<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1998
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 Identification 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 May 11, 1998 was 12,003,108.
<PAGE>
4Health, Inc.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 1998 and
December 31, 1997................................................. 3
Condensed Statements of Operations for Three Months Ended
March 31, 1998 and 1997...................................... 4
Condensed Statements of Cash Flows for Three Months Ended
March 31, 1998 and 1997...................................... 5
Notes to Condensed Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
Item 5. Other Information............................................ 12
Item 6. Exhibits and Reports on Form 8-K............................ 13
SIGNATURES.................................................. 16
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 APRIL 15, 1998 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.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4Health, Inc.
Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
------------------- -------------------
1998 1997
------------------- -------------------
ASSETS (Restated)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 313,817 $ 109,787
Accounts receivable, net 1,497,082 1,609,692
Inventories 1,649,032 1,329,223
Deferred tax asset 160,425 225,506
Other assets 118,343 109,893
Notes receivable, net 44,378 34,817
------------------- -------------------
Total current assets 3,783,077 3,418,918
PROPERTY AND EQUIPMENT, NET 2,238,230 2,295,707
OTHER ASSETS, NET 572,727 570,152
DEFERRED TAX ASSET 56,365 -
NOTES RECEIVABLE 68,502 78,063
------------------- -------------------
Total assets $ 6,718,901 $ 6,362,840
------------------- -------------------
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,253,278 $ 698,310
Accrued interest payable 5,000 -
Accrued liabilities 389,877 360,454
Taxes payable 41,991 60,587
Notes payable 30,066 29,454
Line of credit 441,073 740,797
------------------- -------------------
Total current liabilities 2,161,285 1,889,602
DEFERRED TAXES - 42,376
NOTES PAYABLE 1,289,830 1,297,629
------------------- -------------------
Total liabilities 3,451,115 3,229,607
STOCKHOLDERS' EQUITY
Common stock 119,790 119,779
Additional paid in capital - common stock 11,413,205 11,408,576
Additional paid in capital - common warrants 372,059 275,000
Treasury stock (50,000) (50,000)
Accumulated deficit (8,587,268) (8,620,122)
------------------- -------------------
Total stockholders' equity 3,267,786 3,133,233
------------------- -------------------
Total liabilities and stockholders' equity $ 6,718,901 $ 6,362,840
------------------- -------------------
------------------- -------------------
</TABLE>
See notes to condensed financial statements
3
<PAGE>
4Health, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1998 1997
--------------- ----------------
(Restated)
<S> <C> <C>
Net Sales $ 3,459,406 $ 3,371,803
Cost of goods sold 1,476,836 2,049,486
--------------- ----------------
Gross margin 1,982,570 1,322,317
Operating Expenses
Sales and marketing 1,169,409 1,727,925
Research and development 72,519 173,803
General and administrative 734,399 828,390
--------------- ----------------
Total operating expenses 1,976,327 2,730,118
--------------- ----------------
Net income from operations 6,243 (1,407,801)
Other (expense) income, net (6,949) 22,317
--------------- ----------------
Net income (loss) before income taxes (706) (1,385,484)
Income tax benefit 33,560 141,378
--------------- ----------------
NET INCOME (LOSS) $ 32,854 $ (1,244,106)
--------------- ----------------
--------------- ----------------
Net income (loss) per common share - basic and diluted $ - $ (.11)
--------------- ----------------
--------------- ----------------
Weighted average shares outstanding - basic 11,978,439 11,374,500
--------------- ----------------
--------------- ----------------
Weighted average shares outstanding - diluted 12,109,944 11,374,500
--------------- ----------------
--------------- ----------------
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
4Health, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1997
-------------- --------------
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 32,854 $ 1,244,106)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 66,744 147,123
Bad debt expense 8,151 -
Loss on disposal of assets 679 1,719
Issuance of warrants 97,059 -
Increase (decrease) in:
Accounts receivable 104,459 (318,701)
Inventory (319,809) 1,184,238
Prepaid expenses and other assets (20,972) (510,933)
Deferred income tax assets 8,716 (28,406)
(Increase) decrease in:
Accounts payable 554,968 436,740
Accrued interest payable (8,403) -
Accrued liabilities 42,826 (212,214)
Taxes payable (18,596) (35,938)
Deferred income tax liability (42,376) (113,072)
-------------- --------------
Net cash provided by (used in) operating activities 506,300 (693,550)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (63,727)
-------------- --------------
Net cash used in investing activities - (63,727)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock 4,640 45,000
Borrowings on short-term debt 2,674,488 -
Repayments on short-term borrowings (2,974,211) -
Repayments on long-term borrowings (7,187) 51,508
Repayments on capital leases - (2,619)
-------------- --------------
Net cash (used in) provided by financing activities (302,270) 93,889
-------------- --------------
NET INCREASE (DECREASE) IN CASH 204,030 (663,388)
CASH AND CASH EQUIVALENTS, at beginning of period 109,787 1,086,168
-------------- --------------
CASH AND CASH EQUIVALENTS, at end of period $ 313,817 $ 422,780
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
4Health, Inc.
Notes to Condensed Financial Statements
March 31, 1998
(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 three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Form
10-K dated April 15, 1998 and the Company's Proxy Statement expected to be filed
in May of 1998.
Note 2:
Restatement
The Company's balance sheets as of December 31, 1997 and 1996 and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1997 have been restated
effective July 15, 1996. The restatement is a result of the Securities and
Exchange Commission's review of the Company's proxy materials related to the
merger with Irwin Naturals (See Note 3). The restatement affects the accounting
treatment of the purchase price recorded for the Surgical acquisition in July
1996. In connection therewith, the Company increased the intangible asset
values recorded for the Surgical acquisition by $3,042,000. The remaining
intangible assets of $3,202,000 were then written down in 1997 because the
continuing Surgical operations did not generated sufficient revenue to justify
continuing such valuation. The restatement also included an adjustment to write
down inventory by $758,000 in connection with the exchange for barter credits in
1997. These write downs were considered corrections of errors and the affected
financial reporting periods were restated. The restatement was a non-cash
charge against earnings and does not reflect an adverse change in the Company's
cash flow previously reported. The accounts affected by the restatement are as
follows:
6
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------
As of December 31, 1997
--------------------------------------
Previously As
Reported Restated
------------------- ----------------
<S> <C> <C>
Other assets, net $ 1,317,350 $ 680,045
Deferred tax liability 5,638 42,376
Additional paid-in capital -
common stock 7,904,884 11,408,576
Retained deficit (4,442,387) (8,620,122)
<CAPTION>
--------------------------------------
For the quarter ended March 31, 1997
--------------------------------------
Previously As
Reported Restated
------------------- ----------------
<S> <C> <C>
Net sales $ 3,795,953 $ 3,371,803
Cost of goods sold 1,715,328 2,049,486
General and administrative
expenses 769,083 828,390
The restatement decreased beginning of the year retained earnings by $61,000.
The effect on net income and related per share amounts is as follows:
<CAPTION>
--------------------------------------
For the quarter ended March 31, 1997
--------------------------------------
Previously As
Reported Restated
------------------- ----------------
<S> <C> <C>
Net loss before income tax
benefit $ (567,869) $ (1,385,484)
Net loss (426,491) (1,244,106)
Net loss per common share -
basic and diluted $ (.04) $ (.11)
</TABLE>
Note 3:
Merger Agreement
On January 7, 1998 4Health, Inc. entered into a merger agreement (the
"Merger Agreement") with Irwin Naturals, a privately held California corporation
also engaged in the nutritional supplement business. The Merger Agreement was
amended and restated on April 2, 1998. The merger transaction is conditioned
upon both companies satisfying certain conditions as specified in the agreement
including the approval of the method of accounting for the transaction, the
receipt of shareholder approval of the merger, and the satisfaction of other
customary conditions.
7
<PAGE>
Note 4:
Earnings Per Share
Effective December 15, 1997, the Company has adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share." SFAS No. 128 requires entities to present both Basic Earnings Per Share
("EPS") and Diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common stock outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
<TABLE>
<CAPTION>
Three months ended March 31,
(in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------------------
Per Per
Income Shares Share Loss Shares Share
------------ ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) income $ 33 11,978 $ (1,244 ) 11,375
Basic EPS $ - $ (.11 )
----------- -----------
----------- -----------
Effect of diluted securities:
Stock options outstanding 132
-----------------------------------------------------------------------------------------------
Net income (loss) $ 33 12,110 $ (1,244 ) 11,375
----------- ------------ -------------- -----------
----------- ------------ -------------- -----------
Diluted EPS $ - $ (.11 )
----------- -----------
----------- -----------
</TABLE>
Assumed conversions were not included in the calculation for diluted EPS in 1997
as they would have been anti-dilutive.
Note 5:
Comprehensive Income
Effective for fiscal years beginning after December 15, 1997, the Company
implemented Statement of Financial Accounting Standards ("SFAS") No. 130
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income and net income as
reported is the same for the three months ended March 31, 1998 and 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SEE THE DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS ABOVE.
8
<PAGE>
Results of Operations
COMPARISON OF FIRST QUARTER 1998 TO 1997
Net sales for all company brands for the three months ended March 31, 1998,
increased $87 thousand, or 2.6%, to $3.5 million from $3.4 million compared to
the same period a year ago. The increase in overall net sales for the first
quarter of 1998 as compared to the same quarter in 1997 was due to an increase
in the Nature's Secret-Registered Trademark- brand sales of $436 thousand. The
increase in the Nature's Secret brand net sales was offset by a decrease in net
sale in 1998 in the 4Health-TM- brand of $244 thousand and in the International
division of $101 thousand. The decrease in 4Health brand sales can be
attributed to a large initial sale to a new mass market account in 1997.
International net sales decreased due to a drop-off in sales to the largest
international account.
Excluding a $236 thousand adjustment in 1997 to decrease the sales reserve
upon settlement of litigation, overall net sales for the first quarter ending
March 31, 1998 as compared to the same period in 1997 increased $323 thousand,
or 10.3%. After excluding the effect of the sales reserve adjustment from the
Nature's Secret brand activity, net sales were actually up 30%, or $672 thousand
for the three months ending March 31, 1998 as compared to the same period in
1997. This increase in the first quarter of this year is due to the success of
a new advertising campaign and the successful introduction of new products.
Management expects this trend to continue and be further enhanced by the
introduction of new products throughout 1998. The Harmony Formulas-Registered
Trademark- brand net sales remained relatively stable as compared to the same
period a year ago and management expects this trend to also continue.
Gross profit increased 50% to $2 million for the quarter ending March 31,
1998, from $1.3 million for the same period in 1997. However, in 1997 cost of
goods sold includes a write-down of $758 thousand resulting from inventory being
exchanged for barter credits. Excluding the net effect of the $758 thousand
inventory write-down and the gross profit impact of $183 thousand from the sales
reserve adjustment in 1997, gross profit actually increased by 5% from $1.9
million for the three months ending March 31, 1997 to $2 million for the three
months ending March 31, 1998 due to the increase in sales of Nature's Secret
products.
The gross profit margin increased by 18%, to 57.3%, in the three months
ending March 31, 1998 from 39.2% in the same period a year ago. The net effect
of the $758 thousand inventory write-down and of sales reserve adjustments
totaling $183 thousand in the first three months of 1997 reduced this 1997 gross
profit margin by 21.3%. Excluding these two unusual transactions the core
business profit margin decreased 3.2% to 57.3% for the first quarter ending
March 31, 1998 from 60.5% for the same period in 1997. Management attributed
this decrease in gross profit margin mainly to a 1.8% increase in shipping costs
and 1.1% to costs related to new packaging. The profit margin on product
remained stable for the first quarter of 1998 compared to the same period in
1997.
Total operating expenses for the quarter ending March 31, 1998 decreased
$754 thousand, or 27.6%, to $2 million from $2.7 million for the same quarter in
1997. After
9
<PAGE>
excluding costs related to the proposed merger of $120 thousand in 1998, ongoing
operational costs actually decreased $874 thousand, or 32%. Decreased marketing
expenses of $592 thousand made up the majority of the operating expense
reduction, decreasing from $1.2 million in the first three months of 1997 to
$595 thousand in the same period in 1998, a 49.9% reduction in costs.
Management attributes this decrease to a reduction in expenses for national
advertising agency fees and other related advertising development costs,
marketing related travel costs and Company marketing personnel costs. The
Company's research and development department decreased spending $101 thousand
in the three months ending March 31, 1998 as compared to the same period of 1997
by eliminating clinical studies projects, reducing R & D legal costs and cutting
R & D salaries and related expenses. Sales expenses increase $33 thousand, or
6.2%, in the first quarter of 1998 to $575 thousand as compared to $542 thousand
in the first quarter of 1997. A reclassification of co-op advertising costs
from marketing in 1997 to a sales expense in 1998 caused this increase.
Excluding that $59 thousand of co-op advertising from 1998 first quarter sales
expenses, sales expenses for the first three months of 1998 actually decreased
by $26 thousand when compared to the same period in 1997.
Interest expense increased 33% to $35 thousand in the first quarter 1998
from $27 thousand in the first quarter 1997. The reason for this increase was
the utilization of the Company's line of credit in 1998. Interest income
decreased 84% to $4 thousand in the three months ending March 31, 1998 from $26
thousand during the same period in 1997. This decrease was due to the average
balance of cash and cash equivalents available for investment in the first
quarter of 1998 being less than during the same period a year earlier.
A benefit for income taxes of $34 thousand was recorded as a result of
changes in the deferred tax asset account. The increase in the deferred tax
asset account was primarily related to differences in the book vs. tax treatment
of consulting expenses related to the issuance of stock warrants.
The Company reported a net income of $33 thousand, or $.003 per share, for
the three months ended March 31, 1998 compared to net loss of $1.2 million, or
($.11) per share, for the three months ended March 31, 1997.
Liquidity and Capital Resources
The Company's cash and cash equivalents position increased $204 thousand at
March 31, 1998 to $313 thousand as compared to $109 thousand at December 31,
1997. The growth was due to an increase in open payables related to increased
inventory purchases and a decrease in accounts receivable caused by a reduction
in non-trade receivables. The Company invests it's cash in an interest bearing
money market account. As of March 31, 1998, the Company had working capital of
$1.6 million with a 1.8 to 1 working capital ratio.
Accounts receivable totaled $1.5 million at March 31, 1998 as compared to
$1.6 million on December 31, 1997, a reduction of $113 thousand, or 7%, despite
an increase in overall sales. The increased sales related to the Nature's
Secret brand, which have a shorter collection cycle than the 4Health brand,
caused a reduction in the average collections cycle as
10
<PAGE>
compared to December 31, 1997. The largest portion of the decrease in customer
receivables can be attributed to a $43 thousand reduction in amounts owed for
4Health brand customer receivables. Nature's Secret brand and the International
division receivables remained relatively stable.
Inventories were valued at $1.6 million at March 31, 1998 as compared to
$1.3 million at December 31, 1997, which represents 24% increase, or $.3
million. Inventory levels have been increased to support the level of sales
projected for the second quarter of 1998.
Capital expenditures for the first three months of 1998 were $0 as compared
to $65 thousand for the same period in 1997. Management has placed a temporary
hold on any capital spending pending the outcome of the proposed merger with
Irwin Naturals.
Other assets remained relatively stable at March 31, 1998 as compared to
December 31, 1997.
Accounts payable and accrued liabilities increased $.6 million to $1.6
million from $1 million. This increase is primarily related to amounts due
suppliers for the increased inventory purchases and accounting and legal fees
related to the pending merger. The increase partially resulted from a reduction
of $300 thousand in the balance of the Company's line of credit with Norwest
Business Credit, Inc. The March 31, 1998 balance of the line of credit was $441
thousand. Improved cash flows that resulted form increased sales in the first
quarter of 1998 also contributed to the Company's ability to reduce the line of
credit balance. Additional borrowing capacity on the revolving line of credit
at March 31, 1998 was $756 thousand.
The Company has generated an overall positive cash flow of $204 thousand
for the first three months of 1998 as compared to a negative cash flow of $663
thousand for the same period in 1997. Cash generated by operations for the
first quarter of 1998 was $506 thousand, while during the first quarter of 1997,
Company operations used $694 thousand of cash, a $1.2 million improvement. The
majority of this improvement is due to the successful effort of management to
bring operating and marketing costs in line with sales levels and developing
more effective but cost efficient advertising promotions resulting in a
reduction of operating costs of $754 thousand. For the first three months of
1998 a reduction in accounts receivable of $104 thousand added to the positive
cash flow, while in 1997 an increase in receivables reduced cash flow by $319
thousand. In the first three months of 1998, the Company has utilized line of
credit funds of approximately $300 thousand to finance the purchase of inventory
while no such financing was utilized in the same period in 1997.
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 expansion of sales and marketing efforts, costs associated
with entering into new channels of distribution, and the status of competitive
products.
In January 1998, the Company entered into a merger agreement with Irwin
Naturals, a company also engaged in the nutritional supplement business. The
Company expects the
11
<PAGE>
anticipated merger to substantially increase its revenue stream and its cash
flow generated from operations with minimal additional cost.
Management believes that its working capital and borrowing capacity will be
sufficient to satisfy anticipated sales growth and operating requirements over
the next 12 months. Nonetheless, the Company continues to explore sources of
additional capital for future needs. There can be no assurance, however, that
the Company will not require additional financing earlier than anticipated or
that any additional financing will be available at an 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 1. Legal Proceedings
From time to time the Company is a party to legal proceedings that it
considers routine litigation incidental to its business. Management believes
that the likely outcome of such litigation will not have a material adverse
effect on 4Health's business or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the first
quarter ended March 31, 1998.
Item 5. Other Information
In mid-1997, the Company began a search for a strategic partner. 4Health
management believed that the Company's lack of experience in the food, drug and
mass market was limiting its future sales growth and reducing the Company's
ability to generate significant economies of scale with respect to the cost of
goods sold. As a result of this search, 4Health agreed to merge with Irwin
Naturals, a California corporation ("IN"). The Company chose IN as a strategic
partner because of IN's significant international and mass market sales in
comparison to other potential partners. The merger with IN was on going during
the quarter ended March 31, 1998 and is expected to close in June of 1998.
On October 13, 1997, 4Health and IN entered into a letter of intent setting
forth the basic terms of the merger. On January 7, 1998, 4Health, IN and Klee
Irwin, president of IN, executed a merger agreement, dated as of December 24,
1997 and amended and restated on April 2, 1998 (the "Merger Agreement"),
providing for the merger of IN with and into 4Health (the "Merger"). The Merger
Agreement was approved by the board of directors of 4Health by their unanimous
consents dated January 7, 1998 and April 2, 1998. Under the Merger Agreement,
IN will be merged with and into 4Health, with the effect that IN will be
dissolved and 4Health will continue as the surviving corporate entity, with its
name changed to "Irwin Naturals/4Health, Inc."
12
<PAGE>
At the effective time of the Merger, all 65,250 shares of IN Common Stock
outstanding will be converted into an aggregate of 15,750,000 shares of 4Health
Common Stock (representing approximately 56.8% of the issued outstanding capital
stock of the surviving company) in accordance with the conversion ratio for the
Merger, which provides that 241.37931 shares of 4Health Common Stock will be
issued for each share of IN Common Stock outstanding at the Effective Time. As
part of the Merger, the articles of incorporation of 4Health will be amended to
(i) change its name to "Irwin Naturals/4Health, Inc.," (ii) increase the
authorization of 4Health Common Stock to 50,000,000 shares and (iii) adopt
various provisions regarding the composition of the board of directors, the
nominations for and the removal of directors and other management related
matters.
Item 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Item 2. Plan of Acquisition, Reorganization, Liquidation, or Succession
- ----------------------------------------------------------------------------------------------------------------------------------
2.01 2 Agreement and Plan of Merger dated April 10, 1996, by and between 4health, Inc., and Incorporated by
Surgical Technologies, Inc. as amended June 4, 1996 Reference (6)
2.02 2 Asset Purchase Agreement dated November 30, 1995, by and between Microtek Medical, Incorporated by
Inc., and Surgical Technologies, Inc. Reference (5)
2.03 2 Acquisition Agreement dated effective January 1, 1996, by and between Rex Industries Incorporated by
Acquisition Corporation and Rex Industries, Inc. Reference (5)
2.04 2 Amended and Restated Agreement and Plan of Merger dated December 24, 1997, signed Incorporated by
January 7, 1998, by and between 4Health, Inc. and Irwin Naturals as amended April 2, Reference (1)
1998.
Item 3. Articles of Incorporation and Bylaws
- ----------------------------------------------------------------------------------------------------------------------------------
3.01 3 Articles of Incorporation of Surgical Subsidiary, Inc., a Utah Corporation now known Incorporated by
as Surgical Technologies, Inc. Reference (8)
3.02 3 Articles of Merger and related Plan of Merger Incorporated by
Reference (8)
3.03 3 Bylaws Incorporated by
Reference (8)
3.04 3 Articles of Merger and related Plan of Merger Incorporated by
Reference (6)
3.05 3 Form of Articles of Merger and related Plan of Merger Incorporated by
Reference (1)
13
<PAGE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Item 4. Instruments Defining the Rights of Security Holders
- ----------------------------------------------------------------------------------------------------------------------------------
4.01 4 Form of Warrant Agreement between 4Health, Inc. and Zions First National Bank with Incorporated by
related form of Warrant Reference (6)
4.02 4 Form of Sale Restriction Agreement respecting shareholders of both Surgical Incorporated by
Technologies, Inc., and 4Health, Inc. Reference (6)
4.03 4 Form of Consent, Approval, and Irrevocable Proxy respecting certain Surgical Incorporated by
stockholders with related schedule Reference (6)
4.04 4 Form of Consent, Approval, and Irrevocable Proxy respecting certain 4Health Incorporated by
stockholders with related schedule Reference (6)
4.05 4 Specimen Common Stock Certificate Incorporated by
Reference (6)
4.06 4 Specimen Warrant Certificate Incorporated by
Reference (6)
4.07 4 Warrant certificates between 4Health and Allen & Company Incorporated dated April 15, Incorporated by
1997 Reference (10)
Item 5. Other Items
- ----------------------------------------------------------------------------------------------------------------------------------
5.01 5 Summary of Revolving Line of Credit Agreement between 4Health and Norwest Business Incorporated by
Credit, Inc. Reference (2)
Item 10. Material Contracts
- ----------------------------------------------------------------------------------------------------------------------------------
10.01 10 Form of Directors' Options Incorporated by
Reference (5)*
10.02 10 Stock Option and Stock Award Plan Incorporated by
Reference (5)*
10.03 10 1991 Directors' Stock Option Plan Incorporated by
Reference (5)*
10.04 10 Directors' Stock Option Plan Incorporated by
Reference (7)*
10.05 10 Technology Purchase Agreement between Ellis E. Williams, Professional Medical, Inc., Incorporated by
and Surgical Technologies, Inc., dated February 4, 1993 Reference (8)
10.06 10 Patent Cross-License Agreement between Utah Medical Products, Inc., and Professional Incorporated by
Medical, Inc., dated February 9, 1993 Reference (9)
10.07 10 Form of Promissory Note in the amount of $1,000,000 payable to First Interstate Bank, Incorporated by
dated August 16, 1994 Reference (9)
14
<PAGE>
<CAPTION>
SEC
Exhibit Reference
Number Number Title of Document Location
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.08 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Security Incorporated by
Agreement, and Fixture Filing, dated April 8, 1994, in the principal amount of Reference (8)
$1,000,000 due Standard Insurance Company
10.09 10 Stock Purchase Agreement dated May 6, 1994, between Surgical Technologies, Inc., and Incorporated by
Benitex, A.G. Reference (8)
10.10 10 Real Estate Contract dated February 2, 1994, between Surgical Technologies, Inc. and Incorporated by
Rex Crosland related to the facilities at 2801 South Decker Lake Lane, Salt Lake Reference (8)
City, Utah
10.11 10 Asset Purchase Agreement between Milwaukee Acquisition Company, Insulation Incorporated by
Distributors, Inc., and Surgical Technologies, Inc., effective September 30, 1993 Reference (8)
10.12 10 All-Inclusive Promissory Note and related All-Inclusive Trust Deed, relating to sale Incorporated by
of building and property, dated March 31, 1995, in the principal amount of Reference (9)
$981,375.32
10.13 10 1996 Long-Term Stock Incentive Plan Incorporated by
Reference (6)
10.14 10 Form of $2.00 option granted to Surgical directors, officers, and employees with Incorporated by
related schedule Reference (6)*
10.15 10 Form of Option granted to Todd B. Crosland Incorporated by
Reference (6)*
10.16 10 Form of Option granted to Rockwell D. Schutjer Incorporated by
Reference (6)*
10.17 10 Form of Proprietary Information, Inventions, and Non-Competition Agreement between Incorporated by
4Health and R. Lindsey Duncan Reference (6)
10.18 10 Form of Employment Agreement between the Surviving Corporation and Rockwell D. Incorporated by
Schutjer Reference (6)*
10.19 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Security Incorporated by
Agreement, and Fixture Filing, dated February 20, 1997, in the principal amount of Reference (4)
$1,350,000 due Standard Insurance Company
10.20 10 Form of Non-Negotiable Promissory Note Incorporated by
Reference (1)
Item 20. Other Documents or Statements to Security Holders
- ----------------------------------------------------------------------------------------------------------------------------------
20.01 20 Notice of change of transfer and warrant agent. Incorporated by
Reference (3)
Item 27. Financial Data Schedule
- ----------------------------------------------------------------------------------------------------------------------------------
27.01 27 Financial Data Schedule This Filing
</TABLE>
15
<PAGE>
- -------------------------
(1) Incorporated by reference from 4Health's report on Form 10-K for the
year ended December 31, 1997.
(2) Incorporated by reference from 4Health's report on Form 10-Q for the
quarter ended September 30, 1997.
(3) Incorporated by reference from 4Health's report on Form 10-Q for the
quarter ended March 31, 1997.
(4) Incorporated by reference from 4Health's report on Form 10-K for the
year ended December 31, 1996.
(5) Incorporated by reference from Surgical's registration statement on
Form S-1 filed with the Commission, SEC file number 33-31863.
(6) Incorporate by reference from Surgical's registration statement on
Form S-4 filed with the Commission, SEC file number 33-03243.
(7) Incorporated by reference from Surgical's report on Form 10-K for the
year ended March 31, 1992.
(8) Incorporated by reference from Surgical's report on Form 10-K for the
year ended March 31, 1994.
(9) Incorporated by reference from Surgical's report on Form 10-Q for the
quarter ended December 31, 1995.
(10) 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: May 15, 1998 By: /s/ R. LINDSEY DUNCAN
---------------------------------------
R. Lindsey Duncan
President and Chief Executive
Officer
Dated: May 15, 1998 By: /s/ SCOTT W. LUSK
---------------------------------------
Scott W. Lusk
Director of Finance
16
<PAGE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 314
<SECURITIES> 0
<RECEIVABLES> 1,497
<ALLOWANCES> 0
<INVENTORY> 1,649
<CURRENT-ASSETS> 3,783
<PP&E> 2,238
<DEPRECIATION> 57
<TOTAL-ASSETS> 6,719
<CURRENT-LIABILITIES> 2,161
<BONDS> 1,290
0
0
<COMMON> 120
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,719
<SALES> 3,459
<TOTAL-REVENUES> 1,983
<CGS> 1,477
<TOTAL-COSTS> 3,453
<OTHER-EXPENSES> 7
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> (1)
<INCOME-TAX> (34)
<INCOME-CONTINUING> 33
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
</TABLE>
