SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission file number 0-18160
4HEALTH, INC.
(Exact name of registrant as specified in its charter)
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Utah 87-0468225
(State of incorporation) (I.R.S. Employer Identification No.)
5485 Conestoga Court
Boulder, Colorado 80301
(Address of principal executive offices)
Registrant's telephone number: (303) 546-6306
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The following items were subject to a Form 12b-25 and are
omitted from this report: Part I, Item 1 and Part I, Item 2.
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
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PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements ........................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................. 3
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................. 3
Item 5. Other Information .............................. 3
Item 6. Exhibits and Reports on Form 8-K ............... 4
SIGNATURES .......................................... 8
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This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical facts
included in this Quarterly Report, including, without limitation,
those regarding the Company's financial position, business,
marketing and product introduction and development plans and
objectives of management for future operations, are forward-
looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause
actual results to differ materially from the Company's
expectations ("Cautionary Statements") are disclosed under "Risks
Related to the Business of 4Health" and elsewhere in the
Company's Annual Report on Form 10-K 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
The information required to be furnished in this is the
subject of a Form 12b-25 and has therefore been omitted from this
report.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The information required to be furnished in this is the
subject of a Form 12b-25 and has therefore been omitted from this
report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 10, 1997, 4Health, Inc. was served notice of a law
suit filed against the company by the Richard's Group, Inc. The
action, Richard's Group, Inc. vs. 4Health, Inc. (97-05669-L), was
filed in the District Courts of Dallas County, Texas on June 20,
1997. The action requested judgment be made by the Court against
4Health, Inc. regarding outstanding fees in the amount of
$61,839.92, interest, and legal expenses incurred by the
plaintiff in this matter. The action alleged that these fees
were incurred by the Company for advertising services provided by
the plaintiff. On October 30, 1997, the Company executed a
settlement agreement with the Richard's Group which included a
payment of $54,000 and a dropping of all claims.
Item 5. Other Information
During the third quarter of 1997, the Company signed an
agreement with Norwest Business Credit, Inc. to provide a
revolving line of credit of up to $1.5 million. A summary of the
terms of the revolving line of credit is filed as Exhibit 5.01 to
this Form 10-Q according to Rule SK 601.
On September 26, 1997 the Company issued 500,000 registered
shares of common stock in accordance with Agreement and Plan of
Merger dated April 10, 1996, by and between 4health, Inc., and
Surgical Technologies, Inc. as amended June 4, 1996. (A copy of
this agreement is filed as Exhibit 2.01 and incorporated by
reference from Surgical Technologies, Inc.'s registration
statement on Form S-4 filed with the Commission, SEC file number
33-03243.) The agreement specified that additional shares were
to be issued to original 4health, Inc. shareholders if a certain
operating unit of Surgical Technologies, Inc. did not generate a
certain level of income.
Item 6. Exhibits and Reports on Form 8-K
Exhibit Index
Item 2. Plan of Acquisition, Reorganization, Liquidation, or
Succession
2.01 Agreement and Plan of Merger dated April 10, 1996, by
and between 4health, Inc., and Surgical Technologies, Inc. as
amended June 4, 1996. Incorporated by Reference (4).
2.02 Asset Purchase Agreement dated November 30, 1995, by
and between Microtek Medical, Inc., and Surgical Technologies,
Inc. Incorporated by Reference (3).
2.03 2 Acquisition Agreement dated effective January 1, 1996,
by and between Rex Industries Acquisition Corporation and Rex
Industries, Inc. Incorporated by Reference (3).
Item 3. Articles of Incorporation and Bylaws
3.01 Articles of Incorporation of Surgical Subsidiary, Inc.,
a Utah Corporation now known as Surgical Technologies, Inc.
Incorporated by Reference (6).
3.02 Articles of Merger and related Plan of Merger.
Incorporated by Reference (6).
3.03 Bylaws. Incorporated by Reference (6).
3.04 Articles of Merger and related Plan of Merger.
Incorporated by Reference (4).
Item 4. Instruments Defining the Rights of Security Holders
4.01 Form of Warrant Agreement between 4Health, Inc. and
Zions First National Bank with related form of Warrant.
Incorporated by Reference (4).
4.02 Form of Sale Restriction Agreement respecting
shareholders of both Surgical Technologies, Inc., and 4Health,
Inc. Incorporated by Reference (4).
4.03 Form of Consent, Approval, and Irrevocable Proxy
respecting certain Surgical stockholders with related schedule.
Incorporated by Reference (4).
4.04 Form of Consent, Approval, and Irrevocable Proxy
respecting certain 4Health stockholders with related schedule.
Incorporated by Reference (4).
4.05 Specimen Common Stock Certificate. Incorporated by
Reference (4).
4.06 Specimen Warrant Certificate. Incorporated by
Reference (4).
4.07 Warrant certificates between 4Health and Allen &
Company Incorporated dated April 15, 1997. Incorporated by
Reference (8).
Item 5. Other Items
5.01 Summary of Revolving Line of Credit Agreement between
4Health and Norwest Business Credit, Inc. This Filing.
Item 10. Material Contracts
10.01 Form of Directors' Options. Incorporated by
Reference (3)*.
10.02 Stock Option and Stock Award Plan. Incorporated by
Reference (3)*.
10.03 1991 Directors' Stock Option Plan. Incorporated by
Reference (3)*.
10.04 Directors' Stock Option Plan. Incorporated by
Reference (5)*.
10.05 Technology Purchase Agreement between Ellis E.
Williams, Professional Medical, Inc., and Surgical Technologies,
Inc., dated February 4, 1993. Incorporated by Reference (6).
10.06 Patent Cross-License Agreement between Utah Medical
Products, Inc., and Professional Medical, Inc., dated February 9,
1993. Incorporated by Reference (7).
10.07 Form of Promissory Note in the amount of $1,000,000
payable to First Interstate Bank, dated August 16, 1994.
Incorporated by Reference (7).
10.08 Deed of Trust Note and related Deed of Trust,
Assignment of Rents, Security Agreement, and Fixture Filing,
dated April 8, 1994, in the principal amount of $1,000,000 due
Standard Insurance Company. Incorporated by Reference (6).
10.09 Stock Purchase Agreement dated May 6, 1994, between
Surgical Technologies, Inc., and Benitex, A.G. Incorporated by
Reference (6).
10.10 Real Estate Contract dated February 2, 1994, between
Surgical Technologies, Inc. and Rex Crosland related to the
facilities at 2801 South Decker Lake Lane, Salt Lake City, Utah.
Incorporated by Reference (6).
10.11 Asset Purchase Agreement between Milwaukee Acquisition
Company, Insulation Distributors, Inc., and Surgical
Technologies, Inc., effective September 30, 1993. Incorporated by
Reference (6).
10.12 All-Inclusive Promissory Note and related All-Inclusive
Trust Deed, relating to sale of building and property, dated
March 31, 1995, in the principal amount of $981,375.32.
Incorporated by Reference (7).
10.13 1996 Long-Term Stock Incentive Plan. Incorporated by
Reference (4).
10.14 Form of $2.00 option granted to Surgical directors,
officers, and employees with related schedule. Incorporated by
Reference (4)*.
10.15 Form of Option granted to Todd B. Crosland.
Incorporated by Reference (4)*.
10.16 Form of Option granted to Rockwell D. Schutjer.
Incorporated by Reference (4)*.
10.17 Form of Proprietary Information, Inventions, and Non-
Competition Agreement between 4Health and R. Lindsey Duncan.
Incorporated by Reference (4).
10.18 Form of Employment Agreement between the Surviving
Corporation and Rockwell D. Schutjer. Incorporated by
Reference (4)*.
10.19 Deed of Trust Note and related Deed of Trust,
Assignment of Rents, Security Agreement, and Fixture Filing,
dated February 20, 1997, in the principal amount of $1,350,000
due Standard Insurance Company. Incorporated by Reference (2).
Item 20. Other Documents or Statements to Security Holders
20.01 Notice of change of transfer and warrant agent.
Incorporated by Reference (1).
Item 27. Financial Data Schedule
27.01 Financial Data Schedule. Subject to a Form 12b-25 and
therefore omitted from this filing.
(1) Incorporated by reference from 4Health's report on Form
10-Q for the quarter ended March 31, 1997.
(2) Incorporated by reference from 4Health's report on Form
10-K for the year ended December 31, 1996.
(3) Incorporated by reference from Surgical's registration
statement on Form S-1 filed with the Commission, SEC file number
33-31863.
(4) Incorporate by reference from Surgical's registration
statement on Form S-4 filed with the Commission, SEC file number
33-03243.
(5) Incorporated by reference from Surgical's report on
Form 10-K for the year ended March 31, 1992.
(6) Incorporated by reference from Surgical's report on
Form 10-K for the year ended March 31, 1994.
(7) Incorporated by reference from Surgical's report on
Form 10-Q for the quarter ended December 31, 1995.
(8) Incorporated by reference from Schedule 13D filed with
the Commission by Allen & Company Incorporated on April 18, 1997.
* Represents a management contract, compensatory plan, or
arrangement required to be filed as an exhibit.
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: October 13, 1997
By:/s/ R. LINDSEY DUNCAN
R. Lindsey Duncan
President and Chief
Executive Officer
Dated: October 13, 1997
By:/s/ SCOTT W. LUSK
Scott W. Lusk
Controller (Principal Accounting Officer)
For Information Purpose Only
The following letter presents the key terms and conditions of the
$1,500,000 revolving credit facility which NBCI has extended
credit to 4Health.
BORROWER: 4Health, Inc.
FACILITY: A $1,500,000 revolving loan of which the lesser
of $1,500,000 or the amount determined under
the Borrowing Base (as described below) may be
borrowed.
BORROWING BASE: The calculation for determining the Borrowing
Base is 80% of eligible accounts receivable
plus 50% of eligible inventory.
Ineligible accounts receivable to include,
among other things:
- That portion of an account that is more
than 90 days past invoice date. If more
than 10% of the total amount owed by a
customer is over 90 days from invoice,
then the entire account is ineligible;
- That portion of Mass Market accounts in
excess of $100,000;
- Accounts with offsetting accounts payable
(contra accounts);
- U.S. government accounts;
- Accounts for bartered services;
Unless approved by NBCI in writing, that
portion of an account that exceeds 15% of
total accounts receivable (concentration
accounts).
- Foreign accounts (excluding Canada) without
foreign receivable credit insurance or
backed by an acceptable letter or credit,
- Accounts for goods not as yet shipped
(prebillings), and
- Accounts to related parties.
Advances against inventory is capped at
$300,000.
NBCI reserves the right at any time and in
its sole discretion to redetermine
eligibility, advance rates, and
concentration limits.
MATURITY DATE: The termination date of the Facility is
8/21/00.
COLLATERAL: The Facility is secured by a first priority
interest in all accounts receivable,
inventory, general intangibles, and any
unencumbered machinery and equipment.
INTEREST RATES: The interest rate on the Facility is Norwest
Bank Minnesota's Base Rate plus 2.50% payable
monthly in arrears and calculated on the basis
of actual days elapsed in a year of 360 days.
The default rate of interest is 3.00% higher
than the rate stated above. Norwest Bank
Minnesota's Base Rate shall mean the rate of
interest publicly announced by Norwest Bank
Minnesota from time to time as its Base Rate
(currently 8.5%).
MINIMUM INTEREST: Provided the Facility has not been terminated,
there shall be a $15,000 minimum quarterly
interest charge.
UNUSED
COMMITMENT FEE: 1/4% per annum on the average amount of the
Facility not borrowed, payable monthly in
arrears.
TERMINATION FEE: If the Facility is refinanced prior to
expiration, there shall be a 3% prepayment fee
for the amount of the Facility during the first
year, 2% during the second year, and 1% during
the third year. The Termination Fee shall be
waived if the Facility is refinanced by a
Norwest Bank.
PERSONAL
GUARANTEES: None. However, in the event that NBCI comes
into possession of any of Borrower's Collateral
by reason of the occurrence of an event of
default, R. Lindsey Duncan must agree to assist
NBCI in the disposition of such Collateral.
LOCKBOX AND
COLLATERAL
ACCOUNT: Borrower's receivable collections shall be
remitted to a lockbox. Proceeds of the
lockbox, including cash receipts and
collections received outside of the lockbox,
shall be deposited daily into a "cash
collateral account" owned by NBCI. After
allowing two days for collection and one day
for processing, the funds shall be applied
to the Facility.
QUARTERLY
COLLATERAL
AUDITS AND
OTHER EXPENSES: All costs incurred by NBCI for its initial due
diligence audit and subsequent quarterly field
examinations will be billed on an hourly basis
per analyst (currently, $60 per hour) plus
actual out-of-pocket expenses. On each
anniversary of the Facility, NBCI will
determine the maximum amount that Borrower will
be charged for quarterly field examinations
provided there is no event of default.
In addition to collateral audits, Borrower
shall be responsible for any and all reasonable
expenses of NBCI, including without limitation,
legal fees and expenses, lockbox costs, fees
for the wiring of loan advances ($15 per
advance), and the costs for any subsequent
amendments or documentation.
FACILITY
DORMANCY: Minimum quarterly interest will be reduced from
$15,000 to $3,750 if Borrower provides 30 days
advance notice that the Facility is expected to
remain dormant (at zero balance) for an
extended period of time. While the Facility is
dormant, collateral audits will not be
performed and lockbox collections will be
remitted directly to Borrowers operating
account. To reactivate the Facility, Borrower
will be required to give NBCI at least 30 days
notice to perform an updated collateral audit
prior to funding.
COLLATERAL
AND FINANCIAL
REPORTING: Collateral and financial reporting shall be
required, but not limited to the following:
a. Weekly (or more frequently if necessary)
reporting of sales, credit memos, and
collections along with a Borrowing Base
reconciliation report;
b. Monthly:
1. Receivable aging accompanied with a
calculation of accounts receivable
ineligibility due by the 15th of each
month;
2. Inventory report accompanied with a
calculation of inventory ineligibility
due by the 15th of each month;
3. Accounts payable aging due by the 15th
of each month; and
4. Internally prepared financial
statements of Borrower along with a
covenant compliance report due by the
20th of each month.
c. Annually:
1. Audited financial statements within 90
days of fiscal year end; and
2. Next year's monthly financial
projections prepared 30 days prior to
Borrower's next fiscal year.
d. When prepared, quarterly SEC filings and
any notices to shareholders.
FINANCIAL
COVENANTS: It is contemplated that the following financial
covenants for fiscal 1997 and 1998 will appear
Borrower's loan agreement with NBCI, which
covenants may change if there is a material
misrepresentation in Borrower's financial
reporting which is discovered in the course of
performing our initial due diligence, or if
there are changes in Borrower's financial
projections as presented to NBCI, or if there
is a prior period adjustment after the Facility
closes. (Financial covenants for fiscal years
after 1998 will be set annually for the
upcoming fiscal year).
1. Capital Expenditure Covenant: Limited to
$50,000 per year.
2. Stop Loss Covenant. Total accumulative
year to date losses for fiscal 1997
(excluding any extraordinary gains) shall
not exceed:
$2,000,000 by September 30, 1997
$2,750,000 by December 31, 1997
3. Minimum Profitability. Total accumulative
profitability for fiscal 1998 shall not be
less than:
$50,000 by March 31, 1998
$100,000 by June 30, 1998
$250,000 by September 30, 1998
$300,000 by December 31, 1998
4. Minimum Monthly Net Worth Covenant. Not
less than:
$4,550,000 through September 30, 1997
$3,800,000 from October 1, 1997 to
December 31, 1998
$3,800,000 from January 1, 1998 to
March 31, 1998
$3,850,000 from April 1, 1997 to
June 30, 1998
$3,900,000 from July 1, 1997 to
September 30, 1998
$4,050,000 from October 1, 1997 to
December 30, 1998
$4,100,000 after December 31, 1999
NORWEST BUSINESS CREDIT, INC.
/s/ Tony S. Lee
Tony S. Lee
Banking Officer
