the firm of Satterlee Stephens Burke & Burke LLP, as to the
tax consequences of the Merger, and the firm of Kruse, Landa & Maycock, L.L.C.,
as to the tax consequences of the Recapitalization.
The following discussion is based on the opinions of the firms of Satterlee
Stephens Burke & Burke LLP and Kruse, Landa & Maycock, L.L.C., the pertinent
provisions of the Code, the applicable regulations promulgated by the Treasury
Department under the Code (the "Regulations"), and judicial and administrative
interpretations of the Code and Regulations. Each stockholder should be aware
that the Code, the Regulations, and interpretations are subject to change and
that such changes may be given retroactive effect. In addition, there can be no
assurance that the Internal Revenue Service (the "IRS") will agree with the
interpretations of the Code and the Regulations set forth below.
Federal Tax Consequences of the Merger
The opinion of the firm of Satterlee Stephens Burke & Burke LLP will be to
the effect that:
(a) The Merger will be treated for federal income tax purposes as a
reorganization meeting the requirements of section 368(a) of the Code.
(b) 4Health and Surgical will each be a "party to the
reorganization," within the meaning of section 368(b) of the Code, with
respect to the Merger.
(c) No gain or loss will be recognized by 4Health or Surgical as a
result of the Merger.
(d) Surgical's basis in each 4Health asset received by Surgical in
the Merger generally will be the same as 4Health's basis in the asset
immediately prior to the Merger.
(e) Surgical's holding period for tax purposes of each 4Health asset
received by Surgical in the Merger generally will include the holding
period during which the asset was held by 4Health.
(f) No gain or loss will be recognized for federal income tax
purposes by the holders of the 4Health Common Stock or 4Health Series A
Stock on receipt by them of New Common Stock in exchange for their 4Health
stock.
(g) The basis of the New Common Stock (including Contingent Shares)
received by the holders of the 4Health Common Stock and 4Health Series A
Stock in the Merger in exchange for their 4Health Common Stock and 4Health
Series A Stock will, in the aggregate, be the same as the aggregate basis
for the 4Health Common Stock and 4Health Series A Stock surrendered in
exchange therefor. Until the final distribution of Contingent Shares of
New Common Stock has been made, the interim basis of each share of New
Common Stock will be determined as though the maximum number of Contingent
Shares had been issued to the holders of 4Health Common Stock and 4Health
Series A Stock.
(h) The holding period for federal income tax purposes of the New
Common Stock received by the holders of the 4Health Common Stock and
4Health Series A Stock in the Merger in exchange for their 4Health Common
Stock and 4Health Series A Stock will include the period during which the
4Health Common Stock and 4Health Series A Stock exchanged therefor was
held, assuming that the 4Health stock was held as a capital asset.
(i) A holder of 4Health Common Stock or 4Health Series A Stock who
receives cash in lieu of a fractional share of New Common Stock will be
treated as having received such fractional share of New Common Stock and
having sold it to Surgical. The holder of 4Health Common Stock or 4Health
Series A Stock will generally recognize capital gain or loss equal to the
difference between the basis he would have had for the fractional share of
New Common Stock and the cash received.
Holders of the 4Health Common Stock or 4Health Series A Stock and holders
of the Surgical Stock who receive cash as a result of perfecting their
dissenters' rights with respect to the Merger will generally be taxed on any
gain recognized (or entitled to take any loss with respect thereto) measured by
the difference between the amount of cash received and the basis of such stock
in the hands of the holder of the 4Health Common Stock, 4Health Series A Stock,
or Surgical Stock sold as a result of such dissent. Assuming the 4Health Common
Stock, 4Health Series A Stock, or Surgical Stock is held as a capital asset, the
gain or loss will be capital gain or loss, long-term if the stockholder has held
the stock sold for more than one year. Under certain circumstances, however,
the amount of cash received by such a dissenting holder will be treated as a
dividend and taxed as ordinary income. Since this will depend on the
stockholder's particular circumstances, each holder of 4Health Common Stock,
4Health Series A Stock, or Surgical Stock who contemplates exercising
dissenters' rights should consult his or her own tax advisors as to the tax
treatment of the payment to be made with respect to his or her stock.
Federal Tax Consequences of the Recapitalization
Generally, no gain or loss is recognized by stockholders of a corporation
upon a recapitalization, except to the extent the stockholders receive property
other than stock or securities of the corporation. Because warrants to purchase
stock of a corporation and cash payments in lieu of fractional shares are not
stock or securities for these purposes, the fair market value of the Warrants
and the difference between the holder's basis in any fractional share and the
cash received will be treated as gain.
The opinion of the firm of Kruse, Landa & Maycock, L.L.C., will be to the
effect that:
(a) The Recapitalization will be treated for federal income tax
purposes as a reorganization meeting the requirements of section 368(a) of
the Code.
(b) Surgical will be a "party to the reorganization," within the
meaning of section 368(b) of the Code, with respect to the
Recapitalization.
(c) No gain or loss will be recognized by Surgical as a result of the
Recapitalization.
(d) Assuming the fair market value of the Warrants is zero, no gain
or loss will be recognized for federal income tax purposes by the holders
of the Surgical Stock on receipt by them pursuant to the Recapitalization
of New Common Stock and Warrants in exchange for their Surgical Stock.
(e) The basis of the New Common Stock received by the holders of the
Surgical Stock in exchange for their Surgical Stock pursuant to the
Recapitalization will, in the aggregate, be the same as the aggregate basis
for the Surgical Stock surrendered in exchange therefor, reduced by the
fair market value, if any, of the Warrants received by such stockholder and
increased by the amount of any gain recognized by such stockholder on the
exchange.
(f) The holding period for federal income tax purposes of the New
Common Stock received by the holders of the Surgical Stock in exchange for
their Surgical Stock pursuant to the Recapitalization will include the
period during which the Surgical Stock exchanged therefor was held,
assuming that the Surgical Stock was held as a capital asset.
(g) A holder of Surgical Stock who receives cash in lieu of a
fractional share of New Common Stock and fractional Warrant will be treated
as having received such fractional share of New Common Stock and Warrant
and having sold it to Surgical. The holder of Surgical Stock will
generally recognize capital gain or loss equal to the difference between
the cash received and the basis in the Surgical Stock surrendered.
To the extent that the fair market value of the Warrants as of the
Effective Time is greater than zero, holders of Surgical Stock will recognize
gain to the extent of the fair market value of the Warrants received. This gain
will generally be treated as capital gain.
The opinions of counsel described herein are subject to a number of
assumptions and qualifications that are critical to the opinions and are based
on certain factual information, representations, and warranties. If such
factual information or the representations, warranties, or assumptions are not
true when made or subsequently change, the opinions of counsel may be
inapplicable, and the Merger and/or the Recapitalization may be a taxable
transaction to some or all of the participants.
An opinion of counsel does not provide the same degree of assurance with
respect to the tax consequences of a transaction as would a private letter
ruling from the IRS. An opinion, unlike a private letter ruling, does not have
a binding effect on the IRS or the courts and only represents counsel's legal
judgment as to the tax consequences based on current provisions of the Code and
Regulations and the judicial and administrative interpretations thereof. The
Code and the Regulations and the interpretations thereof by the IRS and the
courts are subject to change, which may adversely affect the tax treatment of
the Merger and which may be given retroactive effect. The IRS may take a
position contrary to the opinions of counsel described herein and, if the matter
is litigated, a court may reach a decision contrary to the opinions.
The preceding material is intended to be only a summary of certain of the
income tax consequences relating to the Merger and the Recapitalization.
PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO ISSUES NOT
COVERED BY THE OPINIONS OF COUNSEL OR REGARDING THEIR OWN PARTICULAR
CIRCUMSTANCES.
OTHER SURGICAL STOCKHOLDER MATTERS
Election of Directors
Pursuant to the terms of the Merger Agreement, approval of the Merger will
constitute the election of directors of the Surviving Corporation. See "THE
MERGER: Management of Surviving Corporation." If the Merger is not approved,
notwithstanding the delivery of irrevocable proxies constituting a majority of
the outstanding Surgical Stock or, notwithstanding such approval, is not
completed, stockholders will be asked to consider and take action upon the
election of directors in lieu of a 1996 annual meeting.
The board of directors has nominated Todd B. Crosland and Rockwell D.
Schutjer for re-election as directors, each to serve for a three-year term
expiring at the annual meeting for fiscal year ending March 31, 1999, and until
his successor shall have been elected and qualified. For biographical and other
information about such nominees, see "MANAGEMENT: Surgical."
It is intended that votes will be cast, pursuant to authority granted by
the enclosed proxy, for the election of the above nominees as directors of
Surgical, except as otherwise specified in the proxy. In the event the nominee
shall be unable to serve, votes will be cast, pursuant to authority granted by
the enclosed proxy, for such person as may be designated by the board of
directors.
Pursuant to Utah Law, directors are elected by a plurality of the votes
cast at a meeting at which a quorum is present. Broker non-votes and
abstentions are not considered.
Adoption of 1996 Long-Term Stock Incentive Plan
As described above under "EXECUTIVE COMPENSATION: 4Health" above, 4Health
presently maintains a stock option plan for employees and certain other
individuals connected with 4Health and its affiliates, pursuant to which options
to purchase 600,000 shares of 4Health Common Stock are outstanding or reserved
for issuance ("Existing 4Health Stock Option Plan").
LTSIP Description
On March 8, 1996, the board of directors of Surgical unanimously adopted,
subject to stockholder approval, a Long-Term Stock Incentive Plan ("LTSIP"), a
copy of which is attached hereto as Appendix "G." The board of directors has
determined that the adoption of the LTSIP is in the best interests of Surgical
and its stockholders on an ongoing basis for the following reasons:
1. The LTSIP assists the Surviving Corporation in employing and
retaining qualified and competent personnel and would encourage valuable
contributions by such personnel to the success of the Surviving Corporation
by providing additional incentive to those employees and others who
contribute significantly to the successful and profitable operations of the
Surviving Corporation and its affiliates. The board of directors believes
that this purpose will be furthered through the granting of awards, as
authorized under the LTSIP, so that such individuals will be encouraged and
enabled to acquire a substantial personal interest in the Surviving
Corporation and its affiliates.
2. The LTSIP makes available to the compensation committee of the
board of directors (the "Committee") a number of incentive devices in
addition to incentive stock options ("ISOs") and non-qualified stock
options ("NSOs"), including reload options ("ROs"), restricted stock awards
("RSAs") and performance units ("PUs"), each of which is described below
and in the LTSIP. The board of directors believes that this added
flexibility will enable the Committee to tailor the type of compensation to
be granted to key personnel to meet both the Surviving Corporation's and
such employee's requirements in the most efficient manner possible.
3. The LTSIP expires on June 1, 2006. The LTSIP authorizes an
aggregate of 3,250,000 shares of New Common Stock for issuance pursuant to
future awards granted thereunder (with a maximum of 2,450,000 shares
available for award to directors, of which a maximum of 120,000 will be
available for award to non-employee directors), before giving effect to the
Merger. As stated above, options granted under the existing 4Health Stock
Option Plan will be replaced with comparable options granted under the
LTSIP for an equivalent number of shares pursuant to the terms of the
Merger. On consummation of the Merger, there will remain an aggregate of
457,198 shares of New Common Stock available for issuance pursuant to
future awards granted under the LTSIP. In no event, however, will the
Committee, without further stockholder approval, grant options under the
LTSIP which, when added to any unexpired or unexercised prior options, will
result in the possible issuance of more than an aggregate of 1,625,000
shares of New Common Stock.
4. Upon consummation of the Merger, the 4Health Stock Option Plan
will be terminated. All outstanding 4Health options will be canceled
pursuant to the Merger. In exchanging ISOs, 4Health employees will not
necessarily receive the same number of ISOs under the LTSIP because of the
restrictions on granting ISOs that are first exercisable for over $100,000
of stock in any one year. However, such employees will receive NSOs for
the balance of any ISOs not available on a one-for-one exchange. Finally,
4Health employees will be given credit for past service to 4Health or its
affiliates for purposes of determining vesting of the new options to be
granted under the LTSIP.
As set forth above, the LTSIP authorizes the Committee to grant NSOs, ISOs,
ROs (i.e., the granting of additional options, where an employee exercises an
option with previously owned stock, covering the number of shares tendered as
part of the exercise price), RSAs (i.e., stock awarded to an employee that is
subject to forfeiture in the event of a premature termination of employment,
failure of the Surviving Corporation to meet certain performance objectives, or
other conditions. PUs (i.e., share-denominated units credited to the employee's
account for delivery or cash-out at some future date based upon performance
criteria to be determined by the Committee), and "tax withholding" (i.e., where
the employee has the option of having the Surviving Corporation withhold shares
on exercise of an award to satisfy tax withholding requirements).
The LTSIP also provides for one-time grants of NSOs covering 10,000 shares
to non-employee directors, upon taking office, vesting one-half upon completion
of one year of service and one-half upon the completion of two years of service,
exercisable at 100% of the fair market value of the New Common Stock on the date
of grant.
The Committee will develop administration guidelines from time to time
which will define eligibility criteria, the types of awards to employees, and
the value of such awards. Specific terms of each award, including minimum
performance criteria which must be met to receive payment, will be provided in
individual award agreements granted each award recipient. Key employees and
other individuals who the Committee deems may provide a valuable contribution to
the success of the Surviving Corporation and its affiliates will be eligible to
participate under the LTSIP. Award agreements shall also contain change-in-
control provisions.
Under the LTSIP, the Committee shall determine the option price of all NSOs
and ISOs; provided, however, in the case of ISOs, the option price shall not be
less than the fair market value of the New Common Stock on the date of grant.
Such "fair market value" is the average of the high and low prices of a share of
New Common Stock traded on the relevant date, as reported on a national
securities exchange or an automated quotation system on which the New Common
Stock is then traded, or, in the event such New Common Stock is not listed on an
exchange or quoted on an automated quotation system, the average of the highest
bid and the lowest asked price quoted by a member firm of the National
Association of Securities Dealers, Inc.
Federal Income Tax Effects
The following is a general summary of the principal federal income tax
effects under current law to award recipients and to Surgical or, if the Merger
is approved, the Surviving Corporation in connection with the various awards
which may be granted with respect to such awards.
1. An NSO (including for this purpose, an RO), is a right to
purchase a specified number of shares of New Common Stock at a fixed option
price over a specified period of time. An optionee will realize no income
for federal income tax purposes upon grant of an NSO under the LTSIP, but
will recognize income upon the exercise of the NSO in an amount equal to
the excess of the fair market value of the shares received upon exercise
over the option price of such shares. The Surviving Corporation will be
entitled to a deduction for federal income tax purposes in the same year
as, and in an amount equal to, the income recognized by the optionee. The
optionee's adjusted basis for the shares of New Common Stock received upon
exercise will be the fair market value on the date of exercise.
2. An ISO is a right to purchase a fixed option price, over a period
not to exceed 10 years, a specified number of shares of New Common Stock
that complies with section 422A of the Code. An optionee who receives an
ISO under the LTSIP will recognize no income for federal income tax
purposes upon either the grant or the exercise of the ISO. Income will be
taxable to the optionee upon the sale of the shares acquired. In general,
the adjusted basis for the shares of New Common Stock received upon
exercise will be the option price paid with respect to such shares. The
Surviving Corporation will not be entitled to a deduction upon the exercise
of an ISO. However, if the shares are sold within a period which is before
the later of two years from the date of the grant of the ISO or one year
from the date of exercise, the optionee will recognize compensation income
in an amount equal to the lesser of the excess of the fair market value on
the date of exercise over the option exercise price, or the excess of the
price received upon sale over the option exercise price, and the Surviving
Corporation would be entitled to corresponding deduction. The amount by
which the fair market value of the shares of New Common Stock received upon
the exercise of an ISO exceeds the exercise price is an item of tax
adjustment under the Code and is therefore included in the alternative
minimum taxable income.
3. An RSA is New Common Stock that is transferred subject to a risk
forfeiture under certain circumstances and restrictions on transfer of
ownership. RSAs may be made with our without cash payment by the
employees. An employee who receives a grant of restricted stock who does
not elect to be taxed at the time of grant will not recognize income upon
an award of shares of New Common Stock, and the Surviving Corporation will
not be entitled to a deduction until the termination of the restrictions.
Upon such termination, the employee will recognize ordinary income in an
amount equal to the fair market value of the New Common Stock at that time
(less any amount paid by the employee for such shares), and the Surviving
Corporation will be entitled to a deduction in the same amount. However
the employee may elect to recognize ordinary income in the year the
restricted stock is granted in amount equal to the fair market value of the
shares at that time, determined without regard to the restrictions. In
that event, the Surviving Corporation will be entitled to a deduction in
such year and in the same amount. Any gain or loss recognized by the
employee upon subsequent disposition of the stock will capital in nature.
4. A PU is a promise by the Surviving Corporation to make payment to
the employee contingent upon the achievement of one or more performance
targets. PUs are payable in cash or shares of New Common Stock. For PUs,
cash plus the fair market value of any New Common Stock received as payment
under the LTSIP will be considered ordinary income to the employee in the
year in which paid, and the Surviving Corporation will be entitled to a
deduction in the same year and in the same amount.
The foregoing summary of the proposed LTSIP is qualified in its entirety by
reference to the specific provisions of the LTSIP, the full text of which is set
forth as Appendix "G" hereto.
As noted above, Surgical has granted to Rockwell D. Schutjer and Todd B.
Crosland options to purchase an aggregate of 265,000 shares of New Common Stock
at $4.00 per share, which the Surviving Corporation can require to be exercised
if the New Common Stock trades at $8.00 per share for a 30 day period. See
"EXECUTIVE COMPENSATION: Surgical."
If the LTSIP is approved by the Surgical Stockholders, the options
currently issued under the Existing 4Health Stock Option Plan, after adjustment
to give effect to the 4Health Common Stock Conversion Ratio, will be converted
into new options issued under the LTSIP to acquire an aggregate of 902,800
shares of New Common Stock. See "EXECUTIVE COMPENSATION: 4Health."
In addition to the options held by Messrs. Schutjer and Crosland and those
issued to 4Health Stockholders, the Surviving Corporation will also have
outstanding options to purchase an aggregate of 60,500 shares of New Common
Stock at exercise prices ranging from $3.50 to $13.50 and expiring on dates
between June 30, 1998 and September 6, 2000. See "EXECUTIVE COMPENSATION:
Surgical."
Vote Required for Approval
The LTSIP is being submitted to the Surgical Stockholders for approval in
accordance with the requirements of rule 16b-3 promulgated under the Exchange
Act and section 422A of the Code, which require that must be approved by a
majority of the shares represented in person or by proxy and entitled to vote at
the meeting. Abstentions and broker non-votes will have the effect of votes
against approval of the LTSIP.
EXPERTS
The audited balance sheets of Surgical as of March 31, 1996 and 1995, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1996, included in
this Joint Proxy Statement/Prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in accounting and
auditing in giving said report.
The audited balance sheets of 4Health as of December 31, 1995 and 1994,
and the related statements of operations, stockholders' equity and cash flows
for each of the years then ended, and the period from inception through December
31, 1993, included in this Joint Proxy Statement/Prospectus and elsewhere in the
registration statement, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
VALIDITY OF NEW COMMON STOCK AND WARRANTS
The validity of the New Common Stock, the Warrants, and the Warrant Shares
offered hereby under the Utah Revised Business Corporation Act and certain other
legal matters will be passed upon for Surgical by Kruse, Landa & Maycock,
L.L.C., Salt Lake City, Utah.
Certain legal matters in connection with the Merger will be passed upon for
4Health by Satterlee Stephens Burke & Burke LLP, New York, New York, which will
be entitled to rely on the opinion of Lorenz Alhadeff Cannon & Rose, LLP, San
Diego, California, as to certain matters of California law.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Title of Document Page #
<S> <C>
Report of Arthur Andersen LLP, independent public accountants (Surgical Technologies, Inc.) F-1
Surgical Technologies, Inc., and Subsidiaries Consolidated Balance Sheets at March 31, 1996
and 1995 F-2
Surgical Technologies, Inc., and Subsidiaries Consolidated Statements of Operations for the
years ended March 31, 1996, 1995, and 1994 F-4
Surgical Technologies, Inc., and Subsidiaries Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1996, 1995, and 1994 F-5
Surgical Technologies, Inc., and Subsidiaries Consolidated Statements of Cash Flows for the
years ended March 31, 1996, 1995, and 1994 F-7
Surgical Technologies, Inc., and Subsidiaries Notes to Consolidated Financial Statements F-9
4Health, Inc., Condensed Balance Sheets (Unaudited) F-22
4Health, Inc., Condensed Statement of Operations (Unaudited) F-23
4Health, Inc., Condensed Statement of Cash Flows (Unaudited) F-24
4Health, Inc., Notes to Condensed Financial Statements (Unaudited) F-25
Report of Arthur Andersen LLP, independent public accountants (4Health, Inc.) F-27
4Health, Inc. Balance Sheets as of December 31, 1995 and 1994 F-28
4Health, Inc. Statements of Operations for the years ended December 31, 1995 and 1994
and the period from inception (February 17, 1993) to December 31, 1993 F-29
4Health, Inc. Statements of Stockholders' Equity for the years ended December 31, 1995
and 1994 and the period from inception (February 17, 1993) to December 31, 1993 F-30
4Health, Inc. Statements of Cash Flows for the years ended December 31, 1995 and 1994
and the period from inception (February 17, 1993) to December 31, 1993 F-31
4Health, Inc. Notes to Financial Statements F-33
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Surgical Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Surgical
Technologies, Inc. and subsidiaries as of March 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surgical Technologies, Inc. and
subsidiaries as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Salt Lake City, Utah
April 12, 1996
Page 1 of 2
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1995
ASSETS
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $3,168,826 $ -
Marketable securities 650,256 601,988
Accounts receivable, net of allowance
for doubtful accounts of $20,000 and
$59,000, respectively 145,535 350,143
Inventories 285,398 1,164,033
Current portion of notes receivable 270,925 1,375,235
Other current assets 83,344 230,936
Current deferred income tax asset - 86,095
---------- ----------
Total current assets 4,604,284 3,808,430
---------- ----------
NET ASSETS OF DISCONTINUED OPERATIONS - 2,600,664
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Machinery and equipment 339,531 500,260
Transportation equipment 155,927 158,057
Office furniture and fixtures 74,203 378,123
Land - 337,555
---------- ----------
569,661 1,373,995
Less accumulated depreciation
and amortization (256,087) (324,235)
---------- ----------
313,574 1,049,760
---------- ----------
OTHER ASSETS:
Intangibles and other, net of
accumulated amortization of $166,493
and $153,435, respectively 687,477 801,894
Notes receivable, less current portion 1,063,070 988,067
Deferred income tax asset - 739,081
---------- ----------
1,750,547 2,529,042
---------- ----------
$6,668,405 $9,987,896
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
Page 2 of 2
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
CURRENT LIABILITIES:
Notes payable $ 961,050 $ 1,042,678
Accounts payable 77,228 268,354
Accrued liabilities 154,848 284,509
Revolving bank loan - 545,505
----------- -----------
Total current liabilities 1,193,126 2,141,046
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 7 and 15)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued - -
Common stock, $.01 par value,
20,000,000 shares authorized,
4,234,550 and 4,328,741 shares
issued, respectively 42,345 43,287
Additional paid-in capital 10,197,760 10,670,034
Accumulated deficit (4,423,417) (2,367,503)
Treasury stock, 106,573 shares
held at cost in 1995 - (498,968)
Stockholder receivables (341,409) -
----------- -----------
Total stockholders' equity 5,475,279 7,846,850
----------- -----------
$ 6,668,405 $ 9,987,896
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
1996 1995 1994
REVENUES $ 1,396,016 $ 1,979,655 $4,802,483
COST OF REVENUES 1,473,336 2,416,126 4,463,106
----------- ----------- -----------
Gross profit (loss) (77,320) (436,471) 339,377
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 1,390,032 1,779,417 2,135,729
Write-off of goodwill - 1,217,364 -
----------- ----------- -----------
1,390,032 2,996,781 2,135,729
----------- ----------- -----------
Loss from operations (1,467,352) (3,433,252) (1,796,352)
----------- ----------- -----------
OTHER EXPENSE, net:
Interest expense (86,727) (185,532) (116,167)
Interest and other income 227,532 45,505 59,494
Loss on disposition of property and
equipment (433,909) (533,065) (14,057)
----------- ----------- -----------
Other expense, net (293,104) (673,092) (70,730)
----------- ----------- -----------
Loss from continuing
operations before income
taxes (1,760,456) (4,106,344) (1,867,082)
INCOME TAX (PROVISION) BENEFIT (627,592) 996,590 657,012
----------- ----------- -----------
Loss from continuing
operations (2,388,048) (3,109,754) (1,210,070)
----------- ----------- -----------
DISCONTINUED OPERATIONS:
Income from operations of
discontinued divisions, net of
applicable income tax provision of
$67,303, $123,246 and $155,050,
respectively 113,134 207,173 170,879
Gain on disposal of divisions, net of
applicable income tax provision of
$130,281 and $84,735, respectively 219,000 - 141,226
----------- ----------- -----------
Income from discontinued
operations 332,134 207,173 312,105
----------- ----------- -----------
NET LOSS $(2,055,914) $(2,902,581) $(897,965)
=========== =========== ===========
NET (LOSS) INCOME PER COMMON SHARE:
Loss from continuing operations $ (.57) $ (.78) $ (.36)
Income from discontinued operations .08 .05 .09
----------- ----------- -----------
Net loss per common share $ (.49) $ (.73) $ (.27)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,225,546 3,960,344 3,363,969
=========== =========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
-------------------------------------------------
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
--------------------
Shares Amount Capital (Accumulated Deficit)
------------------------ -------------- ----------------------
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1993 3,322,429 $33,224 $ 8,044,094 1,433,043
Cost of 100,400 shares of common
stock acquired for treasury - - - -
Stock options exercised 1,000 10 1,990 -
Shares issued in connection with
Royalty Agreement (Note 7) 65,000 650 - -
Shares retired in connection with Eli
Williams & Sons, Inc. escrow
arrangement 14,688) (147) (64,113) -
Shares issued from treasury to
Surgical Technologies, Inc. 401(k)
Retirement Plan at a price of $4.54
per share - - (727) -
Shares issued in connection with
purchase of building, land and
equipment (Note 8) 400,000 4,000 1,071,911 -
Net loss - - - (897,965)
--------- ------- ---------- -----------
BALANCE AT MARCH 31, 1994 3,773,741 $37,737 $9,053,155 $ 535,078
--------- ------- ---------- -----------
--------- ------- ---------- -----------
BALANCE AT MARCH 31, 1994 3,773,741 $37,737 $9,053,155 535,078
Stock options exercised 30,000 300 84,700 -
Shares sold at an average price of
$2.93 per share 525,000 5,250 1,531,247 -
4,200 shares issued from treasury in
consideration for professional
services at a price of $4.76 per
share - - 932 -
Net loss - - - (2,902,581)
--------- ------- ------------ -----------
BALANCE AT MARCH 31, 1995 4,328,741 43,287 10,670,034 (2,367,503)
Shares issued from treasury to
Surgical Technologies, Inc. 401(k)
Retirement Plan at a price of $4.68
per share - - (32,196) -
Issuance of stockholder receivables
in connection with sale of Rex
Industries, Inc. - - - -
Cancellation of treasury stock (94,191) (942) (440,078) -
Net loss - - - (2,055,914)
--------- ------- ------------ -----------
BALANCE AT MARCH 31, 1996 4,234,550 $42,345 $10,197,760 $(4,423,417)
========= ======= =========== ===========
</TABLE>
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
-------------------------------------------------
<TABLE>
<CAPTION>
Treasury Stockholder Total
Stock Receivable
--------------- ------------- -------
<S> <C> <C> <C>
BALANCE AT MARCH 31, 1993 $ (74,397) $ -- $9,435,964
Cost of 100,400 shares of common
stock acquired for treasury (446,276) -- (446,276)
Stock options exercised -- -- 2,000
Shares issued in connection with -- -- 650
Royalty Agreement (Note 7)
Shares retired in connection with Eli
Williams & Sons, Inc. escrow
arrangement -- -- (64,260)
Shares issued from treasury to
Surgical Technologies, Inc. 401(k)
Retirement Plan at a price of $4.54
per share 2,637 -- 1,910
Shares issued in connection with
purchase of building, land and
equipment (Note 8) -- -- 1,075,911
Net loss -- -- (897,965)
---------- --------- -----------
BALANCE AT MARCH 31, 1994 (518,036) -- 9,107,934
========== ========= ===========
Stock options exercised -- -- 85,000
Shares sold at an average price of
$2.93 per share -- -- 1,536,497
4,200 shares issued from treasury in
consideration for professional
services at a price of $4.76 per
share 19,068 -- 20,000
Net loss -- -- (2,902,581)
-------- -------- -----------
BALANCE AT MARCH 31, 1995 (498,968) -- 7,846,850
======== ======== ===========
Shares issued from treasury to
Surgical Technologies, Inc. 401(k)
Retirement Plan at a price of $4.68
per share 57,948 -- 25,752
Issuance of stockholder receivables
in connection with sale of Rex
Industries, Inc. -- (341,409) (341,409)
Cancellation of treasury stock 441,020 -- --
Net loss -- -- (2,055,914)
-------- --------- -----------
BALANCE AT MARCH 31, 1996 $ -- $(341,409) $5,475,279
======== ========== ===========
</TABLE>
Page 1 of 2
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,055,914) $(2,902,581) $ (897,965)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Loss on disposition of property
and equipment 433,909 533,065 14,057
Gain on disposal of divisions (349,281) - (225,961)
Depreciation and amortization 225,870 489,294 430,496
Expenses paid through issuance
of treasury stock 25,752 20,000 1,910
Write-off of goodwill - 1,217,364 -
Provision for losses on accounts
receivable - 125,564 25,052
Changes in assets and
liabilities-
Accounts receivable 52,394 22,703 354,263
Inventories 338,422 290,826 180,280
Other current assets 18,987 5,828 (344)
Intangibles and other (111,127) (22,222) (23,297)
Deferred income tax asset 825,176 (751,559) (66,436)
Accounts payable (221,847) (318,053) (22,501)
Accrued liabilities (403,272) 118,075 (31,362)
Deferred income tax liability - (121,785) (323,215)
----------- ----------- -----------
Net cash used in operating
activities (1,220,931) (1,293,481) (585,023)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of divisions 2,775,543 - 1,171,133
Payments received on notes receivable 1,384,307 182,480 92,444
Proceeds from sale of property and
equipment 801,460 1,010,291 31,770
Change in marketable securities (48,268) (126,988) 461,332
Purchase of property and equipment (38,412) (75,553) (670,090)
Change in net assets of discontinued
operations - - 344,920
----------- ----------- -----------
Net cash provided by
investing activities 4,874,630 990,230 1,431,509
----------- ----------- -----------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
Page 2 of 2
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Increase (Decrease) in Cash and Cash Equivalents
1996 1995 1994
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in revolving bank loan $ (545,505) $ (436,034) $ 645,187
Principal payments on notes payable (124,194) (736,503) (1,311,915)
Proceeds from sale of common stock - 1,621,497 2,000
Purchase of treasury stock - - (446,276)
----------- ----------- -----------
Net cash (used in)
provided by (669,699) 448,960 (1,111,004)
financing activities
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,984,000 145,709 (264,518)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 184,826 39,117 303,635
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 3,168,826 $ 184,826 $ 39,117
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
interest $ 84,023 $ 206,175 $ 107,778
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During fiscal year 1996, the Company disposed of its specialty metals products
division in exchange for approximately $2,776,000 in cash, $556,000 in notes
receivable and the assumption of $224,000 in liabilities (see Note 13).
During fiscal year 1996, the Company sold certain assets related to its
disposable surgical pack product line in exchange for $100,000 in cash and
net notes receivable totaling $150,000 (see Notes 6 and 14).
During fiscal year 1995, the Company refinanced a $1,000,000 note payable to an
officer and stockholder through issuance of a note payable to a finance
company (see Note 8).
During fiscal year 1995, the Company sold a building and other related fixed
assets in exchange for notes receivable totaling $2,192,937 (see Note 6).
During fiscal year 1994, the Company purchased corporate office and warehouse
space, land and certain machinery and equipment valued at $2,646,511 from an
officer and stockholder in exchange for the issuance of 400,000 shares of
restricted common stock valued at $2.69 per share and a $1,570,600 note
payable (see Note 8).
During fiscal year 1994, the Company settled an escrow agreement related to the
purchase of the capital stock and operating assets of Eli Williams & Sons,
Inc. In connection with this settlement, the Company recorded additional
goodwill of $101,627, resulting from the write-off of $11,872 of
transportation equipment and $68,607 of accounts receivable, the assumption
of $85,408 in additional liabilities and the cancellation of 14,688 shares of
common stock valued at $64,260.
During fiscal year 1993, the Company entered into a Technology Purchase
Agreement to acquirethe rights to certain technology. During fiscal year
1994, in connection with this agreement, the Company issued 65,000 registered
shares of common stock at $5.56 per share with a total valueof $361,400 and
paid $55,600 in cash (see Note 7).
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
SURGICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) HISTORY AND ORGANIZATION
Surgical Technologies, Inc. ("Surgical"), a Utah corporation, was incorporated
on April 27, 1989. During January 1994, Surgical changed its state of
incorporation from Delaware to Utah. Surgical owns all the common stock of Rex
Liquidation Corporation, formerly Rex Industries, Inc. ([`Rex''] now inactive)
and IDI Liquidation, Inc., formerly Insulation Distributors, Inc. (["IDI"]now
inactive).
Historically, Surgical and its subsidiaries (collectively referred to as "the
Company") manufactured and marketed a variety of prepackaged, sterile surgical
products for angiography and angioplasty procedures. Primary markets consisted
of hospitals, surgical centers and other health care facilities in the United
States and Canada. Additionally, the Company fabricated a variety of specialty
metal items marketed principally in the intermountain west. During fiscal 1996,
Surgical disposed of its disposable surgical pack and drape manufacturing
product lines as well as its specialty metals products business segment,
retaining the technology and operations related to its angioplasty inflation
device marketed under the name Transflator (the `ID Technology'') as its sole
remaining operation.
On October 1, 1993, two subsidiaries of the Company, (Professional Medical, Inc.
and Professional Drape Corporation) were merged into Surgical. Effective
September 30, 1993 and January 1, 1996, respectively, Surgical discontinued its
industrial insulation products and specialty metals products divisions (see Note
13). The accompanying consolidated financial statements reflect the operating
results and balance sheet items of the discontinued operations separately from
continuing operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of
Surgical and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash includes cash on hand and in bank accounts. As of March 31, 1996, the
Company had cash in bank accounts which exceeded the Federal Deposit Insurance
Corporation limit per account by $3,068,826.
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents to the extent the funds are not being held for investment
purposes.
Marketable Securities
The Company has implemented Statement of Financial Accounting Standards
(`SFAS'') No. 115, ``Accounting for Certain Investments in Debt and Equity
Securities.' In accordance with SFAS No. 115, the Company has classified all
investments in U.S. Treasury bills and certificates of deposit as `available
for sale.' SFAS No. 115 provides for recording of ``available for sale''
investments at current market value with an offsetting adjustment to
stockholders' equity. At March 31, 1995 and 1996, cost approximated market
value for these U.S. Treasury bills and certificates of deposit
Inventories
At March 31, 1996, inventories consist of medical products related to the
manufacture of Surgical's Transflator product and are priced at the lower of
cost (first-in, first-out method) or market value.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated economic useful lives
of the related assets as follows:
Machinery and equipment 7 - 15 years
Transportation equipment 5 years
Office furniture and fixtures 3 - 15 years
Upon sale or other disposition of property and equipment, the cost and related
accumulated depreciation or amortization are removed from the accounts and any
gain or loss is included in the determination of income or loss.
Expenditures for maintenance and repairs are charged to expense as incurred.
Major overhauls and betterments are capitalized and depreciated over their
estimated economic useful lives.
Intangibles
At March 31, 1996, intangible assets consisted of acquired Transflator
technology of $665,179, organizational costs of $70,150 and FDA authorization
costs of $10,000.
The Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful lives of intangibles may warrant
revision or that the remaining balance may not be recoverable. When factors
indicate intangibles should be evaluated for possible impairment, the Company
uses an estimate of the discounted future cash flows over the life of the
intangibles and comparable market information in measuring whether the amount is
recoverable.
During the fourth quarter of fiscal year 1995, the Company determined that the
carrying value of the goodwill associated with the medical products division was
no longer warranted based on projected future cash flows of that division.
Accordingly, the Company wrote off the remaining $1,217,364 of unamortized
goodwill related to the medical products division.
FDA authorizations and organization costs are amortized using the straight-line
method over a period of 20 years. The acquired Transflator technology is
amortized using the straight-line method over a period of 14 years.
Amortization expense related to intangibles totaled $59,770, $156,901 and
$152,829 for the fiscal years ended March 31, 1996, 1995 and 1994, respectively.
Income Taxes
The Company has implemented the provisions of SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires that income taxes be computed using the
liability method. Deferred taxes are determined based on the estimated future
tax effects of differences between the financial reporting and tax reporting
bases of assets and liabilities given the provisions of currently enacted tax
laws.
Revenue Recognition
Revenue is recognized when the product is shipped to the customer.
Net Loss Per Common Share
Net loss per common share is calculated using the weighted average number of
common shares outstanding during each year. Common share equivalents are not
considered in the calculation of the weighted average number of shares
outstanding because they would decrease the net loss per common share.
Fair Value of Financial Instruments
The book value of the Company's financial instruments approximates fair value.
The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
`Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of.' The Company is required to adopt SFAS No. 121 in fiscal
1997. SFAS No. 121 addresses the accounting for (i) impairment of long-lived
assets, certain identifiable intangibles and goodwill related to assets to be
held and used, and (ii) long-lived assets and certain identified intangibles to
be disposed of. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the expected
future cash flows from the use of the asset and its eventual disposition
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Management does not expect that
the adoption of SFAS No. 121 will have a material impact on the Company's
consolidated financial statements.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with the 1996 presentation.
(3) CAPITAL TRANSACTIONS
Preferred Stock
The Board of Directors of the Company has the authority to determine by
resolution the number of preferred shares to be issued by series; the rate and
terms for payment of cumulative or noncumulative dividends; the conversion
features of the preferred stock; the redemption rights and prices, if any; the
terms of the sinking fund, if any, to be provided for the shares; the voting
powers of preferred shareholders; and any other special rights, qualifications,
limitations or restrictions. As of March 31, 1996, no preferred stock has been
issued.
Treasury Stock
On March 28, 1996, the Board of Directors authorized the cancellation of the
Company's outstanding shares of treasury stock. Accordingly, the balance of
treasury stock on that date has been reclassified as a reduction of common stock
and additional paid-in capital in the accompanying consolidated statement of
stockholders' equity for the year ended March 31, 1996.
During fiscal year 1995, the Company issued 4,200 shares of treasury stock in
consideration for $20,000 of professional services.
During fiscal year 1994, the Company repurchased 100,400 shares of its own
common stock for $446,276.
(4) NOTES PAYABLE
As of March 31, 1996 and 1995, notes payable consisted of the following:
1996 1995
Note payable to an insurance company,
interest at 8.25 percent, with
monthly payments of $8,521 through
May 1, 1999 with remaining principal
due on that date, collateralized by
real estate (see (A) below and
Note 8) $ 961,050 $ 981,259
Notes payable to a bank and financing
company, paid in full during fiscal
1996 - 84,147
Other - 19,838
---------- ----------
$ 961,050 $1,085,244
========== ==========
(A) The note payable to an insurance company contains provisions that allow
the lender to demand immediate payment (at its discretion) if the related
real estate is sold by the Company. However, the above provisions are
subject to the provision that the lender will waive the right to demand
immediate payment if the purchaser meets the lender's credit worthiness
criteria and agrees to an adjustment of the interest to the lender's current
rate. During fiscal year 1995, the Company sold the related real estate to
an unrelated entity. The lender has not waived its right to demand immediate
payment. Accordingly, the balance of this note payable has been reflected as
a current liability in the accompanying March 31, 1996 and 1995 consolidated
balance sheets.
(5) REVOLVING BANK LOAN
The Company has a line-of-credit agreement with a bank which enables the Company
to borrow against its eligible accounts receivable and inventories up to a
maximum of $1,000,000 through September 22, 1995 and $500,000 subsequently. As
of March 31, 1996 and 1995, $0 and $545,505, respectively, were outstanding
under this agreement. Borrowings on the line-of-credit accrue interest at the
bank's prime rate plus 1 percent. Interest is payable monthly with the
outstanding borrowings due on September 1, 1996. The weighted average interest
rate on the short-term borrowings was 9.75 percent and 8.90 percent on March 31,
1996 and 1995, respectively. The line-of-credit agreement is secured by the
Company's U.S. Treasury bills and certificates of deposit.
(6) NOTES RECEIVABLE
As of March 31, 1996 and 1995, notes receivable consisted of the following:
1996 1995
Contract receivable from a third party
for the purchase of certain real
property, interest bearing at 8.25
percent with monthly payments of
$8,521 through May 1, 1999, with the
remaining principal due on that date,
secured by real estate $ 961,415 $2,087,937
Receivable from a corporation
related to the sale of the specialty
metals products division, interest at
8 percent, due on or before July 1,
1996, secured by real estate and
110,000 shares of the Company's
common stock 215,000 -
Note receivable from a third party for
the purchase of certain assets,
interest bearing at 10 percent
through February 16, 1999, secured
by purchased assets 150,000 -
1996 1995
Note receivable from a third party for
the purchase of certain real property,
full payment received during fiscal
1996 - 105,000
Receivable related to funds held in
escrow in conjunction with sale of
IDI, full payment received during
fiscal 1996 (see Note 13) - 78,572
Note receivable from a former employee
for the purchase of certain assets
of discontinued divisions, full
payment received during fiscal 1996 - 79,781
Other 7,580 12,012
---------- ----------
1,333,995 2,363,302
Less current portion (270,925) (1,375,235)
---------- ----------
$1,063,070 $ 988,067
========== ==========
(7) COMMITMENTS AND CONTINGENCIES
Operating Lease
The Company leases certain transportation equipment under a noncancelable
operating lease which expires July 1997. The Company has future noncancelable
operating lease commitments of $2,942 during fiscal year 1997.
Total rent expense from operating leases for the years ended March 31, 1996,
1995 and 1994 was approximately $9,400, $17,600, and $31,700, respectively.
Litigation
From time to time, the Company becomes subject to litigation, which it considers
routine to its business activities. Management believes, after consultation
with legal counsel, that the ultimate resolution of these matters will not
materially affect the accompanying consolidated financial statements.
Royalty Agreement
In February 1993, the Company acquired, under an agreement, the rights to
certain medical devices, technology and other proprietary data from a
stockholder. The Company is obligated under the provisions of the agreement to
pay stockholder 10 percent of the net profits generated by the Company relating
to this technology for a period of five years after the date of the agreement.
As of March 31, 1996, no royalties had been paid under this agreement.
(8) RELATED-PARTY TRANSACTIONS
See Note 13 for a description of the sale of discontinued operations to an
officer, director, and stockholder of the Company.
On February 3, 1994, the Company purchased its corporate office facilities
including manufacturing and warehouse space and certain machinery and equipment
from an officer and stockholder of the Company (the "Officer"). In connection
with this purchase, the Company issued 400,000 shares of its restricted common
stock valued at $2.69 per share and a $1,570,600 note payable to the Officer.
The property and equipment have been recorded on the Company's books at their
approximate fair market value at the time of purchase. In addition, the Company
purchased certain office equipment from the Officer for $71,600 in cash which
approximated the fair market value at the time of purchase.
This property and equipment was leased from the Officer prior to the above-
mentioned transaction. Total rent expense under this lease for fiscal year 1994
was approximately $25,500.
On April 22, 1994, the Company refinanced its related party note payable by
issuing a note payable to an insurance company in the amount of $1,000,000
(see Note 4) and a short-term note payable to a bank in the amount of $570,600.
The note is secured by property and buildings and is personally guaranteed by
the Company's president. The $570,600 note payable was repaid during fiscal
year 1995.
(9) INCOME TAXES
The (provision) benefit for income taxes consisted of the following amounts:
Year Ended March 31,
1996 1995 1994
Current:
Federal $ - $ - $337,591
State - - 17,768
-------- -------- --------
- - 355,359
-------- -------- --------
Deferred:
Federal (539,729) 860,057 261,533
State (87,863) 136,533 40,120
--------- -------- --------
(627,592) 966,590 301,653
--------- -------- --------
Total income tax
(provision) benefit $(627,592) $966,590 $657,012
========= ======== ========
Deferred taxes result from temporary differences in the recognition of income
and expense for income tax reporting and financial statement reporting purposes.
Deferred benefits of $996,590 and $657,012 for the years ended March 31, 1995
and 1994, respectively, are the result of net operating losses.
As of March 31, 1996 and 1995, the Company has recorded net deferred income
taxes in the accompanying consolidated balance sheets as follows:
1996 1995
Future deductible temporary differences
related to reserves, accruals and net
operating losses $ 1,744,868 $1,343,774
Valuation allowance (1,697,414) -
----------- ----------
Deferred income tax assets, net of
valuation allowance 47,454 1,343,774
Future taxable temporary differences
related to depreciation and amortization (47,454) (518,598)
----------- ----------
Net deferred income tax asset $ - $ 825,176
=========== ==========
As of March 31, 1996, the Company had a net operating loss carryforward for
income tax reporting purposes of $4,076,000 available to offset future taxable
income. This net operating loss carryforward expires at various dates between
March 31, 2009 and 2011. An NOL generated in a particular year will expire for
federal tax purposes if not utilized within 15 years. Additionally, the
Internal Revenue Code contains provisions which could reduce or limit the
availability and utilization of these NOLs if certain ownership changes have
taken place or will take place. In accordance with SFAS No. 109, a valuation
allowance is provided when it is more likely than not that all or some portion
of the deferred tax asset will not be realized. Due to the uncertainty with
respect to the ultimate realization of the NOLs, the Company established a
valuation allowance for the entire net deferred income tax asset of $1,697,414
as of March 31, 1996, which includes $825,176 related to the net deferred income
tax asset from the prior year. Also consistent with SFAS No. 109, an allocation
of the income (provision) benefit has been made to the income and gain from
discontinued operations which has had a corresponding effect on the income
(provision) benefit associated with the loss from continuing operations.
The differences between the effective income tax rate and the federal statutory
income tax rate on the loss from continuing operations are presented below.
Year Ended March 31,
1996 1995 1994
Benefit at the federal
statutory rate of 34 percent $ 598,555 $1,396,157 $634,808
State income benefit, net of
of federal benefit 58,095 33,479 60,697
Nondeductible expenses (6,758) (433,046) (38,493)
Change in valuation allowance (1,499,830) - -
Other 222,346 - -
----------- ---------- --------
Total income tax
(provision) benefit $ (627,592) $ 996,590 $657,012
=========== ========== ========
(10) PROFIT SHARING AND PENSION PLAN
Effective April 1, 1991, the Company established the Surgical Technologies Inc.
401(k) Retirement Plan. An employee is eligible to participate upon completion
of one year of service and reaching age 21. Company contributions are made at
the discretion of the board of directors. Employee contributions are 100
percent vested. Employees become 100 percent vested in the Company
contributions after six years of service. During fiscal years 1996 and 1994,
the Company contributed 12,382 and 546 shares, respectively, of common stock
valued at $25,752 and $1,910 from its treasury to the plan. The Company did not
make any contributions to the plan during fiscal year 1995.
(11) SIGNIFICANT CUSTOMERS
During fiscal year 1995, Rex generated revenues from Kennecott Utah Copper
Corporation totaling 11 percent of total revenues.
During the fiscal year ended March 31, 1994, the Company generated revenues from
Cordis Corporation, which was a distributor of the Company's products, totaling
43 percent of total revenues. During fiscal year 1994, the Company elected to
terminate the sales arrangement with this customer.
(12) STOCK OPTIONS
During 1989, the Company adopted the Surgical Technologies, Inc. 1989 Stock
Option and Stock Award Plan (the ''1989 Plan'') which provides for the granting
to key employees options to purchase up to 400,000 shares of common stock. The
options issued under the 1989 Plan may be incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonqualified options. The 1989 Plan also provides for the granting of stock
appreciation rights and stock awards to eligible participants, subject to
forfeiture restrictions. As of March 31, 1996, options for the purchase of
29,000 shares of common stock are available for future grants.
On March 18, 1996, the Board of Directors authorized, and the related officers
and employees agreed to, the cancellation of all options for the purchase of
common stock then outstanding under the 1989 Plan. In addition, the Board of
Directors authorized the issuance of options for the purchase of 371,000 shares
of common stock at an exercise of $2.00 per share (the market price on March 18,
1995) to the same officers and employees in individual grants that equaled or
exceeded the options previously held by each such officer or employee.
Effective April 25, 1991, the Company adopted the 1991 Directors' Stock Option
Plan which provides for the granting to certain Directors' options to purchase
up to 70,000 shares of common stock. As of March 31, 1996, no shares are
available for future grants.
During June 1992, the Company adopted the 1992 Directors' Stock Option Plan
pursuant to which 5,000 stock options each year are automatically awarded to
those directors who are not officers or employees of the Company.
On March 8, 1996, the Company adopted the 1996 Long-Term Stock Incentive Plan
(the ''LTSI Plan'') which provides for the granting to certain directors,
officers and key employees options to purchase up to 3,250,000 shares of common
stock. The incentive devices issued under the LTSI Plan may be incentive stock
options, nonqualified stock options, reload options, restricted stock or
performance units. On March 18, 1996, options for the purchase of 530,000
shares of common stock were issued at an exercise price of $2.00 per share. As
of March 31, 1996, options for the purchase of 2,720,000 shares of common stock
are available for future grants.
The LTSI Plan also provides for one-time grants of non-qualified stock options
for the purchase of 40,000 shares of common stock to new non-employee directors,
upon taking office. These options vest one-half upon completion of one year of
service and one-half upon completion of two years of service. The options are
exercisable at 100 percent of the fair value of the related common stock on the
date of grant.
The LTSI Plan was adopted by the Board of Directors, subject to stockholder
approval. Subsequent to March 31, 1996, the Company received irrevocable
proxies constituting a majority of the outstanding common stock of the Company
which guarantee the approval of the proposed merger (see Note 15) and the LTSI
Plan. Accordingly, the options issued under the LTSI Plan have been treated as
outstanding at March 31, 1996 for financial reporting purposes.
The following table presents the aggregate number of options granted, exercised,
and forfeited during the three-year period ended March 31, 1996.
Stock Options Exercise Stock Exercise
Options
Issued Price Issued Price
to Employees Per Share to Directors Per Share
Options outstanding
and exercisable
at March 31, 1993 153,000 $2.00-$8.25 75,000 $2.00-$6.75
Options granted 113,000 4.25-4.68 10,000 4.25
Options forfeited (10,000) 7.25 - -
Options exercised (1,000) 2.00 - -
------- -------
Options outstanding
and exercisable
at March 31, 1994 255,000 2.63 - 8.25 85,000 2.00 - 6.75
------- -------
Options granted - - 10,000 4.38
Options exercised - - (30,000) 2.00 -3.25
------- -------
Options outstanding
and exercisable
at March 31, 1995 255,000 2.63 - 8.25 65,000 3.25 - 6.75
------- -------
Options granted 998,000 2.00 10,000 2.00
Options forfeited (20,000) 2.63 - -
Options canceled (332,000) 1.75 - 8.25 - -
------- -------
Options outstanding
and exercisable
at March 31, 1996 901,000 $2.00 75,000 $2.00-$6.75
======= =======
The outstanding and exercisable options expire two to five years from the dates
of grant, which is during the period April 1996 through March 2001.
(13) DISCONTINUED OPERATIONS
On January 4, 1996, effective January 1, 1996, the Company entered into an
agreement with Rex Industries Acquisition Corporation (''Rex Acquisition'') for
the sale of Rex, including the right to use the name ''Rex Industries, Inc.''
Rex Acquisition is 100 percent owned by an officer, director and stockholder of
the Company. Rex Acquisition acquired substantially all the assets of Rex in
exchange for approximately $2,776,000 in cash, $556,000 in receivables
(including $341,409 from the stockholder), and the assumption of approximately
$224,000 in liabilities. A gain on the disposal of the division of
approximately $349,000 (before related income tax provision) has been reflected
in the accompanying consolidated statement of operations for the year ended
March 31, 1996.
Where appropriate, the financial statements reflect the operating results and
balance sheet items of the discontinued operations separately from continuing
operations. Financial results for periods prior to the date of discontinuance
have been restated to reflect continuing operations. Revenue of the
discontinued operations was approximately $2,021,000 for the period from April
1, 1995 to January 1, 1996, and were approximately $3,034,000 in 1995, and
$2,209,000 in 1994.
Effective September 30, 1993, the Company's board of directors approved a plan
to withdraw from the industrial insulation products business. On October 4,
1993, IDI entered into an Asset Purchase Agreement (the ''Agreement'') with
Milwaukee Acquisition Company ("MAC") to sell substantially all of its operating
assets including the right to the use of the name ''Insulation Distributors,
Inc.'' for a cash payment of $1,371,133 and the assumption of $352,875 in
liabilities. This transaction resulted in a gain on disposal of discontinued
divisions. At the closing, MAC withheld, under an 18-month escrow provision of
the agreement, $200,000 in cash from the purchase price as security for the
Company's guaranty of payment on IDI's accounts receivable and indemnification
against certain liabilities. As of March 31, 1994, the Company established an
allowance of $10,000 against the escrowed funds. The net amount has been
classified as a note receivable in the accompanying March 31, 1995 and 1994
consolidated balance sheets.
Where appropriate, the financial statements reflect the operating results and
net assets of the discontinued operations separately from continuing operations.
Financial results for periods prior to the dates of discontinuance have been
restated to segregate continuing and discontinued operations. Revenue of the
discontinued operations was approximately $1,393,000 for the fiscal year ended
March 31, 1994.
(14) DISPOSITION OF PRODUCT LINES
Sale of Disposable Surgical Pack Product Line
On February 16, 1996, the Company and Medical Techniques, L.C. (the ''Buyer'')
entered into an asset purchase agreement (the ''Kitpack Agreement'') for the
sale of certain assets related to the Company's disposable surgical pack product
line. The Buyer acquired all the assets related to the Company's disposable
surgical pack product line in exchange for $100,000 in cash, a $150,000
promissory note due in three years bearing interest at 10 percent, and a
$300,000 promissory note due in one year bearing no interest. A loss resulting
from the sale of the disposable surgical pack product line of approximately
$172,000 has been included in the consolidated statement of operations for the
year ended March 31, 1996. In addition, the statement of operations for the
year ended March 31, 1996 includes a $300,000 provision for a reserve
established by the Company against the one year promissory note. In accordance
with the Kitpack Agreement, collection of the $300,000 promissory note is
contingent upon the ability of the Buyer to sell certain inventory, which
management believes to be unlikely.
Sale of Medical Drape Product Line
On November 30, 1995, the Company and Microtek Medical, Inc. (`Microtek'')
entered into an asset purchase agreement (the `Drape Agreement'') for the sale
of certain assets related to the Company's medical drape product line. Microtek
acquired all the assets related to the Company's medical drape product line in
exchange for $325,000 in cash, and $50,000 held in escrow, payable to Surgical
upon Microtek reaching certain sales levels of the medical drapes by November
30, 1996. A gain from the sale of assets related to the medical drape product
line of approximately $76,000 has been included in the consolidated statement of
operations for the year ended March 31, 1996.
(15) PROPOSED MERGER WITH 4HEALTH, INC.
On February 14, 1996, the Company entered into a letter of intent and on April
10, 1996, signed an Agreement and Plan of Merger (''Merger Agreement'') with
4Health, Inc. (''4Health''). 4Health was organized in February 1993, and
formulates and supplies nutritional supplements which are available nationwide
through health food stores and health care providers.
The Merger Agreement between the Company and 4Health provides for the merger of
4Health with and into the Company, pursuant to which: (a) the shares of 4Health
common stock and the shares of 4Health Series A preferred stock will be
exchanged for approximately 9,000,000 shares of Surgical common stock, (b) each
four shares of Surgical common stock issued and outstanding will be converted
into two shares of Surgical common stock and one warrant to purchase a share of
the surviving corporation (the ''Surviving Corporation'') common stock at $11.00
per share, (c) the board of directors of Surgical, as the Surviving Corporation,
will be reconstituted to include five designees of 4Health and two designees of
Surgical, and (d) the articles of incorporation of Surgical will be amended to
(i) change its name to ''4Health, Inc.'' (ii) increase the authorization of New
Common Stock to 30,000,000 shares, (iii) add a ''fair price'' provision in the
event of certain corporate transactions, and (iv) restrict the use of written
consents of stockholders in lieu of meetings. The warrants may be redeemed by
the Surviving Corporation at $0.01 per warrant, provided that the trading price
of the underlying Common Stock equals $13.75 per share for 30 consecutive days.
Outstanding options to purchase an aggregate of 671,000 shares of Surgical
common stock at a weighted average price of $2.26 per share will be converted
into options to purchase an aggregate of 335,500 shares of Surgical common stock
at a weighted average price of $4.51 per share. In addition, outstanding
options to purchase an aggregate of 463,750 shares of 4Health common stock at a
weighted average price of $6.55 per share will be converted into options to
purchase an aggregate of 697,791 shares of Surgical common stock at a weighted
average price of $4.35 per share.
The number of shares of Surgical common stock issuable to the holders of 4Health
common stock and Series A preferred stock is subject to adjustment in the event
that the Surviving Corporation does not realize at least $2,000,000 in earnings,
before interest and income taxes, computed in accordance with generally accepted
accounting principles from exploitation of Surgical's ID Technology, the sale of
products based on its ID Technology, or joint venture income based on the ID
Technology by increasing the number of shares of Surgical common stock issuable
to the former 4Health stockholders, on a pro rata basis based on the number of
shares of Surgical common stock issued to them in the merger, in an amount equal
to the quotient calculated by dividing (a) the amount by which $2,000,000
exceeds the ID Technology earnings by (b) $4.00.
The merger will be accounted for under the purchase method of accounting wherein
the related assets and liabilities of the Company will be adjusted to reflect
their estimated fair market values at the effective date of the merger. The
merger will be treated for accounting purposes as a reverse merger wherein
4Health will be treated as the acquiring entity because 4Health's current
stockholders will control the Surviving Corporation.
4HEALTH, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
March December
31,1996 31, 1995
ASSETS
CURRENT ASSETS
Cash $ 1,097,303 $ 919,935
Accounts Receivable 1,072,787 974,621
Inventory 912,945 977,890
Other Current Assets 218, 460 210,210
Total Current Assets 3,301,495 3,082,656
PROPERTY AND EQUIPMENT (NET) 2,254,264 2,124,227
OTHER ASSETS 29,199 20,745
Total Assets $ 5,584,958 $ 5,227,628
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable $ 905,400 $ 609,331
Note Payable - building 1,296,271 ----
Accrued Liabilities 291,196 237,114
Total Current Liabilities 2,492,867 846,445
LONG-TERM OBLIGATIONS, net of current 4,766 1,305,519
portion
OTHER LIABILITIES 32,458 32,458
Total Liabilities 2,530,091 2,184,422
STOCKHOLDERS' EQUITY
Capital Stock - Common 1,071,305 1,071,305
Capital Stock - Preferred 15,000 15,000
Paid-in Capital - Preferred 1,397,771 1,397,771
Retained Earnings 570,791 559,130
Total Stockholders' Equity 3,054,867 3,043,206
Total Liabilities and
Stockholders' Equity $ 5,584,958 $ 5,227,628
4HEALTH, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
For the three months
ended March 31,
1996 1995
NET SALES $ 3,473,400 $ 1,549,008
COST OF SALES 1,257,456 548,751
Gross Profit 2,215,944 1,000,257
OPERATING EXPENSES:
General and administrative 596,591 271,982
Sales and marketing 1,525,613 508,319
Research and development 59,487 26,164
2,181,691 806,465
NET INCOME FROM OPERATIONS 34,253 193,792
OTHER EXPENSE 10,429 10,990
NET INCOME BEFORE PROVISION
FOR INCOME TAXES 23,824 182,802
PROVISION FOR INCOME TAXES 12,162 59,375
NET INCOME $ 11,662 $ 123,427
NET INCOME PER COMMON SHARE $ 0.002 $ 0.021
COMMON SHARES OUTSTANDING 6,041,786 5,784,286
4HEALTH, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the For the
three twelve
months months
ended ended
March 31, December 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 11,662 $ 708,679
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 42,629 122,401
Loss on disposal assets ---- 33,927
(Increase) decrease in-
Accounts receivable (98,166 ) (723,462)
Inventory 64,945 (584,420)
Prepaid expenses and other (8,250 ) (52,118)
Deferred Income Tax Receivable ---- (31,005)
Increase (decrease) in-
Accounts Payable 296,069 311,852
Accrued Liabilities 54,082 97,867
Net cash provided by (used in)
operating activities 362,971 (116,279)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property and Equipment (172,308 ) (689,030)
Proceeds from asset dispositions ---- 11,205
Net cash used in investing
activities (172,308 ) (677,825)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on capital leases (4,483 ) (3,413)
Merger costs (8,812 ) ----
Proceeds from preferred stock ---- 1,500,000
Preferred stock issuance costs ---- (57,229)
Net cash provided by (used in)
financing activities (13,295 ) 1,439,358
NET INCREASE IN CASH AND CASH
EQUIVALENTS 177,368 645,254
CASH AND CASH EQUIVALENTS, at beginning
of period 919,935 274,681
CASH AND CASH EQUIVALENTS, at end of period $1,097,303 $ 919,935
4HEALTH, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
The unaudited condensed financial statements presented herein have been
prepared by the Company in accordance with the instructions to Form 10-Q and do
not include all of the information and note disclosures required by generally
accepted accounting principles. These condensed financial statements should be
read in conjunction with the Company's financial statements and notes thereto
for the year ended December 31, 1995. The accompanying financial statements
have not been examined by independent accountants in accordance with generally
accepted auditing standards, but in the opinion of management such financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's financial position and
results of operations. The results of operations for the three months ended
March 31, 1996, may not be indicative of the results that may be expected for
the year ended December 31, 1996.
NOTE 2
The note payable, dated March 25, 1994, related to the purchase of the land
and corporate headquarters building in the amount of $1,296,271, was
reclassified from a long-term liability to a current liability. The note is due
in full plus accrued interest on March 25, 1997. It is management's intent to
refinance the loan before the due date. The current interest rate on the loan
is 7.5% per annum.
NOTE 3
On February 15, 1996, the Company executed a non-binding Letter of Intent
and on April 10, 1996, signed an agreement and Plan of Merger ('Merger
Agreement') that provides for the merger of the Company with and into Surgical
Technologies, Inc., a Utah corporation. Per the Merger Agreement, Surgical will
continue as the surviving corporate entity, with its name changed to `4Health,
Inc.'
On the effective time of the merger, all outstanding shares of 4Health
Common Stock and all 15,000 shares of 4Health's Preferred Stock will be
converted into an aggregate of approximately 9,000,000 shares of 'New Common
Stock', plus the right to receive a pro rata portion of the Contingent Shares
(as discussed below). On the effective time, each four shares of Surgical
Common Stock issued and outstanding will be converted into two shares of New
Common Stock and one Warrant. Each Warrant will entitle the holder to purchase
one share of New Common Stock at any time within 18 months after the Closing
Date of the merger at $11.00 per share, subject to adjustment to prevent
dilution. The warrants may be redeemed by the surviving corporation at $0.01
per warrant, provided that the trading price of the underlying Common Stock
exceeds $13.75 per share for thirty (30) consecutive days.
As part of the merger, all outstanding options to purchase shares of
4Health Common Stock will be converted, pursuant to the 4Health Conversion Ratio
(1.5047:1), into options to purchase shares of New Common Stock at such
converted exercise prices, such that the cash received by the surviving
corporation upon exercise will be unchanged.
The number of shares of New Common Stock issuable to the holders of 4Health
Common Stock and Preferred Stock shall be adjusted in the event that the
surviving corporation does not realize at least $2,000,000, as defined in the
letter of intent, within twelve months of the Closing Date from exploitation or
transfer of Surgical's ID Technology. The adjustment would occur by increasing
the number of shares of New Common Stock issuable to the former 4Health
Stockholders, on a pro rata basis, based on the number of 4Health Common and
Preferred Stock, treated together as a single class, held by each 4Health
Stockholder immediately prior to the effective time of the merger, in an amount
equal to the quotient of dividing (a) the amount by which $2,000,000 exceeds the
amount realized, as defined in the letter of intent, by (b) $4.00 (the
"Contingent Shares").
As part of the merger, the name of the surviving corporation will be
changed to 4Health, Inc., the surviving corporation's authorized shares of New
Common Stock will be increased to 30,000,000 shares, par value $0.01, and an
amount of New Common Stock or options, to be negotiated, will be issued to two
executive officers and directors of Surgical.
The board of directors of the surviving corporation will consist of five
designees of 4Health and two designees of Surgical, and the By-Laws will provide
for up to nine directors.
Following the merger, the surviving corporation will concentrate its
activities on the accelerated expansion of its nutritional supplement business,
while it pursues the most effective course of action respecting Surgical's ID
Technology.
The merger will be accounted for under the purchase method of accounting.
As such, the related assets and liabilities of Surgical will be adjusted to
reflect their estimated fair market values at the effective date of the merger.
The merger will be treated for accounting purposes as a reverse merger wherein
the Company will be treated as the acquiring company because among other
factors, the Company's stockholders will control the surviving corporation and
the revenues and earnings of the Company exceed those of Surgical.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
4Health, Inc.:
We have audited the accompanying balance sheets of 4HEALTH, INC. (a California
corporation) as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity and cash flows for each of the years then ended
and for the period from inception (February 17, 1993) to December 31, 1993.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 4Health, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the years then ended and for the period from inception (February 17,
1993) to December 31, 1993, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Denver, Colorado,
March 8, 1996 (except with respect to the Merger
Agreement (Note 10), as to which
the date is April 10, 1996).
4HEALTH, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 919,935 $ 274,681
Accounts receivable, net of allowance
for doubtful accounts of $30,859 and
$7,004, respectively 974,621 301,159
Inventories 977,890 393,470
Deferred tax assets 31,005 -
Prepaid expenses and other 129,205 98,548
Note receivable, related party 50,000 -
--------- ----------
Total current assets 3,082,656 1,067,858
PROPERTY AND EQUIPMENT, net 2,124,227 1,602,014
OTHER ASSETS, net 20,745 -
--------- ----------
Total assets $5,227,628$2,669,872
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 609,331 $ 297,479
Accrued interest payable 22,399 17,415
Accrued liabilities 102,950 18,030
Payroll and sales tax payable 40,567 65,062
Note payable, related party 71,198 71,198
--------- ----------
Total current liabilities 846,445 469,184
--------- ----------
OBLIGATIONS UNDER CAPITAL LEASES 9,248 12,661
DEFERRED TAX LIABILITY 32,458 -
NOTE PAYABLE 1,296,271 1,296,271
COMMITMENTS AND CONTINGENCIES (Notes 6, 9
and 10)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $1.00
par value; 30,000 shares authorized, 15,000
issued and outstanding at December
31, 1995 (Note 6)-Par value 15,000 -
Additional paid-in capital 1,397,771 -
Common stock, no par value; 10,000,000 shares
authorized, 5,791,786 and 5,784,286
issued and outstanding, respectively
(Note 5) 1,071,305 1,041,305
Retained earnings (deficit) 559,130 (149,549)
--------- ----------
Total stockholders' equity 3,043,206 891,756
--------- ----------
Total liabilities and stockholders'
equity $5,227,628$2,669,872
The accompanying notes are an integral part of these statements.
4HEALTH, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE
PERIOD FROM INCEPTION (FEBRUARY 17, 1993) TO DECEMBER 31, 1993
1995 1994 1993
NET SALES $10,434,022 $2,076,902 $269,742
COST OF SALES 3,802,877 744,584 87,461
---------- --------- ---------
Gross profit 6,631,145 1,332,318 182,281
---------- --------- ---------
OPERATING EXPENSES:
General and administrative 1,476,986 608,182 149,052
Sales and marketing 3,873,466 817,766 40,752
Research and development 149,366 37,061 -
---------- --------- ---------
5,499,818 1,463,009 189,804
---------- --------- ---------
INCOME (LOSS) FROM OPERATIONS 1,131,327 (130,691) (7,523)
OTHER INCOME (EXPENSE):
Interest income 27,542 43,371 133
Interest expense (90,467) (48,117) (5,922)
---------- --------- ---------
(62,925) (4,746) (5,789)
---------- --------- ---------
NET INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 1,068,402 (135,437) (13,312)
PROVISION FOR INCOME TAXES (359,723) (2,183) 1,383
---------- --------- ---------
NET INCOME (LOSS) $ 708,679 $ (137,620) $(11,929)
NET INCOME (LOSS) PER COMMON SHARE $.12 $(.028) $(.003)
COMMON SHARES OUTSTANDING 5,786,793 4,874,643 4,000,000
The accompanying notes are an integral part of these statements.
4HEALTH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE
PERIOD FROM INCEPTION (FEBRUARY 17, 1993) TO DECEMBER 31, 1993
<TABLE>
Total
Additional Retained Stockholders'
Preferred Stock Paid-In Common Stock Earnings Equity
Shares Amount Capital Shares Amount (Deficit) (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
INCEPTION (February 17, 1993) - $ - $ - - $ - $ - $ -
-
Issuance of common stock in
exchangefor product rights and
assets (Note 1) - - - 4,000,000 30,000 - -
Net loss - - - - - (11,929) (11,929)
------ ------- -------- ---------- ---------- --------- ----------
BALANCES, December 31, 1993 - - - 4,000,000 30,000 (11,929) 18,071
Sale of common stock - - - 1,714,286 958,533 - 958,533
Stock grants - - - 40,000 23,333 - 23,333
Stock issued for services - - - 30,000 29,439 - 29,439
Net loss - - - - - (137,620) (137,620)
------ ------- -------- ---------- ---------- --------- ----------
BALANCES, December 31, 1994 - - - 5,784,286 1,041,305 (149,549) 891,756
Sale of preferred stock at $100 1,500,000
per share 15.000 15.000 1,485,000 - - -
Issuance costs of preferred
stock offering - - (87,229) 7,500 30,000 - (57,229)
Net income - - - - - 708,679 708,679
------ ------- -------- ---------- ---------- --------- ----------
BALANCES, December 31, 1995 15,000 $15,000 $1,397,771 5,791,786 $1,071,305 $ 559,130 $3,043,206
The accompanying notes are an integral part of these statements.
Page 1 of 2
4HEALTH, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE
PERIOD FROM INCEPTION (FEBRUARY 17, 1993) TO DECEMBER 31, 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 708,679 $ (137,620) $ (11,929)
Adjustments to reconcile net
income (loss) to net cash used
in operating activities-
Depreciation and amortization 122,401 31,927 2,018
Loss on disposal of asset 33,927 6,420 -
(Increase) decrease in-
Accounts receivable (723,462) (254,672) (15,078)
Inventories (584,420) (326,867) (53,123)
Prepaid expenses and other (52,118) (85,537) (13,011)
Deferred income tax assets (31,005) 2,183 (2,183)
Increase (decrease) in-
Accounts payable 311,852 260,156 (6,835)
Accrued interest payable 4,984 11,750 5,665
Accrued liabilities 84,920 12,798 5,232
Payroll and sales tax payable (24,495) 63,845 1,217
Deferred income tax liability 32,458 - -
------------ ------------- -----------
Net cash used in
operating activities (116,279) (415,617) (88,027)
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (689,030) (1,608,958) (17,458)
Proceeds from asset dispositions 11,205 - -
------------ ------------- -----------
Net cash used in investing
activities (677,825) (1,608,958) (17,458)
------------ ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock 1,500,000 - -
Preferred stock issuance costs (57,229) - -
Proceeds from common stock - 1,011,305 30,000
Borrowings on long-term debt - 1,607,368 204,636
Repayments on borrowings - (324,373) (124,195)
Repayments on capital leases (3,413) - -
------------ ------------- -----------
Net cash from financing
activities 1,439,358 2,294,300 110,441
------------ ------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 645,254 269,725 4,956
CASH AND CASH EQUIVALENTS, at beginning
of period 274,681 4,956
-
------------ ------------- -----------
CASH AND CASH EQUIVALENTS,
at end of period $ 919,935 $ 274,681 $ 4,956
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for
income taxes $443,769 $ - $800
Cash paid during the year for
interest $ 83,735 $25,308 $228
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
During fiscal year 1995, for services relating to
the sale of preferred stock, the Company issued
7,500 shares of common stock to a director. The
fair value was estimated to be approximately
$30,000.
During fiscal year 1994, the Company entered into
capital leases totaling $13,485 for the lease of
new equipment.
The accompanying notes are an integral part of these statements.
4HEALTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1)ORGANIZATION AND BUSINESS ACTIVITY
Organization
4Health, Inc. (the 'Company'' or ''4Health'') was incorporated and commenced
operations in California on February 17, 1993, when 4,000,000 (Note 5) shares of
common stock were issued to Lindsey Duncan, the Company's president, founder and
majority stockholder.
Business Activity
The Company wholesales vitamins and health food supplements developed by Lindsey
Duncan under the brand names of Nature's Secret and Harmony Formulas. Nature's
Secret products are marketed through retail outlets for the health food
industry, and Harmony Formulas products are marketed to health care
practitioners throughout the U.S. The products are formulated to appeal to the
general public and address overall health considerations.
(2)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid cash investments with original maturity
dates of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company maintains the majority of its cash balances with two
financial institutions, in the form of demand deposits and money market
accounts.
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for estimated credit losses. Its accounts receivable balances are
primarily domestic. The Company had one principal customer which accounted for
approximately 13% of its total revenue for the year ending December 31, 1995.
For the period from inception (February 17, 1993) to December 31, 1993, the
Company had one principal customer which accounted for approximately 11% of its
total revenue.
Inventories
Inventories consist primarily of vitamins and health food supplements and are
valued at the lower of first-in, first-out cost or net realizable value. As of
December 31, 1995 and 1994, all of the Company's inventory consisted of
purchased finished goods.
Property and Equipment
Property and equipment additions, as well as major renewals and improvements to
property and equipment, are capitalized at cost while repairs and maintenance
costs which do not improve or extend the life of the respective assets are
expensed when incurred. Depreciation and amortization is provided using the
straight-line method at rates based on estimated useful lives which range from
3.5 to 39 years. Property and equipment consisted of the following at December
31:
1995 1994
Land $ 270,000 $ 270,000
Buildings and improvements 1,390,219 1,212,178
Machinery and equipment 52,078 28,601
Furniture, fixtures and equipment 552,772 116,415
Construction in progress - 9,220
------------ ------------
2,265,069 1,636,414
Less-Accumulated depreciation (140,842) (34,400)
------------ ------------
$2,124,227 $1,602,014
Recently Issued Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (''SFAS'') No. 123, ''ccounting for Stock-Based
Compensation.'' SFAS No. 123 establishes financial accounting and reporting
standards for stock-based compensation. The Statement defines a fair value-
based method of accounting for an employee stock option or similar equity
instrument. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, 'Accounting for Stock Issued to
Employees.' Entities electing to remain with the accounting in Opinion No. 25
must make pro forma disclosures of net income and earnings per share, as if the
fair value-based method of accounting defined in the Statements had been
applied. The Company will be required to adopt SFAS No. 123 during 1996.
Management believes that the Company will elect to make pro forma disclosure as
allowed by SFAS No. 123.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of.' This statement, effective for the Company in 1996,
establishes standards for the measurement of impairment of long-lived assets to
be held and used, and those to be disposed of. In the opinion of management,
the adoption of SFAS No. 121 will not be material to the results of operations
or net assets of the Company.
Revenue Recognition
The Company recognizes revenue from product sales at time of shipment.
Warraty Cost
The Company warrants satisfaction with its products and grants to its
customers the right to return for full credit any product that is
unsatisfactory to the customer. Returns and credit claims that result
from this policy are accounted for by reducing sales by the amount
refunded to the customer, generally the sales price, in the period in
which the claim occurs. To date, the impact of warranty returns has
not been significant.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term trade
receivables and payables and long-term debt. The carrying values of cash and
short-term trade receivables and payables approximate fair value. The fair
value of long-term notes payable is estimated based on current rates available
for debt with similar credit risk, yield and maturity and at December 31, 1995
approximates the carrying value.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed based on the weighted average
number of common shares outstanding during the period. The effect of
outstanding options and other common stock equivalents are immaterial.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
''Accounting for Income Taxes.'' SFAS No. 109 requires recognition of deferred
income tax assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary differences between the
financial reporting and tax bases of assets and liabilities.
Estimates Made by Management
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(3)NOTE PAYABLE AND LINE OF CREDIT
Note Payable
On March 25, 1994, the Company borrowed a total of $1,296,271 for the purchase
of the land and corporate headquarters building. The loan is secured by the
deed of trust. Payments of interest are payable monthly at a rate of 7.5% per
annum. The principal and any remaining unpaid interest will be due March 25,
1997.
Line of Credit
The Company has a $1,000,000 line of credit available for general working
capital purposes. The line of credit bears interest at Prime + .75%. Any
balance outstanding is secured by the Company's working capital assets and
equipment. Up to $500,000 of any balance outstanding is also secured by the
guarantee of the majority shareholder. This credit line requires the bank's
consent to certain transactions, including the currently proposed merger
(Note 10). Management intends to pursue such consent or seek to replace the
line of credit on comparable terms. As of December 31, 1995 and 1994, the
Company had no balance outstanding under the line of credit.
(4)RELATED PARTY TRANSACTIONS
Loan Payable
The majority shareholder loaned the Company $200,000 during 1994 for the down
payment required on the purchase of the corporate headquarters building. The
loan is unsecured and bears interest at 7.0% and is due by March 31, 1997. At
both December 31, 1995 and 1994, $71,198 was outstanding. Interest expense of
$4,983 and $11,750 has been recorded during fiscal 1995 and 1994, respectively.
Note Receivable
In January 1995, the Company loaned $50,000 to a shareholder which remained
outstanding at December 31, 1995 and is due in 1996.
(5)STOCKHOLDERS' EQUITY
Issuance of Stock
On March 14, 1994, in contemplation of an impending sale of stock, the Company
authorized a stock split of 400 to 1 which resulted in the issuance of 3,990,000
shares of stock to the sole shareholder. All per share amounts and other equity
accounts have been retroactively restated to give effect to the stock split in
the accompanying financial statements.
Sale of Common Stock
During 1994, the Company sold 1,714,286 shares of common stock at approximately
$.58 per share. Stock offering costs related to this sale were approximately
$41,467.
Stock Grants
During 1994, for services rendered to date and to provide for the continuing
value of services to be rendered, the Company granted 40,000 shares of common
stock to certain related parties. The fair value of this stock was estimated to
be $23,333 and was expensed in 1994.
Stock Issued for Services
During 1994, in exchange for legal services provided, the Company issued 30,000
shares of common stock to a director. The fair value of this stock was
estimated to be $29,439 and was expensed during 1994.
(6)MANDATORILY CONVERTIBLE PREFERRED STOCK
During 1995, the Company sold 15,000 shares of Series A Convertible Preferred
Stock (''Preferred Stock''), $1.00 par value, at $100 per share for gross
proceeds of $1,500,000. The Company used the funds for working capital and
investment purposes.
In the event the Company declares a cash dividend on the outstanding shares of
common stock, preferred stockholders are entitled to receive a pro-rata share of
dividends on a basis equal to the number of shares received if the preferred
stock were converted to common stock. Dividends must be paid before any
dividend, distribution or payment may be made to holders of common stock. The
Preferred Stock is convertible, at the option of the holder, in part or in
whole, at a 16.67 to 1 basis. In addition, the Preferred Stock will be
converted to common stock if the Company raises in excess of $1,500,000 from a
common stock offering, on the effective date of an initial public offering or on
August 31, 1997, the second anniversary date of the initial Preferred Stock
sale.
Preferred stockholders have a preference in liquidation over common stockholders
of $100 per share plus any unpaid dividends. Preferred stockholders are
entitled to vote on matters submitted to the common stockholders, such votes are
equal to the number of shares received if the Preferred Stock were converted to
common stock issuable upon conversion.
(7)STOCK OPTION PLAN
In 1995, the Company adopted the 1995 Stock Option Plan (the ''Option Plan''),
whereby certain eligible employees may be granted options. The Option Plan
allows issuance of incentive stock options and non-qualified options. The
Option Plan is administered by a Committee designated by the Board of Directors
(the ''Committee''). The exercise price of incentive stock options shall not be
less than the stock's fair market value on the date of grant. The Committee may
grant options to purchase up to an aggregate of 600,000 shares under the Option
Plan. Outstanding options generally become exercisable over a one-year period.
A summary of stock options activity for the year ended December 31, 1995 is as
follows:
Per Share
Number of Exercise
Shares Price
Balance, December 31, 1994 - -
Granted 186,000 $5.00 to $8.75
Exercised - -
Canceled 3,000 $6.25
--------
Balance, December 31, 1995 183,000 $5.00 to $8.75
Exercisable at December 31, 1995 - -
Subsequent to December 31, 1995, the Company granted an additional 32,750
options with exercise prices ranging from $6.25 to $8.50 and canceled 6,000
options with an exercise price of $6.25.
(8)INCOME TAXES
The Company is subject to corporate federal and state income taxes. Deferred
taxes are determined based on the estimated future tax effects of differences
between the financial reporting and tax bases of assets and liabilities given
the provisions of the enacted tax laws. The net deferred tax asset is comprised
of the following:
1995 1994
DEFERRED TAX ASSETS:
Allowance for bad debts $ 12,035 $ 2,662
Accrued liabilities 18,970 -
Net operating loss carryforward - 58,832
--------- ---------
Total deferred tax assets 31,005 61,494
DEFERRED TAX LIABILITIES:
Tax over book depreciation (32,458) (8,289)
--------- ---------
Net deferred tax (liability) asset,
before valuation reserve (1,453) 53,205
Valuation allowance - (53,205)
--------- ---------
Net deferred tax (liability) asset $ (1,453) $ -
As of December 31, 1994, the Company had net operating loss carryforwards of
approximately $155,000 and net deferred assets of approximately $53,205. The
Company provided a valuation allowance to fully offset its 1994 net deferred tax
assets primarily due to its history of operating losses. Because of taxable
income generated during 1995, the carryforwards were fully utilized, and the
valuation allowance is no longer necessary.
The components of the provision (benefit) for income taxes are as follows:
December 31
-------------------------------------
1995 1994 1993
Current-
Federal $319,568 $ - $ -
State 38,702 2,183 -
Deferred 1,453 - (1,383)
---------- ------- --------
Total $359,723 $2,183 $(1,383)
A reconciliation between the Company's effective tax rate and the statutory
federal income tax rate on the income (loss) from continuing operations is as
follows:
1995 1994 1993
Statutory federal income tax rate 34.0% (34.0)% (34.0)%
State income taxes 3.6 (4.0) (4.0)
Change in valuation allowance (5.5) 38.0 28.0
Other 1.6 - -
------ ------ ------
Effective income tax rate 33.7% .1% 10.0%
(9)COMMITMENTS AND CONTINGENCIES
The Company leased office space under an operating lease agreement from the date
of inception through May of 1994. Rental expense for this agreement was $6,000
for the year ended December 31, 1994. The lease was terminated in May 1994 when
the purchase of the new building was finalized.
Additionally, the Company entered into certain leases which have various
expiration dates. Rental expense was $13,612, $5,141 and $428 for the years
ended December 31, 1995 and 1994, and the period from inception (February 17,
1993) to December 31, 1993, respectively. Future minimum rental payments
applicable to these noncancellable operating leases are as follows for the years
ending December 31:
1996 $ 41,818
1997 39,285
1998 30,049
1999 27,108
2000 25,315
Thereafter -
----------
$163,575
The Company is involved in various legal matters that arise out of the normal
course of business. The Company's management believes it has meritorious
defenses to all lawsuits and that such matters will not have a material adverse
affect on the Company's financial position or results of its operations.
(10) SUBSEQUENT EVENT--PROPOSED MERGER
On February 14, 1996, the Company executed a non-binding Letter of Intent and on
April 10, 1996, signed an Agreement and Plan of Merger (''Merger Agreement'')
that provides for the merger of the Company with and into Surgical Technologies,
Inc., a Utah corporation. Per the Merger Agreement Surgical will continue as
the surviving corporate entity, with its name changed to ''4Health, Inc.''
On the effective time of the merger, all outstanding shares of 4Health Common
Stock and all 15,000 shares of 4Health's Preferred Stock outstanding will be
converted into an aggregate of approximately 9,000,000 shares of ''New Common
Stock'' plus the right to receive a pro rata portion of the Contingent Shares
(as discussed below). On the effective time, each four shares of Surgical
Common Stock issued and outstanding will be converted into two shares of New
Common Stock and one warrant. Each warrant will entitle the holder to purchase
one share of New Common Stock at any time within 18 months after the closing
date of the merger at $11.00 per share, subject to adjustment to prevent
dilution. The warrants may be redeemed by the surviving corporation at $0.01
per warrant, provided that the trading price of the underlying Common Stock
exceeds $13.75 per share for thirty (30) consecutive days.
As part of the merger, all outstanding options to purchase shares of 4Health
Common Stock will be converted, pursuant to the 4Health Conversion Ratio
(1.5047:1), into options to purchase shares of New Common Stock at such
converted exercise prices, such that the cash received by the surviving
corporation upon exercise will be unchanged.
The number of shares of New Common Stock issuable to the holders of 4Health
Common Stock and Preferred Stock shall be adjusted in the event that the
surviving corporation does not realize at least $2,000,000, as defined in the
letter of intent, within twelve months of the closing date from exploitation or
transfer of Surgical's ID Technology. The adjustment would occur by increasing
the number of shares of New Common Stock issuable to the former 4Health
stockholders, on a pro rata basis, based on the number of shares of 4Health
Common and Preferred Stock, treated together as a single class, held by each
4Health stockholder immediately prior to the effective time of the merger, in an
amount equal to the quotient of dividing (a) the amount by which $2,000,000
exceeds the amount realized, as defined in the letter of intent, by (b) $4.00
(the ''Contingent Shares'').
As part of the merger, the name of the surviving corporation will be changed to
4Health, Inc., the surviving corporation's authorized shares of New Common Stock
will be increased to 30,000,000 shares, par value $0.01, and an amount of New
Common Stock or options, to be negotiated, will be issued to two executive
officers and directors of Surgical.
The board of directors of the surviving corporation will consist of five
designees of 4Health and two designees of Surgical, and the By-Laws will provide
for up to nine directors.
Following the merger, the surviving corporation will concentrate its activities
on the accelerated expansion of its nutritional supplement business, while it
pursues the most effective course of action respecting Surgical's ID Technology.
The merger will be accounted for under the purchase method of accounting. As
such, the related assets and liabilities of Surgical will be adjusted to reflect
their estimated fair market values at the effective date of the merger.
The merger will be treated for accounting purposes as a reverse merger wherein
the Company will be treated as the acquiring company because the Company's
stockholders will control the surviving corporation.
APPENDIX A TO REGISTRATION STATEMENT
AGREEMENT AND PLAN OF MERGER
between
4HEALTH, INC.
and
SURGICAL TECHNOLOGIES, INC.
April 10, 1996
ARTICLE I THE MERGER............................................. 2
SECTION 1.01 The Merger................................... 2
SECTION 1.02 Closing; Closing Date; Effective Time........ 2
SECTION 1.03 Effect of the Merger......................... 3
SECTION 1.04 Articles of Incorporation; Bylaws............ 3
SECTION 1.05Directors and Officers ....................... 3
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES.... 4
SECTION 2.01 Merger Consideration; Conversion and
Cancellation of Securities ............................... 4
SECTION 2.02 Exchange and Surrender of Certificates....... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SURGICAL........... 9
SECTION 3.01. Organization and Qualification; Subsidiaries 9
SECTION 3.02 Articles of Incorporation and Bylaws......... 10
SECTION 3.03 Capitalization............................... 10
SECTION 3.04 Authority.................................... 11
SECTION 3.05 No Conflict; Required Filings and Consents... 12
SECTION 3.06 Permits; Compliance.......................... 13
SECTION 3.07 Reports; Financial Statements................ 13
SECTION 3.08 Absence of Certain Changes or Events......... 14
SECTION 3.09 Absence of Litigation........................ 15
SECTION 3.10 Employee Benefit Plans; Labor Matters........ 15
SECTION 3.11 Taxes........................................ 18
SECTION 3.12 Tax Matters.................................. 22
SECTION 3.13 Certain Business Practices................... 23
SECTION 3.14 Environmental Matters........................ 23
SECTION 3.15 Vote Required................................ 26
SECTION 3.16 Brokers...................................... 26
SECTION 3.17 Insurance.................................... 26
SECTION 3.18 Properties................................... 26
SECTION 3.19 Certain Contracts and Restrictions........... 27
SECTION 3.20 Easements.................................... 27
SECTION 3.21 Futures Trading and Fixed Price Exposure..... 27
SECTION 3.22 Information Supplied......................... 27
SECTION 3.23 NNM Listing.................................. 27
SECTION 3.24 Intellectual Property........................ 28
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF 4HEALTH............. 28
SECTION 4.01 Organization and Qualifications; Subsidiaries 28
SECTION 4.02 Articles and Bylaws.......................... 29
SECTION 4.03 Capitalization............................... 29
SECTION 4.04 Authority.................................... 30
SECTION 4.05 No Conflict: Required Filings and Consents... 31
SECTION 4.06 Permits; Compliance.......................... 31
SECTION 4.07 Financial Statements......................... 32
SECTION 4.08 Absence of Certain Changes or Events......... 32
SECTION 4.09 Absence of Litigation........................ 32
SECTION 4.10 Tax Matters.................................. 32
SECTION 4.11 Taxes........................................ 33
SECTION 4.12 Vote Required................................ 34
SECTION 4.13 Brokers...................................... 34
SECTION 4.14 Information Supplied......................... 35
SECTION 4.15 Employee Benefit Plans; Labor Matters........ 35
SECTION 4.16 Certain Business Practices................... 36
SECTION 4.17 Environmental Matters........................ 36
SECTION 4.18 Insurance.................................... 37
SECTION 4.19 Certain Contracts and Restrictions........... 37
SECTION 4.20 Properties................................... 38
SECTION 4.21 Easements.................................... 38
SECTION 4.22 Futures Trading and Fixed Price Exposure..... 38
SECTION 4.23 Intellectual Property........................ 38
ARTICLE V COVENANTS ............................................ 39
SECTION 5.01 Affirmative Covenants of Surgical............ 39
SECTION 5.02 Negative Covenants of Surgical............... 40
SECTION 5.03 Affirmative and Negative Covenants
of 4Health.................................. 44
SECTION 5.04 Access and Information....................... 47
ARTICLE VI ADDITIONAL AGREEMENTS................................. 48
SECTION 6.01 Meetings of Stockholders..................... 48
SECTION 6.02 Registration Statement....................... 48
SECTION 6.03 Appropriate Action; Consents; Filings........ 49
SECTION 6.04 Tax Treatment................................ 51
SECTION 6.05 Public Announcements......................... 51
SECTION 6.06 NNM Listing.................................. 51
SECTION 6.07 Indemnification.............................. 51
SECTION 6.08 Stock Resale Agreement....................... 51
SECTION 6.09 SEC Reports and Registration Statements...... 52
ARTICLE VII CLOSING CONDITIONS................................... 52
SECTION 7.01 Conditions to Obligations of Each Party
Under This Agreement .................................... 52
SECTION 7.02 Additional Conditions to Obligations of 4Health 53
SECTION 7.03 Additional Conditions to Obligations of Surgical.55
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER................... 57
SECTION 8.01 Termination.................................. 57
SECTION 8.02 Effect of Termination........................ 58
SECTION 8.03 Amendment.................................... 58
SECTION 8.04 Waiver....................................... 59
SECTION 8.05 Fees, Expenses and Other Payments............ 59
ARTICLE IX GENERAL PROVISIONS.................................... 61
SECTION 9.01. Effectiveness of Representations, Warranties
and Agreements .......................................... 61
SECTION 9.02 Notices...................................... 62
SECTION 9.03 Certain Definitions.......................... 62
SECTION 9.04 Headings..................................... 64
SECTION 9.05 Severability................................. 64
SECTION 9.06 Entire Agreement............................. 64
SECTION 9.07 Assignment................................... 64
SECTION 9.08 Parties in Interest.......................... 64
SECTION 9.09 Specific Performance......................... 64
SECTION 9.10 Failure or Indulgence Not Waiver;
Remedies Cumulative .................................... 65
SECTION 9.11 Governing Law................................ 65
SECTION 9.12 Counterparts................................. 65
SCHEDULES
Schedule 1.05 Directors of Surviving Corporation
Schedule 2.01(b)(i) Surgical Optionees
Schedule 2.01(b)(ii) Surgical LTSIP Optionees
Surgical Disclosure Schedule
Schedule 3.01 Subsidiaries
Schedule 3.03(a) Reservation of Surgical Common Stock
Schedule 3.03(b)(i) Options, Warrants and Rights
Schedule 3.03(b)(ii) Repurchase and Redemption Obligations, etc.
Schedule 3.03(b)(iii) Investments
Schedule 3.03(b)(iv) Revenue Sharing Agreements
Schedule 3.03(c) Outstanding Stock Awards
Schedule 3.05 Conflicts
Schedule 3.06 Notifications from Governmental Entities
Schedule 3.08 Certain Changes
Schedule 3.09 Litigation
Schedule 3.10(a) Employee Benefit Plans
Schedule 3.10(b) Exceptions to Benefit Plan Compliance
Schedule 3.10(c) Collective Bargaining Agreements
Schedule 3.10(d) Severance Agreements
Schedule 3.10(e) Retiree Benefits
Schedule 3.10(f) Multiemployer Contributions
Schedule 3.10(g) Amendments to Employee Benefit Plans
Schedule 3.11 Tax Liens
Schedule 3.11(b) Tax Proceedings
Schedule 3.11(c) Tax Elections and Consents, etc.
Schedule 3.14 Environmental Matters
Schedule 3.16 Brokers
Schedule 3.17 Insurance
Schedule 3.18 Properties
Schedule 3.19 Material Contracts
Schedule 3.23 NASD Notices
Schedule 3.24 Intellectual Property
Schedule 5.02 Exceptions to Negative Covenants
Schedule 5.02(f) Asset Depositions
4Health Disclosure Schedule
Schedule 4.01 Subsidiaries
Schedule 4.03(a) Reservation of 4Health Common Stock
Schedule 4.03(b)(i) Options, Warrants and Rights
Schedule 4.03(b)(ii) Repurchase and Redemption Obligations, etc.
Schedule 4.03(b)(iii) Investments
Schedule 4.03(b)(iv) Revenue Sharing Agreements
Schedule 4.03(b)(v) Voting Trusts, Proxies
Schedule 4.03(c) Outstanding Stock Awards
Schedule 4.05 Conflicts
Schedule 4.06 Notifications from Governmental Entities
Schedule 4.08 Certain Changes
Schedule 4.09 Litigation
Schedule 4.11 Taxes
Schedule 4.13 Brokers
Schedule 4.15(a) Employee Benefit Plans
Schedule 4.15(c) Multiemployer Plans
Schedule 4.17 Environmental Matters
Schedule 4.19 Material Contracts
Schedule 4.23 Intellectual Property
Schedule 5.03(b)(v) Asset Dispositions
Schedule 5.03(b)(xiv) Affiliate Transactions
EXHIBITS
Exhibit A Articles of Merger
Exhibit B Warrant Agreement and Form of Warrant
Exhibit C This Exhibit is Intentionally Omitted
Exhibit D Employment Agreement
Exhibit E Form of Surgical Irrevocable Proxy
Exhibit F Form of 4Health Irrevocable Proxy
Exhibit G Proprietary Information, Inventions and Non-Competition Agreement
Exhibit H Form of Sale Restriction Agreements
Exhibit I KL&M Opinion
Exhibit J SSB&B Opinion
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of April 10, 1996 (this
"Agreement'), is by and between 4health Inc., a California corporation
("4Health") and Surgical Technologies, Inc., a Utah corporation ("Surgical").
RECITALS
A. 4Health, upon the terms and subject to the conditions of this
Agreement and in accordance with the Revised Business Corporation Act of the
State of Utah ("Utah Law"), will merge with and into Surgical (the "Merger"),
and pursuant thereto, the shares of common stock, no par value, of 4Health
("4Health Common Stock") and the shares of Series A Convertible Preferred Stock,
par value $1.00 per share ("4Health Series A Stock"), issued and outstanding
immediately prior to the Effective Time (as defined herein) of the Merger, not
owned directly or indirectly by 4Health or Surgical or their respective
subsidiaries, will be converted at the Effective Time into the right to receive
an aggregate of 9,000,000 shares of common stock, par value $.01 per share, of
the surviving corporation in the Merger ("New Common Stock"), subject to the
right of holders of such shares of 4Health Common Stock (each, a "Dissenting
4Health Stockholder") to seek an appraisal of the fair value thereof as provided
in Section 1300 of the General Corporation Law of the State of California
("California Law"), each 4 shares of common stock, $.01 per share par value, of
Surgical ("Surgical Common Stock") issued and outstanding immediately prior the
Effective Time, not owned directly or indirectly by 4Health or Surgical or their
respective subsidiaries, will be converted at the Effective Time into two shares
of New Common Stock and a warrant to purchase one share of New Common Stock,
subject to the right of holders of Surgical Common Stock (each, a "Dissenting
Surgical Stockholder") to seek an appraisal of the fair value thereof as
provided in Part 13 of Utah Law, the name of Surgical will be changed to
"4Health, Inc." and the number of authorized shares of New Common Stock will be
increased to 30,000,000 shares.
B. The Board of Directors of Surgical has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
Surgical and is fair to, and in the best interests of, Surgical and its
stockholders and has approved and adopted this Agreement, including the issuance
of New Common Stock, and the other transactions contemplated hereby, and has
recommended approval of this Agreement by the stockholders of Surgical.
C. The Board of Directors of 4Health has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of 4Health
and is fair to, and in the best interests of, 4Health and its stockholders and
has approved and adopted this Agreement and the transactions contemplated
hereby, and has recommended approval of this Agreement by the stockholders of
4Health.
D. For federal income tax purposes, it is intended that the Merger
qualify as a tax-free reorganization under the provisions of section 368(a) of
the United States Internal Revenue Code of 1986 as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and confirmed, the parties hereto
agree as follows:
ARTICLE 1.
THE MERGER
SECTION 1.01. The Merger. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with Utah Law, at the Effective
Time, 4Health shall be merged with and into Surgical (each a "Constituent
Corporation"). As a result of the Merger, the separate corporate existence of
4Health shall cease and Surgical shall continue as the surviving corporation of
the Merger (the "Surviving Corporation") and its name shall be changed to
"4Health, Inc." Certain terms used in this Agreement are defined in Section
9.03 hereof.
SECTION 1.02. Closing; Closing Date; Effective Time. Unless this
Agreement shall have been terminated pursuant to Section 8.01, and subject to
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the consummation of the Merger and the closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Kruse, Landa & Maycock, L.L.C., Eighth Floor, Bank One Tower, 50 West
Broadway (300 South), Salt Lake City, Utah as soon as practicable (but in any
event within two business days) after the satisfaction or, if permissible,
waiver of the conditions set forth in Article VII, or at such other date, time
and place as 4Health and Surgical may agree. The date on which the Closing
takes place is referred to herein as the "Closing Date". As promptly as
practicable on the Closing Date, the parties hereto shall cause the Merger to be
consummated by filing the Articles of Merger, in the form of Exhibit A attached
hereto, with the Division of Corporations and Commercial Code of the State of
Utah (the date and time of such filing, or such later date or time agreed upon
by 4Health and Surgical and set forth therein, being the "Effective Time"). For
all tax purposes, the Closing shall be effective at the end of the day on the
Closing Date.
SECTION 1.03. Effect of the Merger. At the Effective Time, to the full
extent provided under Utah Law, the Surviving Corporation shall possess all the
rights, privileges, powers and franchises of a public as well as of a private
nature, and be subject to all the restrictions, disabilities and duties of each
of the Constituent Corporations; and any and all rights, privileges, powers and
franchises of each of the Constituent Corporations, and all property, real,
personal and mixed, and all debts due to either of the Constituent Corporations
on whatever account, as well as stock subscriptions and all other things in
action belonging to each of the Constituent Corporations, shall be vested in the
Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest shall be thereafter as effectually
the property of the Surviving Corporation as they were of the Constituent
Corporations, and the title to any real estate vested by deed or otherwise, in
either of the Constituent Corporations, shall not revert or be in any way
impaired; but all rights of creditors and all liens upon any property of either
of the Constituent Corporations shall be preserved unimpaired, and all debts,
liabilities and duties of the Constituent Corporations shall thenceforth attach
to the Surviving Corporation and may be enforced against it to the same extent
as if said debts, liabilities and duties had been incurred or contracted by it.
SECTION 1.04. Articles of Incorporation; Bylaws. At the Effective Time,
the articles of incorporation of Surgical, as amended as provided in the
Articles of Merger attached hereto as Exhibit A, inter alia, to change the name
of Surgical to "4Health, Inc.", to increase the authorized number of shares of
New Common Stock to 30,000,000 shares, to provide for a "fair price" provision,
to provide for a super-majority vote requirement in order to remove directors
without cause and to restrict the use of written consents of stockholders in
lieu of meetings, shall be the articles of incorporation of the Surviving
Corporation and thereafter shall continue to be its articles of incorporation
until amended as provided therein and pursuant to Utah Law. The bylaws of
Surgical, as in effect immediately prior to the Effective Time, shall be the
bylaws of the Surviving Corporation and thereafter shall continue to be its
bylaws until amended as provided therein and in the articles of incorporation
and pursuant to Utah Law.
SECTION 1.05. Directors and Officers. The directors of the Surviving
Corporation immediately after the Effective Time shall be the individuals
identified in Schedule 1.05, each to hold office in accordance with the articles
of incorporation and bylaws of the Surviving Corporation, and the officers of
the Surviving Corporation immediately after the Effective Time shall be the
officers of 4Health immediately prior to the Effective Time, each to hold office
in accordance with the bylaws of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed and qualified.
ARTICLE 2.
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Merger Consideration; Conversion and Cancellation of
Securities. At the Effective Time, by virtue of the Merger and without any
action on the part of 4Health, Surgical, or their respective stockholders:
(a) Subject to the other provisions of this Article II, each share of
4Health Common Stock issued and outstanding immediately prior to the Effective
Time (excluding any 4Health Common Stock described in Section 2.01(c) of this
Agreement and shares held by Dissenting 4Health Stockholders) shall be converted
into the right to receive 1.50467 shares of New Common Stock (the "4Health
Common Stock Exchange Ratio"); each share of 4Health Series A Stock, issued and
outstanding immediately prior to the Effective Time (excluding any 4Health
Series A Stock described in Section 2.01(c) of this Agreement and shares held by
Dissenting 4Health Stockholders) shall be converted into the right to receive
25.07782 shares of New Common Stock (the "4Health Series A Stock Exchange
Ratio") and each 4 shares of Surgical Common Stock issued and outstanding at the
Effective Time (excluding any Surgical Common Stock described in Section 2.01(c)
of this Agreement and shares held by Dissenting Surgical Stockholders) will be
converted into two shares of New Common Stock and one warrant to purchase one
share of New Common Stock at any time within eighteen (18) months after the
Effective Time at an exercise price of $11.00 per share, subject to adjustment
(collectively, the "Warrants"), each Warrant to be issued pursuant to a Warrant
Agreement in substantially in the form of Exhibit B attached hereto (the
"Surgical Exchange Ratio," together with the 4Health Common Stock Exchange
Ratio, and the 4Health Series A Stock Exchange Ratio, the "Exchange Ratios").
Notwithstanding the foregoing, if between the date of this Agreement and the
Effective Time the outstanding shares of 4Health Common Stock or Surgical Common
Stock or the 4Health Series A Stock shall have been changed into a different
number of shares or a different class, by reason of any stock dividend,
subdivision, reclassification, conversion, recapitalization, split, combination
or exchange of shares, the Exchange Ratios and the Warrants shall be
correspondingly adjusted to reflect such stock dividend, subdivision,
reclassification, conversion, recapitalization, split, combination or exchange
of shares.
(b) (i) Subject to the other provisions of this Article II, the
right to acquire an aggregate of 121,000 shares of Surgical Common Stock
previously granted pursuant to the Surgical Option Plans (as hereinafter
defined) to the individuals identified in Schedule 2.01(b)(i) of the Surgical
Disclosure Schedule (as hereinafter defined) shall be adjusted as of and at the
Effective Time to reflect the Surgical Exchange Rate and such individuals shall
thereafter be entitled to receive the number of shares of New Common Stock at
the exercise prices during the option terms set forth opposite their names on
Schedule 2.01(b)(i). The holders of such rights, as such, will not be entitled
to receive Warrants at the Effective Time or on the exercise of their rights.
(ii) Subject to the other provisions of this Article II, the
continuing directors of Surgical identified in Schedule 2.01(b)(ii) of the
Surgical Disclosure Schedule shall have been granted stock purchase options
under Surgical's Long Term Stock Incentive Plan by the board of directors of
Surgical to purchase the number of shares of New Common Stock at the exercise
price and during the option term set forth opposite their respective names on
Schedule 2.01(b)(ii) pursuant to the form of Stock Option Agreement included in
such Schedule, which options shall, subject to the approval of the Long Term
Stock Incentive Plan by the stockholders of Surgical, be issued to such
directors at the Effective Time.
(iii) Subject to the other provisions of this Article II, the
former directors, officers, and employees of 4Health identified in Schedule
4.03(c) of the 4Health Disclosure Schedule (as hereinafter defined) shall, at
the Effective Time, be granted stock purchase options under the Long Term Stock
Incentive Plan, in lieu of their existing options, to purchase the number of
shares of New Common Stock at the exercise prices and during the option terms
set forth opposite their respective names on Schedule 4.03(c).
(c) Notwithstanding any provision of this Agreement to the contrary,
each share of 4Health Common Stock and 4Health Series A Stock held in the
treasury of 4Health, each share of Surgical Common Stock held in the treasury of
Surgical and each share of 4Health Common Stock, 4Health Series A Stock and
Surgical Common Stock owned by 4Health or Surgical or any direct or indirect
wholly owned subsidiary of 4Health or of Surgical immediately prior to the
Effective Time shall be canceled and extinguished without any conversion thereof
and no payment shall be made with respect thereto.
(d) Subject to the provisions of Section 2.01(f), all shares of
4Health Common Stock, 4Health Series A Stock and Surgical Common Stock shall
cease to be outstanding and shall automatically be canceled and retired, and
each certificate previously evidencing 4Health Common Stock, 4Health Series A
Stock and Surgical Common Stock immediately prior to the Effective Time (other
than 4Health Common Stock, 4Health Series A Stock and Surgical Common Stock
described in Section 2.01(c) of this Agreement) (the "Converted Shares" or
"Converted Share Certificates," as the case may be) shall thereafter represent
the right to receive, subject to Section 2.02(e) of this Agreement, that number
of shares of New Common Stock and Warrants determined pursuant to Section
2.01(a) hereof or, if applicable, cash pursuant to Sections 2.01(f) or 2.02(f)
of this Agreement (the "Merger Consideration"). The holders of Converted Share
Certificates shall cease to have any rights with respect to such Converted
Shares except as otherwise provided herein or by law. Such Converted Share
Certificates shall be exchanged for certificates evidencing whole shares of New
Common Stock and Warrants upon the surrender of such Converted Share
Certificates in accordance with the provisions of Section 2.02 of this
Agreement, without interest. No fractional shares of New Common Stock or
Warrants shall be issued in connection with the Merger and, in lieu thereof, a
cash payment shall be made pursuant to Section 2.02(f) of this Agreement.
(e) All shares of New Common Stock issued to holders of 4Health
Common Stock, 4Health Series A Stock and Surgical Common Stock and all Warrants
and shares of New Common Stock to be issued upon exercise of the Warrants
("Warrant Shares") in the Merger shall be registered under the Securities Act of
1933, as amended (the "Securities Act").
(f) Notwithstanding anything in this Agreement to the contrary, any
issued and outstanding shares of capital stock of 4Health or Surgical held by a
Dissenting 4Health Stockholder or a Dissenting Surgical Stockholder,
respectively, who has not voted in favor of nor consented to the Merger and who
complies with all the provisions of California Law or Utah Law, respectively,
concerning the right of holders of such stock to dissent from the Merger and
require appraisal of their shares, shall not be converted as described in
Section 2.01(a) but shall become, at the Effective Time, by virtue of the Merger
and without any further action, the right to receive such consideration as may
be determined to be due to such Dissenting 4Health Stockholder or Dissenting
Surgical Stockholder pursuant to California Law or Utah Law, respectively;
provided, however, that shares of 4Health Common Stock and 4Health Series A
Stock or Surgical Common Stock outstanding immediately prior to the Effective
Time and held by a Dissenting 4Health Stockholder or Dissenting Surgical
Stockholder, respectively, who shall, after the Effective Time, withdraw his
demand for appraisal or lose his right of appraisal, in either case pursuant to
California Law or Utah Law, as the case may be, shall be deemed to be converted
as of the Effective Time, into the right to receive New Common Stock or New
Common Stock and Warrants, as the case may be.
(g) Notwithstanding anything in this Agreement to the contrary, in
the event that within the period commencing on the date hereof and ending twelve
(12) months subsequent to the Closing Date, Surgical has not realized at least
two million dollars ($2,000,000) in earnings before interest and federal and
state income taxes computed in accordance with generally accepted accounting
principles consistently applied ("IDT Earnings") from the exploitation of its
inflation device technology (the "ID Technology"), the sale of products based on
its ID Technology or joint venture income received on the sale of products based
on the ID Technology, then the former shareholders of 4Health shall be entitled
to receive, as additional Merger Consideration, on a pro rata basis based upon
such shareholders' record holdings of 4Health Common Stock at the Effective
Time, additional shares of New Common Stock in an aggregate amount equal to the
quotient of (a) the amount by which $2,000,000 exceeds the aggregate amount of
IDT Earnings attributable to the ID Technology divided by (b) $4.00. Solely for
purposes of the foregoing, the holders of 4Health Series A Stock shall be deemed
to have converted their shares of 4Health Series A Stock into an aggregate of
250,000 shares of 4Health Common Stock at the Effective Time.
SECTION 2.02. Exchange and Surrender of Certificates.
(a) As of the Effective Time, Surgical shall deposit, or shall cause
to be deposited with Zions First National Bank, 2200 South Highland Drive, Salt
Lake City, Utah 84106 (the "Exchange Agent"), for the benefit of the holders of
Converted Share Certificates, for exchange in accordance with this Article II,
the Merger Consideration, together with any dividends or distributions with
respect thereto (hereinafter referred to as the "Exchange Fund").
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of shares of 4Health Common
Stock and 4Health Series A Stock and Surgical Common Stock immediately prior to
the Effective Time a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Converted Share
Certificates shall pass, only upon delivery of the Converted Share Certificates
to the Exchange Agent, and which shall be in such form and have such other
provisions as 4Health and Surgical may reasonably specify) and instructions for
use in effecting the surrender of the Converted Share Certificates in exchange
for certificates representing shares of New Common Stock and Warrants issuable
pursuant to Section 2.01 in exchange for such Converted Share Certificates.
Upon surrender of a Converted Share Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal, duly executed, the holder of
such Converted Share Certificate shall be entitled to receive in exchange
therefor a certificate representing that number of whole shares of New Common
Stock and Warrants which such holder has the right to receive in exchange for
the Converted Share Certificate surrendered pursuant to the provisions of this
Article II (after taking into account all Converted Shares then held by such
holder), and the Converted Share Certificates so surrendered shall forthwith be
canceled. In the event of a transfer of ownership of 4Health Common Stock or
4Health Series A Stock or Surgical Common Stock which is not registered in the
transfer records of 4Health or Surgical, a certificate representing the proper
number of shares of New Common Stock may be issued to a transferee if the
Converted Share Certificate representing such 4Health Common Stock or 4Health
Series A Stock or Surgical Common Stock is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.02, each Converted Share
Certificate shall be deemed at any time after the Effective Time to represent
only the New Common Stock and Warrants into which the Converted Shares
represented by such Converted Share Certificate have been converted as provided
in this Article II and the right to receive upon such surrender cash in lieu of
any fractional shares of New Common Stock or Warrants as contemplated by Section
2.02(f).
(c) After the Effective Time, there shall be no further registration
of transfers of 4Health Common Stock and 4Health Series A Stock. If, after the
Effective Time, certificates representing shares of 4Health Common Stock and
4Health Series A Stock are presented to the Surviving Corporation or the
Exchange Agent, they shall be canceled and exchanged for the Merger
Consideration provided for in this Agreement in accordance with the procedures
set forth herein.
(d) Any portion of the Merger Consideration or the Exchange Fund made
available to the Exchange Agent pursuant to Section 2.02(a) that remains
unclaimed by the holders of shares of 4Health Common Stock, 4Health Series A
Stock or Surgical Common Stock one year after the Effective Time shall be
returned to the Surviving Corporation, upon demand, and any such holder who has
not exchanged its shares of 4Health Common Stock or 4Health Series A Stock in
accordance with this Section 2.02 prior to that time shall thereafter look only
to the Surviving Corporation for payment of the Merger Consideration in respect
of its shares of 4Health Common Stock or 4Health Series A Stock.
Notwithstanding the foregoing, the Surviving Corporation shall not be liable to
any holder of Converted Shares for any amount paid to a public official pursuant
to applicable abandoned property, escheat or similar laws.
(e) No dividends, interest or other distributions with respect to
shares of New Common Stock shall be paid to the holder of any unsurrendered
Converted Share Certificates unless and until such Converted Share Certificates
are surrendered as provided in this Section 2.02. Upon such surrender, the
Surviving Corporation shall pay, without interest, all dividends and other
distributions payable in respect of such shares of New Common Stock on a date
subsequent to, and in respect of a record date after, the Effective Time.
(f) No certificates or scrip evidencing fractional shares of New
Common Stock or Warrants shall be issued upon the surrender for exchange of
Converted Share Certificates, and such fractional share interests and Warrants
shall not entitle the owner thereof to any rights as a stockholder of the
Surviving Corporation. In lieu of any such fractional interests, each holder of
a Converted Share Certificate shall, upon surrender of such certificate for
exchange pursuant to this Article II, be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying the last sale
price of the Surgical Common Stock on the National Market System ("NMS") of the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
prior to the Closing Date by 2 and multiplying the product by the fractional
share of New Common Stock to which such holder would otherwise be entitled
(after taking into account all Converted Shares held of record by such holder at
the Effective Time).
(g) The Surviving Corporation shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any former holder of 4Health Common Stock, 4Health Series A Stock or Surgical
Common Stock, such amounts as the Surviving Corporation (or any affiliate
thereof) is required to deduct and withhold with respect to the making of such
payment under the Code, or any provision of state, local or foreign tax law. To
the extent that amounts are so withheld by the Surviving Corporation, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the former holder of the 4Health Common Stock, 4Health Series A
Stock or Surgical Common Stock in respect of which such deduction and
withholding was made. In the event the amount withheld is insufficient so to
satisfy the withholding obligations of the Surviving Corporation, (or any
affiliate thereof), such former stockholder shall reimburse the Surviving
Corporation (or such affiliate), at its request, the amount of any such
insufficiency.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF SURGICAL
Surgical hereby represents and warrants to 4Health that:
SECTION 3.01. Organization and Qualification; Subsidiaries. Each of
Surgical and its subsidiaries is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
organization, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as it is now being conducted and is
duly qualified and in good standing to do business in each jurisdiction in which
the nature of the business conducted by it or the ownership or leasing of its
properties makes such qualification necessary, other than where the failure to
be so duly qualified and in good standing would not have a Surgical Material
Adverse Effect. The term "Surgical Material Adverse Effect" as used in this
Agreement shall mean any change or effect that, individually or when taken
together with all other such changes or effects, would be reasonably likely to
be materially adverse to the assets, liabilities, financial condition, results
of operations or current or future business of Surgical and its subsidiaries,
taken as a whole. Schedule 3.01 of the disclosure schedule delivered to 4Health
by Surgical and attached hereto and made a part hereof (the "Surgical Disclosure
Schedule") sets forth, as of the date hereof, a true and complete list of all
Surgical's directly or indirectly owned subsidiaries, together with (A) the
jurisdiction of incorporation or organization of each subsidiary and the
percentage of each subsidiary's outstanding capital stock or other equity
interests owned by Surgical or another subsidiary of Surgical, and (B) an
indication of whether each such subsidiary is a "Significant Subsidiary" as
defined in Section 9.03(g) of this Agreement. Except as set forth in Schedule
3.01 to the Surgical Disclosure Schedule, neither Surgical nor any of its
subsidiaries owns an equity interest in any other partnership or joint venture
arrangement or other business entity that is material to the assets,
liabilities, financial condition, results of operations or current or future
business of Surgical and its subsidiaries, taken as a whole.
SECTION 3.02. Articles of Incorporation and Bylaws. Surgical has
heretofore furnished to 4Health complete and correct copies of the articles of
incorporation and the bylaws or the equivalent organizational documents as
presently in effect of Surgical and each of its subsidiaries. Neither Surgical
nor any of its subsidiaries is in violation of any of the provisions of its
articles or any material provision of its bylaws (or equivalent organizational
documents).
SECTION 3.03. Capitalization.
(a) The authorized capital stock of Surgical consists of 20,000,000
shares of Surgical Common Stock, of which 4,539,550 shares are issued and
outstanding, 4,391 shares are held in treasury by Surgical and 671,000 shares
are reserved for future issuance pursuant to outstanding stock options or other
contractual arrangements of which 651,000 will be reserved for issuance as at
the Effective Time; and 5,000,000 shares of preferred stock, par value $.01 per
share, of which no shares are issued and outstanding. Except as described in
this Section 3.03 or in Schedule 3.03(a) to the Surgical Disclosure Schedule, no
shares of capital stock of Surgical are reserved for any purpose. Each of the
outstanding shares of capital stock of, or other equity interests in, each of
Surgical and its subsidiaries is duly authorized, validly issued, and, in the
case of shares of capital stock, fully paid and nonassessable, and has not been
issued in violation of (nor are any of the authorized shares of capital stock
of, or other equity interests in, such entities subject to) any preemptive or
similar rights created by statute, the charter or bylaws (or the equivalent
organizational documents) of Surgical or any of its subsidiaries, or any
agreement to which Surgical or any of its subsidiaries is a party or bound, and
such outstanding shares or other equity interests owned by Surgical or a
subsidiary of Surgical are owned free and clear of all security interests,
liens, claims, pledges, agreements, limitations on Surgical's or such
subsidiaries' voting rights, charges or other encumbrances of any nature
whatsoever.
(b) Except as set forth in Schedule 3.03(b)(i) to the Surgical
Disclosure Schedule, there are no options, warrants or other rights (including
registration rights), agreements, arrangements or commitments of any character
to which Surgical or any of its subsidiaries is a party relating to the issued
or unissued capital stock of Surgical or any of its subsidiaries or obligating
Surgical or any of its subsidiaries to grant, issue or sell any shares of the
capital stock of Surgical or any of its subsidiaries, by sale, lease, license or
otherwise. Except as set forth in Schedule 3.03(b)(ii) to the Surgical
Disclosure Schedule, there are no obligations, contingent or otherwise, of
Surgical or any of its subsidiaries to repurchase, redeem or otherwise acquire
any shares of Surgical Common Stock or other capital stock of Surgical, or the
capital stock or other equity interests of any subsidiary of Surgical; or
provide material funds to, or make any material investment in (in the form of a
loan, capital contribution or otherwise), or provide any guarantee with respect
to the obligations of, any subsidiary of Surgical or any other person. Except
as described in Schedule 3.03(b)(iii) to the Surgical Disclosure Schedule,
neither Surgical nor any of its subsidiaries (x) directly or indirectly owns,
(y) has agreed to purchase or otherwise acquire or (z) holds any interest
convertible into or exchangeable or exercisable for, 5% or more of the capital
stock of any corporation, partnership, joint venture or other business
association or entity (other than the subsidiaries of Surgical set forth in
Schedule 3.01 to the Surgical Disclosure Schedule). Except as set forth in
Schedule 3.03(b)(iv) to the Surgical Disclosure Schedule, there are no
agreements, arrangements or commitments of any character (contingent or
otherwise) pursuant to which any person is or may be entitled to receive any
payment based on the revenues or earnings, or calculated in accordance
therewith, of Surgical or any of its subsidiaries. Except as contemplated
hereby, there are no voting trusts, proxies or other agreements or
understandings to which Surgical or any of its subsidiaries is or will be a
party or by which Surgical or any of its subsidiaries is or will be bound with
respect to the voting of any shares of capital stock of Surgical or any of its
subsidiaries.
(c) Surgical has made available to 4Health complete and correct
copies of its Pinnacle Environmental, Inc. 1989 Stock Option and Stock Award
Plan; Pinnacle Environmental, Inc. 1991 Directors' Stock Option Plan; Surgical
Technologies, Inc. 1992 Directors' Stock Option Plan and the Long Term Stock
Incentive Plan (collectively, the "Surgical Option Plans") and the forms of
options issued pursuant to the Surgical Option Plans, including all amendments
thereto, and all options and warrants that are not in the form specified under
clause (i) above. Schedule 3.03(c) to the Surgical Disclosure Schedule sets
forth a complete and correct list of all outstanding warrants and options,
restricted stock or any other stock awards (the "Surgical Stock Awards") granted
under the Surgical Option Plans or otherwise, setting forth as of the date
hereof (i) the number and type of Surgical Stock Awards, (ii) the exercise price
of each outstanding stock option or warrant, (iii) the number of stock options
and warrants presently exercisable, and (iv) any other material terms and
conditions thereof.
(d) The shares of New Common Stock to be issued pursuant to the
Merger, the Warrants and the Warrant Shares (upon exercise and issuance in
accordance with the Warrants) will be duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights created by statute,
Surgical's articles of incorporation or bylaws or any agreement to which
Surgical is a party or by which it is bound, will be registered under the
Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and will be registered or exempt from registration under
applicable state securities or blue sky laws ("Blue Sky Laws").
SECTION 3.04. Authority. Surgical has all requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger and the issuance of the New Common Stock and Warrants
pursuant to the Merger, the approval thereof by the stockholders of Surgical as
described in Section 3.15 hereof). The execution and delivery of this Agreement
by Surgical and the consummation by Surgical of the transactions contemplated
hereby have been duly authorized by all necessary corporate action and no other
corporate proceedings on the part of Surgical are necessary to authorize this
Agreement or to cons the New Common Stock and Warrants, the adoption of this
Agreement by the stockholders of Surgical as described in Section 3.15 hereof).
This Agreement has been duly executed and delivered by Surgical and, assuming
the due authorization, execution and delivery thereof by 4Health, constitutes
the legal, valid and binding obligation of Surgical enforceable against Surgical
in accordance with its terms, except that such enforcement may be subject to
applicable bankruptcy, insolvency or other similar laws, now or hereafter in
effect, affecting creditors' rights generally, and the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
SECTION 3.05. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Surgical does
not, and the consummation of the transactions contemplated hereby in accordance
with its terms will not conflict with or violate the articles of incorporation
or bylaws, or the equivalent organizational documents, in each case as amended
or restated, of Surgical or any of its subsidiaries, conflict with or violate
any federal, state, foreign or local law, statute, ordinance, rule, regulation,
order, judgment or decree (collectively, "Laws") applicable to Surgical or any
of its subsidiaries or by or to which any of their respective properties is
bound or subject or except as described in Schedule 3.05 to the Surgical
Disclosure Schedule, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or require payment under, or result in the creation of a lien
or encumbrance on any of the properties or assets of Surgical or any of its
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Surgical or any of its subsidiaries is a party or by or to which
Surgical or any of its subsidiaries or any of their respective properties is
bound or subject, except for any such conflicts or violations described in
clause (ii) or breaches, defaults, events, rights of termination, amendment,
acceleration or cancellation, payment obligations or liens or encumbrances
described in clause (iii) that would not have a Surgical Material Adverse
Effect. Surgical has taken all actions necessary under Utah Law to elect out of
the provisions of the Control Share Acquisitions Act, Section 61-6-1 et seq., of
Utah Law to ensure that the restrictions on business combinations set forth in
such sections do not, and will not, apply with respect to or as a result of the
transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement by Surgical does
not, and consummation of the transactions contemplated hereby will not, require
Surgical to obtain any consent, license, permit, approval, waiver, authorization
or order of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign (collectively, "Governmental
Entities"), except for filing (A) a registration statement on Form S-4 (the
"Form S-4") under the Securities Act, (B) preliminary and definitive proxy
materials under the Exchange Act, (C) registrations, qualifications and claims
for exemptions under Blue Sky Laws, and (D) appropriate merger documents as
required by Utah Law; and where the failure to obtain such consents, licenses,
permits, approvals, waivers, authorizations or orders, or to make such filings
or notifications, would not, either individually or in the aggregate, materially
interfere with Surgical's performance of its obligations under this Agreement
and would not have a Surgical Material Adverse Effect.
SECTION 3.06. Permits; Compliance. Each of Surgical and its subsidiaries
and, to Surgical's knowledge, each third party operator of any of Surgical's
properties, is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exemptions, consents, certificates,
approvals and orders necessary to own, lease and operate its properties and to
carry on its business as it is now being conducted (collectively, the "Surgical
Permits"), and there is no action, proceeding or investigation pending or, to
the knowledge of Surgical, threatened regarding suspension or cancellation of
any of the Surgical Permits, except where the failure to possess, or the
suspension or cancellation of, such Surgical Permits would not have a Surgical
Material Adverse Effect. Neither Surgical nor any of its subsidiaries is in
conflict with, or in default or violation of any Law applicable to Surgical or
any of its subsidiaries or by or to which any of their respective properties is
bound or subject or any of the Surgical Permits, except for any such conflicts,
defaults or violations that would not have a Surgical Material Adverse Effect.
During the period commencing on April 1, 1995 and ending on the date hereof,
neither Surgical nor any of its subsidiaries has received from any Governmental
Entity any written notification with respect to possible conflicts, defaults or
violations of Laws, except as set forth in Schedule 3.06 of the Surgical
Disclosure Schedule and except for written notices relating to possible
conflicts, defaults or violations that would not have a Surgical Material
Adverse Effect.
SECTION 3.07. Reports; Financial Statements.
(a) Since March 31, 1991, Surgical and its subsidiaries have filed
all forms, reports, statements and other documents required to be filed with (A)
the Securities and Exchange Commission (the "SEC") including, without
limitation, (1) all Registration Statements filed under the Securities Act, (2)
all Annual Reports on Form 10-K, (3) all Quarterly Reports on Form 10-Q, (4) all
proxy statements relating to meetings of stockholders (whether annual or
special), (5) all Current Reports on Form 8-K and (6) all other reports,
schedules, registration statements or other documents (collectively referred to
as the "Surgical SEC Reports") and (B) any applicable state securities
authorities and all forms, reports, statements and other documents required to
be filed with any other applicable federal or state regulatory authorities,
except where the failure to file any such forms, reports, statements or other
documents would not have a Surgical Material Adverse Effect (all such forms,
reports, statements and other documents in clauses (i) and (ii) of this Section
3.07(a) being referred to herein, collectively, as the "Surgical Reports"). The
Surgical Reports, including all Surgical Reports filed after the date of this
Agreement and prior to the Effective Time, including, without limitation, the
Form S-4 relating to the Merger, (x) were or will be prepared in accordance with
the requirements of applicable Law (including, with respect to Surgical SEC
Reports, the Securities Act and the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Surgical SEC
Reports) and (y) did not at the time they were filed, or will not at the time
they are filed, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are made,
not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Surgical SEC Reports filed prior
to the Effective Time, including, without limitation, the Form S-4 (as regards
Surgical), have been or will be prepared in accordance with the published rules
and regulations of the SEC and generally accepted accounting principles applied
on a consistent basis throughout the periods involved (except (a) to the extent
required by changes in generally accepted accounting principles; (b) with
respect to Surgical SEC Reports filed prior to the date of this Agreement, as
may be indicated in the notes thereto; and (c) with respect to interim financial
statements as may be permitted by Article 10 of Regulation S-X) and fairly
present or will fairly present the consolidated financial position of Surgical
and its subsidiaries as of the respective dates thereof and the consolidated
results of operations and cash flows for the periods indicated (including
reasonable estimates of normal and recurring year-end adjustments), except that
(x) any unaudited interim financial statements were or will be subject to normal
and recurring year-end adjustments and (y) any pro forma financial statements
contained in such consolidated financial statements are not necessarily
indicative of the consolidated financial position of Surgical and its
subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows for the periods indicated.
SECTION 3.08. Absence of Certain Changes or Events. Except as disclosed
in Surgical SEC Reports filed prior to the date of this Agreement or as
contemplated by this Agreement or as set forth in Schedule 3.08 to the Surgical
Disclosure Schedule, since March 31, 1995 Surgical and its subsidiaries have
conducted their respective businesses only in the ordinary course and in a
manner consistent with past practice and there has not been: any material
damage, destruction or loss (whether or not covered by insurance) with respect
to any material assets of Surgical or any of its subsidiaries; any material
change by Surgical or any of its subsidiaries in their accounting methods,
principles or practices; any declaration, setting aside or payment of any
dividends or distributions in respect of shares of Surgical Common Stock or the
shares of stock of, or other equity interests in, any subsidiary of Surgical, or
any redemption, purchase or other acquisition by Surgical or any of its
subsidiaries of any of Surgical's securities or any of the securities of any
subsidiary of Surgical; any increase in the benefits under, or the
establishment or amendment of, any bonus, insurance, severance, deferred
compensation, pension, retirement, profit sharing, stock option (including,
without limitation, the granting of stock options, stock appreciation rights,
performance awards, or restricted stock awards), stock purchase or other
employee benefit plan, or any increase in the compensation payable or to become
payable to directors, officers or employees of Surgical or its subsidiaries;
any revaluation by Surgical or any of its subsidiaries of any of their assets,
including the writing down of the value of inventory or the writing down or off
of notes or accounts receivable, other than in the ordinary course of business
and consistent with past practices; any entry by Surgical or any of its
subsidiaries into any commitment or transaction material to Surgical and its
subsidiaries, taken as a whole (other than this Agreement and the transactions
contemplated hereby); any material increase in indebtedness for borrowed money;
or a Surgical Material Adverse Effect.
SECTION 3.09. Absence of Litigation. Except as disclosed in the Surgical
SEC Reports filed prior to the date of this Agreement or as set forth in
Schedule 3.09 to the Surgical Disclosure Schedule, there is no claim, action,
suit, litigation, proceeding, arbitration or, to the knowledge of Surgical,
investigation of any kind, at law or in equity (including actions or proceedings
seeking injunctive relief), pending or, to the knowledge of Surgical, threatened
against Surgical or any of its subsidiaries or any properties or rights of
Surgical or any of its subsidiaries (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which would not have a
Surgical Material Adverse Effect), and neither Surgical nor any of its
subsidiaries is subject to any continuing order of, consent decree, settlement
agreement or other similar written agreement with, or, to the knowledge of
Surgical, continuing investigation by, any Governmental Entity, or any judgment,
order, writ, injunction, decree or award of any Government Entity or arbitrator,
including, without limitation, cease-and-desist or other orders, except for
matters that would not have a Surgical Material Adverse Effect.
SECTION 3.10. Employee Benefit Plans; Labor Matters.
(a) Schedule 3.10(a) to the Surgical Disclosure Schedule sets forth
each employee benefit plan (as such term is defined in ERISA section 3(3))
maintained or contributed to during the past five years by Surgical or any
member of its ERISA Group or with respect to which Surgical or any member of its
ERISA Group could incur liability under Sections 4063, 4069, 4212(c) or 4204 of
ERISA, and any other retirement, pension, stock option, stock appreciation
rights, profit sharing, incentive compensation, deferred compensation, savings,
thrift, vacation pay, severance pay, or other employee compensation or benefit
plan, agreement, practice, or arrangement, whether written or unwritten,
whether or not legally binding (collectively, the "Surgical Benefit Plans").
For purposes of this Agreement, "ERISA Group" means a controlled or affiliated
group within the meaning of Code section 414(b), (c), (m), or (o) of which
Surgical is a member. Surgical has made available to 4Health correct and
complete copies of all Surgical Benefit Plans (including a detailed written
description of any Surgical Benefit Plan that is unwritten, including a
description of eligibility criteria, participation, vesting, benefits, funding
arrangements and assets and any other provisions relating to Surgical) and, with
respect to each Surgical Benefit Plan, a copy of each of the following, to the
extent each is applicable to each Surgical Benefit Plan: the most recent
favorable determination letter, materials submitted to the Internal Revenue
Service in support of a pending determination letter request, the most recent
letter issued by the Internal Revenue Service recognizing tax exemption, each
insurance contract, trust agreement, or other funding vehicle, the three most
recently filed Forms 5500 plus all schedules and attachments, the three most
recent actuarial valuations, and each summary plan description or other general
explanation or communication distributed or otherwise provided to employees with
respect to each Surgical Benefit Plan that describes the terms of the Surgical
Benefit Plan.
(b) With respect to the Surgical Benefit Plans, no event has occurred
and, to the knowledge or Surgical, there exists no condition or set of
circumstances, in connection with which Surgical or any member of its ERISA
Group could be subject to any liability under the terms of such Surgical Benefit
Plans, ERISA, the Code or any other applicable Law which would have a Surgical
Material Adverse Effect. Except as otherwise set forth on Schedule 3.10(b) to
the Surgical Disclosure Schedule:
(i) As to any Surgical Benefit Plan intended to be qualified
under Section 401 of the Code, such Surgical Benefit Plan satisfies the
requirements of such Section and there has been no termination or partial
termination of such Surgical Benefit Plan within the meaning of Section
411(d)(3) of the Code and Surgical has administered all such Plans in accordance
with all applicable Laws;
(ii) There are no actions, suits or claims pending (other than
routine claims for benefits) or, to the knowledge of Surgical, threatened
against, or with respect to, any of the Surgical Benefit Plans or their assets,
any plan sponsor, or any fiduciary (as such term is defined in Section 3(21) of
ERISA), and Surgical has no knowledge of any facts that could give rise to any
actions, suits or claims;
(iii) All contributions required to be made to the Surgical
Benefit Plans pursuant to their terms and provisions have been made timely;
(iv) As to any Surgical Benefit Plan subject to Title IV of
ERISA, there has been no event or condition which presents the material risk of
plan termination, no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of ERISA or Section 412 of the Code has been
incurred, no reportable event within the meaning of Section 4043 of ERISA has
occurred, no notice of intent to terminate the Surgical Benefit Plan has been
given under Section 4041 of ERISA, no proceeding has been instituted under
Section 4042 of ERISA to terminate the Surgical Benefit Plan, and no liability
to the Pension Benefit Guaranty Corporation or to the Plan has been incurred;
(v) Neither Surgical nor any party in interest (as such term is
defined in ERISA section 3(14)) nor any disqualified person has engaged in any
prohibited transaction within the meaning of ERISA section 406 or Code section
4975 that would subject Surgical to any liability; and
(vi) The consummation of the transactions contemplated by this
Agreement will not give rise to any acceleration of vesting of payments or
options, the acceleration of the time of making any payments, or the making of
any payments, which in the aggregate would result in an "excess parachute
payment" within the meaning of Section 280G of the Code and the imposition of
the excise under Section 4999 of the Code.
(c) Except as set forth in Schedule 3.10(c) to the Surgical
Disclosure Schedule, neither Surgical nor any member of its ERISA Group,
including, without limitation, any of its subsidiaries, is or has ever been a
party to any collective bargaining or other labor union contracts. No
collective bargaining agreement is being negotiated by Surgical or any of its
subsidiaries. There is no pending or threatened labor dispute, strike or work
stoppage against Surgical or any of its subsidiaries which may interfere with
the respective business activities of Surgical or any of its subsidiaries. None
of Surgical, any of its subsidiaries or any of their respective representatives
or employees has committed any unfair labor practices in connection with the
operation of the respective businesses of Surgical or its subsidiaries, and
there is no pending or threatened charge or complaint against Surgical or any of
its subsidiaries by the National Labor Relations Board or any comparable state
agency.
(d) Except as disclosed in Schedule 3.10(d) to the Surgical
Disclosure Schedule and as contemplated by this Agreement, neither Surgical nor
any of its subsidiaries is a party to or is bound by any severance agreements,
programs or policies. Schedule 3.10(d) to the Surgical Disclosure Schedule sets
forth, and Surgical has made available to 4Health true and correct copies of,
all employment agreements with officers or Surgical or its subsidiaries; all
agreements with consultants of Surgical or its subsidiaries obligating Surgical
or any subsidiary to make annual cash payments in an amount exceeding $25,000;
all non-competition agreements with Surgical or a subsidiary executed by
officers of Surgical; and all plans, programs, agreements and other
arrangements of Surgical or its subsidiaries with or relating to its directors.
(e) Except as provided in Schedule 3.10(e) to the Surgical Disclosure
Schedule, (x) no Surgical Benefit Plan provides retiree medical or retiree life
insurance benefits to any person and (y) neither Surgical nor any of its
subsidiaries is contractually or otherwise obligated (whether or not in writing)
to provide any person with life insurance or medical benefits upon retirement or
termination of employment, other than as required by the provisions of Sections
601 through 608 of ERISA and Section 4980B of the Code and each such Surgical
Benefit Plan or arrangement may be amended or terminated by Surgical or its
subsidiaries at any time without liability.
(f) Except as set forth in Schedule 3.10(f) to the Surgical
Disclosure Schedule, neither Surgical nor any member of its ERISA Group
including, without limitation, any of its subsidiaries, contributes to or has an
obligation to contribute to, and has not within six years prior to the date of
this Agreement contributed to or had an obligation to contribute to or has any
secondary liability under ERISA Section 4204 to, a multiemployer plan within the
meaning of Section 3(37) of ERISA.
(g) Except as contemplated by this Agreement or as set forth in
Schedule 3.10(g), Surgical has not amended, or taken any actions with respect
to, any of the Surgical Benefit Plans or any of the plans, programs, agreements,
policies or other arrangements described in Section 3.10(d) of this Agreement
since March 31, 1995.
(h) With respect to each Surgical Benefit Plan that is a "group
health plan" within the meaning of Section 5000(b) of the Code, each such
Surgical Benefit Plan complies and has complied with the requirements of Part 6
of Title I of ERISA and Sections 4980B and 5000 of the Code, except where the
failure to so comply would not have a Surgical Material Adverse Effect.
SECTION 3.11. Taxes. Except when a failure of any representation made in
this Section 3.11 to be true and correct would not result in a liability to
Surgical in excess of $10,000 in the case of a representation known to Surgical
to be untrue or incorrect or $25,000 in the case of a representation not known
to Surgical to be untrue or incorrect:
(a) (1) Except to the extent that the applicable statute of
limitations has expired, all Returns required to be filed by or on behalf of
Surgical have been duly filed on a timely basis with the appropriate
Governmental Entities and such Returns (including all attached statements and
schedules) are true, correct and complete. Except to the extent that the
applicable statute of limitations with respect thereto has expired, all Taxes
(as defined in (f) below) have been paid in full on a timely basis, and no other
Taxes are payable by Surgical with respect thereto for items or periods covered
by such Returns (whether or not shown on or reportable on such Returns) or with
respect to any period prior to the Effective Time;
(2) Surgical has complied in all respects with all applicable
Laws relating to the payment and withholding of Taxes (including any estimated
Taxes and withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or
similar provisions under foreign laws) and has, within the time and in the
manner prescribed by Law, withheld from employee wages and paid over all amounts
withheld under applicable Laws.
(3) Surgical has disclosed on its income tax returns all
positions taken therein that could give rise to a substantial understatement
penalty within the meaning of Code Section 6662;
(4) There are no liens on any of the assets of Surgical with
respect to Taxes, other than liens for Taxes not yet due and payable or as set
forth in Schedule 3.11 of the Surgical Disclosure Schedule for Taxes that are
being contested in good faith through appropriate proceedings and for which
appropriate reserves have been established;
(5) Surgical does not have any liability under Treasury
Regulation Section 1.1502-6 or any analogous state, local or foreign law by
reason of having been a member of any consolidated, combined or unitary group,
other than in the current affiliated group of which Surgical is the common
parent corporation;
(6) Except to the extent that the applicable statute of
limitations has expired, Surgical has made available to 4Health complete copies
of: (i) all federal, state and local, as well as any other taxing authority,
income tax, sales and use tax, employment tax and franchise tax returns of
Surgical for all periods since the formation of Surgical (or any predecessor in
interest), and (ii) all tax audit reports, work papers statements of
deficiencies, closing or other agreements received by Surgical or on its behalf
or relating to Taxes; and
(7) Surgical does not do business in or derive income from any
state, local, territorial or foreign taxing jurisdiction so as to be subject to
Return filing requirements of such jurisdiction, other than those for which
Returns have been furnished to 4Health.
(b) Except as disclosed in Schedule 3.11(b) of the Surgical
Disclosure Schedule:
(1) There is no audit of any Returns of Surgical by a
governmental or taxing authority in process, pending or, to the knowledge of
Surgical, threatened (formally or informally);
(2) Except to the extent that the applicable statute of
limitations has expired and except as to matters that have been resolved, no
deficiencies exist or have been asserted (either formally or informally) or are
expected to be asserted with respect to Taxes of Surgical, and no notice (either
formally or informally) has been received by Surgical that it has not filed a
Return or paid Taxes required to be filed or paid by it;
(3) Surgical is not a party to any pending action or proceeding
for assessment or collection of Taxes, nor has such action or proceeding been
asserted or threatened (either formally or informally) against it or any of its
assets, except to the extent that the applicable statute of limitations has
expired and except as to matters that have been resolved;
(4) No waiver or extension of any statute of limitations is in
effect with respect to Taxes or Returns of Surgical;
(5) No action has been taken that would have the effect of
deferring any liability for Taxes for Surgical from any period prior to the
Effective Time to any period after the Effective Time;
(6) There are no requests for rulings, subpoenas or requests for
information pending with respect to the Taxes of Surgical;
(7) No power of attorney has been granted by Surgical, with
respect to any matter relating to Taxes;
(8) Surgical has never been included in an affiliated group of
corporations, within the meaning of Section 1504 of the Code, other than in the
current affiliated group of which Surgical is the common parent corporation;
(9) Surgical is not (nor has it ever been) a party to any tax
sharing agreement between affiliated corporations; and
(10) The amount of liability for unpaid Taxes of Surgical for all
periods ending on or before the Effective Time will not, in the aggregate,
materially exceed the amount of the liability accruals for Taxes reflected on
the consolidated balance sheet of Surgical as of the Closing Date.
(c) Except as disclosed on Schedule 3.11(c) of the Surgical
Disclosure Schedule:
(1) Surgical is not required to treat any of its assets as owned
by another person for federal income tax purposes or as tax-exempt bond financed
property or tax-exempt use property within the meaning of Section 168 of the
Code;
(2) Surgical has not issued or assumed any corporate acquisition
indebtedness that is subject to Sections 279(a) and (b) of the Code;
(3) Surgical has not entered into any compensatory agreements
with respect to the performance of services under which payment would result in
a nondeductible expense pursuant Section 280G of the Code or an excise tax to
the recipient of such payment pursuant to Section 4999 of the Code;
(4) No election has been made under Section 338 of the Code with
respect to Surgical and no action has been taken that would result in any income
tax liability to Surgical as a result of a deemed election within the meaning of
Section 338 of the Code;
(5) No consent under Section 341(f) of the Code has been filed
with respect to Surgical;
(6) Surgical has not agreed, nor is it required to make, any
adjustment under Code Section 481(a) by reason of a change in accounting method
or otherwise;
(7) Surgical has not disposed of any property that is presently
being accounted for under the installment method;
(8) Surgical is not a party to any interest rate swap or
currency swap;
(9) Surgical has not participated in any international boycott
as defined in Code Section 999;
(10) There are no outstanding balances of deferred gain or loss
accounts related to deferred intercompany transactions with respect to Surgical
under Treasury Regulations Section Section 1.1502-13 or 1.1502-13T;
(11) Surgical has not made and will not make any election under
Treasury Regulations Section 1.1502-20(g)(1) (or any similar provision) with
respect to the reattribution of net operating losses of Surgical;
(12) There is no excess loss account under Treasury Regulation
Section1.1502-19 with respect to the stock of Surgical or any subsidiary;
(13) Surgical is not subject to any joint venture, partnership or
other arrangement or contract that is treated as a partnership for federal
income tax purposes;
(14) Surgical has not made any of the foregoing elections and is
not required to apply any of the foregoing rules under any comparable state,
local or foreign income tax provisions;
(15) Surgical does not have and has never had a permanent
establishment in any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country; and
(16) Except as required with respect to cash paid for fractional
shares and to dissenting stockholders or otherwise contemplated by this
Agreement, Surgical does not intend to withhold any amount from the Merger
Consideration pursuant to the tax withholding provisions of Section 3406 of the
Code, or of Subchapter A of Chapter 3 of the Code, or of any other provision of
law.
(d) The books and records of Surgical, including the Returns of
Surgical made available to 4Health, contain accurate and complete information
with respect to:
(1) All material tax elections in effect with respect to
Surgical;
(2) The current tax basis of the assets of Surgical;
(3) The current and accumulated earnings and profits of
Surgical;
(4) The net operating losses of Surgical by taxable year;
(5) The net capital losses of Surgical;
(6) The tax credit carry overs of Surgical; and
(7) The overall foreign losses of Surgical under Section 904(f)
of the Code that are subject to recapture.
(e) The Returns provided by Surgical to 4Health contain accurate and
complete information with respect to the net operating losses, net operating
loss carry forwards and other tax attributes of Surgical, and the extent to
which they are subject to any limitation under Code Sections 381, 382, 383, or
384, or any other provision of the Code or the federal consolidated return
regulations (or any predecessor provision of any Code section or the
regulations) and, apart from any such limitations and apart from any limitation
that would be imposed as a result of the Merger, there is nothing that would
prevent Surgical from utilizing these net operating losses, net operating loss
carry forwards or other tax attributes as so limited if it has sufficient
income.
(f) (1) For purposes of this Agreement the term "Taxes" shall mean
all taxes, however, denominated, including any interest, penalties or other
additions to tax that may become payable in respect thereof, imposed by any
federal, territorial, state, local or foreign government or any agency or
political subdivision of any such government, which taxes shall include, without
limiting the generality of the foregoing, all income or profit taxes, payroll
and employee withholding taxes, unemployment insurance, social security taxes,
sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross
receipts taxes, business license taxes, occupation taxes, real and personal
property taxes, stamp taxes, environmental taxes, transfer taxes, workers'
compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar nature
to any of the foregoing, required to be paid, withheld or collected.
(2) For the purposes of this Agreement, the term "Returns" shall
mean all reports, estimates, declarations of estimated tax, information
statements and returns relating to, or required to be filed in connection with,
any Taxes, including information returns or reports with respect to backup
withholding and other payments to third parties.
(3) All references to "Surgical" in this Section 3.11 shall
include all subsidiaries of Surgical and where appropriate in this Section 3.11,
the singular shall include the plural.
SECTION 3.12. Tax Matters.
(a) Neither Surgical nor, to the knowledge of Surgical, any of its
affiliates has taken or agreed to take any action that would prevent the Merger
from constituting a tax-free reorganization qualifying under the provisions of
Section 368(a) of the Code.
(b) Surgical has no plan or intention to reacquire the New Common
Stock issued in the Merger.
(c) Surgical and the holders of Surgical Common Stock will each pay
their respective expenses, if any, incurred in connection with the Merger.
(d) There is no intercorporate indebtedness existing between Surgical
and 4Health that was issued, acquired or will be settled at a discount.
(e) Surgical is not an investment company as defined in section
368(a)(2)(F)(iii) and (iv) of the Code.
(f) Except as contemplated by this Agreement, Surgical will take no
action prior to the Effective Time to cease operations or dispose of any of the
stock or, except in the ordinary course of business, any assets of any of its
subsidiaries or current lines of business.
SECTION 3.13. Certain Business Practices. None of Surgical, any of its
subsidiaries or any directors, officers, agents or employees of Surgical or any
of its subsidiaries has used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity, made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns or violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended, or made any other
unlawful payment.
SECTION 3.14. Environmental Matters.
(a) Except for matters disclosed in Schedule 3.14 to the Surgical
Disclosure Schedule and except for matters that would not result individually in
liability to Surgical or any of its subsidiaries in excess of (i) $10,000 in the
case of matters known to Surgical or in the aggregate with all other such
matters, in liability to Surgical or any of its subsidiaries in excess of
$25,000, or (ii) $25,000 in the case of matters not known to Surgical or in the
aggregate with all other such matters, in liability to Surgical or any of its
subsidiaries in excess of $50,000.
(i) The properties, operations and activities of Surgical and
its subsidiaries are in compliance with all applicable Environmental Laws and
there are no circumstances which could reasonably be expected to prevent or
interfere with their continued compliance with applicable Environmental Laws.
(ii) Surgical and its subsidiaries and the properties and
operations of Surgical and its subsidiaries are not subject to any existing,
pending, or, to Surgical's knowledge, threatened civil, criminal or
administrative action, suit, claim, notice of violation, investigation, notice
of potential liability, request for information, inquiry, demand or proceeding
under applicable Environmental Laws, and to Surgical's knowledge no basis exists
therefor.
(iii) Surgical and its subsidiaries have not agreed, whether
by contract or by consent agreement with Governmental Entities or private
persons, to undertake investigation, clean up, or remedial activities.
(iv) All notices, permits, licenses, or similar authorizations
required to be obtained or filed by Surgical or any of its subsidiaries under
any Environmental Laws in connection with any aspect of the business of Surgical
or any of its subsidiaries, including without limitation those relating to the
treatment, storage, disposal or discharge of Hazardous Materials, have been duly
obtained or filed and will remain valid and in effect after the Merger, and
Surgical and its subsidiaries are in compliance with the terms and conditions of
all such notices, permits, licenses and similar authorizations.
(v) Surgical and its subsidiaries have satisfied and are
currently in compliance with all financial responsibility requirements
applicable to their operations and imposed by any Governmental Entity under
Environmental Laws, and Surgical and its subsidiaries have not received any
notice of noncompliance with respect to any such financial responsibility
requirements.
(vi) There are no physical or environmental conditions existing
on any property of Surgical or its subsidiaries or resulting from Surgical's or
such subsidiaries' operations or activities, past or present, at any location,
including without limitation, releases and disposal of Hazardous Materials, that
would give rise to any on-site or off-site investigation, reporting, or remedial
obligations or other Environmental Liability.
(vii) To the extent required by applicable Environmental
Laws, all Hazardous Materials generated by Surgical and its subsidiaries have
been transported only by persons authorized under applicable Environmental Laws
to transport such materials, and disposed of only at treatment, storage and
disposal facilities authorized under applicable Environmental Laws to treat,
store or dispose of such Hazardous Materials.
(viii) There has been no exposure of any person or property to
Hazardous Materials or any release of Hazardous Materials into the environment
by Surgical or its present or prior subsidiaries or in connection with their
present or prior properties or operations that could reasonably be expected to
give rise to any Environmental Liability. All employees of Surgical and its
subsidiaries with exposure to asbestos in connection with Surgical's or such
subsidiaries' operations or activities, past or present, have received annual
physicals with pulmonary and respiratory examinations and chest x-rays without
the manifestation of asbestos-related conditions and Surgical is not aware of
any pulmonary or respiratory illnesses suffered or incurred by any such employee
related to exposure to asbestos caused by such employee's employment with
Surgical or any of its subsidiaries.
(ix) No release or clean up of Hazardous Materials has occurred
at Surgical and its subsidiaries' properties which could reasonably be expected
to result in the assertion or creation of any lien on the properties by any
governmental body or agency or other Governmental Entity with respect thereto,
nor has any such lien been asserted or made by any governmental body, agency or
entity with respect thereto.
(x) To Surgical's knowledge, the operations of each third party
operator of any of Surgical or its subsidiaries' properties are in compliance
with the terms of this Section 3.14.
(xi) Surgical and its subsidiaries have complied with all
Environmental Protection Agency guidelines relating to the removal of asbestos
and all such asbestos removal activities were scheduled with Surgical's or its
subsidiaries' insurers and were (and continue to be) insured under insurance
policies maintained with reputable insurers (which are current, in full force
and effect and which name Surgical as an insured).
(b) Surgical and its subsidiaries have made available to 4Health all
internal and external environmental audits, studies, documents and
correspondence on environmental matters in the possession of Surgical or its
subsidiaries relating to any of the present or prior properties or operations of
Surgical and its subsidiaries.
(c) For purposes of this Agreement, the following terms shall be
defined as follows:
(i) "Environmental Laws" shall mean any and all laws, statutes,
ordinances, rules, regulations or orders of any Governmental Entity pertaining
to pollution, health, safety, or the environment, including, without limitation,
the Clean Air Act, the Comprehensive Environmental, Response, Compensation, and
Liability Act ("CERCLA"), the Clean Water Act, the Occupational Safety and
Health Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal
Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking
Water Act, the Toxic Substances Control Act, the Hazardous Materials
Transportation Act, the Oil Pollution Act, all as amended, any state laws
implementing the foregoing federal laws, any state laws pertaining to, health,
safety and waste management including, without limitation, the handling of
asbestos, medical waste or disposable products, hydrocarbon products, PCBs or
other Hazardous Materials or processing or disposing of wastes or the use,
maintenance and closure of pits and impoundments, all other federal, state or
local environmental conservation or protection and health and safety laws, and
any common law creating liability for environmental conditions. Environmental
Laws shall include, without limitation, all restrictions, conditions, standards,
limitations, prohibitions, requirements, guidelines, obligations, schedules and
timetables contained in Environmental Laws or contained in any regulation, plan,
code, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder.
(ii) "Hazardous Materials" shall mean any materials that are
regulated by or form the basis of liability under Environmental Laws, and
include, without limitation, asbestos, wastes, including, without limitation,
medical wastes or disposable products, hazardous substances, pollutants or
contaminants, hazardous or solid wastes, hazardous constituents, hazardous
materials, toxic substances, petroleum, including crude oil or any fraction
thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic
gas usable for fuel (or mixtures of natural gas and such synthetic gas).
(iii) "Environmental Liability" shall mean liabilities,
fines, penalties, obligations, consequential damages, responsibilities, response
costs, natural resource damages, corrective action costs, reclamation costs, and
costs and expenses, known or unknown, absolute or contingent, past, present or
future, resulting from any requirement, claim or demand under Environmental Laws
or contract.
SECTION 3.15. Vote Required. The only vote of the holders of any class or
series of Surgical capital stock necessary to approve the Merger and adopt this
Agreement is the affirmative vote of the holders of at least a majority of the
outstanding shares of Surgical Common Stock.
SECTION 3.16. Brokers. Except as set forth in Schedule 3.16 to the
Surgical Disclosure Schedule, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Surgical. Prior to the date of this Agreement, Surgical has made
available to 4Health a complete and correct copy of all agreements referenced in
Schedule 3.16 to the Surgical Disclosure Schedule pursuant to which such firm
will be entitled to any payment relating to the transactions contemplated by
this Agreement.
SECTION 3.17. Insurance. Schedule 3.17 to the Surgical Disclosure
Schedule sets forth a true and complete listing of all material policies
currently in force, and all other policies under which a claim could be made as
of the date hereof (i.e., all incurrence-based policies), for fire, products and
environmental or pollution control liability, general liability, vehicle,
workers' compensation, directors and officers' liability, title and other
insurance owned or held by or covering Surgical or any of its property, assets,
or activities, past or present. As of the date hereof, all of such policies are
in full force and effect, and Surgical has not received any outstanding notice
of cancellation or termination with respect to any policy of fire, products or
environmental or pollution control liability, general liability, vehicle,
workers' compensation, directors' and officers' liability, title and other
insurance owned or held by or covering Surgical or any of its property, assets,
or activities, past or present. Neither the Merger nor any of the transactions
contemplated hereby shall cause the termination or may form the basis for
terminating any such insurance policies or insurance coverages presently
maintained by Surgical.
SECTION 3.18. Properties. Except as set forth in Schedule 3.18 to the
Surgical Disclosure Schedule, with respect to Surgical and its subsidiaries'
properties, except for liens arising in the ordinary course of business after
the date hereof and properties and assets disposed of in the ordinary course of
business after the date of the most recent balance sheet contained in the Form
10-Q referred to below, Surgical and its subsidiaries have good and marketable
title free and clear of all liens, except for easements, rights-of-way,
servitudes and permits on, over or in respect of any of such properties that are
not such as to materially interfere with the operation, value or use thereof, to
all their material properties and assets, whether tangible or intangible, real
personal or mixed, reflected in Surgical's most recent consolidated balance
sheet contained in Surgical's most recent Surgical SEC Report on Form 10-Q filed
prior to the date hereof as being owned by Surgical and its subsidiaries as of
the date thereof or purported to be owned on the date hereof. All buildings,
and all fixtures, equipment and other property and assets which are material to
its business on a consolidated basis, are held under valid instruments
enforceable by Surgical or its subsidiaries in accordance with their respective
terms. Substantially all of Surgical's and its subsidiaries' equipment in
regular use has been well maintained and is in good and serviceable condition,
reasonable wear and tear excepted.
SECTION 3.19. Certain Contracts and Restrictions. Other than agreements,
contracts or commitments listed elsewhere in the Surgical Disclosure Schedule,
Schedule 3.19 to the Surgical Disclosure Schedule lists, as of the date hereof,
each agreement, contract or commitment (including any amendments thereto) to
which Surgical or any of its subsidiaries is a party or by which Surgical or any
of its subsidiaries is bound (i) involving consideration during the next twelve
months in excess of $10,000 or (ii) which is otherwise material to the assets,
liabilities, financial condition, results of operations or current or future
business of Surgical and its subsidiaries, taken as a whole. As of the date of
this Agreement and except as indicated on the Surgical Disclosure Schedule, (i)
Surgical has fully complied with all material terms and conditions of all
agreements, contracts and commitments listed in the Surgical Disclosure Schedule
and all such agreements, contracts and commitments are in full force and effect,
(ii) Surgical has no knowledge of any defaults thereunder or any cancellations
or modifications thereof, and (iii) such agreements, contracts and commitments
are not subject to any memorandum or other written document or understanding
permitting cancellation.
SECTION 3.20. Easements. Except when a failure of any representation made
in this Section 3.20 to be true an correct would not result in a liability to
Surgical in excess of (i) $10,000 in the case of a representation known to
Surgical to be untrue or incorrect or (ii) $25,000 in the case of a
representation not known to Surgical to be untrue or incorrect, the business of
Surgical and its subsidiaries has been operated in a manner that does not
violate the material terms of any easements, rights of way, permits, servitudes,
licenses and similar rights relating to real property used by Surgical and its
subsidiaries in its business (collectively, "Surgical Easements"), and all
material Surgical Easements are valid and enforceable and grant the rights
purported to be granted thereby and all rights necessary thereunder for the
current operation of such business.
SECTION 3.21. Futures Trading and Fixed Price Exposure. None of Surgical
or any of its subsidiaries is presently engaged in any futures or options
trading or is a party to any price, interest rate or currency swaps, hedges,
futures or other derivative instruments.
SECTION 3.22. Information Supplied. Without limiting any of the
representations and warranties contained herein, the representations and
warranties of Surgical contained in this Agreement and the information set forth
in the Surgical Disclosure Schedule is complete and accurate and does not
contain any untrue statement of material fact, or omit a material fact necessary
in order to make the statements contained therein, in light of the circumstances
under which such statements are or were made, not misleading.
SECTION 3.23. NNM Listing. The Surgical Common Stock is traded in the
over-the-counter market on the NASDAQ National Market ("NNM"), and, except as
set forth in Schedule 3.23 to the Surgical Disclosure Schedule, Surgical has not
received any current notice from NASDAQ or the National Association of
Securities Dealers Inc. ("NASD") that it intends to delist the Surgical Common
Stock from the NNM.
SECTION 3.24. Intellectual Property. Schedule 3.24 lists all the
registered patents, trademarks, service marks, copyrights, trade names and
applications for any of the foregoing owned by Surgical or any of its
subsidiaries as of the date of this Agreement (the "Registered Intellectual
Property"). Surgical has good and marketable title to the Registered
Intellectual Property and has good and marketable title to, or valid licenses or
rights to use, all patents, copyrights, trademarks, trade names, brand names,
proprietary and other technical information, technology and software
(collectively, "Intellectual Property") which are used in the operation of its
business as presently conducted, free from any liens and free from any
requirement of any past, present or future royalty payments, license fees,
charges or other payments or conditions or restrictions, whatsoever, except as
set forth on Schedule 3.24. Immediately after the Effective Time, the Surviving
Corporation will own or will have the right to use all Intellectual Property
free from liens and on the same terms and conditions as in effect prior to the
Effective Time. There are no claims or proceedings pending or, to the
Surgical's knowledge, threatened, against Surgical asserting that Surgical or
any of its subsidiaries is infringing or engaging in the unauthorized use of any
Intellectual Property of any other person or entity. Schedule 3.24 sets forth
all agreements and arrangements (i) pursuant to which Surgical or any of its
subsidiaries has licensed Intellectual Property to, or the use of Intellectual
Property in other areas permitted (through non-assertion, settlement or similar
agreements or otherwise) by, any other person and (ii) pursuant to which
Surgical or any of its subsidiaries has had Intellectual Property licensed to
it, or has otherwise been permitted to use Intellectual Property (through non-
assertion, settlement or similar agreements or otherwise). All of the
agreements or arrangements to the extent set forth on Schedule 3.24 (w) are in
full force and effect in accordance with their terms and Surgical is not aware
that any default exists thereunder by Surgical or any of its subsidiaries or by
any other party thereto; (x) are free and clear of liens; and (y) do not contain
any change of control or other terms or conditions that will become applicable
or inapplicable as a result of the consummation of the Merger and the
transactions contemplated by this Agreement. Surgical has delivered to 4Health
true and complete copies of all agreements and arrangements set forth on
Schedule 3.24. There are no royalties, license fees, charges or other amounts
payable by, or on behalf of Surgical or any of its subsidiaries in respect of
any Intellectual Property other than as set forth on Schedule 3.24.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF 4HEALTH
4Health hereby represents and warrants to Surgical that:
SECTION 4.01. Organization and Qualifications; Subsidiaries. 4Health is a
corporation duly organized, validly existing and in good standing under the laws
of its state of incorporation and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of the business conducted by
it or the ownership or leasing of its properties makes such qualification
necessary, other than where the failure to be so duly qualified and in good
standing would not have a 4Health Material Adverse Effect. The term "4Health
Material Adverse Effect" as used in this Agreement shall mean any change or
effect that, individually or when taken together with all such other changes or
effects, would be reasonably likely to be materially adverse to the assets,
liabilities, financial condition, results of operations or current or future
business of 4Health. 4Health does not own, directly or indirectly, any
subsidiaries and except as set forth in Schedule 4.01 to the disclosure schedule
delivered to Surgical by 4Health and which is attached hereto and is made a part
hereof (the "4Health Disclosure Schedule"), 4Health does not own an equity
interest in any other partnership or joint venture arrangement or other business
entity that is material to the assets, liabilities, financial condition, results
of operations or current or future business of 4Health and its subsidiaries,
taken as a whole.
SECTION 4.02. Articles and Bylaws. 4Health has heretofore furnished to
Surgical a complete and correct copy of the articles of incorporation and bylaws
or the equivalent organizational documents as presently in effect of 4Health.
4Health is not in violation of any of the provisions of its articles or any
material provision of its bylaws.
SECTION 4.03. Capitalization.
(a) The authorized capital stock of 4Health consists of (i)
10,000,000 shares of 4Health Common Stock, of which 5,731,381 shares are issued
and outstanding, 60,405 shares are held in treasury by 4Health and 600,000
shares are reserved for future issuance pursuant to outstanding stock options
and warrants; and (ii) 1,000,000 shares of series preferred stock, par value
$1.00 per share, of which 15,000 shares have been designated "Series A
Convertible Preferred Stock" and are issued and outstanding. Except as
described in this Section 4.03 or Schedule 4.03(a) of the 4Health Disclosure
Schedule, no shares of capital stock of 4Health are reserved for any purpose.
Each of the outstanding shares of capital stock of, or other equity interests
in, 4Health is duly authorized, validly issued, and, in the case of shares of
capital stock, fully paid and nonassessable, and has not been issued in
violation of (nor are any of the authorized shares of capital stock of, or other
equity interests in, such entities subject to) any preemptive or similar rights
created by statue, the charter or bylaws (or the equivalent organizational
documents) of 4Health, or any agreement to which 4Health is a party or bound,
and such outstanding shares or other equity interests owned by 4Health are owned
free and clear of all security interests, liens, claims, pledges, agreements,
limitations on 4Health's voting rights, charges or other encumbrances of any
nature whatsoever.
(b) Except as set forth in Schedule 4.03(b)(i) to the 4Health
Disclosure Schedule, there are no options, warrants or other rights (including
registration rights), agreements, arrangements or commitments of any character
to which 4Health is a party relating to the issued or unissued capital stock of
4Health or obligating 4Health to grant, issue or sell any shares of the capital
stock of 4Health, by sale, leases, license or otherwise. Except as set forth in
Schedule 4.03(b)(ii) to the 4Health Disclosure Schedule, there are no
obligations, contingent or otherwise, of 4Health to (i) repurchase, redeem or
otherwise acquire any shares of 4Health Common Stock or other capital stock of
4Health; or (ii) provide material funds to, or make any material investment in
(in the form of a loan, capital contribution or otherwise), or provide any
guarantee with respect to the obligations of any other person. Except as
described in Schedule 4.03(b)(iii) to the 4Health Disclosure Schedule, 4Health
(x) does not directly or indirectly own, (y) has not agreed to purchase or
otherwise acquire or (z) does not holds any interest convertible into or
exchangeable or exercisable for, 5% or more of the capital stock of any
corporation, partnership, joint venture or other business association or entity.
Except as set forth in Schedule 4.03(b)(iv) to the 4Health Disclosure Schedule,
there are no agreements, arrangements or commitments of any character
(contingent or otherwise) pursuant to which any person is or may be entitled to
receive any payment based on the revenues or earnings or calculated in
accordance therewith, of 4Health. Except as set forth in Schedule 4.03(b)(v),
there are no voting trusts, proxies or other agreements or understanding to
which 4Health is a party or by which 4Health is bound with respect to the voting
of any shares of capital stock of 4Health.
(c) 4Health has made available to Surgical complete and correct
copies of (i) its 1995 Stock Option Plan (The "4Health Option Plan") and the
forms of options issued pursuant to the 4Health Option Plan, including all
amendments thereto and (ii) all options and warrants that are not in the form
specified under clause (i) above. Schedule 4.03(c) to the 4Health Disclosure
Schedule sets forth a complete and correct list of all outstanding warrants and
options, restricted stock or any other stock awards and shares of stock reserved
for issuance under such stock options, the form thereof provided under clause
(i) above. Schedule 4.03(c) to the 4Health Disclosure Schedule sets forth a
complete and correct list of al outstanding warrants and options, restricted
stock or any other stock awards (the "4Health Stock Awards") granted under the
4Health Option Plan or otherwise, setting forth as of the date hereof (i) the
number of type of 4Health Stock Awards, (ii) the exercise price of each
outstanding stock option or warrants, and (iii) the number of stock options and
warrants presently exercisable.
SECTION 4.04. Authority. 4Health has all requisite corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the transactions contemplated hereby (subject to,
with respect to the Merger, the adoption of this Agreement by the stockholders
of 4Health as described in Section 4.12 hereof). The execution and delivery of
this Agreement by 4Health and the consummation by 4Health of the transactions
contemplated hereby had been duly authorized by all necessary corporate action
and no other corporate proceedings on the part of 4Health are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby
(subject to, with respect to the approval and adoption of this Agreement and the
Merger, the approval thereof by the holders of 4Health Common Stock and the
4Health Series A Stock as described in Section 4.12). This Agreement has been
duly executed and delivered by 4Health and, assuming the due authorization,
execution and delivery thereof by Surgical, constitutes the legal, valid and
binding obligation of 4Health enforceable against 4Health in accordance with its
terms, except that (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect. affecting
creditors' rights generally, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
SECTION 4.05. No Conflict: Required Filings and Consents.
(a) Except as set forth in Schedule 4.05 to the 4Health Disclosure
Schedule, the execution and delivery of this Agreement by 4Health does not, and
the consummation of the transaction contemplated hereby will not (i) conflict
with or violate the articles of incorporation or bylaws, or the equivalent
organizational documents, in each case as amended or restated, of 4Health, (ii)
conflict with or violate any Laws applicable to 4Health or by which any of its
properties is bound or subject, or (iii) result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of 4Health pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which 4Health is a party or by or
to which 4Health or any of its respective properties is bound or subject, except
for any such conflicts or violations described in clause (ii) or breaches,
defaults, events, rights of termination, amendment, acceleration or
cancellation, payments obligations or liens or encumbrances described in clause
(iii) that would not have a 4Health Material Adverse Effect.
(b) The execution and delivery of this Agreement by 4Health does not,
and consummation of the transactions contemplated hereby will not, require
4Health to obtain any consent, license, permit, approval, waiver, authorization
or order of, or to make any filing with or notification to, any Governmental
Entity, except for filing (A) preliminary and definitive proxy materials under
the Exchange Act, and (B) appropriate merger documents as required by California
and Utah Law; and where the failure to obtain such consents, licenses, permits,
approvals, waivers, authorizations or orders, or to make such filings or
notifications, would not, either individually or in the aggregate, materially
interfere with 4Health's performance of its obligations under this Agreement and
would not have a 4Health Material Adverse Effect.
SECTION 4.06. Permits; Compliance. 4Health and to 4Health's knowledge
each third party operator of any of 4Health's properties, is in possession of
all franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents. certificates, approvals and orders necessary to won, lease
and operate its properties and to carry on its business as it is now being
conducted (collectively, the "4Health Permits"), and there is no action,
proceeding or investigation pending or, to the knowledge of 4Health, threatened
regarding suspension or cancellation of any of the 4Health Permits, except where
the failure to possess, or the suspension or cancellation of, such 4Health
Permits would not have a 4Health Material Adverse Effect. Except as set forth
in Schedule 4.06 to the 4Health Disclosure Schedule, 4Health has not received
from any Governmental Entity any written notification with respect to possible
conflicts, defaults or violations of Laws, except for written notices relating
to possible conflicts, defaults or violations that would not have a 4Health
Material Adverse Effect.
SECTION 4.07. Financial Statements. 4Health's audited consolidated
financial statements (including the related notes thereto) for the year ended
December 31, 1995 (i) have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except (A) to the extent required by changes in generally accepted
accounting principles and (B) as may be indicated in the notes thereto) and (ii)
fairly present the financial position of 4Health as of the respective dates
thereof and the result of operations and cash flows for the periods indicated
(including reasonable estimates of normal and recurring year-end adjustments),
except that (x) any unaudited interim financial statements were or will be
subject to normal and recurring year-end adjustments and (y) any pro forma
financial information contained in such financial statements is not necessarily
indicative of the financial position of 4Health as of the respective dates
thereof and the results of operations and cash flows for the periods indicated.
SECTION 4.08. Absence of Certain Changes or Events. Except as disclosed
in the 4Health Disclosure Schedule or as contemplated by this Agreement or as
set forth in Schedule 4.08 to the 4Health Disclosure Schedule, since December
31, 1995, 4Health has conducted its business in the ordinary course of business
consistent with past practice. Since December 31, 1995, there has not been (i)
any event, change, or effect (including the occurrence of any liabilities of any
nature, whether or not accrued, contingent or otherwise) having or, which would
be reasonably likely to have, individually or in the aggregate, a 4Health
Material Adverse Effect; (ii) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock or property) with respect
to the equity interests of 4Health or any redemption, purchase or other
acquisition by 4Health of any of 4Health's; (iii) any revaluation by 4Health
of its assets, including the writing down of the value of inventory or the
writing down or off of notes or accounts receivable, other than in the ordinary
course of business and consistent with past practices; (iv) any change by
4Health in accounting principles or methods, except insofar as may be required
by a change in generally accepted accounting principles;(v) a fundamental change
in the nature of 4Health's business; or (vi) a 4Health Material Adverse Effect.
SECTION 4.09. Absence of Litigation. Except as set forth in Schedule 4.09
to the 4Health Disclosure Schedule, there is no claim, suit, litigation,
proceeding, arbitration or, to the knowledge of 4Health, investigation of any
kind, at law or in equity (including actions or proceedings against 4Health or
any of its properties (except for claims, actions, suits, litigation,
proceedings, arbitrations or investigations which would not have a 4Health
Material Adverse Effect), and 4Health is not subject to any continuing order of,
consent decree, settlement agreement or other similar written agreement with,
or, to the knowledge of 4Health, continuing investigation by, any Governmental
Entity, or any judgment, order, writ, injunction, decree or award of any
Government Entity or arbitrator, including, without limitation, cease-and-desist
or other orders, except for matters that would not have a 4Health Material
Adverse Effect.
SECTION 4.10. Tax Matters. Neither 4Health nor, to the knowledge of
4Health, any of its affiliates has taken or agreed to take any action that would
prevent the Merger from constituting a tax-free reorganization qualifying under
the provisions of section 368(a) of the Code.
SECTION 4.11. Taxes. Except as set forth in Schedule 4.11 of the 4Health
Disclosure Schedule and except as such failure of any representation or warranty
made in this Section 4.11 to be true and correct which would not have a 4Health
Material Adverse Effect:
(a) Except to the extent that the applicable statute of limitations
has expired, all Returns required to be filed by or on behalf of 4Health have
been (i) duly filed on a timely basis with the appropriate governmental
authorities and such Returns are true, correct and complete, and (ii) duly paid
in full or made a provision in accordance with generally accepted accounting
principles for the payment of all Taxes for all periods covered by such Returns
or with respect to any period prior to the Effective Time.
(b) 4Health has complied in all respect with all applicable laws,
rules and regulations relating to the payment and withholding of Taxes
(including any estimated Taxes and the withholding of Taxes pursuant to Sections
1441 and 1442 of the Code or similar provisions under any foreign laws) and
have, within the time and the manner prescribed by law, withheld from employee
wages and paid over all amounts withheld under applicable laws.
(c) There is no plan or intention by an stockholder of 4Health who
owns one percent or more of 4Health Common Stock, and to the knowledge of
4Health there is no plan or intention on the part of any of the remaining
stockholders of 4Health, to sell, exchange or otherwise dispose of a number of
shares of New Common Stock to be received in the Merger that would reduce the
4Health stockholders' ownership of New Common Stock to a number of shares having
a value, as of the Effective Time, of less than 50 percent of the value of all
of the 4Health Common Stock (including shares of 4Health Common Stock exchanged
for cash in lieu of fractional shares of Common Stock) outstanding immediately
prior to the Effective Time.
(d) 4Health (A) has not been a member of an affiliated group filing
a consolidated federal income tax return other than a group the common parent of
which was 4Health, (B) does not have any liability under Treas. Reg. Section
1.1502-6 or any analogous state, local or foreign law by reason of having been a
member of any consolidated, combined or unitary group, other than in the current
affiliated group of which 4Health is the common parent corporation, and (C) is
not a party to any tax sharing agreement with any person other than current
members of the consolidated group of which 4Health is the common parent
corporation.
(e) There is no material dispute or claim concerning any
liabilities for Taxes of 4Health either raised or reasonably expected to be
raised by any taxing authority.
(f) 4Health has made available to Surgical complete copies of (i)
all federal income tax returns of 4Health for all periods since the formation of
4Health for all periods open under the statute of limitations for assessments
and (ii) examination reports, and statements of deficiencies assessed by
4Health.
(g) No consent under Section 341(f) of the Code has been filed with
respect to 4Health.
(h) 4Health has not entered into any compensatory agreements with
respect to the performance of services under which payment would result in a
nondeductible expense pursuant to Section 280G of the Code.
(i) 4Health has not agreed, nor is it required to make, prior to
the Effective Time, any adjustment under Code Section 481(a) by reason of a
change in accounting method or otherwise.
(j) 4Health has not issued or assumed any corporate acquisition
indebtedness that is subject to Sections 279(a) and (b) of the Code.
(k) The amount of liability for unpaid Taxes of 4Health for all
periods ending on or before the Effective Time will not, in the aggregate,
materially exceed the amount of the liability accruals for Taxes reflected on
the balance sheet of 4Health as of the Closing Date.
(l) The tax returns provided by 4Health to Surgical contain
accurate and complete information with respect to the net operating losses, net
operating loss carryforwards and other tax attributes of 4Health, and the extent
to which they are subject to any limitation under Code Sections 381, 382, 383 or
384, or any other provision of the Code or the federal consolidated return
regulations (or any predecessor provision of any Code section or the
regulations) and, apart from any such limitations and apart from any limitation
that would be imposed as a result of the Merger, there is nothing that would
prevent Surgical from utilizing these net operating losses, net operating loss
carryforwards or other tax attributes as so limited if sufficient income were
realized.
(m) 4Health is not disposed of any property in a transaction that
is presently accounted for under the installment method.
(n) 4Health is not required to treat any of their assets as owned
by another person for federal income tax purposes or as tax-exempt bond property
or as tax-exempt use property within the meaning of Section 168 of the Code.
SECTION 4.12. Vote Required. The only vote of the holders of any class or
series of 4Health capital stock necessary to approve the Merger is the
affirmative vote of the holders of (i) 2,865,691 of the shares of 4Health Common
Stock and (ii) 10,001 of the shares of 4Health Series A Stock outstanding.
SECTION 4.13. Brokers. Except as set forth in Schedule 4.13 of the
4Health Disclosure Schedule, no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of 4Health. Prior to the date of this Agreement, 4Health has made
available to Surgical a complete and correct copy of all agreements referenced
in Schedule 4.13 pursuant to which any such firm will be entitled to any payment
related to the transactions contemplated by this Agreement.
SECTION 4. 14. Information Supplied. Without limiting any of the
representations and warranties contained herein, no representation or warranty
of 4Health and no statement by 4Health or other information contained in or
documents referred to in the 4Health Disclosure Schedule, as of the date of such
representation, warranty, statement or document, contains or contained any
untrue statement of material fact, or, at the date thereof, omits or omitted to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements are or were
made, not misleading.
SECTION 4. 15. Employee Benefit Plans; Labor Matters. (a) Except as set
forth in Schedule 4.15(a) to the 4Health Disclosure Schedule, 4Health does not
maintain nor has it contributed during the past five years to any employee
benefit plan (as such term is defined in ERISA section 3(s) or with respect to
which 4Health or any member of its ERISA Group would incur liability under
Sections 4065, 4069, 4212 (c) or 4204 of ERISA, and any other retirement,
pension, stock option, stock application rights, profit sharing, incentive
compensation, deferred compensation, savings, thrift, vacation pay, severance
pay, or other employee compensation or benefit plan, agreement, practice or
arrangement, whether written or unwritten, whether or not legally binding
(collectively, the "4Health Benefit Plans"). As of the date of this Agreement,
except as would not have a 4Health Material Adverse Effect, the material 4Health
Benefit Plans maintained by 4Health, or any member of its ERISA Group, or with
respect to which 4Health has or may have a liability are in substantial
compliance with applicable laws, including ERISA and the Code. Schedule 4.15(a)
sets forth a list of all 4Health Plans, true and complete copies of which have
been furnished to Surgical.
(b) With respect to the 4Health Plans, no event has occurred and, to
the knowledge of 4Health, there exists no condition or set of circumstances, in
connection with which 4Health or any member of its ERISA Group could be subject
to any liability under the terms of such 4Health Plans, ERISA, the Code or any
other applicable Law which would have a 4Health Material Adverse Effect.
(c) Except as otherwise set forth on Schedule 4.15(c) to the 4Health
Disclosure Schedule, neither 4Health nor any member of its ERISA Group
contributes to or has an obligation to contribute to, and has not within five
years prior to the date of this Agreement contributed to or had an obligation to
contribute to or has any secondary liability under ERISA Section 4204 to, a
multiemployer plan within the meaning of Section 3(37) of ERISA.
(d) Neither 4Health nor any member of its ERISA Group, is or has ever
been a party to any collective bargaining or other labor union contracts. No
collective bargaining agreement is being negotiated by 4Health. There is no
pending or threatened labor dispute, strike or work stoppage against 4Health or
any of its subsidiaries which may interfere with the business activities of
4Health. None of 4Health or any of its representatives or employees has
committed any unfair labor practices in connection with the operation of the
business of 4Health, and there is no pending or threatened charge or complaint
against 4Health by the National Labor Relations Board or any comparable state
agency.
(e) With respect to each 4Health Benefit Plan that is a "group health
plan" within the meaning of Section 5000(b) of the Code, each such 4Health
Benefit Plan complies and has complied with the requirements of Part 6 of Title
I of ERISA and Sections 4980B and 5000 of the Code, except where the failure to
so comply would not have a 4Health Material Adverse Effect.
SECTION 4. 16. Certain Business Practices. None of 4Health, or any
directors, offices, agents or employees of 4Health has used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses relating
to political activity, made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns or violated any provision of the Foreign Corrupt Practices Act of
1977, as amended, or made any other unlawful payment.
SECTION 4. 17. Environmental Matters. Except as disclosed in Schedule
4.17 to the 4Health Disclosure Schedule and except for matters that would not
have or are reasonably not likely to have a 4Health Material Adverse Effect, to
the best knowledge of 4Health:
(i) the properties, operations and activities of 4Health are in
compliance with all applicable Environmental Laws and there are no circumstances
which could reasonably be expected to prevent or interfere with their continued
compliance with applicable Environmental Laws;
(ii) 4Health and the properties and operations of 4Health are not
subject to any existing, pending, or, to 4Health's knowledge, threatened civil,
criminal or administrative action, suit, claim, notice of violation,
investigation, notice of potential lability, request for information, inquiry,
demand or proceeding under applicable Environmental Laws;
(iii) 4Health has have not agreed, whether by contract or by
consent agreement with governmental authorities or private persons, to
undertaken investigation, clean up, or remedial activities;
(iv) All notices, permits, licenses, or similar authorizations
required to be obtained or filed by 4Health under any Environmental Law in
connection with any aspect of the business of 4Health, including without
limitation those relating to the treatment, storage, disposal or discharge of
Hazardous Materials, have been duly obtained or filed and will remain valid and
in effect after the Merger, and 4Health is in compliance with the terms and
conditions of all such notices, permits, licenses and similar authorizations;
(v) 4Health has satisfied and is currently in compliance with
all financial responsibility requirements applicable to their operations and
imposed by any governmental authority under Environmental Laws, and 4Health has
not received any notice of noncompliance with respect to any such financial
responsibility requirements;
(vi) There are no physical or environmental conditions existing
on any property of 4Health or resulting from 4Health's operations or activities,
past or present, at any location, including without limitation, releases and
disposal of Hazardous Materials, that would give rise to any on-site or off-site
investigation, reporting, or remedial obligations or other Environmental
Liability;
(vii) To the extent required by applicable Environmental
Laws, all Hazardous Materials generated by 4Health have been transported only by
persons authorized under applicable Environmental Laws to transport such
materials, and disposed of only at treatment, storage and disposal facilities
authorized under applicable Environmental Laws to treat, store or dispose of
such Hazardous Materials;
(viii) There has been no exposure of any person or property to
Hazardous Materials or any lease of Hazardous Materials into the environment by
4Health or in connection with their present or prior properties or operations
that could reasonably be expected to give rise to any Environmental Liability;
(ix) No release or clean up of Hazardous Materials has occurred
at 4Health's properties which could reasonably be expected to in the assertion
or creation of any lien on the properties by any governmental body or agency
with respect thereto, nor has any such lien been asserted or made by any
governmental body or agency with respect thereto; and
(x) The operations of each third party operator of any of
4Health's properties are in compliance with the terms of this Section 4.17.
(b) 4Health has made available to Surgical all material internal and
external environmental audits, studies, documents and correspondence on
environmental matters in the possession of 4Health relating to any of the
present or prior properties or operations of 4Health.
SECTION 4. 18. Insurance. 4Health is currently insured, and during each of
the past five calendar years has been insured, for reasonable amounts against
such risks as companies engaged in a similar business would, in accordance with
good business practice, customarily be insured.
SECTION 4.19. Certain Contracts and Restrictions. Other than agreements,
contracts or commitments listed elsewhere in the 4Health Disclosure Schedule,
Schedule 4.19 to the 4Health Disclosure Schedule lists, as of the date hereof,
each agreement, contract or commitment (including any amendments thereto) to
which 4Health is a party or by which 4Health is bound involving consideration
during the next twelve months in excess of $10,000 or which is otherwise
material to the assets, liabilities, financial condition, results of operations
or current or future business of 4Health, taken as a whole. As of the date of
this Agreement and except as indicated on the 4Health Disclosure Schedule,
4Health has fully complied with all material terms and conditions of all
agreements, contracts and commitments that will be listed in the 4Health
Disclosure Schedule and all such agreements, contracts and commitments are in
full force and effect, 4Health has no knowledge of any defaults thereunder or
any cancellations or modifications thereof, and such agreements, contracts and
commitments are not subject to any memorandum or other written document or
understanding permitting cancellation.
SECTION 4.20. Properties. Except for liens arising in the ordinary course
of business after the date hereof and properties and assets disposed of in the
ordinary course of business after the date of 4Health's most recent balance
sheet, 4Health has good and marketable title free and clear of all liens, the
existence of which would have a 4Health Material Adverse Effect, to all their
material properties and assets, whether tangible or intangible, real, personal
or mixed, reflected in 4Health's most recent balance sheet as being owned by
4Health as of the date thereof or purported to be owned on the date hereof. All
buildings, and all fixtures, equipment and other property and assets which are
material to its business on a consolidated basis, held under leases by any of
4Health are held under valid instruments enforceable by 4Health in accordance
with their respective terms. Substantially all of 4Health's equipment in regular
use has been well maintained and is in good and serviceable condition,
reasonable wear an tear excepted.
SECTION 4.21. Easements. The business of 4Health has been operated in a
manner that does not violate the material terms of any easements, rights of way,
permits, servitude, licenses and similar rights relating to real property used
by 4Health in its business (collectively, "4Health Easements") except for
violations that have not resulted and will not result in a 4Health Material
Adverse Effect. All material 4Health Easements are valid and enforceable and
grant the rights purported to be granted thereby and all rights necessary
thereunder for the current operation of such business.
SECTION 4.22. Futures Trading and Fixed Price Exposure. 4Health is not
presently engaged in any futures or options trading nor is it a party to any
price, interest rate or currency swaps, hedges, futures or other derivative
instruments.
SECTION 4.23. Intellectual Property. Schedule 4.23 lists all the
registered patents, trademarks, service marks, copyrights, trade names and
applications for any of the foregoing owned by 4Health as of the date of this
Agreement (the "4Health Registered Intellectual Property"). 4Health has good
and marketable title to the 4Health Registered Intellectual Property and has
good and marketable title to, or valid licenses or rights to use, all patents,
copyrights, trademarks, trade names, brand names, proprietary and other
technical information, technology and software (collectively, "4Health
Intellectual Property") which are used in the operation of its business as
presently conducted, free from any liens and free from any requirement of any
past, present or future royalty payments, license fees, charges or other
payments or conditions or restrictions, whatsoever, except as set forth on
Schedule 4.23. Immediately after the Effective Time, the Surviving Corporation
will own or will have the right to use all 4Health Intellectual Property free
from liens and on the same terms and conditions as in effect prior to the
Effective Time. Except as set forth in Schedule 4.23, there are no claims or
proceedings pending or, to the 4Health's knowledge, threatened, against 4Health
asserting that 4Health is infringing or engaging in the unauthorized use of any
4Health Intellectual Property of any other person or entity. Section 4.23 sets
forth all agreements and arrangements (i) pursuant to which 4Health has licensed
4Health Intellectual Property to, or the use of 4Health Intellectual Property in
other areas permitted (through non-assertion, settlement or similar agreements
or otherwise) by, any other person and (ii) pursuant to which 4Health has had
4Health Intellectual Property licensed to it, or has otherwise been permitted to
use 4Health Intellectual Property (through non-assertion, settlement or similar
agreements or otherwise). All of the agreements or arrangements to the extent
set forth on Schedule 4.23 (x) are in full force and effect in accordance with
their terms and 4Health is not aware that any default exists thereunder by
4Health or by any other party thereto; (y) are free and clear or liens; (z) do
not contain any change of control or other terms or conditions that will become
applicable or inapplicable as a result of the consummation of the Merger and the
transactions contemplated by this Agreement. 4Health has delivered to 4Health
true and complete copies of all agreements and arrangements set forth on
Schedule 4.23. There are no royalties, license fees, charges or other amounts
payable by, or on behalf of 4Health in respect of any 4Health Intellectual
Property other than as set forth on Schedule 4.23. Included in Schedule 4.23 is
a complete and correct copy of the Assignment executed by R. Lindsey Duncan
assigning all of his rights, title and interest in and to the formulae,
manufacturing technology and other proprietary technical data used in the
manufacture of 4Health products currently manufactured and sold in 4Health's
business.
ARTICLE 5.
COVENANTS
SECTION 5.01. Affirmative Covenants of Surgical. Surgical hereby
covenants and agrees that, at or prior to the Effective Time, unless otherwise
expressly contemplated by this Agreement or consented to in writing by 4Health,
Surgical will and will cause its subsidiaries to:
(a) continue to operate its business based on its ID Technology while
seeking to enter into agreements or arrangements with third parties to
manufacture and market, joint venture, or otherwise exploit such Technology
and/or the products based on such Technology;
(b) use all reasonable efforts to preserve substantially intact its
business organization, maintain its material rights and franchises, retain the
services of its respective officers and employees and maintain its relationships
with its material customers and suppliers;
(d) maintain and keep its material properties and assets in as good
repair and conditions as at present, ordinary wear and tear excepted, and
maintain supplies and inventories of products based on its ID Technology in
quantities consistent with its customary business practice;
(e) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that currently
maintained;
(f) enter into a three year employment agreement with Rockwell D.
Schutjer ("Schutjer") in substantially the form attached as Exhibit D hereto;
(g) secure the irrevocable proxies from Messrs. Crosland, Rex
Crosland, and Schutjer, constituting a majority of the directors and the
principal shareholders of Surgical, representing at least forty percent (40%) of
the outstanding shares of capital stock entitled to vote on the Merger and the
other matters contemplated hereby, to vote in favor of the Merger and such
matters as may be presented at the meeting of Surgical stockholders to be
convened to approve the Merger, each in substantially the form of Exhibit E
hereto;
(h) take all such steps as are commercially reasonable in order to
consummate the Merger and all other transactions contemplated hereby, including,
without limitation, securing all requisite consents thereto; and
(i) file and seek the effectiveness of a registration statement on
Form S-8 registering the shares of Surgical Common Stock subject to the Long
Term Stock Incentive Plan and options to acquire Surgical Common Stock issued
and outstanding immediately prior to the Effective Time.
SECTION 5.02. Negative Covenants of Surgical. Except as expressly
contemplated by this Agreement or otherwise consented to in writing by 4Health,
from the date of this Agreement until the Effective Time, Surgical will not do,
and will not permit any of its subsidiaries to do, any of the foregoing:
(a) except as set forth on in Schedule 5.02 to the Surgical
Disclosure Schedule, increase the compensation payable to or to become payable
to any director or executive officer; grant any severance or termination pay
to, or enter into or amend any employment or severance agreement with, any
director, officer or employee; establish, adopt or enter into any employee
benefit plan or arrangement; or except as may be required by applicable law,
amend, or take any other actions with respect to, any of the Surgical Benefit
Plans or any of the plans, programs, agreements, policies or other arrangements
described in Section 3.10(d) of this Agreement;
(b) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
wholly owned subsidiary of Surgical to Surgical or another owned subsidiary of
Surgical;
(c) except as contemplated by this Agreement or as described in
Schedule 3.03(b)(ii) to the Surgical Disclosure Schedule, (i) redeem, purchase
or otherwise acquire any shares of its or any of its subsidiaries' capital stock
or any securities or obligations convertible into or exchangeable for any shares
of its or its subsidiaries' capital stock (other than any such acquisitions
directly from any wholly owned subsidiary of Surgical in exchange for capital
contributions or loans to such subsidiary), or any options, warrants or
conversion or other rights to acquire any shares of its or its subsidiaries'
capital stock or any such securities or obligations (except in connection with
the exercise of outstanding stock options in accordance with their terms);
effect any reorganization or recapitalization; or split, combine or reclassify
any of its or its subsidiaries' capital stock or issue or authorize or propose
the issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its or its subsidiaries' capital stock;
(d) except as described in Schedule 3.03(b)(i) to the Surgical
Disclosure Schedule or as contemplated by this Agreement, issue, deliver,
award, grant or sell, or authorize or propose the issuance, delivery, award,
grant or sale (including the grant of any security interests, liens, claims,
pledges, limitations in voting rights, charges or other encumbrances) of, any
shares of any class of its or its subsidiaries' capital stock (including shares
held in treasury), any securities convertible into or exercisable or
exchangeable for any such shares, or any rights, warrants or options to acquire
any such shares (except as permitted pursuant to Sections 2.01(a), 2.01(b) and
5.01(f) of this Agreement or for the issuance of shares upon the exercise of
outstanding stock options or the vesting of restricted stock in accordance with
the terms of outstanding Surgical Stock Awards); amend or otherwise modify the
terms of any such rights, warrants or options the effect of which shall be to
make such terms more favorable to the holders thereof; or take any action to
accelerate the exercisability of stock options;
(e) acquire or agree to acquire, by merging or consolidating with, by
purchasing any equity interest in or a portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business and consistent with past
practice);
(f) except as disclosed in Schedule 5.02(f) to the Surgical
Disclosure Schedule, sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge,
transfer or otherwise dispose of, any of its material assets or any material
assets of any of its subsidiaries, except for the sale of inventory or other
dispositions in the ordinary course;
(g) initiate, solicit or encourage (including by way of furnishing
information or assistance), or take any other action to facilitate, any
inquiries or the making of any proposal relating to, or that may reasonably be
expected to lead to, any Competing Transaction (as defined below), or enter into
discussions or negotiate with any person or entity in furtherance of such
inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize or permit any of the officers, directors or
employees of Surgical or any of its subsidiaries or any investment banker,
financial advisor, attorney, accountant or other representative retained by
Surgical or any of Surgical's subsidiaries to take any such action, and Surgical
shall promptly notify 4Health of all relevant terms of any such inquiries and
proposals received by Surgical or any of its subsidiaries or by any such
officer, director, investment banker, financial advisor, attorney, accountant or
other representative relating to any of such matters and if such inquiry or
proposal is in writing, Surgical shall promptly deliver or cause to be delivered
to 4Health a copy of such inquiry or proposal. For purposes of this Agreement,
"Competing Transaction" shall mean any of the following (other than the
transactions contemplated by this Agreement) involving a party hereto or any of
its subsidiaries: (i) any merger, consolidation, share exchange, business
combination or similar transaction; (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of 20% or more of the assets of a party
hereto and its subsidiaries, taken as a whole, (iii) any tender offer or
exchange offer for 20% or more of the outstanding shares of capital stock of a
party hereto or the filing of a registration statement under the Securities Act
in connection therewith; (iv) any person (other than stockholders as of the date
of this Agreement) having acquired beneficial ownership of, or any group (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations promulgated thereunder) having been formed which beneficially owns
or has the right to acquire beneficial ownership of, 20% or more of the
outstanding shares of capital stock of a party hereto; or (v) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing; provided, however, transactions
involving the ID Technology or the products based on the ID Technology shall not
be deemed to be a "Competing Transaction;"
(h) release any third party from its obligations, or grant any
consent, under any existing standstill provision relating to a Competing
Transaction or otherwise under any confidentiality or other agreement, or fail
to fully enforce any such agreement;
(i) adopt or propose to adopt any amendments to its articles of
incorporation or bylaws, which would alter the terms of its capital stock or
would have an adverse impact on the consummation of the transactions
contemplated by this Agreement;
(j) (A) change any of its methods of accounting in effect at March
31, 1995, or (B) make or rescind any express or deemed election relating to
Taxes, settle or compromise any claim, action, suit, litigation, audit or
controversy relating to Taxes (except where the amount of such settlements or
controversies, individually or in the aggregate, does not exceed $10,000), or
change any of its methods of reporting income or deductions for federal income
tax purposes from those employed in the preparation of the federal income tax
returns for the taxable year ended March 31, 1995, except in each case, as may
be required by Law or generally accepted accounting principles;
(k) incur any obligations for borrowed money or purchase money
indebtedness or guarantee, whether or not evidenced by a note, bond, debenture
or similar instrument, except in the ordinary course of business consistent with
past practice and in no event in excess of
$10,000 in the aggregate;
(l) enter into any material arrangement, agreement or contract with
any third party which provides for an exclusive arrangement with that third
party or is substantially more restrictive on Surgical or substantially less
advantageous to Surgical than arrangements, agreements or contracts existing on
the date hereof;
(m) take any action, other than actions required by this Agreement,
which would result in a failure to maintain the listing of the Surgical Common
Stock on the NMS;
(n) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of Surgical or any of its subsidiaries;
(o) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction of any such claims, liabilities or
obligations, (x) reflected on, or reserved against in, or contemplated by, the
financial statements (or the notes thereto) of Surgical and its subsidiaries,
(y) incurred in the ordinary course of business consistent with past practice or
(z) which are legally required to be paid, discharged or satisfied;
(p) knowingly take, or agree to commit to take, any action that would
make any representation or warranty of Surgical contained herein inaccurate in
any respect at, or as of any time prior to, the Effective Time;
(q) other than between or among wholly-owned subsidiaries of Surgical
which remain wholly-owned or between Surgical and its wholly-owned subsidiaries
which remain wholly-owned, neither Surgical nor any of its subsidiaries will
engage in any transaction with, or enter into any agreement, arrangement, or
understanding with, directly or indirectly, any of Surgical's affiliates,
including, without limitation, any transactions, agreements, arrangements or
understanding with any affiliate or other person covered under Item 404 of
Regulation S-K promulgated under the Securities Act, other than pursuant to such
agreement, arrangements or understandings existing on the date of this Agreement
(which are set forth on Section 5.01 of the Surgical Disclosure Schedule) or as
disclosed in writing to 4Health on the date hereof or which are contemplated
under this Agreement; provided, that Surgical provides 4Health with all
information concerning any such agreement, arrangement or understanding that
4Health may reasonably request;
(r) agree to or approve any commitment, including any authorization
for expenditure or agreement to acquire property, obligating Surgical for an
amount in excess of $10,000;
(s) engage in any futures or options trading or be a party to any
price or currency swaps, hedges, futures or derivative instruments; or
(t) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. Affirmative and Negative Covenants of 4Health.
(a) Health hereby covenants and agrees that, prior to the Effective
Time, unless otherwise expressly contemplated by this Agreement or consented to
in writing by Surgical, 4Health will:
(i) operate its business in all material respects in the usual
and ordinary course, consistent with past practice;
(ii) use all reasonable efforts to preserve substantially intact
its business organization, maintain its material rights and franchises, retain
the serves of its respective officers and 4Health employees and maintain its
relationships with its material customers and suppliers;
(iii) maintain and keep its material properties and assets in
as good repair and condition as at present, ordinary wear and tear excepted, and
maintain supplies and inventories in quantities consistent with its customary
business practice;
(iv) use all reasonable efforts to keep in full force and effect
insurance and bonds comparable in amount and scope of coverage to that currently
maintained;
(v) secure irrevocable proxies from Messrs. R. Lindsey Duncan,
Richard B. Carlock, Cheryl Wheeler, Henry S. Stone, David A. Melman, and Ivory &
Sime Enterprise Capital PLC constituting all of the directors and principal
shareholders of 4Health owning in excess of fifty percent (50%) of the votes
entitled to be cast on the Merger by the outstanding shares of capital stock and
the other matters contemplated hereby, to vote in favor of the Merger and such
other matters as may be presented at the meeting of 4Health stockholders to be
convened to approve the Merger, each in substantially the form of Exhibit F
hereto;
(vi) enter into a Proprietary Information, Inventions and Non-
Competition Agreement in substantially the form of Exhibit G hereto; and
(vii) take all such steps as are commercially reasonable in
order to consummate the Merger and all other transactions contemplated hereby,
including, without limitation, securing all requisite consents thereto.
(b) Except as expressly contemplated by this Agreement or otherwise
consented to in writing by 4Health, from the date of this Agreement until the
Effective Time, 4Health will not do any of the foregoing:
(i) declare or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock;
(ii) except as contemplated by this Agreement or as described in
Schedule 4.03(b)(ii) to the 4Health Disclosure Schedule, (i) redeem, purchase or
otherwise acquire any shares of its capital stock or any securities or
obligations convertible into or exchangeable for any shares of its capital
stock, or any options, warrants or conversion or other rights to acquire any
shares of its or any such securities or obligations (except in connection with
the exercise of outstanding stock options in accordance with their terms); (ii)
effect any reorganization or recapitalization; or (iii) split, combine or
reclassify any of its capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for, shares of its capital stock;
(iii) except as described in Schedule 4.03(b)(i) to the
4Health Disclosure Schedule or as contemplated by this Agreement, (i) issue,
deliver, award, grant or sell, or authorize or propose the issuance, delivery,
award, grant or sale (including the grant of any security interests, liens,
claims, pledges, limitations in voting rights, charges or other encumbrances)
of, any shares of any class of its capital stock (including shares held in
treasury), any securities convertible into or exercisable or exchangeable for
any such shares, or any rights, warrants or options to acquire any such shares
(except as permitted pursuant to Sections 2.01(a), 2.01(b) and 5.01(f) of this
Agreement or for the issuance of shares upon the exercise of outstanding stock
options or the vesting of restricted stock in accordance with the terms of
outstanding 4Health Stock Awards); (ii) amend or otherwise modify the terms of
any such rights, warrants or options the effect of which shall be to make such
terms more favorable to the holders thereof; or (iii) take any action to
accelerate the exercisability of stock options;
(iv) acquire or agree to acquire, by merging or consolidating
with, by purchasing any equity interest in or a portion of the assets of, or by
any other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or agree
to acquire any assets of any other person (other than pursuant to this Agreement
or for the purchase of assets from suppliers or vendors in the ordinary course
of business and consistent with past practice);
(v) except as discussed in Schedule 5.03(b)(v) to the 4Health
Disclosure Schedule, sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge,
transfer or otherwise dispose of, any of its material assets;
(vi) initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal relating to, or that may reasonably
be expected to lead to, any Competing Transaction, or enter into discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize or permit any of the officers, directors or employees
of 4Health or any investment banker, financial advisor, attorney, accountant or
other representative retained by 4Health to take any such action, and 4Health
shall promptly notify Surgical of all relevant terms of any such inquiries and
proposals received by 4Health or any of its subsidiaries or by any such officer,
director, investment banker, financial advisor, attorney, accountant or other
representative relating to any of such matters and if such inquiry or proposal
is in writing, 4Health shall promptly deliver or cause to be delivered to
Surgical a copy of such inquiry or proposal;
(vii) release any third party from its obligations, or grant
any consent, under any existing standstill provision relating to a Competing
Transaction or otherwise under any confidentiality or other agreement, or fail
to fully enforce any such agreement;
(viii) adopt or propose to adopt any amendments to its articles
of incorporation or bylaws, which would alter the terms of its capital stock or
would have an adverse impact on the consummation of the transactions
contemplated by this Agreement;
(ix) (A) change any of its methods of accounting in effect at
December 31, 1995, or (B) make or rescind any express or deemed election
relating to Taxes, settle or compromise any claim, action, suit, litigation,
audit or controversy relating to Taxes (except where the amount of such
settlements or controversies, individually or in the aggregate, does not exceed
$10,000), or change any of its methods of reporting income or deductions for
federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ended December 31, 1995, except
in each case, as may be required by Law or generally accepted accounting
principles;
(x) incur any obligations for borrowed money or purchase money
indebtedness or guarantee, whether or not evidenced by a note, bond, debenture
or similar instrument, except in the ordinary course of business consistent with
past practice and in no event in excess of $10,000 in the aggregate;
(xi) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
material reorganization of 4Health;
(xii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of any such
claims, liabilities or obligations, (x) reflected on, or reserved against in, or
contemplated by, the financial statements (or the notes thereto) of 4Health, (y)
incurred in the ordinary course of business consistent with past practice or (z)
which are legally required to be paid, discharged or satisfied;
(xiii) knowingly take, or agree to commit to take, any action
that would make any representation or warranty of 4Health contained herein
inaccurate in any respect at, or as of any time prior to, the Effective Time;
(xiv) Except to the extent described in Schedule 5.03(b) (xiv),
4Health will not engage in any transaction with, or enter into any agreement,
arrangement, or understanding with, directly or indirectly, any of 4Health's
affiliates, including, without limitation, any transactions, agreements,
arrangements or understanding with any affiliate or other person covered under
Item 404 of Regulation S-K promulgated under the Securities Act, other than
pursuant to such agreement, arrangements or understandings existing on the date
of this Agreement (which are set forth on Section 5.03(b)(xiv) of the 4Health
Disclosure Schedule) or as disclosed in writing to Surgical on the date hereof
or which are contemplated under this Agreement; provided, that 4Health provides
Surgical with all information concerning any such agreement, arrangement or
understanding that Surgical may reasonably request;
(xv) engage in any futures or options trading or be a party to
any price or currency swaps, hedges, futures or derivative instruments; or
(xvi) agree in writing or otherwise to do any of the
foregoing.
SECTION 5.04. Access and Information.
(a) Surgical shall, and shall cause its subsidiaries to, afford
4Health and its officers, directors, employees, accountants, consultants, legal
counsel, agents and other representatives (collectively, the "4Health
Representatives") reasonable access at reasonable times, upon reasonable prior
notice, to the officers, employees, agents, properties, offices and other
facilities of Surgical and its subsidiaries and to the books and records thereof
and furnish promptly to 4Health and the 4Health Representatives such
information concerning the business, properties, contracts, records and
personnel of Surgical and its subsidiaries (including, without limitation,
financial, operating and other data and information) as may be reasonably
requested, from time to time, by 4Health or such Representatives.
(b) 4Health shall (i) afford to Surgical and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, the "Surgical Representatives") reasonable access
at reasonable times, upon reasonable prior notice, to the officers, employees,
accountants, agents, properties, offices and other facilities of 4Health and to
its books and records and (ii) furnish promptly to Surgical and Surgical
Representatives such information concerning the business, properties, contracts,
records and personnel of 4Health (including, without limitation, financial,
operating and other data and information) as may be reasonably requested, from
time to time, by Surgical or such Representatives.
(c) Notwithstanding the foregoing provisions of this Section 5.04,
neither party shall be required to grant access or furnish information to the
other party to the extent that such access to or the furnishing of such
information is prohibited by Law. No investigation by the parties hereto made
heretofore or hereafter shall affect the representations and warranties of the
parties which are herein contained and each such representation and warranty
shall survive such investigation.
(d) The information received pursuant to Section 5.04(a) and (b)
shall be deemed to be "confidential information" for purposes of paragraph 13 of
that certain Letter Agreement, as amended, dated February 15, 1996 between
Surgical and 4Health (the "Letter Agreement"), the provisions of which shall
survive the execution, delivery and termination of this Agreement.
ARTICLE 6.
ADDITIONAL AGREEMENTS
SECTION 6.01. Meetings of Stockholders.
(a) Surgical shall, promptly after the effectiveness of the Form S-4,
take all actions necessary in accordance with Utah Law and its articles of
incorporation and bylaws to convene a special meeting of Surgical's stockholders
to act on this Agreement (the "Surgical Stockholders Meeting"), and Surgical
shall consult with 4Health in connection therewith. Surgical shall use its best
efforts to solicit from stockholders of Surgical proxies in favor of the
approval and adoption of this Agreement and to secure the vote of stockholders
required by Utah Law and its articles of incorporation and bylaws to approve and
adopt this Agreement and the Merger.
(b) 4Health shall, promptly after the effectiveness of the Form S-4,
take all action necessary in accordance with California Law and its articles of
incorporation and bylaws to convene a special meeting of 4Health's stockholders
to act on this Agreement (the "4Health Stockholders Meeting"). 4Health shall
use its best efforts to solicit from stockholders of 4Health proxies in favor of
the approval and adoption of this Agreement and to secure the vote of
stockholders required by California Law and its articles of incorporation and
bylaws to approve and adopt this Agreement and the Merger.
SECTION 6.02. Registration Statement.
(a) As promptly as practicable after the execution of this Agreement,
4Health and Surgical shall prepare and file with the SEC the Form S-4, including
a proxy statement for stockholders of Surgical and 4Health in connection with
the transactions contemplated by this Agreement and a prospectus for the
issuance by Surgical of the New Common Stock, Warrants and Warrant Shares (the
"Proxy Statement/Prospectus"). Each of 4Health and Surgical shall use its best
efforts to cause the Form S-4 to be declared effective by the SEC as promptly as
practicable, and shall take any action required to be taken under any applicable
federal or state securities laws in connection with the issuance of shares of
New Common Stock, Warrants and upon exercise thereof, Warrant Shares, in the
Merger. Each of 4Health and Surgical shall furnish to the other all information
concerning it and the holders of its capital stock as the other may reasonably
request in connection with such actions. As promptly as practicable after the
Form S-4 shall have been declared effective by the SEC, Surgical shall mail the
Proxy Statement/Prospectus to its stockholders entitled to notice of and to vote
at the Surgical Stockholders Meeting and to the stockholders of 4Health entitled
to notice of and to vote at the 4Health Stockholders Meeting. The Proxy
Statement/Prospectus shall include the recommendation of Surgical's Board of
Directors in favor of the Merger and adoption of this Agreement. The Proxy
Statement/Prospectus shall include the recommendation of 4Health's Board of
Directors in favor of approval of the Merger and adoption of this Agreement.
(b) The information supplied by Surgical for inclusion in the Form S-
4 shall not, at the time the Proxy Statement/Prospectus is mailed to the
stockholders of Surgical and 4Health, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. If at any
time prior to the Effective Time any event or circumstance relating to Surgical
or any of its affiliates, or its or their respective officers or directors, is
discovered by Surgical that should be set forth in a supplement to the Proxy
Statement/Prospectus, Surgical shall promptly inform 4Health thereof in writing.
All documents that Surgical is responsible for filing with the SEC in connection
with the transactions contemplated herein shall comply as to form in all
material respects with the applicable requirements of the Securities Act and the
rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(c) The information supplied by 4Health for inclusion in the Form S-4
shall not, at the time the Proxy Statement/Prospectus is mailed to the
stockholders of Surgical and 4Health, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. If at any
time prior to the Effective Time any event or circumstance relating to 4Health
or any of its affiliates, or to their respective officers or directors, is
discovered by 4Health that should be set forth in a supplement to the Proxy
Statement/Prospectus, 4Health shall promptly inform Surgical thereof in writing.
SECTION 6.03. Appropriate Action; Consents; Filings.
(a) Surgical and 4Health shall each use, and Surgical shall cause
each of its subsidiaries to use, all reasonable efforts to (i) take, or cause to
be taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Agreement, (ii) obtain
from any Governmental Entities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by 4Health
or Surgical or any of its subsidiaries in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, the Merger,
(iii) make all necessary filings, and thereafter make any other required
submissions, with respect to this Agreement and the Merger required under (A)
the Securities Act and the Exchange Act and the rules and regulations
thereunder, and any other applicable federal or state securities laws, and (B)
any other applicable Law; provided that 4Health and Surgical shall cooperate
with each other in connection with the making of all such filings, including
providing copies of all such documents to the nonfiling party and its advisors
prior to such filings and, if requested, shall accept all reasonable additions,
deletions or changes suggested in connection therewith. Surgical and 4Health
shall furnish all information required for any application or other filing to be
made pursuant to the rules and regulations of any applicable Law (including all
information required to be included in the Form S-4) in connection with the
transactions contemplated by this Agreement.
(b) 4Health and Surgical agree to cooperate with respect to, and
shall cause each of their respective subsidiaries to cooperate with respect to,
and agree to use all reasonable efforts vigorously to contest and resist, any
action, including legislative, administrative or judicial action, and to have
vacated, lifted, reversed or overturned any decree, judgment, injunction or
other order (whether temporary, preliminary or permanent) (an "Order") of any
Governmental Entity that is in effect and that restricts, prevents or prohibits
the consummation of the Merger or any other transactions contemplated by this
Agreement, including, without limitation, by vigorously pursuing all available
avenues of administrative and judicial appeal and all available legislative
action. Each of 4Health and Surgical also agree to take any and all actions,
including, without limitation, the disposition of assets or the withdrawal from
doing business in particular jurisdictions, required by regulatory authorities
as a condition to the granting of any approvals required in order to permit the
consummation of the Merger or as may be required to avoid, lift, vacate or
reverse any legislative or judicial action which would otherwise cause any
condition to Closing not to be satisfied; provided, however, that in no event
shall 4Health be required to take any action that would or could reasonably be
expected to have a 4Health Material Adverse Effect, and Surgical shall not be
required to take any action which would or could reasonably be expected to have
a Surgical Material Adverse Effect.
(c) (i) Each of Surgical and 4Health shall give (or Surgical shall
cause its subsidiaries to give) any notices to third parties, and use, and cause
their respective subsidiaries to use, all reasonable efforts to obtain any third
party consents (A) necessary, proper or advisable to consummate the transactions
contemplated by this Agreement, (B) otherwise required under any contracts,
licenses, leases or other agreements in connection with the consummation of the
transactions contemplated hereby or (C) required to prevent a Surgical Material
Adverse Effect from occurring prior to the Effective Time or a 4Health Material
Adverse Effect from occurring after the Effective Time.
(ii) In the event that any party shall fail to obtain any third
party consent described in subsection (c)(i) above, such party shall use all
reasonable efforts, and shall take any such actions reasonably requested by the
other party, to limit the adverse effect upon 4Health and Surgical and its
subsidiaries, and their respective businesses resulting or which could
reasonably be expected to result after the Effective Time, from the failure to
obtain such consent.
(d) Each of 4Health and Surgical shall promptly notify the other of
(w) any material change in its current or future business, assets, liabilities,
financial condition or results of operations, (x) any complaints, investigations
or hearings (or communications indicating that the same may be contemplated) of
any Governmental Entities with respect to its business or the transactions
contemplated hereby, (y) the institution or the threat of material litigation
involving it or any of its subsidiaries or (z) any event or condition that might
reasonably be expected to cause any of its representations, warranties,
covenants or agreements set forth herein not to be true and correct at the
Effective Time. As used in the preceding sentence, "material litigation" means
any case, arbitration or adversary proceeding or other matter which would have
been required to be disclosed on the Surgical Disclosure Schedule pursuant to
Section 3.09 or the 4Health Disclosure Schedule pursuant to Section 4.09, as the
case may be, if in existence on the date hereof, or in respect of which the
legal fees and other costs to Surgical (or its subsidiaries) might reasonably
be expected to exceed $10,000 over the life of the matter or to 4Health (or its
subsidiaries) might reasonably be expected to exceed $10,000 over the life of
the matter.
SECTION 6.04. Tax Treatment. Each party hereto shall use all reasonable
efforts to cause the Merger to qualify, and shall not take, and shall use all
reasonable efforts to prevent any affiliate of such party from taking, any
actions that could prevent the Merger from qualifying, as a reorganization under
the provisions of section 368(a) of the Code
SECTION 6.05. Public Announcements. Neither party shall issue any press
release or otherwise make any public statements with respect to the Merger
without the approval of the other. [The press release announcing the execution
and delivery of this Agreement shall be a joint press release of 4Health and
Surgical].
SECTION 6.06. NNM Listing. Each party hereto shall use all reasonable
efforts to cause the shares of New Common Stock and Warrants to be issued in the
Merger to be approved for listing (subject to official notice of issuance) on
the NNM or other national securities exchange prior to the Effective Time.
SECTION 6.07. Indemnification. For a period of six years after the
Effective Time, Surgical shall not amend or otherwise modify Article VI of the
articles of incorporation of Surgical or Article V of the bylaws of Surgical (as
in effect at the Effective Time) in a manner that would adversely affect the
rights thereunder of any individuals, who at any time prior to and at the
Effective Time were or are directors or officers of Surgical, in respect of
their terms of office or acts or omissions occurring at or prior to or after the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such amendment or modification is required by Law. This
Section 6.07 is intended to be for the benefit of, and shall be enforceable by,
the persons referred to in the foregoing sentence, their heirs and personal
representatives, and shall be binding on Surgical and its successors and
assigns.
SECTION 6.08. Stock Resale Agreement. The Constituent Corporations each
agree to deliver, on or prior to the Effective Time, agreements in substantially
the form of Exhibit H attached hereto of each stockholder who is a director or
executive officer of a Constituent Corporation not to effect any sales of the
New Common Stock in excess of the volume limitations specified in Rule 145(d)
promulgated under the Securities Act and each stockholder who owns, directly or
indirectly (including shares owned by affiliates), immediately prior to the
effectiveness of the Merger, such number of shares of Constituent Corporation
common stock (or securities convertible into such common stock) as will equal at
least 5% of the outstanding shares of Constituent Corporation common stock, not
to effect any sales of the New Common Stock for a period 180 days subsequent to
the Closing Date and thereafter not to effect any sales of the New Common Stock
in excess of the lesser of (x) the volume limitations specified in Rule 145(d)
or (y) an amount of shares equal to 2% of the total issued and outstanding
shares of the Surviving Corporation in cumulative sales effected during the
preceding 12 months, subject to the provisions of Exhibit H relating to "block"
transactions by such stockholders; such restriction to continue in force and
effect for a period of 12 months from the Effective Time. Thereafter,
"affiliates" of the Constituent Corporations will continue to be subject to the
requirements of Rule 145 as provided therein.
SECTION 6.09. SEC Reports and Registration Statements. Surgical shall use
all reasonable efforts, including the timely filing of all Surgical SEC Requests
that may be due subsequent to the date hereof and obtaining any consents
required from Surgical's auditors necessary to include such auditor's reports in
such Surgical SEC Reports, the Form S-4 and a registration statement or Form S-8
(the "Form S-8") with respect to stock options issued and to be issued by
Surgical, to maintain the effectiveness of the Form S-8 registering the issuance
of Surgical Common Stock or exercise of rights guaranteed under the Long Term
Stock Incentive Plan or existing immediately prior to the Effective Time for a
period of three years subsequent to the Closing Date. This Section 6.09 is
intended for the benefit of, and shall be enforceable by, the persons holding
the rights referred to in the foregoing sentence, their heirs and legal
representatives and shall be binding on Surgical and its successors and assigns.
ARTICLE 7.
CLOSING CONDITIONS
SECTION 7.01. Conditions to Obligations of Each Party Under This
Agreement. The respective obligations of each party to effect the Merger and
the other transactions contemplated hereby shall be subject to the satisfaction
at or prior to the Closing Date of the following conditions, any or all of which
may be waived in writing by the parties hereto, in whole or in part, to the
extent permitted by applicable Law:
(a) Securities Laws. The Form S-4 shall have been declared
effective by the SEC and Surgical shall have received all Blue Sky permits and
other authorizations necessary to consummate the transactions contemplated by
this Agreement.
(b) Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the requisite vote of the stockholders of Surgical,
and this Agreement and the Merger shall have been approved and adopted by the
requisite vote of the stockholders of 4Health.
(c) No Order. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect and
which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger.
SECTION 7.02. Additional Conditions to Obligations of 4Health. The
obligations of 4Health to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by 4Health, in whole or in part, to the extent permitted by applicable
law:
(a) Representations and Warranties. Each of the representations and
warranties of Surgical contained in this Agreement shall be true and correct as
of the Closing Date as though made on and as of the Closing Date (except to the
extent such representations and warranties specifically relate to an earlier
date, in which case such representations and warranties shall be true and
correct as of such earlier date). 4Health shall have received a certificate of
the President and the Chief Financial Officer of Surgical, dated the Closing
Date, to such effect.
(b) Agreements and Covenants. Surgical shall have performed or
complied with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Closing Date. 4Health shall
have received a certificate of the President and the Chief Financial Officer of
Surgical, dated the Closing Date, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no change, occurrence or circumstance in the current or future
business, assets, liabilities, financial condition or results of operations of
Surgical or any of its subsidiaries having or reasonably likely to have,
individually or in the aggregate, a Surgical Material Adverse Effect. 4Health
shall have received a certificate of the President and the Chief Financial
Officer of Surgical, dated the Closing Date, to such effect.
(d) Absence of Regulatory Conditions. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger, by any Governmental Entity in connection with
the grant of a regulatory approval necessary, in the reasonable business
judgment of 4Health, to the continuing operation of the current or future
business of Surgical, which imposes any condition or restriction upon 4Health or
the business or operations of Surgical which, in the reasonable business
judgment of 4Health, would be materially burdensome in the context of the
transactions contemplated by this Agreement.
(e) Tax Opinion. 4Health shall have received the written opinion of
Messrs. Satterlee Stephens Burke & Burke LLP, dated the Closing Date, to the
effect that: the Merger will constitute a reorganization within the meaning of
section 368(a) of the Code; 4Health and Surgical will each be a party to that
reorganization within the meaning of section 368(b) of the Code; 4Health will
not recognize any gain or loss for federal income tax purposes as a result of
the Merger; and for federal income tax purposes no gain or loss will be
recognized by the holders of 4Health Common Stock and 4Health Series A Stock
upon receipt of shares of New Common Stock in the Merger, except with respect to
any cash received in lieu of a fractional share interest in the New Common
Stock; and such tax opinion shall not have been withdrawn or modified in any
material respect prior to the Closing Date. Counsel may rely on representations
from the parties and the 4Health stockholders in rendering its opinion.
(f) KL&M Opinion. 4Health shall have received from Kruse, Landa &
Maycock, L.L.C., counsel to Surgical, an opinion dated the Closing Date in
substantially the form set forth in Exhibit I hereto.
(g) Withholding. Surgical must not have determined to withhold any
amount from the Merger Consideration pursuant to the tax withholding provisions
of section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of
any other provision of law, except with respect to cash paid for fractional
shares and to dissenting stockholders.
(h) Comfort Letter. 4Health shall have received a letter from Arthur
Andersen LLP stating that they are independent public accountants, within the
meaning of the Securities Act and the rules and regulations thereunder and that
on the basis of a reading of the unaudited interim financial statements prepared
by Surgical and inquiries of officers of Surgical responsible for financial and
accounting matters and such other procedures and inquiries as may be specified
in such letter, nothing has come to their attention which gives them reason to
believe that (i) the [unaudited] financial statements included in the Form S-4
were not prepared in accordance with the related requirements under Securities
Act or the Exchange Act and generally accepted accounting principles and
practices applied on a basis substantially consistent with those followed in the
preparation of the audited financial statements included in such Form S-4, and
(ii) during the period from March 31, 1995 to a specified date not more than
five days prior to the Closing Date, there was any change in the capital stock
or increase in the indebtedness for borrowed money of Surgical.
(i) Dissenters' Rights. The number of shares of Surgical Common
Stock for which valid notices of intention to demand payment pursuant to the
applicable provisions of Utah Law have been provided and remain outstanding
immediately prior to the effectiveness of the Merger does not exceed 225,000 of
the issued and outstanding shares of Surgical Common Stock immediately prior to
the Effective Time.
(j) Resignation of Directors. The Surviving Corporation shall have
received letters of resignation effective as of the Closing Date addressed to
the Company from those members of Surgical's board of directors other than
Messrs. Crosland and Schutjer.
(k) Maintenance of Listing. Surgical shall have maintained its
listing on the NNM or is listed on another national securities exchange or in
the NASDAQ SmallCap Market.
SECTION 7.03. Additional Conditions to Obligations of Surgical. The
obligations of Surgical to effect the Merger and the other transactions
contemplated hereby are also subject to the satisfaction at or prior to the
Closing Date of the following conditions, any or all of which may be waived in
writing by Surgical, in whole or in part, to the extent permitted by applicable
law:
(a) Representations and Warranties. Each of the representations and
warranties of 4Health contained in this Agreement shall be true and correct as
of the Closing Date as though made on and as of the Closing Date (except to the
extent such representations and warranties specifically relate to an earlier
date, in which case such representations and warranties shall be true and
correct as of such earlier date). Surgical shall have received a certificate of
the President and the Chief Financial Officer of 4Health, dated the Closing
Date, to such effect.
(b) Agreements and Covenants. 4Health shall have performed or
complied with all agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Closing Date. Surgical
shall have received a certificate of the President and the Chief Financial
Officer of 4Health, dated the Closing Date, to such effect.
(c) Material Adverse Change. Since the date of this Agreement, there
shall have been no change, occurrence or circumstance in the current or future
business, assets, liabilities, financial condition or results of operations of
4Health or any of its subsidiaries having or reasonably likely to have,
individually or in the aggregate, a 4Health Material Adverse Effect. Surgical
shall have received a certificate of the President and the Chief Financial
Officer of 4Health, dated the Closing Date, to such effect.
(d) Absence of Regulatory Conditions. There shall not be any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Merger, by any Governmental Entity in connection with
the grant of a regulatory approval necessary, in the reasonable business
judgment of Surgical, to the continuing operation of the current or future
business of 4Health, which imposes any condition or restriction upon Surgical or
the business or operations of 4Health which, in the reasonable business judgment
of Surgical, would be materially burdensome in the context of the transactions
contemplated by this Agreement.
(e) Tax Opinion. Messrs. Kruse, Landa & Maycock, L.L.C. shall have
delivered its written opinion to Surgical, to the effect that: the receipt of
shares of New Common Stock and Warrants for shares of Surgical Common Stock (the
"Recapitalization") will be treated for federal income tax purposes as a
reorganization meeting the requirements of Section 368(a)(1)(E) of the Code;
Surgical will be a "party to the reorganization," within the meaning of Section
368(b) of the Code, with respect to the Recapitalization; no gain or loss will
be recognized by Surgical as a result of the Recapitalization; assuming the
fair market value of the Warrants is zero, no gain or loss will be recognized
for federal income tax purposes by the holders of the Surgical Common Stock on
receipt by them pursuant to the Recapitalization of New Common Stock and
Warrants in exchange for their Surgical Common Stock; the basis of the New
Common Stock received by the holders of the Surgical Common Stock in exchange
for their Surgical Common Stock pursuant to the Recapitalization will, in the
aggregate, be the same as the aggregate basis for the Surgical Common Stock
surrendered in exchange therefor, reduced by the fair market value, if any, of
the Warrants received by such shareholder and increased by the amount of any
gain recognized by such shareholder on the exchange; and the holding period for
federal income tax purposes of the New Common Stock received by the holders of
the Surgical Common Stock in exchange for their Surgical Common Stock pursuant
to the Recapitalization will include the period during which the Surgical Common
Stock exchanged therefor was held, assuming that the Surgical Common Stock was
held as a capital asset; and such tax opinion shall not have been withdrawn or
modified in any material respect prior to the Closing Date. Counsel may rely on
representations from the parties and the Surgical stockholders in rendering its
opinion.
(f) SSB&B Opinion. Surgical shall have received from Messrs.
Satterlee Stephens Burke & Burke LLP, counsel to 4Health, an opinion dated the
Closing Date, in substantially the form set forth in Exhibit J hereto. In
rendering their opinion, Messrs. Satterlee Stephens Burke & Burke LLP shall be
entitled to rely on the opinion of Messrs. Lorenz Alhadeff Cannon & Rose as to
matters involving California Law.
(g) Comfort Letter. Surgical shall have received a letter from
Arthur Andersen LLP stating that they are independent public accountants, within
the meaning of the Securities Act and the rules and regulations thereunder, and
that on the basis of a reading of the unaudited interim financial statements
prepared by 4Health and inquiries of officers of 4Health responsible for
financial and accounting matters and such other procedures and inquiries as may
be specified in such letter, nothing has come to their attention which gives
them reason to believe that the unaudited financial statements included in the
Form S-4 were not prepared in accordance with the related requirements under the
Securities Act or Exchange Act and generally accepted accounting principles and
practices applied on a basis substantially consistent with those followed in the
preparation of the audited financial statements included in such Form S-4, and
(ii) during the period from December 31, 1995 to a specified date not more than
five days prior to the Closing Date, there was any change in the capital stock
or increase in the indebtedness for borrowed money of 4Health, or any decrease
in the total net sales and total net income of 4Health compared with the
corresponding period of the prior year.
(h) Dissenters Rights. The number of shares of 4Health Common Stock
for which valid notices of intention to demand payment pursuant to the
applicable provisions of California Law have been provided and remain
outstanding immediately prior to the effectiveness of the Merger does not exceed
five percent (5%) of the issued and outstanding Surgical Common Stock
immediately prior to the Effective Time.
ARTICLE 8.
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of this Agreement
and the Merger by the stockholders of Surgical and 4Health:
(a) by mutual consent of 4Health and Surgical;
(b) by 4Health, upon a material breach of any representation,
warranty, covenant or agreement on the part of Surgical set forth in this
Agreement, or if any representation or warranty of Surgical shall have become
untrue, in either case such that the conditions set forth in Section 7.02(a) or
Section 7.02(b) of this Agreement, as the case may be, would be incapable of
being satisfied by June 30, 1996 (or as otherwise extended as described in
Section 8.01(e)); provided, that in any case, a wilful breach shall be deemed to
cause such condition as to be incapable of being satisfied for purposes of this
Section 8.01(b);
(c) by Surgical, upon a material breach of any representation,
warranty, covenant or agreement on the part of 4Health set forth in this
Agreement, or if any representation or warranty of 4Health shall have become
untrue, in either case such that the conditions set forth in Section 7.03, would
be incapable of being satisfied by June 30, 1996 (or as otherwise extended as
described in Section 8.01(e)); provided, that in any case, a wilful breach shall
be deemed to cause such conditions to be incapable of being satisfied for
purposes of Section 8.01(c);
(d) by either 4Health or Surgical, if there shall be any Order which
is final and nonappealable preventing the consummation of the Merger, except if
the party relying on such Order to terminate this Agreement has not complied
with its obligations under Section 6.03(b) of this Agreement;
(e) by either 4Health or Surgical, if the Merger shall not have been
consummated before June 30, 1996; provided, however, that this Agreement may be
extended by written notice of either 4Health or Surgical to a date not later
than September 30, 1996, if the Merger shall not have been consummated as a
direct result of Surgical or 4Health having failed by June 30, 1996 to receive
all required regulatory approvals or consents with respect to the Merger;
(f) by either 4Health or Surgical, if this Agreement and the Merger
shall fail to receive the requisite vote for approval and adoption by the
stockholders of Surgical at the Surgical Stockholders Meeting or by the
stockholders of 4Health at the 4Health Stockholders Meeting;
(g) by 4Health, if the Board of Directors of Surgical withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to 4Health or shall resolved to do any of the foregoing; the
Board of Directors of Surgical shall have recommended to the stockholders of
Surgical any Competing Transaction or shall have resolved to do so; a tender
offer of exchange offer for 20% or more of the outstanding shares of capital
stock of Surgical is commenced, and the Board of Directors of Surgical does not
recommend that stockholders not tender their shares into such tender or exchange
offer; any person (other than 4Health or an affiliate thereof, or any
stockholder of Surgical as of the date of this Agreement) shall have acquired
beneficial ownership or the right to acquire beneficial ownership of, or any
"group" (as such term if defined under Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder), shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, 20% or
more of the then outstanding shares of capital stock of Surgical; or (v)
Surgical fails to satisfy the condition to 4Health's obligation set forth in
Section 7.02(k).
(h) by Surgical, if the Board of Directors of 4Health withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to Surgical or shall resolve to do any of the foregoing; the
Board of Directors of 4Health shall have recommended to the stockholders of
4Health any Competing Transaction involving 4Health or shall have resolved to do
so.
The right of any party hereto to terminate this Agreement pursuant to
this Section 8.01 shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective officers, directors,
representatives or agents, whether prior to or after the execution of this
Agreement.
SECTION 8.02. Effect of Termination. Except as provided in Section 8.05
or Section 9.01 of this Agreement, in the event of the termination of this
Agreement pursuant to Section 8.01, this Agreement shall forthwith become void,
there shall be no liability on the part of 4Health or Surgical to the other and
all rights and obligations of any party hereto shall cease, except that nothing
herein shall relieve any party of any liability for any breach of such party's
covenants or agreements contained in this Agreement, or any willful breach of
such party's representations or warranties contained in this Agreement.
SECTION 8.03. Amendment. This Agreement may be amended by the parties
hereto by action taken by or on behalf of their respective Boards of Directors
at any time prior to the Effective Time; provided, however, that, after approval
of the Merger by the stockholders of Surgical and 4Health, no amendment, which
under applicable Law may not be made without the approval of the stockholders of
Surgical or 4Health, may be made without such approval, and no amendment, which
under the applicable rules of the NMS or NASDAQ, may not be made without the
approval of the stockholders of Surgical, may be made without such approval.
This Agreement may not be amended except by an instrument in writing signed by
the parties hereto.
SECTION 8.04. Waiver. At any time prior to the Effective Time, any party
hereto may extend the time for the performance of any of the obligations or
other acts of the other party hereto, waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto and waive compliance by the other party with
any of the agreements or conditions contained herein. Any such extension or
waiver shall be valid only if set forth in an instrument in writing signed by
the party or parties to be bound thereby.
SECTION 8.05. Fees, Expenses and Other Payments.
(a) Except as provided in Section 8.05(c) of this Agreement, in the
event the Merger is not consummated all Expenses (as defined in paragraph (b) of
this Section 8.05) incurred by the parties hereto shall be borne solely and
entirely by the party that has incurred such Expenses; it being agreed that all
Expenses incurred in connection with the Form S-4 shall be borne by Surgical and
all amounts due Rockefeller, Rothschild & Steele shall be borne by 4Health;
provided, however, in the event the Merger is consummated, all Expenses incurred
in connection with the Merger and the transactions contemplated thereby will be
paid by the Surviving Corporation.
(b) "Expenses" as used in this Agreement shall include all out-of-
pocket expenses (including, without limitation, all fees and expenses of
counsel, accountants, investment bankers, experts and consultants to a party
hereto and its affiliates) incurred by a party or on its behalf in connection
with or related to the authorization, preparation, negotiation, execution and
performance of this Agreement, the preparation, printing, filing and mailing of
the Form S-4 and the Proxy Statement/Prospectus, the solicitation of stockholder
approvals and all other matters related to the consummation of the transactions
contemplated hereby.
(c) Surgical agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(b) and (x) such termination is the result of a
wilful breach of any representation, warranty, covenant or agreement of Surgical
contained herein, (y) Surgical shall have had contacts or entered into
negotiations relating to a Competing Transaction prior to or on the date of
termination of this Agreement, and (z) within twelve months after the date of
termination of this Agreement, and with respect to any person or group with whom
the contacts or negotiations referred to in clause (y) have occurred, a Business
Combination (as defined in Section 8.05(f)) shall have occurred or Surgical
shall have entered into a definitive agreement providing for a Business
Combination; or
(ii) Section 8.01(f) because this Agreement and the Merger shall
fail to receive the requisite vote for approval and adoption by the stockholders
of 4Health at the 4Health Stockholders Meeting and at the time of such meeting
there shall exist a Competing Transaction; or
(iii) Section 8.01(g)(i) and at the time of the withdrawal,
modification or change (or resolution to do so) of its recommendation by the
Board of Directors of Surgical, there shall exist a Competing Transaction; or
(iv) Sections 8.01(g)(ii), (iii) or (v);
then Surgical shall pay to 4Health an amount equal to $100,000, which amount is
inclusive of all of 4Health's Expenses.
(d) 4Health agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(c) and (x) such termination is the result of a
wilful breach of any representation, warranty, covenant or agreement of 4Health
contained herein, (y) 4Health shall have had contacts or entered into
negotiations relating to a Competing Transaction prior to or on the date of
termination of this Agreement, and (z) within twelve months after the date of
termination of this Agreement, and with respect to any person or group with whom
the contacts or negotiations referred to in clause (y) have occurred, a Business
Combination (as defined in Section 8.05(f)) shall have occurred or 4Health shall
have entered into a definitive agreement providing for a Business Combination;
or
(ii) Section 8.01(f) because this Agreement and the Merger shall
fail to receive the requisite vote for approval and adoption by the stockholders
of Surgical at the Surgical Stockholders Meeting and at the time of such meeting
there shall exist a Competing Transaction; or
(iii) Section 8.01(h)(i) and at the time of the withdrawal,
modification or change (or resolution to do so) of its recommendation by the
Board of Directors of 4Health, there shall exist a Competing Transaction; or
(iv) Sections 8.01(h)(ii);
then 4Health shall pay to Surgical an amount equal to $100,000, which amount is
inclusive of all of Surgical's Expenses.
(d) Any payment required to be made pursuant to Section 8.05(c) or
Section 8.05(d) of this Agreement shall be made as promptly as practicable but
not later than three business days after termination of this Agreement, and
shall be made by wire transfer of immediately available funds to an account
designated by Surgical or 4Health, as the case may be, except that any payment
to be made as the result of an event described in Section 8.05(c)(i) or Section
8.05(d)(i) shall be made as promptly as practicable but not later than three
business days after the occurrence of the Business Combination or the execution
of the definitive agreement providing for a Business Combination.
(e) For purposes of this Section 8.05, the term "Business
Combination" means a merger (other than pursuant to this Agreement),
consolidation, share exchange, business combination or similar transaction
involving Surgical or 4Health, a sale, lease, exchange, transfer or other
disposition of 20% or more of the assets of Surgical and its subsidiaries, or
4Health, taken as a whole, in a single transaction or a series of transactions,
or the acquisition, by a person (other than 4Health or any affiliate thereof)
or group (as such term is defined under Section 13(d) of the Exchange Act and
the rules and regulations thereunder) of beneficial ownership (as defined in
Rule 13d-3 under the Exchange Act) of 20% or more of the Surgical or 4Health
Common Stock, as the case may be, whether by tender or exchange offer or
otherwise.
ARTICLE 9.
GENERAL PROVISIONS
SECTION 9.01. Effectiveness of Representations, Warranties and Agreements.
(a) Except as set forth in Section 9.01(b) of this Agreement, the
representations, warranties and agreements of each party hereto shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any other party hereto, any person controlling any such party or
any of their officers, directors, representatives or agents, whether prior to or
after the execution of this Agreement.
(b) The representations, warranties and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Article VIII, except that the agreements set forth in Articles I and
II and V and Sections 6.04, 6.07 and 6.09 shall survive the Effective Time and
those set forth in Sections 5.04(d), 8.02 and 8.05 and Article IX hereof shall
survive termination.
SECTION 9.02. Notices. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
upon receipt, if delivered personally or by air courier, or mailed by registered
or certified mail (postage prepaid, return receipt requested), to the parties at
the following addresses (or at such other address for a party as shall be
specified by like changes of address) or sent by electronic transmission to the
telecopier number specified below (to be followed promptly by personal or air
courier delivery or mailing as hereinafter provided):
(a) If to 4Health, to:
5485 Conestoga Court
Boulder, Colorado 80301
Attn: R. Lindsey Duncan, President
Facsimile Number: (303) 546-6416
with copy to: Satterlee Stephens Burke & Burke LLP
230 Park Avenue, Suite 1130
New York, NY 10169
Attn: Peter A. Basilevsky, Esq.
Facsimile Number: (212) 818-9606
(b) If to Surgical, to:
6241 South Shenandoah Park Avenue
Salt Lake City, Utah 84121
Attn: Todd R. Crosland
Facsimile Number: (801) 355-0904
with copy to: Kruse, Landa & Maycock, L.L.C.
Eighth Floor, Bank One Tower
50 West Broadway (300 South)
Salt Lake City, Utah 84101-2034
Attn: James R. Kruse, Esq.
Facsimile Number: (801) 359-3954
SECTION 9.03. Certain Definitions. For the purposes of this Agreement,
the term:
(a). "affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the first mentioned person;
(b) a person shall be deemed a "beneficial owner" of or to have
"beneficial ownership" of Surgical Common Stock or 4Health Common Stock, as the
case may be, in accordance with the interpretation of the term "beneficial
ownership" as defined in Rule 13d-3 under the Exchange Act, as in effect on the
date hereof; provided that a person shall be deemed to be the beneficial owner
of, and to have beneficial ownership of, Surgical Common Stock or 4Health Common
Stock, as the case may be, that such person or any affiliate of such person has
the right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding or upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise.
(c) "business day" means any day other than a day on which banks in
the State of Utah are authorized or obligated to be closed;
(d) "control" (including the terms "controlled," "controlled by" and
"under common control with") means the possession, directly or indirectly or as
trustee or executor, of the power to direct or cause the direction of the
management or policies of a person, whether through the ownership of stock or as
trustee or executor, by contract or credit arrangement or otherwise;
(e) "knowledge" or "known" shall mean, with respect to any matter in
question, if an executive officer of Surgical or 4Health, as the case may be,
has actual knowledge of such matter;
(f) "person" means an individual, corporation, partnership,
association, trust, unincorporated organization, other entity or group (as
defined in Section 13(d) of the Exchange Act);
(g) "Significant Subsidiary" means any subsidiary of Surgical that
would constitute a Significant Subsidiary of such party within the meaning of
Rule 1-02 of Regulation S-X of the SEC; and
(h) "subsidiary" or "subsidiaries" of Surgical, the Surviving
Corporation or any other person, means any corporation, partnership, joint
venture or other legal entity of which Surgical, the Surviving Corporation or
any such other person, as the case may be (either alone or through or together
with any other subsidiary), owns, directly or indirectly, currently or in the
past, 50% or more of the stock or other equity interests the holders of which
are generally entitled to vote for the election of the board of directors or
other governing body of such corporation or other legal entity.
SECTION 9.04. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Section references herein are, unless the
context otherwise requires, references to sections of this Agreement.
SECTION 9.05. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the extent
possible.
SECTION 9.06. Entire Agreement. This Agreement (together with the
Exhibits, the Surgical Disclosure Schedule and the 4Health Disclosure Schedule)
constitutes the entire agreement of the parties, and supersede all prior
agreements and undertakings, including the Letter Agreement (except for the
provisions of Paragraph 13 thereof), both written and oral, among the parties or
between any of them, with respect to the subject matter hereof. Surgical and
4Health agree that nothing contained in this Agreement, the proxies granted by
certain stockholders of Surgical and 4Health on or about the date hereof or the
transactions contemplated hereby or thereby shall be deemed to violate the
Letter Agreement.
SECTION 9.07. Assignment. This Agreement shall not be assigned by
operation of law or otherwise.
SECTION 9.08. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied (other than as contemplated by Section 6.07 or
Section 6.09), is intended to or shall confer upon any other person any right,
benefit or remedy of any nature whatsoever under or by reason of this Agreement.
SECTION 9.09. Specific Performance. The parties hereby acknowledge and
agree that the failure of any party to perform its agreements and covenants
hereunder, including its failure to take all actions as are necessary on its
part to the consummation of the Merger, will cause irreparable injury to the
other parties for which damages, even if available, will not be an adequate
remedy. Accordingly, each party hereby consents to the issuance of injunctive
relief by any court of competent jurisdiction to compel performance of such
party's obligations and to the granting by any court of the remedy of specific
performance of its obligations hereunder.
SECTION 9.10. Failure or Indulgence Not Waiver; Remedies Cumulative. No
failure or delay on the part of any party hereto in the exercise of any right
hereunder shall impair such right or be construed to be a waiver of, or
acquiescence in, any breach of any representation, warranty or agreement herein,
nor shall any single or partial exercise of any such right preclude other or
further exercise thereof or of any other right. All rights and remedies
existing under this Agreement are cumulative to, and not exclusive of, any
rights or remedies otherwise available.
SECTION 9.11. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Utah, regardless of the
laws that might otherwise govern under applicable principles of conflicts of
law.
SECTION 9.12. Counterparts. This Agreement may be executed in multiple
counterparts, and by the different parties hereto in separate counterparts, each
of which when executed shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
4HEALTH INC.
By:/s/
Name:R. Lindsey Duncan
Title:President
SURGICAL TECHNOLOGIES, INC.
By:/s/
Name:Todd B. Crosland
Title:Vice-President, Finance
June 4, 1996
Surgical Technologies, Inc.
2801 South Decker Lake Lane
Salt Lake City, Utah 84119
Dear Sirs:
Due to the timing of the Securities and Exchange Commission's review and
comment process as regards the Registration Statement on Form S-4 filed by
4health, Inc. ("4Health"), and Surgical Technologies, Inc. ("Surgical"), with
respect to the proposed merger of 4Health with and into Surgical (the "Merger"),
it appears likely that the Merger will not be consummated before June 30, 1996.
In light of this circumstance, it is our understanding that both parties to
the Agreement and Plan of Merger dated April 10, 1996 (the "Merger Agreement")
between 4Health and Surgical agree to amend (i) subsections (b), (c) and (e) of
Section 8.01 of the Merger Agreement to replace each reference to "June 30,
1996" in each such subsection with "September 30, 1996" in such subsection with
"December 31, 1996." All of the other provisions of the Merger Agreement shall
remain in full force and effect as currently provided.
If the foregoing represents your understanding of the agreement between the
parties, please execute the enclosed copy of this letter in the space indicated
below, returning the same to the undersigned.
Upon execution by both parties, this letter agreement shall be effective
and binding and enforceable upon the parties hereto.
4HEALTH, INC.
By: /s/
Name: Richard B. Carlock
Title: CFO
AGREED AND ACCEPTED
AS OF THIS 4TH DAY OF JUNE, 1996.
SURGICAL TECHNOLOGIES, INC.
By: /s/
Name: Todd B. Crosland
Title: Vice-President Finance
<PAGE>
APPENDIX B TO REGISTRATION STATEMENT
4HEALTH INC.
AND
ZIONS FIRST NATIONAL BANK
WARRANT AGREEMENT
Dated as of , 1996
-----
AGREEMENT, dated this day of , 1996, between 4HEALTH INC., a Utah
--- ----
corporation (the "Company"), and ZIONS FIRST NATIONAL BANK, a [ ]
----------
banking corporation, as Warrant Agent (the "Warrant Agent").
W I T N E S S E T H
WHEREAS, in connection with (i) the merger of 4Health, Inc., a California
corporation with and into the Company (previously known as Surgical
Technologies, Inc.) (the "Merger") and (ii) the recapitalization of the issued
and outstanding shares of common stock, par value $.01 per share of Surgical
Technologies, Inc. (the "Surgical Common Stock") pursuant to which each four
shares of Surgical Common Stock issued and outstanding immediately prior to the
Effective Time (as defined hereinafter) of the Merger will be converted at the
Effective Time into two shares of common stock, par value $.01 per share, of the
Company ("New Common Stock") and a warrant to purchase one share of New Common
Stock upon the terms and conditions hereinafter set forth (the "Warrants"), the
Company will issue up to [ ] Warrants; and
WHEREAS, the Company desires to provide for the issuance of certificates
representing the Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
-----------
the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
voting and in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business in Salt
Lake City, Utah, shall be administered, which office is located on the date
hereof at [ ].
-------------
(c) "Effective Time" shall mean the date and time of filing of the
Articles of Merger (relating to the Merger) with the Division of Corporations
and Commercial Code of the State of Utah.
(d) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder thereof or his
attorney duly authorized in writing, and (ii) payment in cash or by check made
payable to the Warrant Agent for the account of the Company, of the amount in
lawful money of the United States of America in good funds equal to the
applicable Exercise Price.
(e) "Exercise Price" shall mean, subject to modification and
adjustment as provided in Section 8, $11.00 per share of Common Stock, and
further subject to the Company's right, in its sole discretion, to decrease the
Exercise Price or increase the number of shares of Common Stock issuable on
exercise on not less the 30 days' prior written notice to the Registered
Holders.
(f) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(g) "Subsidiary" or "Subsidiaries" shall mean any corporation or
corporations, as the case may be, of which stock having ordinary power to elect
a majority of the Board of Directors of such corporation (regardless of whether
or not at the time stock of any other class or classes of such corporation shall
have or may have voting power by reason of the happening of any contingency) is
at the time directly or indirectly owned by the Company or by one or more
Subsidiaries, or by the Company and one or more Subsidiaries.
(h) "Transfer Agent" shall mean Zions First National Bank, Salt Lake
City, Utah, or its authorized successor.
(i) "Warrant Agent" shall mean Zions First National Bank, Salt Lake
City, Utah or its authorized successor.
(j) "Warrant Certificate" shall mean a certificate representing a
Warrant or Warrants substantially in the form annexed hereto as Exhibit A.
(k) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (Salt
Lake City time) on , 1997 or, if such date shall in the State of Utah be a
-----
holiday or a day on which banks are authorized to close, then 5:00 p.m. (Salt
Lake City time) on the next following day which in the State of Utah is not a
holiday or a day on which banks are authorized to close, subject to the
Company's right, prior to the Warrant Expiration Date, in its sole discretion,
to extend such Warrant Expiration Date on not less than ten business days prior
written notice to the Registered Holders.
SECTION 2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) One Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase, at the Exercise Price
therefor from the Effective Time until the Warrant Expiration Date, one share of
Common Stock upon the exercise thereof, subject to modification and adjustment
as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing [ ] Warrants to purchase up to an aggregate of [ ]
shares of Common Stock (subject to modification and adjustment as provided in
Section 8) shall be executed by the Company and delivered to the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided in Section 7 hereof, no Warrant Certificates
shall be issued except (i) Warrant Certificates initially issued hereunder, (ii)
Warrant Certificates issued upon any transfer or exchange of Warrants, (iii)
Warrant Certificates issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7, and (iv) at the option of
the Company, Warrant Certificates in such form as may be approved by its Board
of Directors, to reflect any adjustment or change in the Exercise Price, the
number of shares of Common Stock purchasable upon exercise of the Warrants or
the Redemption Price therefor made pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates shall be substantially in the form
annexed hereto as Exhibit A (the provisions of which are hereby incorporated
herein), and may have such letters, numbers or other marks of identification or
designation and such legends, summaries or endorsements printed, lithographed or
engraved thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
law or with any rule or regulation of any stock exchange on which the Warrants
may be listed, or to conform to usage. The Warrants Certificates shall be dated
the date of issuance thereof (whether upon initial issuance, transfer, exchange
or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates).
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, President or any Vice President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon, and shall have
imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall
be manually countersigned by the Warrant Agent and shall not be valid for any
purpose unless so countersigned. In case any officer of the Company who shall
have signed any of the Warrant Certificates shall cease to be such officer of
the Company before the date of issuance of the Warrant Certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent,
issued and delivered with the same force and effect as though the person who
signed such Warrant Certificates had not ceased to be such officer of the
Company.
SECTION 4. Exercise.
--------
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised commencing at any time on or after the Effective Time,
but not after the Warrant Expiration Date, upon the terms and subject to the
conditions set forth herein (including the provisions set forth in Sections 5
and 9 hereof) and in the applicable Warrant Certificate. A Warrant shall be
deemed to have been exercised immediately prior to the close of business on the
Exercise Date; provided that the Warrant Certificate representing such Warrant,
with the exercise form thereon duly executed by the Registered Holder thereof or
his attorney duly authorized in writing, together with payment in cash or by
check made payable to the Warrant Agent for the account of the Company, of an
amount in lawful money of the United States of America equal to the applicable
Exercise Price has been received in good funds by the Warrant Agent. The person
entitled to receive the securities deliverable upon such exercise shall be
treated for all purposes as the Registered Holder of such securities as of the
close of business on the Exercise Date. If Warrants in denominations other than
two or whole number multiples thereof shall be exercised at one time by the same
Registered Holder, the number of full shares of Common Stock which shall be
issuable upon exercise thereof shall be computed on the basis of the aggregate
number of full shares of Common Stock issuable upon such exercise. As soon as
practicable on or after the Exercise Date and the confirmation of receipt of
good funds by the Warrant Agent and, in any event, within five business days
after the Exercise Date or the confirmation of the receipt of good funds,
whichever is later, the Warrant Agent, on behalf of the Company, shall cause to
be issued to the person or persons entitled to receive the same a Common Stock
certificate or certificates for the shares of Common Stock deliverable upon such
exercise, and the Warrant Agent shall deliver the same to the person or persons
entitled thereto. Upon the exercise of any Warrant, the Warrant Agent shall
promptly notify the Company in writing of such fact and of the number of
securities delivered upon such exercise and shall cause all payments of an
amount in cash or by check made payable to the order of the Company, equal to
the Exercise Price, to be deposited promptly in the Company's bank account.
(b) The Company shall not be obligated to issue any fractional share
interests or fractional warrant interests upon the exercise of any Warrant or
Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of
fractional interests. In lieu of any such fractional interest, the Registered
Holder shall, upon surrender of the Warrant Certificate (as herein provided), be
paid an amount in cash (without interest) rounded to the nearest cent determined
by multiplying the Exercise Price as then in effect by the fractional interest;
provided, however, that the Company shall not be required to pay any amount
which is less than $2.00.
(c) Prior to exercise of any Warrant, the Registered Holder shall not
be entitled to any rights of a shareholder of the Company, including, without
limitation, the right to vote or to receive dividends or other distributions,
and shall not be entitled to receive any notice of any proceedings of the
Company, except as otherwise provided herein.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes, etc.
-----------------------------------------------------
(a) The Company covenants that, so long as any Warrants are
outstanding, it will at all times reserve and keep available out of its
authorized Common Stock, solely for the purpose of issue upon exercise of
Warrants, such number of shares of Common Stock as shall then be issuable upon
the exercise of all outstanding Warrants. The Company covenants that upon the
exercise of the Warrants and payment of the Exercise Price all shares of Common
Stock which shall be issuable upon such exercise, shall, at the time of delivery
thereof, be duly and validly issued and fully paid and non-assessable and free
from all preemptive or similar rights, taxes, liens and charges with respect to
the issue thereof. The Company shall use its best efforts to list such shares
on each securities exchange, if any, on which the other shares of outstanding
Common Stock of the Company are then listed.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its best efforts to cause the same to become
effective, keep such registration statement current while any of the Warrants
are outstanding and deliver a prospectus which complies with Section 10(a)(3) of
the Securities Act of 1993, as amended (the "Act"), to the Registered Holder
exercising the Warrant (except, if in the opinion of counsel to the Company,
such registration is not required under the federal securities law or if the
Company receives a letter from the staff of the Securities and Exchange
Commission ("Commission") stating that it would not take any enforcement action
if such registration is not effected). The Company will use its best efforts to
obtain appropriate approvals or registrations under state "blue sky" securities
laws. With respect to any such securities, however, Warrants may not be
exercised by, or shares of Common Stock issued to, any Registered Holder in any
state in which such exercise or issuance would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required upon exercise of the Warrants, and
the Company will comply with all such requisitions.
SECTION 6. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at the Corporate Office, books in
which, subject to such reasonable regulations as it may prescribe, it shall
register Warrant Certificates and the transfer thereof. Upon due presentment
for registration of transfer of any Warrant Certificate at such office, the
Company shall execute and the Warrant Agent shall issue and deliver to the
transferee or transferees a new Warrant Certificate or Certificates representing
an equal aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the reverse of the
exercise form shall be duly endorsed or be accompanied by a written instrument
or instruments of transfer and subscription, in form satisfactory to the Company
and the Warrant Agent, duly executed by the Registered Holder thereof or his
attorney duly authorized in writing.
(d) No service charge shall be made for any exchange or registration
of transfer of Warrant Certificates. However, the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
shall be promptly cancelled by the Warrant Agent.
(f) Prior to due presentment for registration or transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
------------------
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall countersign and deliver in lieu thereof a new
Warrant Certificate representing an equal aggregate number of Warrants.
Applicants for a substitute Warrant Certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Exercise Price and Number of Shares of Common
-----------------------------------------------------------
Stock Deliverable.
- -----------------
(a) (i) Except as hereinafter provided, in the event the Company
shall, at any time or from time to time after the date hereof, sell any shares
of Common Stock for a consideration per share less than the average of the
highest and lowest quoted selling price of a share of Common Stock as reported
on the composite tape for securities listed on such national securities exchange
on which the Common Stock is then listed for trading as may be designated by the
Compensation Committee of the Board of Directors of the Company, or, in the
event that the Common Stock is not listed for trading on a national securities
exchange but is quoted on an automated quotation system, on such automated
quotation system, or, in the event that the Common Stock is not quoted on an
automated quotation system, the average of the highest bid and lowest asked
price of a share of Common Stock as quoted by a member firm of the National
Association of Securities Dealers, Inc., in any such case on the valuation date
(or, if there were no sales on the valuation date, the average of the highest
and lowest quoted selling prices or bid and asked price as reported on said
composite tape or automated quotation system or by such member firm, as the case
may be, for the most recent day during which a sale occurred (hereinafter
"Market Price"), or issue any shares of Common Stock as a stock dividend to the
holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares, the Exercise Price for the
Warrants (whether or not the same shall be issued and then outstanding) in
effect immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent to the nearest cent) determined by
dividing (i) the sum of (a) the total number of shares of Common Stock
outstanding immediately prior to such Change of Shares, multiplied by the
Exercise Price in effect immediately prior to such Change of Shares, and (b) the
consideration, if any, received by the Company upon such sale, issuance,
subdivision or combination by (ii) the total number of shares of Common Stock
outstanding immediately after such Change of Shares; provided, however, that in
no event shall the Exercise Price be adjusted pursuant to this computation to an
amount in excess of the Exercise Price in effect immediately prior to such
computation, except in the case of a combination of outstanding shares of Common
Stock.
For the purposes of any adjustment to be made in accordance with this
Section 8(a), the following provisions shall be applicable:
(A) In case of the issuance or sale of shares of Common Stock
(or of other securities deemed hereunder to involve the issuance or sale of
shares of Common Stock) for a consideration part or all of which shall be cash,
the amount of the cash portion of the consideration therefor deemed to have been
received by the Company shall be (i) the subscription price, if shares of Common
Stock are offered by the Company for subscription, or (ii) the public offering
price (before deducting therefrom any compensation paid or discount allowed in
the sale, underwriting or purchase thereof by underwriters or any expenses
incurred in connection therewith), if such securities are sold to the
underwriters or dealers for public offering without a subscription offering, or
(iii) the gross amount of cash actually received by the Company for such
securities, in any other case.
(B) In case of the issuance or sale (otherwise than as a
dividend or other distribution on any stock of the Company, and otherwise than
on the exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash deemed to have been
received by the Company shall be the value of such consideration as determined
in good faith by the Board of Directors of the Company.
(C) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of shareholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(D) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (B) of this Section 8(a).
(E) The number of shares of Common Stock at any one time
outstanding shall be deemed to include the aggregate maximum number of shares
issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(ii) Upon each adjustment of the Exercise Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Exercise
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Exercise Price.
(b) Subject to the provisions of Section 8(f), in case the Company
shall at any time after the date hereof issue options, rights or warrants to
subscribe for shares of Common Stock, or issue any securities convertible into
or exchangeable for shares of Common Stock to all Common Stockholders for a
consideration per share (determined as provided in Section 8(a) and as provided
below) less than the Market Price in effect immediately prior to the issuance of
such options, rights or warrants, or such convertible or exchangeable
securities, or without consideration (including the issuance of any such
securities by way of dividend or other distribution), the Exercise Price for the
Warrants (whether or not the same shall be issued and outstanding) in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, as the case may be, shall be reduced to
a price determined by making the computation in accordance with the provisions
of Section 8(a) hereof; provided that:
(A) The aggregate maximum number of shares of Common Stock, as
the case may be, issuable or that may become issuable under such options, rights
or warrants (assuming exercise in full even if not then currently exercisable or
currently exercisable in full) shall be deemed to be issued and outstanding at
the time such options, rights or warrants were issued, for a consideration equal
to the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration, if any, received by
the Company for such options, rights or warrants; provided, however, that upon
the expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (A) (and for the
purposes of subsection (E) of Section 8(a) hereof) shall be reduced by the
number of shares as to which options, warrants and/or rights shall have expired,
and such number of shares shall no longer be deemed to be issued and
outstanding, and the Exercise Price then in effect shall forthwith be readjusted
and thereafter be the price that it would have been had adjustment been made on
the basis of the issuance only of the shares actually issued plus the shares
remaining issuable upon the exercise of those options, rights or warrants as to
which the exercise rights shall not have expired or terminated unexercised.
(B) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable upon conversion or exchange of any
convertible or exchangeable securities (assuming conversion or exchange in full
even if not then currently convertible or exchangeable in full) shall be deemed
to be issued and outstanding at the time of issuance of such securities, for a
consideration equal to the consideration received by the Company for such
securities, plus the minimum consideration, if any receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
of Common Stock deemed to be issued and outstanding pursuant to this subsection
(B) (and for the purposes of subsection (E) of Section 8(a) hereof) shall be
reduced by the number of shares as to which the conversion or exchange rights
shall have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued and outstanding, and the Exercise Price then in
effect shall forthwith be readjusted and thereafter be the price that it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued plus the shares remaining issuable upon conversion or
exchange of those convertible or exchangeable securities as to which the
conversion or exchange rights shall not have expired or terminated unexercised.
(C) If any change shall occur in the price per share provided
for in any of the options, rights or warrants referred to in subsection (A) of
this Section 8(b), or in the price per share or ratio at which the securities
referred to in subsection (B) of this Section 8(b) are convertible or
exchangeable, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, shall be deemed to
have expired or terminated on the date when such price change became effective
in respect of shares not theretofore issued pursuant to the exercise or
conversion or exchange thereof, and the Company shall be deemed to have issued
upon such date new options, rights or warrants or convertible or exchangeable
securities.
(c) In case of any reclassification or change of outstanding shares
of Common Stock issuable upon exercise of the Warrants (other than a change in
par value, or from par value to no par value, or from no par value to par value
or as a result of a subdivision or combination), or in case of any consolidation
or merger of the Company with or into another corporation (other than a merger
with a Subsidiary in which merger the Company is the continuing corporation and
which does not result in any reclassification or change of the then outstanding
shares of Common Stock or other capital stock issuable upon exercise of the
Warrants (other than a change in par value, or from par value to no par value,
or from no par value to par value or as a result of subdivision or combination)
or in case of any sale or conveyance to another corporation of the property of
the Company as an entirety or substantially as an entirety, then, as a condition
of such reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the Registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale or
conveyance and shall forthwith file at the Corporate Office of the Warrant Agent
a statement signed by its President or a Vice President and by its Treasurer or
an Assistant Treasurer or its Secretary or an Assistant Secretary evidencing
such provision. Such provisions shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in Section 8(a) and (b). The above provisions of this Section 8(c) shall
similarly apply to successive reclassifications and changes of shares of Common
Stock and to successive consolidations, mergers, sales or conveyances.
(d) Irrespective of any adjustments or changes in the Exercise Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(e) hereof, continue to express the Exercise Price per
share and the number of shares purchasable thereunder as the Exercise Price per
share and the number of shares purchasable thereunder were expressed in the
Warrant Certificates when the same were originally issued.
(e) After each adjustment of the Exercise Price pursuant to this
Section 8, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Exercise Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
or her last address as it shall appear on the registry books of the Warrant
Agent. No failure to mail such notice or any defect therein or in the mailing
thereof shall affect the validity thereof except as to the holder to whom the
Company failed to mail such notice, or except as to the holder whose notice was
defective. The affidavit of an officer of the Warrant Agent or the Secretary or
an Assistant Secretary of the Company that such notice has been mailed shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
(f) No adjustment of the Exercise Price shall be made as a result of
or in connection with (A) the issuance or sale of shares of Common Stock
pursuant to options, warrants, stock purchase agreements and convertible or
exchangeable securities outstanding or in effect on the date hereof, (B) the
issuance and sale of the Company's securities pursuant to this Agreement, or (C)
the grant, issuance or sale of options or warrants or issuance of securities
upon the exercise thereof or the grant, issuance or sale of any other security,
pursuant to the provisions of the Company's Long Term Stock Incentive Plan or
(D) the issuance or sale of shares of Common Stock, if the amount of said
adjustment shall be less that $.10; provided, however, that in such case, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with the next subsequent
adjustment that shall amount, together with any adjustment so carried forward,
to at least $.10.
SECTION 9. Redemption.
----------
(a) The Company may, at any time after the Effective Time, on 30 days
prior written notice (the "Notice of Redemption") redeem all (but not part) of
the Warrants then outstanding at the price of $0.01 per Warrant (the "Redemption
Price"); provided, however, that before any such call for redemption of Warrants
can take place, the Market Price for the Common Stock in the primary market in
which the Common Stock is traded shall have, for thirty (30) consecutive trading
days subsequent to the Effective Time and ending no more than ten (10) days
prior to the date of the Notice of Redemption, equalled or exceeded $13.75 per
share (subject to adjustment in the event of any stock splits or other similar
events as provided in Section 8 hereof).
(b) In case the Company shall exercise its right to redeem all of the
Warrants, it shall mail or cause to be mailed to the Registered Holders of the
Warrants a Notice of Redemption, by first class, postage prepaid, within ten
(10) calendar days of the aforementioned thirty (30) consecutive trading days
and not later than the fortieth (40th) day before the date fixed for redemption,
at their last address as shall appear on the records of the Warrant Agent. Any
notice mailed in the manner provided herein shall be conclusively presumed to
have been duly given whether or not the Registered Holder receives such notice.
(c) The Notice of Redemption shall specify (i) the Redemption Price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificate shall be delivered and the Redemption Price shall be paid, and (iv)
that the right to exercise the Warrant shall terminate at 5:00 p.m. (Salt Lake
City time) on the business day immediately preceding the date fixed for
redemption. The date fixed for the redemption of the Warrants shall be the
Redemption Date. No failure to mail such notice or any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or the Secretary or Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m.
(Salt Lake City time) on the business day immediately preceding the Redemption
Date. The redemption price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
SECTION 10. Concerning the Warrant Agent.
----------------------------
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or by any other act hereunder, be deemed to make any
representations as to the validity or value or authorization of the Warrant
Certificates or the Warrants represented thereby or of any securities or other
property delivered upon exercise of any Warrant or whether any stock issued upon
exercise of any Warrant is fully paid and non-assessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Exercise Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustment, or with respect
to the nature or extent of any such adjustment, when made, or with respect to
the method employed in making the same. It shall not (i) be liable for any
recital or statement of fact contained herein or for any action taken, suffered
or omitted by it in reliance on any Warrant Certificate or other document or
instrument believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement except for its own
gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, President or any Vice President (unless
other evidence in respect thereof is herein specifically prescribed). The
Warrant Agent shall not be liable for any action taken, suffered or omitted by
it in accordance with such notice, statement, instruction, request, direction,
order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder. The Company further agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agents's own gross negligence or willful misconduct),
after giving 30 days' prior written notice to the Company. At least 15 days
prior to the date such resignation is to become effective, the Warrant Agent
shall cause a copy of such notice of resignation to be mailed to the Registered
Holder of each Warrant Certificate at the Company's expense. Upon such
resignation the Company shall appoint in writing a new warrant agent. If the
Company shall fail to make such appointment within a period of 30 days after it
has been notified in writing of such resignation by the resigning Warrant Agent,
then the Registered Holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court, shall be a
bank or trust company having a capital and surplus, as shown by its last
published report to its stockholders, of not less than $10,000,000, or a stock
transfer company doing business in New York, New York. After acceptance in
writing of such appointment by the new warrant agent is received by the Company,
such new warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the warrant agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. The Warrant Agent shall promptly transfer the books and records relating
to the Warrants to such successor warrant agent. Not later than the effective
date of any such appointment the Company shall file notice thereof with the
resigning Warrant Agent and shall forthwith cause a copy of such notice to be
mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act; provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Company may, on 30 business days' notice to the Warrant Agent
and the Registered Holders, replace the Warrant Agent with a successor warrant
agent meeting the requirements set forth in subsection (f) hereof.
(j) The Warrant Agent shall retain for a period of two years from the
date of exercise any Warrant Certificate received by it upon such exercise.
SECTION 11. Modification of Agreement.
-------------------------
The Warrant Agent and the Company may by supplemental agreement make any
changes or corrections in this Agreement (i) that they shall deem appropriate to
cure any ambiguity or to correct any defective or inconsistent provision or
manifest mistake or error herein contained; (ii) that they may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
Warrant Certificates; or (iii) which are required by law; provided, however,
that this Agreement shall not otherwise be modified, supplemented or altered in
any other respect except with the consent in writing of the Registered Holders
representing not less than 66-2/3% of the Warrants then outstanding; provided,
further, that no change in the number or nature of the securities purchasable
upon the exercise of any Warrant, or the Exercise Price therefor, shall be made
without the consent in writing of the Registered Holder of the Warrant
Certificate, other than such changes as are specifically prescribed by this
Agreement as originally executed, including, without limitation, the changes
permitted by Section 1(e) hereof, or as so consented to.
SECTION 12. Notices.
-------
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been made when delivered or mailed first-
class postage prepaid, or delivered to a telegraph office for transmission if to
the Registered Holder of a Warrant Certificate, at the address of such holder as
shown on the registry books maintained by the Warrant Agent; if to the Company
at 5485 Conestoga Court, Boulder, Colorado 80301, Attention: President, or at
such other addresses as may have been furnished to the Warrant Agent in writing
by the Company; and if to the Warrant Agent, at its Corporate Office.
SECTION 13. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of Utah without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Nothing in
this Agreement is intended or shall be construed to confer upon any other person
any right, remedy or claim or to impose upon any other person any duty,
liability or obligation.
SECTION 15. Counterparts.
------------
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the first date first above written.
[SEAL]
4HEALTH INC. ZIONS FIRST NATIONAL BANK
As Warrant Agent
By: By:
------------------------- --------------------------
Name: Name:
----------------------- -------------------------
Title: Title:
---------------------- ------------------------
<PAGE>
EXHIBIT A
to the Warrant Agreement
No. W VOID AFTER , 1997
-------- ------
WARRANTS
REDEEMABLE WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
4HEALTH INC.
CUSIP NO.
----------
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Warrants (the "Warrants") specified above. Each Warrant initially
entitles the Registered Holder to purchase, subject to the terms and conditions
set forth in this Certificate and the Warrant Agreement (as hereinafter
defined), one fully paid and non-assessable share of Common Stock, $.01 par
value, of 4Health Inc, a Utah corporation (the "Company"), at any time from
, 1996 and prior to the Expiration Date (as hereinafter defined) upon the
- -----
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of Zions First
National Bank, [ ], as Warrant Agent, or its successor (the "Warrant
-----------
Agent"), accompanied by payment of $11.00, subject to adjustment (the "Exercise
Price"), in lawful money of the United States of America in cash or by check
made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated , 1996, by
------
and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (Salt Lake City time) on
, 1997. If such date shall in the State of Utah be a holiday or a day on
- -----
which the banks are authorized to close, the Expiration Date shall mean 5:00
P.M. (Salt Lake City time) the next following day which in the State of Utah is
not a holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has
covenanted and agreed that, if required by the Act, it will file a registration
statement under the Act, use its best efforts to cause the same to become
effective, to keep such registration statement current, if required under the
Act, while any of the Warrants are outstanding, and deliver a prospectus which
complies with Section 10(a)(3) of the Act to the Registered Holder exercising
this Warrant. This Warrant shall not be exercisable by a Registered Holder in
any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
of Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a shareholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $0.01 per
Warrant, at any time commencing after , 1996; provided that the Market
-----
Price (as defined in the Warrant Agreement) for the Common Stock in the primary
market in which the Common Stock is traded shall have for thirty (30)
consecutive trading days and ending no more than (10) days prior to the Notice
of Redemption, as defined below, equalled or exceeded $13.75 per share (subject
to adjustment in the event of any stock splits or other similar events)
(hereinafter referred to as the "Redemption Period"). Notice of redemption (the
"Notice of Redemption") shall be given not later than the fortieth (40th) day
before the date fixed for redemption (the "Redemption Date"), all as provided in
the Warrant Agreement. The Registered Holder may exercise the Warrants pursuant
to and in accordance with the terms of this Warrant Certificate and the Warrant
Agreement at any time during the Redemption Period up to but excluding the
Redemption Date. On and after the Redemption Date, the Registered Holder shall
have no rights with respect to the Warrants except to receive $0.01 per Warrant
upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of Utah without giving effect to conflicts of laws.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ,1996
4HEALTH INC.
[SEAL]
By:
---------------------------
Name:
-----------------------
Title:
----------------------
By:
---------------------------
Name:
-----------------------
Title:
----------------------
COUNTERSIGNED:
ZIONS FIRST NATIONAL BANK,
as Warrant Agent
By:
------------------------------
Authorized Officer
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the
- ----------
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
================================================
------------------------------------------------
(please print or type name and address)
and be delivered to
------------------------------------------------
------------------------------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING
1. The exercise of this Warrant was solicited by [ ]
.
---------------------------------------
2. If the exercise of this Warrant was not
solicited, please check the following box. [ ]
Dated: 199 X
------------- -- =======================================
---------------------------------------
Address
Social Security or Taxpayer
Identification Number
Signature Guaranteed
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, , hereby
--------------------------------------
sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
==================================================
--------------------------------------------------
(please print or type name and address)
of the Warrants represented by this
- -------------------------------------
Warrant Certificate, and hereby irrevocably constitutes and appoints
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated: 199 x
------------- -- ---------------------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE,
MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE.
<PAGE>
APPENDIX C TO REGISTRATION STATEMENT
SALE RESTRICTION AGREEMENT
- -------------------
- -------------------
- -------------------
Ladies and Gentlemen:
In order to induce (" ") to enter
------------------------ ---------
into that certain Agreement and Plan of Merger, dated as of April 10, 1996 (the
"Merger Agreement"), with (" "), and to consummate the
------------ ---------
transactions contemplated thereby, pursuant to which, inter alia, 4Health will
----- ----
be merged with and into Surgical (the "Merger") for shares of common stock, par
value $.01 per share, of the surviving corporation ("New Common Stock") and the
issued and outstanding shares of common stock, par value $.01, of Surgical
("Surgical Common Stock") will be combined and exchanged for shares of New
Common Stock and warrants to purchase New Common Stock, all as further described
in the Merger Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned
shareholder of 4Health hereby acknowledges and agrees as follows:
1. As a result of the Merger, the undersigned may receive shares of
New Common Stock (the shares of New Common Stock issued in the Merger are
referred to herein collectively as the "New Securities") in exchange for the
number of shares of , par value, of (" ")
------------ --- --------- -----------
specified on the signature page hereof which the undersigned hereby represents
and warrants are owned by the undersigned.
2. The undersigned hereby represents, warrants and covenants to
Surgical and 4Health that in the event the undersigned receives any New
Securities as a result of the Merger:
THE UNDERSIGNED SHALL NOT MAKE ANY SALE, TRANSFER OR OTHER
DISPOSITION OF THE NEW SECURITIES IN VIOLATION OF THE UNITED STATES SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") OR THE RULES AND REGULATIONS PROMULGATED
THEREUNDER (THE "RULES AND REGULATIONS");
THE UNDERSIGNED HAS CAREFULLY READ THIS LETTER AND THE MERGER
AGREEMENT AND DISCUSSED THE REQUIREMENTS OF SUCH DOCUMENTS AND OTHER APPLICABLE
LIMITATIONS UPON THE UNDERSIGNED'S ABILITY TO SELL, TRANSFER OR OTHERWISE
DISPOSE (A "DISPOSITION") OF THE NEW SECURITIES TO THE EXTENT THE UNDERSIGNED
FELT NECESSARY, WITH ITS COUNSEL OR COUNSEL FOR THE COMPANY;
THE UNDERSIGNED HAS BEEN ADVISED THAT THE ISSUANCE OF NEW
SECURITIES TO IT PURSUANT TO THE MERGER IS INTENDED TO BE REGISTERED WITH THE
COMMISSION UNDER THE ACT ON A REGISTRATION STATEMENT ON FORM S-4. THE
UNDERSIGNED HAS ALSO BEEN ADVISED THAT AS A CONDITION TO THE CONSUMMATION OF THE
MERGER, THE MERGER AGREEMENT CONTEMPLATES THAT SHAREHOLDERS OF WHO
-----------
OWN, DIRECTLY OR INDIRECTLY, IMMEDIATELY PRIOR TO THE EFFECTIVENESS OF THE
MERGER, SUCH NUMBER OF SHARES OF , OR SECURITIES CONVERTIBLE INTO
--------------
(INCLUDING SHARES OR SECURITIES OWNED BY AFFILIATES), AS SHALL
- -------------
EQUAL AT LEAST 5% OF THE OUTSTANDING SHARES OF COMMON STOCK ARE
---------
REQUIRED TO AGREE THAT THEY WILL NOT EFFECT A DISPOSITION OF SHARES OF NEW
SECURITIES FOR A PERIOD OF 180 DAYS SUBSEQUENT TO THE CLOSING DATE (AS DEFINED
IN THE MERGER AGREEMENT) OF THE MERGER AND THEREAFTER THE UNDERSIGNED WILL NOT
EFFECT A DISPOSITION OF THE NEW SECURITIES IN EXCESS OF THE LESSER OF (X) THE
VOLUME LIMITATIONS SPECIFIED IN RULE 145(D) OF THE RULES AND REGULATIONS (THE
"RULE 145(D) LIMITATIONS") OR (Y) AN AMOUNT OF SECURITIES EQUAL TO 2% OF THE
TOTAL ISSUED AND OUTSTANDING SHARES OF NEW COMMON STOCK OF THE SURVIVING
CORPORATION IN CUMULATIVE SALES EFFECTED DURING THE PRECEDING 12 MONTHS;
PROVIDED, HOWEVER, IN THE EVENT THE UNDERSIGNED IS NOT AN "AFFILIATE" OF
- -------- -------
, AS DEFINED IN THE RULES AND REGULATIONS, NOTWITHSTANDING THE FOREGOING
- --------
THE UNDERSIGNED SHALL BE ENTITLED TO EFFECT DISPOSITIONS OF NEW COMMON STOCK IN
"BLOCK" TRANSACTIONS THROUGH ONE BROKER OR DEALER APPROVED IN WRITING BY THE
SURVIVING CORPORATION, IN ITS REASONABLE JUDGMENT, TO "QUALIFIED INSTITUTIONAL
BUYERS" IN TRANSACTIONS WHICH MEET THE FOLLOWING REQUIREMENTS:
Time of Sales. The Disposition shall be
-------------
effected through the broker or dealer (I) such
that the sale would not constitute the opening
transaction in the security on any exchange or
reported in the consolidated transaction reporting
system contemplated by Rule 11Aa3-1 of the Rules
and Regulations as to which last sale information
is reported regarding the New Securities; (II) at
a time other than during the one-half hour before
the scheduled close of trading on the principal
market for the New Securities if such market is a
national securities exchange; (III) if the
transaction is effected through the facilities of
an exchange, at a time other than during the one-
half hour before the scheduled close of trading on
the national securities exchange in which the
transaction is reported; (IV) if the sale is to be
made otherwise than on a national securities
exchange, at a time other than during the one-half
hour before the termination of the period in which
last sales prices are reported in the consolidated
system; or (V) otherwise than on a national
securities exchange if a current independent offer
quotation for the security is reported in Level 2
of the automated quotation system ("NASDAQ")
operated by the National Association of Securities
Dealers, Inc.
Sales Price. The Disposition effected
-----------
through the broker or dealer shall be effected at
a price per share (I) if the New Securities are
exchange traded or are reported securities,
exclusive of any commission paid to a broker
acting as agent, or commission equivalent, mark-
up, or differential paid to a dealer or (II) if
the New Securities are NASDAQ securities, or are
not reported securities, otherwise than on a
national securities exchange, inclusive of any
commission equivalent, mark-up, or differential
paid to a dealer, in either case which is no less
than ninety percent (90%) of (w) for a reported
security, the published offer price, as that term
is defined in Rule 11Ac1-1(a)(9), that is the
lowest current independent published offer or the
last independent sale price reported in the
consolidated system, which ever is higher; (x) on
a national securities exchange, for an exchange
traded security, the price per security that is
not lower than the current independent offer
quotation or the last independent sale price on
that exchange, which ever is higher; (y) otherwise
than on a national securities exchange for a
NASDAQ security, the price per security that is
not lower than the lowest current independent
offer quotation reported in Level 2 of NASDAQ; or
(z) otherwise than on a national securities
exchange, for a security that is not a reported
security or a NASDAQ security, the price per
security that is not lower than the lowest current
independent offer quotation, determined on the
basis of reasonable inquiry.
At the request of 4Health and in order to induce Surgical to enter into the
Merger Agreement, the undersigned agrees to be bound by the provisions of this
Paragraph C and as regards the undersigned, as used herein the Rule 145(d)
Limitations involve the Disposition, in any fiscal quarter of the Surviving
Corporation, of the greater of (i) shares of New Common Stock or
----------
(ii) the average weekly volume of trading in the New Common Stock as provided in
Rule 145(e)(1)(ii) or (1)(iii)(as the applicable case may be);
(2) As used herein, the term "block" shall have the meaning ascribed
to such term in Rule 10b-18(a)(14) and the term "Qualified Institutional Buyer"
shall have the meaning ascribed to such term in Rule 144A of the Rules and
Regulations.
(3) If the undersigned stockholder is not an "affiliate" of 4Health,
the restrictions of this Paragraph C shall expire and be of no further force and
effect on the first anniversary of the Closing Date of the Merger.
THE UNDERSIGNED UNDERSTANDS THAT THE SURVIVING CORPORATION IS
UNDER NO OBLIGATION TO REGISTER THE DISPOSITION OF THE NEW SECURITIES BY IT OR
ON ITS BEHALF UNDER THE ACT OR TO TAKE ANY OTHER ACTION NECESSARY IN ORDER TO
MAKE COMPLIANCE WITH AN EXEMPTION FROM SUCH REGISTRATION AVAILABLE;
THE UNDERSIGNED ALSO UNDERSTANDS THAT STOP TRANSFER INSTRUCTIONS
WILL BE GIVEN TO THE SURVIVING CORPORATION'S TRANSFER AGENTS WITH RESPECT TO THE
NEW SECURITIES AND THAT THERE WILL BE PLACED ON THE CERTIFICATES FOR THE NEW
SECURITIES ISSUED TO IT, OR ANY SUBSTITUTIONS THEREFOR, A LEGEND STATING IN
SUBSTANCE:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED
IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SECURITIES REPRESENTED
BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE
WITH THE TERMS OF AN AGREEMENT DATED ,
------------------
1996 BETWEEN THE REGISTERED HOLDER HEREOF AND , A
---------
COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES
OF "; and
----------
THE UNDERSIGNED ALSO UNDERSTANDS THAT UNLESS THE TRANSFER BY IT
OF ITS NEW SECURITIES HAS BEEN REGISTERED UNDER THE ACT, THE SURVIVING
CORPORATION RESERVES THE RIGHT TO PUT THE FOLLOWING LEGEND ON THE CERTIFICATES
ISSUED TO MY TRANSFEREE:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE
ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE
SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN
ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING
OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933."
the New Common Stock has not been registered under the Act and the applicable
period provided in Rule 145(d)(2) shall have elapsed from the date the
undersigned acquired the New Securities received in the Merger and a sale of the
New Securities has been effected in accordance with the provisions of the Act
and the Rules and Regulations, (ii) the applicable period provided in Rule
145(d)(3) shall have elapsed from the date the undersigned acquired the New
Securities received in the Merger and the provisions of Rule 145(d)(3) are then
available to the undersigned, or (iii) the Surviving Corporation has received
either an opinion of counsel, which opinion and counsel shall be reasonably
satisfactory to the Surviving Corporation, or a "no action" letter obtained by
the undersigned from the staff of the Commission, to the effect that the
restrictions imposed by Rule 145 under the Act do not apply to the undersigned.
Execution of this letter should not be considered an admission on the
undersigned's part that the undersigned is an "affiliate" of as
-------
described in the Act or the Rules and Regulations or as a waiver of any rights
the undersigned may have to object to any claim that the undersigned is such an
affiliate on or after the date of this letter.
This letter may be executed in counterparts each copy of which shall
be deemed to be an original and all of which together constitute a single
instrument. This letter embodies our entire understanding of the subject matter
hereof and may not be amended except by an instrument in writing signed by the
parties hereto. The provisions of this letter inure to the benefit of Surgical
Technologies, Inc., its successors and assigns and are binding upon the
undersigned stockholder and such stockholder's heirs, legal representatives,
successors, and assigns. All pronouns used herein shall include the masculine,
feminine and neuter gender as the identity of the stockholder may require and
the singular shall include the plural.
The Undersigned Owns Very truly yours,
Shares of
===============
[NAME OF SHAREHOLDER]
By:
-------------------------------------------------
Name:
Title:
Accepted this day of
---------
, 1996 by
=======================
By:
Name:
Title:
<PAGE>
APPENDIX D TO REGISTRATION STATEMENT
ARTICLES OF MERGER
OF
4HEALTH INC.
(A CALIFORNIA CORPORATION)
WITH AND INTO
SURGICAL TECHNOLOGIES, INC.
(A UTAH CORPORATION)
The undersigned corporations, desiring to merge under the laws of the state
of Utah, do hereby sign and deliver to the Division of Corporations and
Commercial Code these Articles of Merger merging 4health Inc., a California
corporation, with and into Surgical Technologies, Inc., a Utah corporation, and
changing the name of the surviving corporation to 4Health, Inc.
ARTICLE I
AGREEMENT OF MERGER
The Plan of Merger in the form attached hereto and incorporated herein by
this reference sets forth the following terms and conditions:
1. The constituent corporations to this merger are:
(a) 4health Inc. ("4Health"), which is incorporated under the laws of
the state of California.
(b) Surgical Technologies, Inc. ("Surgical"), which is incorporated
under the laws of the state of Utah.
2. Surgical shall continue in existence after the merger as the surviving
corporation.
3. The articles of incorporation of Surgical, shall, on the merger
becoming effective, be and constitute the articles of incorporation of the
surviving corporation with the following amendments:
The provisions of the Articles of Incorporation of Surgical Technologies,
Inc., shall be revised to amend Articles I, III, IV, and VII thereof to read in
their entirety as follows and to add a new Article X.
Article I
Name
The name of the Corporation shall be: 4Health, Inc.
Article IV
Control Share Acquisition and Fair Price Provision
B. For the purposes of this Article IV:
(1) A "person" shall mean any individual, firm, corporation,
partnership, trust, or other entity.
(2) "Net Assets" shall mean the difference between the aggregate
amount of all assets and the aggregate amount of all liabilities of the
Corporation as they appear on the Corporation's most recent audited
financial statements.
(3) "Voting Stock" means then outstanding shares of stock of all
classes and series of the Corporation entitled to vote in the election of
directors.
(4) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on January 1, 1996.
(5) "Subsidiary" means any corporation of which more than a majority
of any class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for purposes of the definition of
Interested Stockholder set forth in Paragraph B(7) of this Article IV, the
term "Subsidiary" shall mean only a corporation of which a majority of each
class of equity security is owned by the Corporation, by a Subsidiary, or
by the Corporation and one or more Subsidiaries.
(6) A person shall be a "Beneficial Owner" of any Voting Stock:
(A) which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; or
(B) which such person or any of its Affiliates or Associates has
(i) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any
agreement, arrangement, or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (ii) the right to vote or to direct the vote pursuant to any
agreement, arrangement, or understanding; or
(C) which is beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates or
Associates has any agreement, arrangement, or understanding for the
purpose of acquiring, holding, voting, or disposing of any shares of
Voting Stock.
(7) "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(A) shall become a Beneficial Owner, directly or indirectly, of
more than 20% of the combined voting power of the then outstanding
Voting Stock at any time after the provisions of this Article IV shall
first become effective; or
(B) shall become an Affiliate of the Corporation at any time
after the provisions of this Article IV shall first become effective,
and at any time within the two-year period immediately prior to the
date in question was the Beneficial Owner, directly or indirectly, of
20% or more of the combined voting power of the then outstanding
Voting Stock; or
(C) is an assignee of or has otherwise succeeded to any shares
of Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or a series of transactions
not involving a public offering within the meaning of the Securities
Act of 1933.
(8) "Disinterested Director" means any member of the board of
directors of the Corporation who is unaffiliated with, and not a nominee
of, an Interested Stockholder and was a member of the board of directors
prior to the time that the Interested Stockholder became an Interested
Stockholder and any successor of a Disinterested Director who is
unaffiliated with, and not a nominee of, an Interested Stockholder and who
is recommended to succeed a Disinterested Director by a majority of
Disinterested Directors then on the board of directors.
(9) "Fair Market Value" means:
(A) in the case of stock, the highest closing sale price during
the 30-day period immediately preceding the date in question of a
share of such stock on the Composite Tape for New York Stock Exchange-
Listed Stocks, or, if such stock is not quoted on such Composite Tape,
on the New York Stock Exchange, or, if such stock is not listed on
such Exchange, on the principal United States securities exchange
registered under the Securities Exchange Act of 1934, on which such
stock is listed, or, if such stock is not listed on any such exchange,
the highest closing bid quotation with respect to a share of such
stock during the 30-day period preceding the date in question on the
National Association of Securities Dealers, Inc. Automated Quotations
System or any automated quotation system then in use, or if no such
quotations are available, the fair market value on the date in
question of a share of such stock as determined by a majority of the
Disinterested Directors in good faith; and
(B) In the case of stock of any class of securities not traded
on any securities exchange or in the over-the-counter market or in the
case of property other than cash or stock, the fair market value of
such securities or property on the date in question as determined by a
majority of the Disinterested Directors in good faith.
(10) "Business Combination" means any transaction which is referred to
in any one or more of Paragraphs C(1) through (5) below.
(11) In the event of any Business Combination in which the Corporation
survives, the phrase "consideration to be received" as used in Paragraphs
D(2)(A) and (B) shall include the shares of Common Stock and/or the shares
of any other class of outstanding Voting Stock retained by the holders of
such shares.
(12) For the purposes of determining whether a person is an Interested
Stockholder pursuant to Paragraph B(7), the number of shares of Voting
Stock deemed to be outstanding shall include shares deemed owned through
application of Paragraph B(6)(B)(i) but shall not include any other shares
of Voting Stock which may be issuable to other persons pursuant to any
agreement, arrangement, or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
C. In addition to any affirmative vote required by law or any other
Article of these Articles of Incorporation, and except as otherwise expressly
provided in Paragraph D of this Article IV:
(1) any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation (whether
or not itself an Interested Stockholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested
Stockholder; or
(2) any sale, lease, exchange, mortgage, pledge, transfer, or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder of any assets of the Corporation, or of any Subsidiary, having
an aggregate Fair Market Value equal to ten percent (10%) or more of the
Net Assets of the Corporation;
(3) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder in exchange for cash,
securities, or other property (or a combination thereof) having an
aggregate Fair Market Value equal to ten percent (10% or more of the Net
Assets of the Corporation, other than the issuance of securities by the
Corporation or any Subsidiary upon the conversion of convertible securities
of the Corporation or any Subsidiary which were not acquired from the
Corporation or any Subsidiary by any Interested Stockholder or any
Affiliate or Associate of any Interested Stockholder; or
(4) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate or Associate of any Interested Stockholder; or
(5) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportionate share of the outstanding stock of any class of
equity or convertible securities of the Corporation or any Subsidiary
directly or indirectly owned by any Interested Stockholder or any Affiliate
or Associate of any Interested Stockholder;
shall require the affirmative vote of the holders of at least (i) 67% of the
then outstanding shares of Voting Stock, and (ii) a majority of the then
outstanding shares of Voting Stock held by persons who are not Interested
Stockholders or Affiliates or Associates of Interested Stockholders; provided,
however, that the majority vote requirement of this clause (ii) shall not be
applicable if the Business Combination is approved by the affirmative vote of
the holders of note less than 80% of the then outstanding shares of Voting
Stock. The foregoing affirmative vote requirements are hereinafter referred to
as the "Special Vote Requirements." The Special Vote Requirement shall be
applicable notwithstanding the fact that no vote may be required, or that a
lesser percentage may be specified, by law or in any agreement with any national
securities exchange or otherwise.
D. The provisions of Paragraph C shall not be applicable to any
particular Business Combination, and such Business Combination shall require
only such affirmative vote as is required by law and any other Article of these
Articles of Incorporation, if all of the conditions specified in either of the
following Paragraphs (1) and (2) are met:
(1) Approval by Disinterested Directors. The Business Combination
shall have been approved by a majority of the Disinterested Directors.
(2) Price and Procedural Requirements. All of the following
conditions shall have been met:
(A) The aggregate amount of the cash and the Fair Market Value,
as of the date of the consummation of the Business Combination, of
consideration other than cash to be received per share by holders of
Common Stock and any series of Preferred Stock of the Corporation in
such Business Combination shall be at least equal to the higher of (i)
the highest price paid for any share (including brokerage commissions
transfer taxes, and soliciting dealers' fees) of such class or series
of stock by any person who is an Interested Stockholder, or by any of
his Affiliates or Associates, within the two-year period immediately
prior to the time of the first public announcement of the proposed
Business Combination (the "Announcement Date") or in the transaction
in which such person became an Interested Stockholder, whichever price
is the higher; or (ii) the Fair Market Value per share of such class
or series of stock on the Announcement Date or on the date on which
the Interested Stockholder became an Interested Stockholder (the
"Determination Date"), whichever is higher; provided, however, that if
the Interested Stockholder has not previously paid for shares of
series of Preferred Stock or if the highest preferential amount per
share of a series of Preferred Stock to which the holders thereof
would be entitled in the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the affairs of the
Corporation (regardless of whether the Business Combination to be
consummated constitutes such an event) is greater than such aggregate
amount, holders of such series of Preferred Stock shall receive an
amount for each such share at least equal to the highest preferential
amount applicable to such series of Preferred Stock. The provisions
of this Paragraph D(2)(A) shall be required to be met with respect to
every class or series of Preferred Stock, whether or not the
Interested Stockholder has previously become the Beneficial Owner of
any shares of a particular class or series of Preferred Stock prior to
proposing the Business Combination. The price paid for any share of
any such class or series of stock shall be the amount of cash plus the
Fair Market Value of any consideration to be received therefor,
determined at the time of payment thereof.
(B) The consideration to be received by holders of a particular
class of outstanding Voting Stock shall be in cash or in the same form
as the Interested Stockholder has previously paid for shares of such
class of Voting Stock. If the Interested Stockholder has paid for
shares of any class of Voting Stock with varying forms of
consideration, the form of consideration for such class of Voting
Stock shall be either cash or the form of consideration used to
acquire the largest number of shares of such class of Voting Stock
previously acquired by it. The prices determined in accordance with
Paragraph D(2)(A) above shall be subject to an appropriate adjustment
in the event of any stock dividend, stock split, subdivision,
combination of shares, or similar event.
(C) After such Interested Stockholder has become an Interested
Stockholder and through the date of consummation of such Business
Combination: (i) there shall have been (1) no reduction in the annual
rate of dividends paid on the Common Stock (except as necessary to
reflect any subdivision of the Common Stock), except as approved by a
majority of the Disinterested Directors, and (2) no failure to
increase such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split),
recapitalization, reorganization, or any similar transaction which has
the effect of reducing the number of outstanding shares of the Common
Stock, unless the failure so to increase such annual rate is approved
by a majority of the Disinterested Directors; and (ii) such Interested
Stockholder shall not have become the beneficial owner of any
additional shares of Voting Stock, except as part of the transaction
which results in such Interested Stockholder becoming an Interested
Stockholder.
(D) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a
stockholder), of any loans, advances, guarantees, pledges, or other
financial assistance or any tax credits or other tax advantages
provided by the Corporation, whether in anticipation of or in
connection with such Business Combination or otherwise.
(E) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act, rules, or
regulations) shall be mailed to all stockholders of the Corporation at
least 30 days prior to the consummation of such Business Combination
(whether or not such proxy or information statements is required to be
mailed pursuant to such Act or subsequent provisions).
E. The majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine for the purposes of this Article IV, on the
basis of information known to them after reasonable inquiry, all facts necessary
to determine the applicability of the various provisions of this Article IV,
including, (i) whether a person is an Interested Stockholder, (ii) the number of
shares of Voting Stock of which any person is the Beneficial Owner, (iii)
whether a person is an Affiliate or Associate of another, (iv) whether the
requirements of Paragraph C(2) have been met with respect to any Business
Combination, and (v) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value equal to ten percent (10%) or
more of the Net Assets of the Corporation; and the good faith determination of a
majority of the Disinterested Directors shall be conclusive and binding for all
purposes of this Article IV.
F. Nothing contained in this Article IV shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
G. Notwithstanding any other provisions of these Articles of
Incorporation or the Bylaws of the Corporation (and notwithstanding the fact
that a lesser percentage may be specified by law, these Articles of
Incorporation or the Bylaws of the Corporation), any proposal to amend or
repeal, or adopt any provisions inconsistent with, this Article IV of these
Articles of Incorporation shall be approved by the affirmative vote of at least
(1) 67% of the then outstanding shares of Voting Stock and (2) a majority of the
then outstanding shares of Voting Stock held by persons who are not Interested
Stockholders; provided that, the majority vote requirement of this clause (2)
shall not be applicable if the proposal is approved by the affirmative vote of
not less than 80% of the then outstanding shares of Voting Stock.
Article VII
Board of Directors
A. The board of directors shall have authority to exercise all such
powers and to do all such other lawful acts and things which the Corporation or
its stockholders might do, unless prohibited from doing so by applicable laws,
by the Articles of Incorporation or by the Bylaws of the Corporation.
B. Unless and until otherwise provided in the Bylaws, all of the
corporate powers of this Corporation shall be vested in, and managed by, a board
of not less than three nor more than nine directors, except that when all of the
outstanding shares are held of record by fewer than three stockholders, then
there need be only as many directors as there are stockholders, but this shall
not prevent a greater number of directors as aforementioned.
C. The board of directors shall be and is divided into three classes:
Class I, Class II, and Class III, which shall be as nearly equal in number as
possible. Each director shall serve for a term ending on the date of the third
annual meeting of stockholders following the annual meeting at which the
director was elected; provided, however, that each initial director in Class I
shall hold office until the annual meeting of stockholders in 1997; each initial
director in Class II shall hold office until the annual meeting of stockholders
in 1998; and each initial director in Class III shall hold office until the
annual meeting of stockholders in 1999. Notwithstanding the foregoing
provisions in this Article VII, each director shall serve until his successor is
duly elected and qualified or until his death, resignation, or removal.
D. The number of directors may be increased or decreased within the
limits above provided by a majority vote of the directors. In the event of any
increase or decrease in the authorized number of directors, the newly created or
eliminated directorships resulting from such increase or decrease shall be
apportioned by the board of directors among the three classes of directors so as
to maintain such classes as nearly equal as possible. No decrease in the number
of directors constituting the board of directors shall shorten the term of any
incumbent director.
E. Newly created directorships resulting from any increase in the number
of directors and any vacancies on the board of directors resulting from death,
resignation, disqualification, removal, or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in office (and
not by stockholders), even though less than a quorum of the board of directors.
Any director elected in accordance with the preceding sentence shall hold office
for the remainder of the full term of the class of director's successor shall
have been elected and qualified.
F. Directors may be removed from office with or without cause, except
upon the affirmative vote of the holders of not less than a majority of the
outstanding shares of stock of the Corporation then entitled to vote generally
in the election of directors, voting together as a single class. Any amendment,
change, or repeal of this Article VII shall require the favorable vote of the
holders of at least a majority of the outstanding shares of stock of the
Corporation then entitled to vote generally in the election of directors, voting
together as a single class.
G. The board of directors shall have authority to adopt, amend, or repeal
Bylaws, including the right to adopt, amend, or repeal Bylaws fixing their
qualifications, or fixing or increasing their compensation.
Article X
Written Consents
Except with respect to the removal, with or without cause, of no more than
up to three directors in any fiscal year of the Corporation or unless authorized
by a majority of the Disinterested Directors (as defined in Article IV), no
action required to be taken at any annual or special meeting of stockholders of
the Corporation may be taken without a meeting, and the power of stockholders to
consent in writing, without a meeting, to the taking of any action is
specifically denied. In the event of any such removal or if a majority of the
Disinterested Directors authorizes the Corporation to take action upon such
written consent, the consent in writing to such action signed by stockholders
holding at least that portion of the total voting power on the question which is
required by law or these Articles of Incorporation shall be sufficient for the
purpose, without the necessity for a meeting of the stockholders. In order that
the Corporation may determine the stockholders entitled to consent to corporate
action in writing without a meeting, the board of directors may fix a record
date by majority vote, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the board of directors. Any
amendment, change, or repeal of this Article X, or any other amendment of the
Articles of Incorporation that will have the effect of permitting circumvention
of or modifying this Article X, shall require the favorable vote, at a
stockholders' meeting, of the holders of at least sixty-seven percent (67%) of
the outstanding shares of stock of the Corporation then entitled to vote
generally in the election of directors, voting together as a single class.
4. The outstanding shares of shall be converted into
----------------
shares of , on the merger becoming effective, as set forth
---------------------
in the Plan of Merger.
ARTICLE II
SHAREHOLDER APPROVAL
The foregoing Plan of Merger was approved:
1. By the holders of the issued and outstanding shares of
----------
common stock, par value $0.01, of Surgical, with shares voting in
----------
favor of the merger, shares voted against, and shares
---------- ----------
abstaining; and
2. By the holders of the issued and outstanding shares of
----------
common stock, par value $ , of 4Health, with shares voting in
----- ----------
favor of the merger, against, and abstaining.
---------- ----------
The number of votes cast for the Plan of Merger by each voting group of
each constituent corporation was sufficient for approval of the Plan of Merger
by such voting group.
The undersigned affirm and acknowledge, under penalties of perjury, that
the foregoing instrument is their act and deed and that the facts stated herein
are true.
DATED this day of , 1996.
----- ----------
4HEALTH INC.
Attest:
By By
----------------------------- ----------------------------
, Secretary ,
------------------------- ------------------------
President
SURGICAL TECHNOLOGIES, INC.
Attest:
By By
----------------------------- ----------------------------
, Secretary Rex Crosland, President
-------------------------
Attachment to Articles of Merger
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan") dated as of the day of ,
----- ----------
1996, is entered into by and between 4HEALTH, INC., a California corporation
("4Health"), and SURGICAL TECHNOLOGIES, INC., a Utah corporation ("Surgical"),
which are collectively referred to as the "Constituent Corporations."
Recitals
WHEREAS, 4Health is a corporation duly organized and existing under the
laws of the state of California, having authorized capital of 10,000,000 shares
of common stock, no par value (the "4Health Common Stock"), of which 5,731,381
shares are outstanding as of the date hereof, and 1,000,000 shares of preferred
stock, par value $1.00 per share, of which 15,000 shares of Series A Convertible
Preferred Stock (the "4Health Series A Stock") are issued and outstanding as of
the date hereof;
WHEREAS Surgical is a corporation duly organized and existing under the
laws of the state of Utah, having an authorized capital of 20,000,000 shares of
common stock, par value $0.01 (the "Surgical Common Stock"), of which 4,542,216
shares are issued and outstanding as of the date hereof, and 5,000,000 shares of
preferred stock, par value $0.01 per share (the "Surgical Preferred Stock"), of
which no shares are issued and outstanding as of the date hereof;
WHEREAS, 4Health and Surgical have entered into an Agreement and Plan of
Merger (the "Merger Agreement") dated as of April 10, 1996, setting forth
certain representations, warranties, covenants, agreements, and conditions in
connection with said merger; and
WHEREAS, the respective boards of directors and shareholders of the
Constituent Corporations have each duly approved this Plan providing for the
merger of 4Health with and into Surgical; with Surgical, after changing its name
of "4Health, Inc.," as the surviving corporation, all as authorized by the
statutes of the state of Utah and California.
Agreement
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and for the purpose of setting forth the terms
and conditions of said merger and the manner and basis of causing the shares of
4Health Common and Preferred Stock to be converted into shares of Surgical
Common Stock, and such other provisions as are deemed necessary or desirable,
the parties hereto have agreed and do hereby agree, subject to the conditions
hereinafter set forth, as follows:
Article I
Merger and Name of Surviving Corporation
On the Effective Date of the merger (as hereinafter defined), 4Health and
Surgical shall cease to exist separately and 4Health shall be merged with and
into Surgical, which is hereby designated as the "Surviving Corporation," the
name of which on and after the Effective Date of the merger shall be "4Health,
Inc."
Article II
Terms and Conditions of Merger
1. The terms and conditions of the merger (in addition to those set forth
elsewhere in this Plan) are as follows:
(a) On the Effective Date of the merger:
(i) 4Health shall be merged into Surgical to form a single
corporation, and Surgical shall be designated herein as the Surviving
Corporation.
(ii) The separate existence of 4Health shall cease.
(iii) The Surviving Corporation shall have all the rights,
privileges, immunities, and powers and shall be subject to all duties
and liabilities of a corporation organized under the laws of the state
of Utah.
(iv) The Surviving Corporation shall thereupon and thereafter
possess all the rights, privileges, immunities, and franchises, of a
public as well as of a private nature, of each of the Constituent
Corporations; all property, real, personal, and mixed, and all debts
due of whatever account, including subscriptions to shares, and all
other closes in action, and all and every other interest, of or
belonging to or due to each of the Constituent Corporations, shall be
taken and deemed to be transferred to and vested in the Surviving
Corporation without further act or deed; the title to any real estate,
or any interest therein, vested in either Constituent Corporation
shall not revert or be in any way impaired by reason of the merger;
the Surviving Corporation shall thenceforth be responsible and liable
for all the liabilities and obligations of each of the Constituent
Corporations; any claim existing or action or proceeding pending by or
against either of such Constituent Corporations may be prosecuted as
if the merger had not taken place, or the Surviving Corporation may be
substituted in place of the Constituent Corporation; and neither the
rights of creditors nor any liens on the property of either of the
Constituent Corporations shall be impaired by the merger.
(b) On the Effective Date of the merger, the board of directors of
the Surviving Corporation shall consist of R. Lindsey Duncan, Richard B.
Carlock, Cheryl M. Wheeler, Henry S. Stone, David A. Melman, Todd B.
Crosland, and Rockwell D. Schutjer, to serve thereafter in accordance with
the bylaws of the Surviving Corporation and until their respective
successors shall have been duly elected and qualified in accordance with
such bylaws and the laws of the state of Utah.
(c) On the Effective Date of the merger, the officers of the
Surviving Corporation shall be the officers of 4Health immediately prior to
the merger, with such officers to serve thereafter in accordance with the
bylaws of the Surviving Corporation and until their respective successors
shall have been duly elected and qualified in accordance with such bylaws
and the laws of the state of Utah.
(d) If on the Effective Date of the merger, a vacancy shall exist in
the board of directors or in any of the offices of the Surviving
Corporation, such vacancy may be filled in the manner provided for in the
bylaws of the Surviving Corporation.
Article III
Manner and Basis of Converting Shares
1. The manner and basis of converting the shares of the Constituent
Corporations and the mode of carrying the merger into effect are as follows:
(a) Each share of 4Health Common Stock outstanding on the Effective
Date of the merger shall, without any action on the part of the holder
thereof, be converted into 1.50467 fully paid and nonassessable shares of
the Surviving Corporation (the "New Common Stock"), which shall be, upon
such conversion, validly issued and outstanding, fully paid, and
nonassessable.
(b) Each share of 4Health Preferred Stock outstanding on the
Effective Date of the merger shall, without any action on the part of the
holder thereof, be converted into 25.07782 fully paid and nonassessable
shares of New Common Stock, which shall be, upon such conversion, validly
issued and outstanding, fully paid, and nonassessable.
(c) Each four shares of Surgical Common Stock outstanding on the
Effective Date of the merger shall, without any action on the part of the
holder thereof, be converted into two shares of New Common Stock and one
warrant to purchase a share of New Common Stock at an exercise price of
$11.00 per share (the "Warrants"), which shall be, upon such conversion,
validly issued and outstanding, fully paid, and nonassessable.
(d) All shares held by 4Health as treasury stock shall be cancelled
and of no further force and effect.
(e) All shares held by Surgical as treasury stock shall be cancelled
and returned to the status of authorized but unissued.
(f) After the Effective Date of the merger, each holder of a
certificate which prior thereto represented outstanding shares of 4Health
Common or Preferred Stock shall be entitled, upon surrender thereof to the
transfer and exchange agent of Surgical, to receive in exchange therefor a
certificate or certificates representing the number of whole shares of the
New Common Stock into which the shares of 4Health Common or Preferred Stock
so surrendered shall have been converted as set forth above. After the
Effective Date of the Merger, each holder of a certificate which prior
thereto represented outstanding shares of Surgical Common Stock shall be
entitled, on surrender thereof to the transfer and exchange agent of
Surgical, to receive in exchange therefor a certificate or certificates
representing the number of whole shares of New Common Stock and the number
of whole Warrants to which the holder is entitled as set forth above.
Until so surrendered, each such outstanding certificate shall for all
purposes evidence the ownership of the shares of New Common Stock into
which the shares of 4Health Common and Preferred Stock and Surgical Common
Stock shall have been converted; provided that, dividends or other
distributions which are payable with respect to the shares of New Common
Stock shall be set aside and shall not be paid to the holders of such
certificates until the certificates shall have been surrendered in exchange
for certificates representing shares of New Common Stock. On surrender,
such holder shall be entitled to receive the dividends or other
distributions previously withheld, without payment of interest.
(g) In lieu of any fractional interest in a share of New Common Stock
or Warrant, each holder shall be entitled, on surrender of all certificates
previously held in exchange for certificates representing shares of New
Common Stock, be paid an amount in cash (without interest) rounded to the
nearest cent, determined by multiplying the last sale price of the Surgical
Common Stock, as reported by the Nasdaq National Market ("NNM") prior to
the Effective Date, by two and multiplying the product by the fractional
share of New Common Stock to which the holder would otherwise be entitled.
(h) The shares of New Common Stock into which shares of the 4Health
Common and Preferred Stock and Surgical Common Stock shall have been
converted pursuant to this Plan shall be issued in full satisfaction of all
of the holder's rights as a shareholder of 4Health or Surgical, as the case
may be.
(i) If any certificate for shares of New Common Stock is to be issued
in a name other than that in which the certificate surrendered in exchange
therefor is registered, it shall be a condition of the issuance thereof
that the certificate surrendered shall be properly endorsed and otherwise
in proper form for transfer and that the person requested such exchange pay
to the registrar and transfer agent of the Surviving Corporation any
transfer or other taxes required by reason of the issuance of a certificate
of shares of New Common Stock in any name other than that of the registered
holder of the certificate surrendered, or established to the satisfaction
of the registrar and transfer agent that such tax has been paid or is not
payable.
Article IV
Articles of Incorporation and Bylaws
1. The articles of incorporation of Surgical, as amended by the Articles
of Merger, shall, on the merger becoming effective, be and constitute the
articles of incorporation of the Surviving Corporation until amended in the
manner provided by law.
2. The bylaws of Surgical shall, on the merger becoming effective, be and
constitute the bylaws of the Surviving Corporation until amended in the manner
provided by law.
Article V
Approval and Effective Date of the Merger;
Miscellaneous Matters
1. The merger shall become effective when all the following actions shall
have been taken:
(a) This Plan shall be authorized, adopted, and approved by and on
behalf of each Constituent Corporation in accordance with the laws of the
states of California and Utah; and
(b) This Plan, or articles of merger in the form required, executed
and verified in accordance with the laws of the states of California and
Utah, shall be filed with the California Secretary of State and the
Division of Corporations and Commercial Code of the state of Utah.
The date on which such actions are completed and such merger is effected is
herein referred to as the "Effective Date."
2. If at any time the Surviving Corporation shall deem or be advised that
any further grants, assignments, confirmations, or assurances are necessary or
desirable to vest, perfect, or confirm title in the Surviving Corporation, of
record or otherwise, to any property of 4Health acquired or to be acquired by,
or as a result of, the merger, the officers and directors of 4Health or any of
them shall be severally and fully authorized to execute and deliver any and all
such deeds, assignments, confirmations, and assurances and to do all things
necessary or proper so as to best prove, confirm, and ratify title to such
property in the Surviving Corporation and otherwise carry out the purposes of
the merger and the terms of this Plan.
3. For the convenience of the parties and to facilitate the filing and
recording of this Plan, any number of counterparts hereof may be executed, each
such counterpart shall be deemed to be an original instrument, and all such
counterparts together shall be considered one instrument.
4. This Plan shall be governed by and construed in accordance with the
laws of the state of Utah.
5. This Plan cannot be altered or amended, except pursuant to an
instrument in writing signed on behalf of the parties hereto.
The foregoing Plan of Merger, having been approved by the board of
directors of each Constituent Corporation, and having been adopted separately by
the stockholders of each Constituent Corporation thereto in accordance with the
laws of the states of California and Utah, respectively, the president and
secretary of 4Health and Surgical do hereby execute this Plan of Merger as of
the date first above written.
4HEALTH, INC.
a California corporation
Attest:
By By
------------------------- ----------------------------
, Secretary , President
------------ ---------------------------
SURGICAL, INC.
a Utah corporation
Attest:
By By
------------------------- ----------------------------
Secretary Rex Crosland, President
----------
<PAGE>
APPENDIX E TO REGISTRATION STATEMENT
CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. Dissenters' Rights
Section 1300. Reorganization or short-form merger; dissenting shares;
corporate purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a short-
form merger may, by complying with this chapter, require the corporation in
which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A)
or(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (A) were not voted in favor of the
reorganization or, (B) if described in subparagraph (A) or (B) of paragraph
(1)(without regard to the provisos in that paragraph), were voted against the
reorganization, or which were held of record on the effective date of a short-
form merger; provided, however, that subparagraph (A) rather than subparagraph
(B) of this paragraph applies in any case where the approval required by Section
1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Section 1301. Notice to holder of dissenting shares in reorganizations; demand
for purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Section 1302. Submission of share certificates for endorsement; uncertificated
securities
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
Section 1303. Payment of agreed price with interest; agreement fixing fair
market value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Section 1304. Action to determine whether shares are dissenting shares or fair
market value; lmitation; joinder; consolidation; determination of issues;
appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Section 1305. Report of appraisers; confirmation; determination by court;
judgment; payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendred
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Section 1306. Prevention of immediate payment; status as creditors; interest
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Section 1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
Section 1308. Rights of dissenting shareholders; withdrawal of demand for
payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
Section 1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Section 1310. Suspension of right to compensation or valuation proceedings;
litigation of shareholders' approval
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
Section 1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
Section 1312. Right of dissenting shareholder to attack, set aside or rescind
merger or reorganization; restraining order or injunction; conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or short-
form merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
<PAGE>
APPENDIX F TO REGISTRATION STATEMENT
UTAH REVISED BUSINESS
CORPORATION ACT
PART 13
DISSENTERS' RIGHTS
16-10a-1301. Definitions.
For purposes of Part 13:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 16-10a-1302 and who exercises that right
when and in the manner required by Sections 16-10a-1320 through 16-10a-
1328.
(4) "Fair value" with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action.
(5) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the statutory rate set forth
in Section 15-1-1, compounded annually.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of
shares that are registered in the name of a nominee to the extent the
beneficial owner is recognized by the corporation as the shareholder as
provided in Section 16-10a-723.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
16-10a-1302. Right to dissent.
(1) A shareholder, whether or not entitled to vote, is entitled to dissent
from, and obtain payment of the fair value of shares held by him in the event
of, any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a
party if:
(i) shareholder approval is required for the merger by
Section 16-10a-1103 or the articles of incorporation; or
(ii) the corporation is a subsidiary that is merged with its
parent under Section 16-10a-1104;
(b) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired;
(c) consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of the corporation for which a
shareholder vote is required under Subsection 16-10a-1202(1), but not
including a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale; and
(d) consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote
upon the consent of the corporation to the disposition pursuant to
Subsection 16-10a-1202(2).
(2) A shareholder is entitled to dissent and obtain payment of the fair
value of his shares in the event of any other corporate action to the extent the
articles of incorporation, bylaws, or a resolution of the board of directors so
provides.
(3) Notwithstanding the other provisions of this part, except to the
extent otherwise provided in the articles of incorporation, bylaws, or a
resolution of the board of directors, and subject to the limitations set forth
in Subsection (4), a shareholder is not entitled to dissent and obtain payment
under Subsection (1) of the fair value of the shares of any class or series of
shares which either were listed on a national securities exchange registered
under the federal Securities Exchange Act of 1934, as amended, or on the
National Market System of the National Association of Securities Dealers
Automated Quotation System, or were held of record by more than 2,000
shareholders, at the time of:
(a) the record date fixed under Section 16-10a-707 to determine the
shareholders entitled to receive notice of the shareholders' meeting
at which the corporate action is submitted to a vote;
(b) the record date fixed under Section 16-10a-704 to determine
shareholders entitled to sign writings consenting to the proposed
corporate action; or
(c) the effective date of the corporate action if the corporate
action is authorized other than by a vote of shareholders.
(4) The limitation set forth in Subsection (3) does not apply if the
shareholder will receive for his shares, pursuant to the corporate action,
anything except:
(a) shares of the corporation surviving the consummation of the plan
of merger or share exchange;
(b) shares of a corporation which at the effective date of the plan
of merger or share exchange either will be listed on a national
securities exchange registered under the federal Securities Exchange
Act of 1934, as amended, or on the National Market System of the
National Association of Securities Dealers Automated Quotation System,
or will be held of record by more than 2,000 shareholders;
(c) cash in lieu of fractional shares; or
(d)any combination of the shares described in Subsection (4), or cash
in lieu of fractional shares.
(5) A shareholder entitled to dissent and obtain payment for his shares
under this part may not challenge the corporate action creating the entitlement
unless the action is unlawful or fraudulent with respect to him or to the
corporation.
16-10a-1303. Dissent by nominees and beneficial owners.
(1) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if the shareholder dissents with
respect to all shares beneficially owned by any one person and causes the
corporation to receive written notice which states the dissent and the name and
address of each person on whose behalf dissenters' rights are being asserted.
The rights of a partial dissenter under this subsection are determined as if the
shares as to which the shareholder dissents and the other shares held of record
by him were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) the beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) the beneficial shareholder dissents with respect to all shares of
which he is the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents
with respect to the shares held by any one or more beneficial shareholders, each
beneficial shareholder must certify to the corporation that both he and the
record shareholders of all shares owned beneficially by him have asserted, or
will timely assert, dissenters' rights as to all the shares unlimited on the
ability to exercise dissenters' rights. The certification requirement must be
stated in the dissenters' notice given pursuant to Section 16-10a-1322.
16-10a-1320. Notice of dissenters' rights.
(1) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is submitted to a vote at a shareholders' meeting, the
meeting notice must be sent to all shareholders of the corporation as of the
applicable record date, whether or not they are entitled to vote at the meeting.
The notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this part. The notice must be accompanied by a copy of
this part and the materials, if any, that under this chapter are required to be
given the shareholders entitled to vote on the proposed action at the meeting.
Failure to give notice as required by this subsection does not affect any action
taken at the shareholders' meeting for which the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders pursuant to
Section 16-10a-704, any written or oral solicitation of a shareholder to execute
a written consent to the action contemplated by Section 16-10a-704 must be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this part, by a copy of this
part, and by the materials, if any, that under this chapter would have been
required to be given to shareholders entitled to vote on the proposed action if
the proposed action were submitted to a vote at a shareholders' meeting. Failure
to give written notice as provided by this subsection does not affect any action
taken pursuant to Section 16-10a-704 for which the notice was to have been
given.
16-10a-1321. Demand for payment - Eligibility and notice of intent.
(1) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights:
(a) must cause the corporation to receive, before the vote is taken,
written notice of his intent to demand payment for shares if the proposed
action is effectuated; and
(b) may not vote any of his shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is authorized without a meeting of shareholders pursuant to
Section 16-10a-704, a shareholder who wishes to assert dissenters' rights may
not execute a writing consenting to the proposed corporate action.
(3) In order to be entitled to payment for shares under this part, unless
otherwise provided in the articles of incorporation, bylaws, or a resolution
adopted by the board of directors, a shareholder must have been a shareholder
with respect to the shares for which payment is demanded as of the date the
proposed corporate action creating dissenters' rights under Section 16-10a-1302
is approved by the shareholders, if shareholder approval is required, or as of
the effective date of the corporate action if the corporate action is authorized
other than by a vote of shareholders.
(4) A shareholder who does not satisfy the requirements of Subsections (1)
through (3) is not entitled to payment for shares under this part.
16-10a-1322. Dissenters' notice.
(1) If proposed corporate action creating dissenters' rights under Section
16-10a-1302 is authorized, the corporation shall give a written dissenters'
notice to all shareholders who are entitled to demand payment for their shares
under this part.
(2) The dissenters' notice required by Subsection (1) must be sent no
later than ten days after the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302, and shall:
(a) state that the corporate action was authorized and the effective
date or proposed effective date of the corporate action;
(b) state an address at which the corporation will receive payment
demands and an address at which certificates for certificated shares
must be deposited;
(c) inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(d) supply a form for demanding payment, which form requests a
dissenter to state an address to which payment is to be made;
(e) set a date by which the corporation must receive the payment
demand and by which certificates for certificated shares must be
deposited at the address indicated in the dissenters' notice, which
dates may not be fewer than 30 nor more than 70 days after the date
the dissenters' notice required by Subsection (1) is given;
(f) state the requirement contemplated by Subsection 16-10a-1303(3),
if the requirement is imposed; and
(g) be accompanied by a copy of this part.
16-10a-1323. Procedure to demand payment.
(1) A shareholder who is given a dissenters' notice described in Section
16-10a-1322, who meets the requirements of Section 16-10a-1321, and wishes to
assert dissenters' rights must, in accordance with the terms of the dissenters'
notice:
(a) cause the corporation to receive a payment demand, which may be
the payment demand form contemplated in Subsection 16-10a-1322(2)(d),
duly completed, or may be stated in another writing;
(b) deposit certificates for his certificated shares in accordance
with the terms of the dissenters' notice; and
(c) if required by the corporation in the dissenters' notice
described in Section 16-10a-1322, as contemplated by Section 16-10a-
1327, certify in writing, in or with the payment demand, whether or
not he or the person on whose behalf he asserts dissenters' rights
acquired beneficial ownership of the shares before the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action creating dissenters' rights under
Section 16-10a-1302.
(2) A shareholder who demands payment in accordance with Subsection (1)
retains all rights of a shareholder except the right to transfer the shares
until the effective date of the proposed corporate action giving rise to the
exercise of dissenters' rights and has only the right to receive payment for the
shares after the effective date of the corporate action.
(3) A shareholder who does not demand payment and deposit share
certificates as required, by the date or dates set in the dissenters' notice, is
not entitled to payment for shares under this part.
16-10a-1324. Uncertificated shares.
(1) Upon receipt of a demand for payment under Section 16-10a-1323 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
of the shares until the proposed corporate action is taken or the restrictions
are released under Section 16-10a-1326.
(2) In all other respects, the provisions of Section 16-10a-1323 apply to
shareholders who own uncertificated shares.
16-10a-1325. Payment.
(1) Except as provided in Section 16-10a-1327, upon the later of the
effective date of the corporate action creating dissenters' rights under Section
16-10a-1302, and receipt by the corporation of each payment demand pursuant to
Section 16-10a-1323, the corporation shall pay the amount the corporation
estimates to be the fair value of the dissenter's shares, plus interest to each
dissenter who has complied with Section 16-10a-1323, and who meets the
requirements of Section 16-10a-1321, and who has not yet received payment.
(2) Each payment made pursuant to Subsection (1) must be accompanied by:
(a) (i) (A) the corporation's balance sheet as of the end of its
most recent fiscal year, or if not available, a fiscal year
ending not more than 16 months before the date of payment;
(B) an income statement for that year;
(C) a statement of changes in shareholders' equity for that year
and a statement of cash flow for that year, if the corporation
customarily provides such statements to shareholders; and
(D) the latest available interim financial statements, if any;
(ii) the balance sheet and statements referred to in Subsection (i)
must be audited if the corporation customarily provides audited
financial statements to shareholders;
(b) a statement of the corporation's estimate of the fair value of
the shares and the amount of interest payable with respect to the
shares;
(c) a statement of the dissenter's right to demand payment under
Section 16-10a-1328; and
(d) a copy of this part.
16-10a-1326. Failure to take action.
(1) If the effective date of the corporate action creating dissenters'
rights under Section 16-10a-1302 does not occur within 60 days after the date
set by the corporation as the date by which the corporation must receive payment
demands as provided in Section 16-10a-1322, the corporation shall return all
deposited certificates and release the transfer restrictions imposed on
uncertificated shares, and all shareholders who submitted a demand for payment
pursuant to Section 16-10a-1323 shall thereafter have all rights of a
shareholder as if no demand for payment had been made.
(2) If the effective date of the corporate action creating dissenters'
rights under Section 16-10a-1302 occurs more than 60 days after the date set by
the corporation as the date by which the corporation must receive payment
demands as provided in Section 16-10a-1322, then the corporation shall send a
new dissenters' notice, as provided in Section 16-10a-1322, and the provisions
of Sections 16-10a-1323 through 16-10a-1328 shall again be applicable.
16-10a-1327 Special provisions relating to shares acquired after announcement
of proposed corporate action.
(1) A corporation may, with the dissenters' notice given pursuant to
Section 16-10a-1322, state the date of the first announcement to news media or
to shareholders of the terms of the proposed corporate action creating
dissenters' rights under Section 16-10a-1302 and state that a shareholder who
asserts dissenters' rights must certify in writing, in or with the payment
demand, whether or not he or the person on whose behalf he asserts dissenters'
rights acquired beneficial ownership of the shares before that date. With
respect to any dissenter who does not certify in writing, in or with the payment
demand that he or the person on whose behalf the dissenters' rights are being
asserted, acquired beneficial ownership of the shares before that date, the
corporation may, in lieu of making the payment provided in Section 16-10a-1325,
offer to make payment if the dissenter agrees to accept it in full satisfaction
of his demand.
(2) An offer to make payment under Subsection (1) shall include or be
accompanied by the information required by Subsection 16-10a-1325(2).
16-10a-1328. Procedure if shareholder dissatisfied with payment or offer.
(1) A dissenter who has not accepted an offer made by a corporation under
Section 16-10a-1327 may notify the corporation in writing of his own estimate of
the fair value of his shares and demand payment of the estimated amount, plus
interest, less any payment made under Section 16-10a-1325, if:
(a) the dissenter believes that the amount paid under Section 16-10a-
1325 or offered under Section 16-10a-1327 is less than the fair value of
the shares;
(b) the corporation fails to make payment under Section 16-10a-1325
within 60 days after the date set by the corporation as the date by which
it must receive the payment demand; or
(c) the corporation, having failed to take the proposed corporate
action creating dissenters' rights, does not return the deposited
certificates or release the transfer restrictions imposed on uncertificated
shares as required by Section 16-10a-1326.
(2) A dissenter waives the right to demand payment under this section
unless he causes the corporation to receive the notice required by Subsection
(1) within 30 days after the corporation made or offered payment for his shares.
16-10a-1330. Judicial appraisal of shares - Court action.
(1) If a demand for payment under Section 16-10a-1328 remains unresolved,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand contemplated by Section 16-10a-1328, and petition the court to
determine the fair value of the shares and the amount of interest. If the
corporation does not commence the proceeding within the 60-day period, it shall
pay each dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in Subsection
(1) in the district court of the county in this state where the corporation's
principal office, or if it has no principal office in this state, the county
where its registered office is located. If the corporation is a foreign
corporation without a registered office in this state, it shall commence the
proceeding in the county in this state where the registered office of the
domestic corporation merged with, or whose shares were acquired by, the foreign
corporation was located.
(3) The corporation shall make all dissenters who have satisfied the
requirements of Sections 16-10a-1321, 16-10a-1323, and 16-10a-1328, whether or
not they are residents of this state whose demands remain unresolved, parties to
the proceeding commenced under Subsection (2) as an action against their shares.
All such dissenters who are named as parties must be served with a copy of the
petition. Service on each dissenter may be by registered or certified mail to
the address stated in his payment demand made pursuant to Section 16-10a-1328.
If no address is stated in the payment demand, service may be made at the
address stated in the payment demand given pursuant to Section 16-10a-1323. If
no address is stated in the payment demand, service may be made at the address
shown on the corporation's current record of shareholders for the record
shareholder holding the dissenter's shares. Service may also be made otherwise
as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under Subsection (2) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
Subsection (2) is entitled to judgment:
(a) for the amount, if any, by which the court finds that the fair
value of his shares, plus interest, exceeds the amount paid by the
corporation pursuant to Section 16-10a-1325; or
(b) for the fair value, plus interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under
Section 16-10a-1327.
16-10a-1331. Court costs and counsel fees.
(1) The court in an appraisal proceeding commenced under Section 16-10a-
1330 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds that the dissenters acted arbitrarily, vexatiously,
or not in good faith in demanding payment under Section 16-10a-1328.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of Sections 16-10a-1320 through 16-10a-1328; or
(b) against either the corporation or one or more dissenters, in
favor of any other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily, vexatiously, or not
in good faith with respect to the rights provided by this part.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to those counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefited.
<PAGE>
APPENDIX G TO REGISTRATION STATEMENT
SURGICAL TECHNOLOGIES, INC.
LONG-TERM STOCK INCENTIVE PLAN
1. Purpose. The purpose of the Surgical Technologies, Inc. Long-Term
Stock Incentive Plan (the "Plan") is to promote the interests of Surgical
Technologies, Inc. ("Surgical"), and its shareholders by strengthening the
ability of the Company (as hereinafter defined) to attract and retain directors,
officers, and key employees, and certain other individuals whom the Company
deems can render a valuable contribution to the direction and success of the
Company's efforts by helping create an entrepreneurial environment in which such
individuals are encouraged to maximize shareholder value. The Plan permits the
granting of Incentive Stock Option, Nonqualified Stock Options, Reload Options,
Restricted Stock, and Performance Units, all as hereinafter defined.
2. Definitions; Construction.
(a) As used in the Plan the defined terms "Plan," and "Surgical"
shall have the meanings ascribed to them above and the following defined
terms shall have the following meanings:
(i) "Affiliate" shall mean any parent corporation or subsidiary
corporation of Surgical as defined in sections 425(e) and (f) of the
Code as the same may be in effect from time to time.
(ii) "Agreement" shall mean an agreement between the Company and
a participant setting forth the terms and conditions of an Award.
(iii) "Award" shall mean an Incentive Stock Option,
Nonqualified Stock Option, Reload Option, Restricted Stock or
Performance Unit as described in and granted under the Plan.
(iv) "Board" shall mean the Board of Directors of Surgical.
(v) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(vi) "Committee" shall mean the Compensation Committee of the
Board, as the same may be constituted from time to time.
(vii)"Common Stock" shall mean shares of capital stock of
Surgical designated as "Common Stock" pursuant to Surgical's Articles
of Incorporation.
(viii)"Company" shall mean Surgical and its Affiliates.
(ix) "Fair Market Value" shall mean the average of the highest
and lowest quoted selling price of a share of Common Stock as
reported on the composite tape for securities listed on such national
securities exchange on which the Common Stock is then listed for
trading as may be designated by the Committee, or in the event that
the Common Stock is not listed for trading on a national securities
exchange but is quoted on an automated quotation system, on such
automated quotation system, or in the event that the Common Stock is
not quoted on an automated quotation system, the average of the
highest bid and lowest asked price of a share of Common Stock as
quoted by a member firm of the National Association of Securities
Dealers, Inc., in any such case on the valuation date or, if there
were no sales on the valuation date, the average of the highest and
the lowest quoted selling prices or bid and asked price as reported
on said composite tape or automated quotation system or by such
member firm, as the case may be, for the most recent day during which
a sale occurred.
(x) "Incentive Stock Option" shall mean an option granted
pursuant to the provisions of this Plan that meets the requirements
of section 422 of the Code, as the same may be in effect from time to
time.
(xi) "Non Employee Director" shall mean any member of the Board
of the Company who is not also an employee of the Company.
(xii)"Nonqualified Stock Option" shall mean any option granted
pursuant to the provisions of the Plan that is not an Incentive Stock
Option.
(xiii)"Performance Unit" shall mean a grant described in section
8.
(xiv)"Reload Option" shall mean any Nonqualified Stock Option
granted pursuant to the provisions of section 6(i).
(xv) "Restricted Stock" shall mean any stock delivered subject to
the restrictions set forth in section 7.
(xvi)"Stockholder Employee" shall mean any employee owning stock
(using the attribution rules of section 425(d) of the Code, as the
same may be in effect from time to time) possessing more than 10% of
the total combined voting power of all classes of stock of Surgical or
any of its Affiliates.
(b) References in the Plan to sections are to sections of the Plan
unless otherwise indicated. The words "hereof," "herein," "hereunder," and
comparable terms refer to the entirety of the Plan and not to any
particular section or other subdivision hereof. Words in the singular
include the plural and vice versa. Words in the masculine gender shall
include the feminine and neuter and vice versa. The word ''or" is not
exclusive. The word "including" shall be deemed to mean ''including,
without limitation." The section headings contained herein are for
reference purposes only and shall not affect in any way the meaning or
interpretation of the Plan.
3. Stock Available Under the Plan. The stock subject to Awards shall be
Common Stock. Subject to adjustment as provided in section 9, the total number
of shares of Common Stock with respect to which Awards may be granted may equal
but shall not exceed 3,250,000 shares; (provided, however, that the maximum
number of shares that may be available for Awards to directors of the Company
under this Plan shall be limited to 2,450,000; and, provided, further, that the
maximum number of shares that shall be available for Awards to Non-employee
Directors is limited to 120,000. For purposes of computing the number of
shares of Common Stock available for Awards at any time, there shall be debited
against the total number of shares (i) the number of shares of Common Stock
issuable upon exercise of any options, (ii) the number of shares of Restricted
Stock awarded, and (iii) and the maximum number of shares of Common Stock that
may be issued under Performance Unit Awards. Any shares represented by Awards
which are canceled, forfeited, terminated or expire unexercised shall again be
available for grant and issuance under the Plan.
4. Participants. Persons eligible for Awards under the Plan shall be
limited to such key employees of the Company, including directors of the
Company, who have substantial responsibility in the direction and management of
the Company and certain other individuals who, while not employees of the
Company, are identified by the Committee or the Board as persons who can render
a valuable contribution to the direction end success of the Company's efforts.
Except in the case of Non-employee Directors, the Committee shall have the sole
discretion to select those persons eligible for Awards. Non-employee Directors
shall be eligible to participate in the Plan only to the extent provided in
section 5.
5. Non-Employee Director Award.
(a) Upon assuming office, each Non-employee Director shall be
granted a Nonqualified Stock Option to acquire 10,000 shares of Common
Stock at an exercise price equal to 100% of the Fair Market Value of such
Common Stock on the date of grant.
(b) The Nonqualified Stock Options to be granted to all Non-employee
Directors upon assuming office shall become exercisable one-half upon
completion of one year of service as a director and the remaining balance
upon completion of two years of service as a director after such Option is
granted (subject to the provisions of section 10) and shall expire five
years from the date the Option is granted (the "Option Period"), unless
ended sooner due to termination of service or death or disability of the
optionee or if fully exercised prior to the end of such Option Period. If
the directorship of an optionee is terminated within the Option Period for
any reason other than (i) death or disability or (ii) on account of any
act of (1) fraud or intentional misrepresentation, or (2) embezzlement,
misappropriation or conversion of assets or opportunities of the Company
(any such act resulting in the automatic termination of the Option), the
Option may be exercised, to the extent the optionee was able to do so at
the date of termination of the directorship, within three months (or such
longer period as the Board may determine, but not to exceed one year)
after such termination (if otherwise within the Option Period). If an
optionee dies or becomes disabled while a director of the Company, the
Option may be exercised, to the extent the optionee was entitled to
exercise such Option at the date of his death or disability, within one
year after such death or disability (if otherwise within the Option
Period), whether or not one year of service as a director has elapsed, by
the executor or administrator of the estate of the optionee, or by the
legal representative of an incapacitated director, or by the person or
persons who shall have acquired the Option directly from the optionee by a
bequest or pursuant to the laws of descent or distribution or pursuant to
a qualified domestic relations order.
(c) The Nonqualified Stock Options granted to Non-employee Directors
shall be exercisable in the manner provided in section 6(d); shall be
non-transferable except as provided in section 6(f); shall not confer any
rights as a stockholder as provided in section 6(j); and shall not give rise
to any right to receive fractional shares as provided in section 6(k).
6. Terms and Conditions of Options. Options granted pursuant to the Plan
shall be evidenced by Agreements in such form, not inconsistent with the Plan, as
the Committee shall determine. The following terms and conditions shall apply to
all Incentive Stock Options, Nonqualified Stock Options and Reload Options.
(a) Option Price. The Committee shall determine the option price of
all Nonqualified Stock Options and all Incentive Stock Options; provided,
however, in the case of Incentive Stock Options, the option price shall not
be less than the Fair Market Value of the Common Stock on the date the
Option is granted and, provided further, that in the case of an individual
who is a Stockholder Employee on the date of grant, the option price of an
Incentive Stock Option shall be at least 110% of the then Fair Market Value
of the Common Stock.
(b) Option Term. The Committee shall determine the expiration date of
a Nonqualified Stock Option and an Incentive Stock Option; provided,
however, in the case of Incentive Stock Options, the term shall expire no
later than one day prior to the end of ten years after the date the option
was granted, and, provided, further, that Incentive Stock Options granted to
employees who are Stockholder Employees on the date of grant shall expire no
later than one day prior to the end of five years after the date of grant.
Options may terminate earlier as provided herein.
(c) Exercise of Options. The Committee shall determine when Incentive
Stock Options and Nonqualified Stock Options are exercisable, in whole or in
part, provided, however, that under no circumstances will an option be
exercisable within six months (or such greater or lesser period prescribed
or permitted by any applicable rule promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), including without
limitation Rule 16(b)-3), as in effect from time to time, from its date of
grant. Options may be exercised at an earlier date as provided herein.
(d) Manner of Exercise. Each Agreement shall specify whether, upon
exercise of Options, shares of Common Stock shall be paid for in full with
(i) cash (including a certified or official bank check or the equivalent
acceptable to Surgical), (ii) the equivalent Fair Market Value of shares of
Common Stock, properly endorsed, (iii) the equivalent fair market value of
any other property acceptable to Surgical, or (iv) any combination of (i),
(ii), or (iii). Options may be exercised by written notice to Surgical in
the manner provided in the applicable Agreement, accompanied by payment of
the exercise price in the manner provided in the applicable Agreement or in
such other manner as may be acceptable to the Committee, in its absolute
discretion. In the event the Common Stock issuable upon exercise of an
option is not registered under the Securities Act of 1933, as amended (the
"Securities Act''), then Surgical will require that the registered owner
deliver an investment representation in form acceptable to Surgical and its
counsel and Surgical will place a legend on the certificate for such Common
Stock restricting the transfer of the same.
(e) Limitation on Amount. In the case of Incentive Stock Options
only, no employees may be granted Incentive Stock Options to the extent the
aggregate Fair Market Value (as of the date of grant) of the Common Stock
subject to Incentive Stock Options that are first exercisable during any
calendar year exceeds $100,000.
(f) Non-Transferability. All options granted under this Plan shall
be non-assignable and non-transferable otherwise that by will or by the
laws of descent and distribution or pursuant to a qualified domestic
relations order. During the lifetime of the optionee, the option is
exercisable only by him, or, in the case of his incapacity, by his legal
representative.
(g) Termination of Employment. In the case of Nonqualified Stock
Options, the Committee shall determine the applicable provisions for death,
disability and termination of employment In the case of Incentive Stock
Options, (i) on termination of an optionee's employment with the Company
other than by reason of death or disability, the optionee shall have the
right to exercise his then outstanding Incentive Stock Option within three
months of such termination to the extent he was entitled to exercise the
same immediately prior to termination; and (ii) on termination of
employment by reason of death or disability within the meaning of section
22(e)(3) of the Code, as the same may be in effect from time to time, the
optionee, his estate, personal representative, or beneficiary shall have
the right to exercise his then outstanding Incentive Stock Options at any
time within 12 months from the date of death or termination of employment
by reason of disability for the full number of shares subject to Incentive
Stock Options at the date of termination of employment by reason of death
or disability, irrespective of any vesting provisions except as provided in
the first sentence of section 6(c) above.
(h) Time of Grant. The grant of an option shall occur only when a
written Agreement shall have been duly executed and delivered by or an
behalf of Surgical and the employee to whom the option is granted.
(i) Reload Options. If the applicable Agreement so provides or upon
the approval of the Committee at the time of exercise of an Option, in the
event an optionee exercises a Nonqualified Stock Option by payment of all
or a portion of the exercise price with shares of Common Stock which the
optionee has owned for at least six months, the optionee may receive a
Reload Option in the form a new Nonqualified Stock Option to purchase a
number of shares of Common Stock equal to the number of shares of Common
Stock used in payment of the exercise price of the original option
(j) No Stockholder Rights. Nothing contained in the Plan or in any
Agreement shall be construed to confer upon the holder of an option the
right to vote or to receive dividends or subscription rights, or to consent
or to receive notice as a stockholder in respect of the meetings of
stockholders of Surgical or the election of directors of Surgical or any
other matter, or any other rights whatsoever as a stockholder of Surgical.
(k) No Fractional Shares. Surgical shall not be required to issue
fractional shares of Common Stock upon exercise of any options.
7. Restricted Stock. Except as otherwise provided herein, the Committee
shall have the sole discretion to determine the restrictions that shall apply to
each award of Restricted Stock hereunder (including, without limitation, the
time and manner of voting, provisions applicable on death, disability or other
termination of employment, conditions of forfeiture, and whether any
consideration should be paid by the grantee). Any such restrictions shall be
embodied in the applicable Agreement and in a legend placed on the certificate
for Restricted Stock. As soon as practicable following a grant of Restricted
Stock, Surgical shall transfer to the name of the grantee any and all awarded
shares. A certificate or certificates for all shares of Restricted Stock
registered in the name of a grantee shall be promptly drawn and held for the
grantee by Surgical. The grantee shall thereupon be a stockholder and shall
have all the rights of a stockholder with respect to such shares, including the
right to vote and receive all dividends or other distributions made or paid with
respect to such shares. As the restrictions specified by the Committee and as
set forth in the applicable Agreement are released, a certificate (without the
legend described above) for the number of shares with respect to which
restrictions have been released will be delivered to the grantee as soon as
practicable. Any new, additional, or different securities, cash, or other
property the grantee may become entitled to receive shall be subject to the same
restrictions applicable to the Restricted Stock with respect to which such new,
additional, or different securities or property are received. Shares of
Restricted Stock may not be sold, exchanged, transferred. pledged,
hypothecated, or otherwise disposed of until such time as the stated
restrictions lapse.
8. Performance Units. The Committee may grant Performance Units
entitling the holder to receive a fixed or variable number of share-denominated
units subject to such conditions of vesting and time of payment as the Committee
may determine and as set forth in the applicable Agreement. Performance Units
may be paid in cash or in a combination of cash and shares of Common Stock, as
the Committee shall determine. Such Performance Units shall represent an
unsecured and unfunded promise to pay the Fair Market Value of the shares of
Common Stock represented by the Units and the holder shall have no rights other
than as a general creditor of the Company. Performance Units may not be sold,
exchanged, transferred, pledged, hypothecated, or otherwise disposed of except
as provided in the applicable Agreement.
9. Recapitalization or Reorganization.
(a) The aggregate number of shares of Common Stock for which Awards
may be granted under the Plan, the number of shares covered by outstanding
Awards and Awards to be granted to Directors and Non-employee Directors,
and the exercise price per share for each outstanding option, shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from the subdivision or
consolidation of shares, or the payment of a stock dividend after the
effective date of the Plan, or other increase or decrease in such shares
effected without receipt of consideration by Surgical; provided, however,
that any adjustment to Awards resulting in the right to receive fractional
shares shall be eliminated.
(b) If Surgical shall at any time merge or consolidate with or into
another corporation, the holder of each Award will thereafter receive, upon
exercise or transfer of shares, the securities or property to which a
holder of an equivalent number of shares of Common Stock would have been
entitled upon such merger or consolidation, and Surgical shall take such
steps in connection with such merger or consolidation as may be necessary
to assure that the provisions of this Plan shall thereafter be applicable,
as nearly as reasonably may be, in relation to any securities or property
thereafter deliverable. A sale of all or substantially all of the assets
of Surgical for a consideration (apart from the assumption of obligations)
consisting primarily of securities shall be deemed a merger or
consolidation for the foregoing purposes.
10. Change In Control. Notwithstanding any provision In the Plan to the
contrary, but subject to the first sentence of section 6(c) hereof, (i) each
option granted under the Plan shall become immediately exercisable in whole or
in part, at the election of the optionee, (ii) the restrictions applicable to
each share of Restricted Stock shall immediately lapse, and (iii) payment of
Performance Units shall be immediately due upon the occurrence of an event which
constitutes a change in control of Surgical. For purposes of this section 10, a
"change in control of Surgical" shall mean a change in control of a nature that
would be required to be reported in response to Item 1 of Form 8-K promulgated
under the Exchange Act or a sale of all or substantially all of the assets of
Surgical; provided that, without limitation, such a change in control shall (i)
not be deemed to have occurred upon the merger of 4Health, Inc., a California
corporation ("4Health") with and into Surgical, and (ii) be deemed to have
occurred if:
(a) any "person'' (as such term is used in sections 13(d) and 14(d)
of the Exchange Act), other than Surgical or any person who on the
effective date the Merger is an officer or director of Surgical, is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act, as such Rule is in effect from time to time), directly or indirectly,
of securities of Surgical representing 30% or more of the combined voting
power of Surgical's then outstanding securities, unless such person owns,
directly or indirectly, as of such effective date of the Merger, more than
25% of the combined voting power of Surgical's then outstanding securities,
in which case, if any such person (a "Major Stockholder") becomes the
beneficial owner, directly or indirectly, of 33-1/3% or more of the
combined voting power of Surgical's then outstanding securities (otherwise
than pursuant to the Merger); provided, further, however, that acquisition
of 33-1/3% or more of such combined voting power shall not constitute a
"change in control of Surgical'' if (1) such combined voting power does not
exceed 37-1/2% or more of the combined voting power of the Surgical's then
outstanding securities, or (2) either (i) any such increase in a Major
Stockholder's beneficial ownership results from redemption of purchase by
Surgical of its securities, or (ii) the Board, by vote of a majority of the
full Board, in good faith, determines (hereinafter referred to as a
"Determination") both (X) that such acquisition does not constitute, in
fact, a change in control of Surgical and (Y) that such Major Stockholder
does not and cannot then control Surgical; or (iii) any such shares were
acquired in the Merger; and
(b) during any period of two consecutive years prior to the date of
such Determination, individuals who at the beginning of such period
constituted the Board cease for any reason to constitute at least a
majority thereof, unless the election of such director who was not a
director at the beginning of such period has been approved in advance by
directors representing at least a majority of the directors then in office
who were directors at the beginning of the Period.
11. Administration.
(a) The Plan shall be administered by the Committee. The Committee
shall consist of at least two (2) directors, appointed by the Board, who
are "disinterested persons" within the meaning of Rule 16b-3(c)(2)(i)
promulgated under the Exchange Act, as such Rule or any other comparable
Rule may be in effect from time to time, such that during the one year
period prior to becoming a member of such Committee and during such service
as a Committee member, respectively, he will not have been granted and will
not be granted options, Restricted Stock, Performance Units, or other
equity securities of the Company under any other plan of the Company,
except pursuant to a "formula plan" as defined in Rule 16b-3(c)(2)(ii)
promulgated under the Exchange Act, as such Rule or any other comparable
Rule may be in effect from time to time (including, for this purpose, an
Award pursuant to section 5). The Board may from time to time remove
members from or add members to the Committee. Vacancies in the Committee,
however caused, shall be filled by the Board. The Committee shall select
one of its members chairman and shall hold meetings at such time and places
as it may determine. The Committee may appoint a secretary and, subject to
the provisions of the Plan and to policies determined by the Board, may
make such rules and regulations for the conduct of its business as it shall
deem advisable. A majority of the Committee shall constitute a quorum.
All action of the Committee shall be taken by a majority of its members.
Any action may be taken by a written instrument signed by at least a
majority of the members or at a meeting conducted by means of telephone or
similar communications equipment pursuant to which all persons
participating in the meeting can hear each other, and action so taken shall
be as fully effective as if it had been taken at a meeting duly called and
held.
(b) Subject to the express terms and conditions of the Plan, the
Committee shall have full power to make Awards, to construe or interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to
it and to make all other determinations necessary or advisable for its
administration.
(c) Except as otherwise provided herein, the Committee may determine
which persons shall be granted Awards and the number of shares subject to
Awards and the time at which Awards shall be made.
(d) The Committee shall report to the Board the names of persons
granted Awards, the number of shares involved, and the terms and conditions
of each Award.
(e) No member of the Board or of the Committee shall be liable for
any action or determination made in good faith with respect to the Plan or
any option or award and service on the Committee shall constitute service
as a director, entitling such Committee member to indemnification and
reimbursement for such service to the same extent as for service rendered
as a director.
12. Tax Withholding. The Committee may require any person entitled to
receive payment in respect of an Award to remit to the Company, prior to such
payment, an amount sufficient to satisfy any Federal, state or local tax
withholding requirements. The Committee shall also have the exclusive right to
permit an individual to satisfy, in whole or in part, such obligation to remit
taxes by directing the Company to withhold shares of Common Stock that would
otherwise be received by such individual, pursuant to such rules as the
Committee may determine from time to time in compliance with the provisions of
Rule 16b-3(e) promulgated under the Exchange Act, as such Rule or any other
comparable Rule may be in effect from time to time.
13. Effective Date and Termination, This Plan shall become effective
immediately on adoption by the Board. However, any Awards under the Plan shall
be conditioned on the approval of the Plan within 12 months after adoption by
the Board by holders of a majority of the issued and outstanding shares of
Common Stock in attendance, in person, or by proxy at a meeting of shareholders.
This Plan shall terminate on March 1, 2006, but the Board of Directors may
terminate the Plan at any time prior thereto. Termination of the Plan shall not
alter or impair, without the consent of the optionee or grantee, any of the
rights or obligations and any Award made under the Plan.
14. Amendments. The Board may from time to time alter, amend, suspend or
discontinue the Plan; provided, however, that no such action of the Board may
alter the provisions of the Plan so as to alter any outstanding Awards to the
detriment of the optionee or grantee without his consent, and, no amendment to
the Plan shall be made without stockholder approval which shall (i) increase
(except as provided in section 9) the total number of shares reserved for
issuance pursuant to the Plan; (ii) change the class of individuals entitled to
participate under the Plan; or (iii) withdraw the administration of the Plan
from a committee consisting of at least two "disinterested persons" as defined
in section 11 (a). The Committee may, from time to time, alter, amend, cancel,
or terminate any outstanding award, in any manner not inconsistent with the
Plan; provided, however, that no such action of the Committee may alter, amend,
cancel, or terminate an Award to the detriment of the optionee or grantee
without his consent, including, (i) to change the date or dates as of which an
Award becomes exercisable, is deemed earned, or becomes nonforfeitable, or (ii)
to cancel and reissue an Award under such different terms and conditions as the
Committee determines appropriate. The provisions of section 5 of the Plan may
not be amended more than once every six months except to comport with changes
to the Code, the Employee Retirement Income Security Act, or the rules
thereunder. Notwithstanding anything in the Plan to the contrary, the Board
shall have the power to amend the Plan to conform the Plan to all applicable
requirements of law.
15. No Right to Employment. No person shall have any claim or right to
receive grants of Awards under the Plan. Neither the Plan, the grant of Awards
under the Plan, nor any action taken or omitted to be taken under the Plan
shall be deemed to create or confer on any employee any right to be retained in
the employ of the Company or to interfere with or to limit in any way the right
of the Company to terminate the employment of such individual at any time.
16. Registration. There shall be no obligation or duty for the Company
to register under the Securities Act or any state securities law at any time
the Awards that may be granted hereunder or the Common Stock that may be
issuable upon grant or exercise of such Awards. The Company shall not be
required be issue or deliver any shares of stock prior to completion of such
registration or other qualification of such shares under any state or federal
law, rule, or regulation as Surgical shall determine to be necessary or
desirable.
17. Prior Options. Any individual who, on the effective date of the
Merger, holds an unexpired and unexercised option under 4Health's stock option
plan (a "Prior Option"), shall be entitled to replace his Prior Option with a
new option issued under this Plan such New Option to be of substantially like
tenor for an equivalent number of shares after adjustment for the conversion
ratio under which outstanding shares of Common Stock of 4Health shall be
converted into shares of Common Stock of the Company pursuant to the Merger.
Proxy
Surgical Technologies, Inc.
Special Meeting in Lieu of an Annual Meeting of the Stockholders of Surgical
Technologies, Inc.
(This Proxy is Solicited on Behalf of the Board of Directors)
The undersigned hereby appoints Todd B. Crosland and Rockwell D. Schutjer
proxies, with full power of substitution, to vote the shares of common stock
of Surgical Technologies, Inc. (the "Company"), which the undersigned is
entitled to vote at the special meeting in lieu of an annual meeting of
shareholders of the Company (the "Stockholders' Meeting") to be held at the
Little America Hotel, 500 South Main Street 84101, on July 15, 1996, at 10:00
a.m., local time, or any adjournment(s) thereof, such proxies being directed
to vote as specified below. If no instructions are specified, such proxy will
be voted "FOR" each proposal.
To vote in accordance with the board of directors' recommendations, sign
below. The "FOR" boxes may, but need not, be checked. To withhold authority
for the proxies to vote for any of the recommendations, check the appropriate
box(es) marked "WITHHOLD AUTHORITY" below.
The board of directors recommends votes "FOR" the following proposals,
each of which has been proposed by the board of directors:
1. To approve an Agreement and Plan of Merger (the "Merger") between the
Company and 4Health, Inc., a California corporation ("4Health"), pursuant to
which 4Health would be merged with and into the Company;
FOR / / AGAINST / / WITHHOLD AUTHORITY / /
-- -- --
2. To approve the 1996 Long-Term Stock Incentive Plan;
FOR / / AGAINST / / WITHHOLD AUTHORITY / /
-- -- --
3. If the Merger is not completed, to elect Todd B. Crosland to serve as a
director until the 1999 annual meeting and until a successor is elected and
qualified;
FOR / / WITHHOLD AUTHORITY / /
-- --
4. If the Merger is not completed, to elect Rockwell D. Schutjer to serve as
a director until the 1999 annual meeting and until a successor is elected and
qualified; and
FOR / / WITHHOLD AUTHORITY / /
-- --
5. To transact such other business as may properly come before the
Stockholders' Meeting.
FOR / / AGAINST / / WITHHOLD AUTHORITY / /
-- -- --
PLEASE PRINT YOUR NAME AND SIGN EXACTLY AS YOUR NAME APPEARS IN THE RECORDS OF
THE COMPANY. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN.
Dated: , 1996 Signature
------------
Signature of Joint Owner
PLEASE MARK, SIGN, DATE, AND RETURN
THIS PROXY TO:
SURGICAL TECHNOLOGIES, INC.
2801 South Decker Lake Lane
Salt Lake City, Utah 84119
Proxy
4Health, Inc.
Special Meeting in Lieu of an Annual Meeting of the Stockholders of
4Health, Inc.
(This Proxy is Solicited on Behalf of the Board of Directors)
The undersigned hereby appoints R. Lindsey Duncan and Richard B. Carlock
proxies, with full power of substitution, to vote the shares of common
stock of 4Health, Inc. (the "Company"), which the undersigned is entitled
to vote at the special meeting in lieu of an annual meeting of stockholder
of the Company (the "Stockholders' Meeting") to be held at the Little
America Hotel, 500 South Main Street 84101, on July 15, 1996, at 9:30
a.m., local time, or any adjournment(s) thereof, such proxies being
directed to vote as specified below. If no instructions are specified,
such proxy will be voted "FOR" each proposal.
To vote in accordance with the board of directors' recommendations, sign
below. The "FOR" boxes may, but need not, be checked. To withhold
authority for the proxies to vote for any of the recommendations, check
the appropriate box(es) marked "WITHHOLD AUTHORITY" below.
The board of directors recommends votes "FOR" the following proposals,
each of which has been proposed by the board of directors:
1. To approve an Agreement and Plan of Merger (the "Merger")
between the Company and Surgical Technologies, Inc., a Utah corporation
("Surgical"), pursuant to which the Company would be merged with and into
Surgical; and
FOR / / AGAINST / / WITHHOLD AUTHORITY / /
-- -- --
2. To transact such other business as may properly come before
the Stockholders' Meeting.
FOR / / AGAINST / / WITHHOLD AUTHORITY / /
-- -- --
(PLEASE SIGN ON BACK)
PLEASE PRINT YOUR NAME AND SIGN EXACTLY AS YOUR NAME APPEARS IN THE
RECORDS OF THE COMPANY. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH
SHOULD SIGN.
Dated: , 1996 Signature
-------------
Signature of Joint Owner
PLEASE MARK, SIGN, DATE, AND RETURN
THIS PROXY TO:
4HEALTH, INC.
5485 Conestoga Court
Boulder, Colorado 80301
</TABLE>
