The following items were the subject
of a Form 12b-25 and are included
herein: Item 1. Financial Statements
and Item 2. Management's Discussion
and Analysis of Financial Condition
and Results of Operations.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------------
Commission file number 0-18160
4HEALTH, INC.
(Exact name of registrant as specified in its charter)
----------------
Utah 87-0468225
(State of incorporation) (I.R.S. Employer Id. No.)
5485 Conestoga Court
Boulder, Colorado 80301
(Address of principal executive offices)
Registrant's telephone number: (303) 546-6306
----------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes: X No:
The number of shares of the registrant's Common Stock, par value
$.01 per share, outstanding as of September 30, 1997
was 11,905,920.
4Health, Inc.
Index to Form 10-Q/AA
<TABLE>
<CAPTION>
<S> <C>
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30,
1997 and December 31, 1996....................4
Condensed Statement of Operations for Three
and Nine Months Ended September 30, 1997
and 1996......................................5
Condensed Statements of Cash Flows for Nine
Months Ended September 30, 1997 and 1996......6
Notes to Condensed Financial Statements............7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............13
SIGNATURES.............................................14
</TABLE>
This Quarterly Report on Form 10-Q/AA includes "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and
Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). All statements other than statements of
historical facts included in this Quarterly Report, including,
without limitation, those regarding the Company's financial
position, business, marketing and product introduction and
development plans and objectives of management for future
operations, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors
that could cause actual results to differ materially from the
Company's expectations ("Cautionary Statements") are disclosed
under "Risks Related to the Business of 4Health" and elsewhere in
the Company's Annual Report on Form 10-K dated March 27, 1997 and
in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in the Annual Report.
All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on behalf of the
Company, are expressly qualified in their entirety by the
Cautionary Statements.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
4Health, Inc.
Condensed Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1997 December 31, 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 290,258 $ 1,086,168
Accounts receivable, net 1,351,021 1,105,207
Inventories 1,576,787 2,534,881
Deferred tax asset 325,190 313,872
Prepaid expenses 455,010 171,138
Notes receivable 31,830 265,819
____________ ____________
Total current assets 4,030,096 5,477,085
PROPERTY AND EQUIPMENT, NET 2,407,122 2,559,629
PREPAID EXPENSES 700,000 0
OTHER ASSETS, NET 574,027 1,136,531
NOTES RECEIVABLE 87,624 116,308
____________ ____________
Total assets $ 7,798,869 $ 9,289,553
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,000,833 $ 484,079
Accrued liabilities 572,282 878,025
Taxes payable 45,300 113,833
Notes payable 366,520 20,555
Capital leases 694 3,733
____________ ____________
Total current liabilities 1,985,629 1,500,225
DEFERRED TAXES 92,692 152,112
NOTES PAYABLE 1,305,269 1,275,716
STOCKHOLDERS' EQUITY
Common stock 119,059 114,603
Additional paid in capital
- common stock 7,883,752 8,226,844
Additional paid in capital
- common warrants 190,316 0
Treasury stock (50,000) (50,000)
Accumulated deficit (3,727,848) (1,929,947)
____________ ____________
Total stockholders' equity 4,415,279 6,361,500
Total liabilities and ____________ ____________
stockholders' equity $ 7,798,869 $ 9,289,553
============ ============
</TABLE>
See notes to condensed financial statements.
4Health, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net Sales $3,076,185 $3,311,507 $10,296,532 $14,791,932
Cost of goods
sold 1,301,328 1,284,440 4,849,056 5,780,097
_________ _________ __________ __________
Gross margin 1,774,857 2,027,067 5,447,476 9,011,835
Operating Expenses
Sales 490,118 680,936 1,627,971 2,108,099
Marketing 868,345 1,217,597 3,171,062 5,313,103
Research and
development 69,435 136,622 367,841 290,323
General and
administrative682,218 799,624 2,189,387 2,047,099
_________ _________ __________ __________
Total operating
expenses 2,110,116 2,834,779 7,356,261 9,758,624
_________ _________ __________ __________
Net income from
operations (335,259) (807,712) (1,908,785) (746,789)
Other income
(expense) 11,459 52,480 15,734 28,228
_________ _________ __________ __________
Net income (loss)
before income
taxes (323,800) (755,232) (1,893,051) (718,561)
Income tax benefit
(provision) (52,970) 17,137 88,408 91,776
_________ _________ __________ __________
NET INCOME(LOSS)$(376,770) $(738,095) $(1,804,643) $(626,785)
========= ========= ========== ==========
Net income (loss) per
common share $(0.03) $(0.07) $(0.16) $(0.07)
========= ========= ========== ==========
Weighted average shares
outstanding11,427,693 10,906,635 11,396,393 9,423,827
</TABLE>
See notes to condensed financial statements.
4Health, Inc.
Condensed Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES <C> <C>
Net income (loss) $ (1,797,901) $ (626,785)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 241,145 160,875
Bad debt expense 14,565 0
Loss on disposal of assets 22,845 4,501
Issuance of Warrants 190,316 0
(Increase) decrease in:
Accounts receivable (260,380) (74,486)
Inventory 958,094 (1,128,040)
Prepaid expenses and other (916,839) (463,061)
Deferred income tax assets (11,318) (82,168)
(Increase) decrease in:
Accounts payable 516,754 917,565
Accrued liabilities (305,744) 257,888
Taxes payable (68,533) 12,287
Deferred income tax liability (59,420) 89,270
Net cash (used in) from operating _________ _________
activities (1,476,416) (932,154)
CASH FLOWS FROM INVESTING ACTIVITIES _________ _________
Proceeds from sale of marketable
securities 0 524,002
Acquisition of SGTI 0 3,639,257
Purchase of fixed assets (86,261) (462,009)
Proceeds from asset dispositions 600 0
Proceeds from note receivable 262,673 5,957
Net cash from (used in) investing _________ _________
activities 177,012 3,707,207
CASH FLOWS FROM FINANCING ACTIVITIES _________ _________
Proceeds from common stock 130,049 59,330
Acquisition costs 0 (454,866)
Borrowings on short-term debt 337,665 0
Borrowings on long-term debt 1,350,000 0
Repayments on long-term borrowings(1,312,147) (71,198)
Repayments on capital leases (2,073) (4,199)
_________ _________
Net cash used in financing activities 503,494 (470,933)
_________ _________
NET (DECREASE) INCREASE IN CASH (795,910) 2,304,120
CASH AND CASH EQUIVALENTS, at
beginning of period 1,086,168 919,935
_________ _________
CASH AND CASH EQUIVALENTS, at
end of period $ 290,258 $ 3,224,055
========= =========
</TABLE>
See notes to condensed financial statements.
4Health, Inc.
Notes to Condensed Financial Statements
September 30, 1997
(Unaudited)
Note 1:
Basis of Presentation
The accompanying unaudited condensed financial statements
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30,
1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Form 10-K dated March 31, 1997
and the Company's Proxy Statement dated April 25, 1997.
Note 2:
Certain Sales Transactions
In February 1997, the Company entered into a negotiated
settlement with General Nutrition Corporation, Inc. ("GNC") to
settle all pending litigation between the two parties. The
terms of the settlement include the Company supplying GNC with
certain 4Health products free of charge and taking back certain
other 4Health products. The execution of this settlement
agreement was completed during the first and second quarters of
1997.
On February 25, 1997, 4Health entered into a barter
agreement with Active Media Services, Inc. Under the terms of
the agreement, the Company sold to Active Media Services,
Inc. certain inventory with a cost of $780,308 for which the
Company received $2,300,000 in barter credits. These barter
credits can be used in lieu of cash to purchase goods and
services available through Active Media Services, Inc. 4Health
intends to use these barter credits for advertising, printing,
travel, and other normal operating expenditures. This
transaction was recorded at the cost of the product sold to
Active Media Services, Inc. ($758,308) and the unused
portion of the barter credits is reflected in the balance sheet
as a prepaid expense. As of June 30, 1997, none of the barter
credits had been used. Product costing $424,149 was shipped to
Active Media Services, Inc. during the first quarter with the
balance of $334,159 shipped in the second quarter 1997.
Note 3:
Line of Credit
Effective September 4, 1997, the Company entered into a $1.5
million revolving line of credit with Norwest Business Credit,
Inc. The line of credit bears interest at the Norwest Bank
Minnesota's Base Rate (currently 8.5%) plus 2.5%. The available
balance is determined by certain accounts receivable and
inventory. Any balance outstanding is secured by certain
accounts receivable, inventory, general intangibles, and any
unencumbered machinery and equipment.
Note 4:
Issuance of New common Stock
Pursuant to a clause in the 1996 merger agreement between
4health, Inc. and Surgical Technologies, Inc., 500,000 new shares
of stock were issued to original 4health, Inc. stockholders on
September 26, 1997. The merger agreement stated that in the
event the surviving company did not realize at least $2,000,000
in Inflation Device Technology earnings within 12 months
subsequent to the closing date (July 15, 1996) of the merger, the
number of shares of New Common Stock issuable to the original
4health shareholders would be increased on a pro rata basis.
Note 5:
Subsequent Event - Merger Agreement
On October 13, 1997, 4Health executed a letter of intent to
acquire Irwin Naturals, Inc. ("INI") a privately held California
corporation engaged in the nutritional supplement business. The
merger would result in INI becoming a wholly owned subsidiary of
4Health in consideration of the issuance of 15,750,000 restricted
shares of 4Health common stock. The transaction is conditioned
upon the execution of a definitive acquisition agreement.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
See the disclosure regarding forward looking statements
above.
Results of Operations
Comparison of Third Quarter 1997 to 1996
Net sales for the three months ended September 30, 1997,
decreased 7.1% to $3.1 million from $3.3 million compared to the
same period a year ago. Net sales in the Nature's Secret brand
were down 9.2%, or $253 thousand, for the third quarter 1997
compared to the third quarter 1996 due primarily to increased
competition and overall weakness in healthfood store sales.
Gross margin percentage decreased 3.5 % for the quarter ended
September 30, 1997 down to 57.7% from 61.2% for the same period
in 1996. Management attributes this decrease to a shift in
sales of products with an overall lower profit margin. Gross
margin for the third quarter 1997 declined 12% to $1.8 million
from $2.0 million in the third quarter of 1996. Management
attributes this decline to a combination of the drop in net sales
revenue and the drop in gross margin percentage due to change in
sales product mix.
Operating expenses dropped 25% in the third quarter of 1997 to
$2.1 million compared to $2.8 in the third quarter of 1996.
Marketing expenses decreased $350 thousand or 29% from $1.2
million to $870 thousand in the third quarter ended September 30,
1997 as compared to the third quarter of 1996 due mainly to an
overall reduction in advertising, advertising development and
marketing personnel costs. Management believes a more focused
and grassroots approach to its marketing strategy will not only
be far less expensive but also more effective. Sales expenses
decreased $191 thousand or 28% from $681 thousand to $490
thousand in the third quarter ended September 30, 1997 as
compared to the same quarter in 1996 due mainly to a reduction
in personnel, primarily in the outside sales force. General and
administrative expenses decreased 15% to $682 thousand in the
third quarter 1997 compared to $800 thousand in third quarter
1996. The decrease was due to the efforts of management to
reduce corporate overhead. This reduction in general and
administrative expenses covered a broad range of expense
categories and amounted to $213 thousand which was offset by $103
thousand in investment banking fees incurred in the third quarter
of 1997 which were nonexistent in 1996. 4Health's research and
development department decreased spending $67 thousand in the
third quarter 1997 compared to the third quarter 1996. This
decrease was due to costs incurred in the third quarter of 1996
involving a clinical study of one of its products. The company
had no clinical studies in progress in the third quarter of 1997.
Interest income decreased 86% to $12 thousand in the third
quarter 1997 from $86 thousand in the third quarter 1996. The
reason for this decrease was the average balance of cash and
cash equivalents in the third quarter of 1997 was less than
the average balance during the same period a year earlier.
The Company reported a net loss of $384 thousand, or $.03 per
share, for the three months ended September 30, 1997 compared
to a net loss of $738 thousand, or $.06 per share, for the
three months ended September 30, 1996.
Comparison of Year-to-Date 1997 to 1996
Net sales for the nine months ended September 30, 1997,
decreased 30.0% or $4.5 million to $10.3 million from $14.8
million compared to the same period a year ago. Net sales in
the Nature's Secret brand were down 39%, or $5.4 million, year-
to-date 1997 compared to year-to-date 1996 due primarily to a
drop in 1997 sales to a major customer of $3.1 million and a
drop in 1997 Nature's Secret sales other than to that major
customer of $3.0 million. Offsetting those decreases in 1997,
were an increase in 1997 net sales in the Mass Market division
of $900 thousand and a $758 thousand sale to a barter company,
Active Media Services, Inc. Excluding net sales to a major
customer and to Active Media, net sales decreased $1.4 million
or 14% for the nine months ended September 30, 1997 when
compared to the same period a year earlier.
Gross margin decreased 40% to $5.4 million year-to-date 1997
from $9 million for the same period in 1996. Gross margin
percentage for the nine months ended September 30, 1997
declined 8% when compared to the same period in 1996.
Management attributes 5% of this decline to the $758 thousand
sale to Active Media Services, Inc., which was recorded at
cost, and the other 3% to a shift in sales to products with
an overall lower profit margin and to more aggressive
discounting due to competitive pressures in the first half of
the year.
Operating expenses were down 25% for the nine months ended
September 30, 1997 to $7.4 million compared to $9.8 million for
the nine months ended September 30, 1996. The ongoing plan by
management to bring sales and marketing costs in line with
existing revenues is the reason for this decrease. Marketing
expenses decreased 40%, or $2.1 million, for the nine months
ended September 30, 1997 to $3.2 million compared to $5.3
million for the same period in 1996. The decrease in marketing
expenses in 1997 came from a reduction in advertising in the
amount of $1.4 million with the balance of the decrease created
primarily by personnel and promotion cuts. Sales expenses
declined 23% to $1.6 million year-to-date in 1997 from $2.1
million for the same period in 1996. Reduction in personnel
and related selling expenses account for most of this decrease
in 1997. General and administrative expenses increased 7%, or
$140 thousand, to $2.2 million year-to-date 1997 compared to
$2.0 million year-to-date 1996. This increase was due
primarily to an increase in legal fees during the first half of
1997 and investment banking fees incurred in 1997 and not in
1996. 4Health's research and development department increased
spending 27%, or $77 thousand, year-to-date 1997 compared to
1996. This increase was due to the costs associated with
clinical studies that were conducted in the first half
of 1997.
Interest income decreased 57%, or $63 thousand, to $48 thousand
year-to-date 1997 from $111 thousand year-to-date 1996. The
reason for this decrease was the amount of cash and cash
equivalents available for investment in interest bearing
accounts was down compared to the amount available at the
end of 1996.
The Company reported a net loss of $1.8 million, or $.16 per
share, for the nine months ended September 30, 1997 compared to
a net loss of $627 thousand, or $.07 per share, for the nine
months ended September 30, 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents position at September
30, 1997, was $.3 million compared to $1.1 million on December
31, 1996. The $.8 million decrease in cash and cash
equivalents position was a result of these resources being used
to fund ongoing operations. The Company has a working capital
ratio of 2 to 1.
The Company invests it's cash in an interest bearing money market
account.
Accounts receivable totaled $1.35 million at September 30, 1997
as compared to $1.1 million on December 31, 1996. This $.25
million or 23% increase was due to primarily to the longer
collection cycle for mass market related sales.
Inventories were valued at $1.6 million at September 30, 1997 as
compared to $2.5 million at December 31, 1996, which represents
36% decrease or $.9 million. This decrease was due primarily to
the sale to Active Media Services, Inc. of $.75 million.
The Company's prepaid advertising and promotion costs related to
its UnDo product, as well as, prepaid costs associated with the
introduction of new products and packaging caused short term
prepaid expenses to increase to $.5 million at September 30, 1997
from $.2 million at December 31, 1996. This represents an
increase of 250%.
Notes receivable decreased $263 thousand to $119 thousand at
September 30, 1997 from $382 thousand at December 31, 1996. This
was due to the collection of funds owed to Surgical Technologies,
Inc. prior to the merger of 4Health and Surgical.
Capital expenditures for the first nine months of 1997 were $86
thousand compared to $462 thousand for the same period in 1996.
Other assets, net decreased 50% at September 30, 1997 from $1.1
million at December 31, 1996 to $574 thousand due primarily to
an adjustment in the value of certain intangible assets related
to the issuance of additional shares of stock on September 26,
1997 to original 4health, Inc. shareholders of record at the time
of the merger with Surgical Technologies, Inc. (See Note 4 of
the Notes to Condensed Financial Statements of this Form 10-
Q/AA.)
Accounts payable and accrued liabilities increased $.2 million at
September 30, 1997 to $1.6 million compared to the balance on
December 31, 1996 and is related primarily to amounts due
suppliers for inventory and unpaid advertising and promotion
costs.
Notes payable increased to $367 thousand at September 30 1997
from $21 thousand at December 31, 1996 due to the company
borrowing on its revolving line of credit which was negotiated
and activated during the current quarter. Available borrowing
capacity in addition to amounts outstanding at September 30,
1997 was $630 thousand.
The deferred tax liability decreased $60 thousand due to
interim tax estimates by management.
Additional paid-in capital decreased $343 thousand to $7.9
million at September 30, 1997 from $8.2 million at December 31,
1996. This decrease was due primarily to an adjustment related
to the issuance of additional shares of stock on September 26,
1997 to original 4health, Inc. shareholders of record at the time
of the merger with Surgical Technologies, Inc. (See Note 4 of
the Notes to Condensed Financial Statements of this Form 10-
Q/AA.) This adjustment was partially offset by an increase in
additional paid-in capital related to warrants as of September
30, 1997 in the amount of $190 thousand as compared to $0 at
December 31, 1996. These warrant costs relate to warrant
certificates issued on April 15, 1997 in which warrants are to be
exchanged for investment banking and consulting services.
Additional paid in capital related to warrants as of September
30, 1997 was $190 thousand as compared to $0 at December 31,
1996. These warrant costs relate to warrant certificates issued
on April 15, 1997 in which warrants are to be exchanged for
investment banking and consulting services.
As previously mentioned, the Company has $.3 million in cash
reserves at September 30, 1997 and working capital of $2 million
with a 2 to 1 working capital ratio. Former Surgical
Stockholders were issued 1,135,554 warrants and, if exercise at
an $11.00 exercise price, could generate $12.5 million in cash
for 4Health, Inc. These Warrants expire 18 months from the
issuance date of July 15, 1996 and likelihood of them being
exercised is dependent on the performance of the 4Health, Inc.
Common Stock. As the stock price exceeds $11.00 per share, the
probability of exercise increases. Currently, the stock is
trading in the vicinity of $6.50 per share.
The Company's future capital requirements will depend on many
factors, including the nature and timing of orders from
customers, collection of accounts on trade sales, the level of
sales and marketing efforts, costs associated with entering into
new channels of distribution, and the status of competitive
products.
Management believes that its working capital and borrowing
capacity will be sufficient to satisfy anticipated sales growth
and investment in facilities for at least 12 months. The Company
continues to seek additional financing for future needs. There
can be no assurance, however, that the Company will not require
additional financing earlier than anticipated. Further, there
can be no assurance that any additional financing will be
available at acceptable terms, or at all. The inability to
obtain such financing could have a material adverse effect on the
Company's business, financial condition, and results of
operations.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports of Form 8-K
Item 27. Financial Data Schedule. This Filing.
Signatures
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
4Health, Inc.
Dated: November 18, 1997
By:/s/ R. LINDSEY DUNCAN
R. Lindsey Duncan
President and Chief Executive Officer
Dated: November 18, 1997
By:/s/ SCOTT W. LUSK
Scott W. Lusk
Controller (Principal Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.01 Financial Data Sheet
This schedule contains summary financial information extracted
from the consolidated financial statements and is qualified in
its entirety by reference to such financial statements.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 290
<SECURITIES> 0
<RECEIVABLES> 1,351
<ALLOWANCES> 0
<INVENTORY> 1,577
<CURRENT-ASSETS> 4,030
<PP&E> 2,407
<DEPRECIATION> (60)
<TOTAL-ASSETS> 7,799
<CURRENT-LIABILITIES> 1,986
<BONDS> 0
0
0
<COMMON> 119
<TOTAL-LIABILITY-AND-EQUITY> 7,799
<SALES> 3,076
<TOTAL-REVENUES> 3,076
<CGS> 1,301
<TOTAL-COSTS> 3,411
<OTHER-EXPENSES> (11)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> (323)
<INCOME-TAX> (52)
<INCOME-CONTINUING> (377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (377)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
