<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Materials pursuant to Rule 240.14a-11(c) or Rule
14a-12
4HEALTH, INC.
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(Name of Registrant as Specified In Its Charter)
N/A
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(Name of Person(s) Filing Proxy Statement, if Other Than Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
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<PAGE>
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 annual meeting of
the stockholders of 4Health, Inc., a Utah corporation ("4Health"), will be held
on June 30, 1998, at 1:00 p.m., Pacific time, at 10549 West Jefferson Blvd.,
Culver City, CA 90232, to consider and take action upon the following matters:
1. Approval of an Amended and Restated Agreement and Plan of Merger
(the "Merger Agreement"), among 4Health, Irwin Naturals, a California
corporation ("IN"), and Mr. Klee Irwin, the Chief Executive Officer and a
principal stockholder of IN ("Irwin"), and the consummation of the
transactions contemplated thereby, pursuant to which IN will be merged with
and into 4Health (the "Merger") and, in connection therewith, the shares of
common stock, no par value, of IN ("IN Common 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 15,750,000 shares of the common stock, par value
$.01 per share, of 4Health ("4Health Common Stock"), with the effect that
each share of outstanding IN Common Stock will be converted into 241.37931
shares of 4Health Common Stock, subject to certain adjustments;
2. Subject to the consummation of the Merger, the election of
Messrs. R. Lindsey Duncan, Klee Irwin, Anthony Robbins, Clarke Keough and
Jonathan Diamond, to the Board of Directors of 4Health; and if the Merger
is not consummated for any reason, the re-election of Ms. Cheryl Wheeler to
the Board of Directors of 4Health;
3. Subject to the consummation of the Merger, the amendment of the
Articles of Incorporation and Bylaws of 4Health 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, nominations for and
removal of directors and other management related matters;
4. The ratification of Arthur Anderson LLP, independent public
accountants, as 4Health's independent auditors for the year 1998; and
5. To transact such other business as may properly come before the
meeting.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ABOVE
PROPOSALS, EACH OF WHICH IS DESCRIBED IN MORE DETAIL IN THE ACCOMPANYING PROXY
STATEMENT.
ONLY STOCKHOLDERS OF RECORD AS OF THE CLOSE OF BUSINESS ON MAY 26, 1998
(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 OR SUBMIT A PROXY.
By Order of the Board of Directors
Cheryl Wheeler, Secretary
Boulder, Colorado
June 19, 1998
<PAGE>
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TABLE OF CONTENTS
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INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
APPROVAL OF THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ELECTION OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
AMENDMENTS OF THE 4HEALTH ARTICLES OF INCORPORATION AND BYLAWS . . . . . . . .26
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS. . . . . . . . . . . .28
MARKET PRICE AND DIVIDEND POLICY FOR 4HEALTH COMMON STOCK. . . . . . . . . . .29
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS. . . . . . . . . .30
BUSINESS OF 4HEALTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
BUSINESS OF IN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48
BUSINESS OF THE SURVIVING CORPORATION FOLLOWING THE MERGER . . . . . . . . . .59
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . .60
MANAGEMENT OF THE SURVIVING CORPORATION. . . . . . . . . . . . . . . . . . . .61
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF 4HEALTH . . . .64
MANAGEMENT AND EXECUTIVE COMPENSATION OF 4HEALTH DURING 1997 . . . . . . . . .66
TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
INDEPENDENT ACCOUNTANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .71
OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
STOCKHOLDER PROPOSALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . F-1
INDEX TO APPENDICES
A. Amended and Restated Agreement and Plan of Merger
B. Form of Articles of Merger with Plan of Merger attached
<PAGE>
PROXY STATEMENT
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4HEALTH, INC.
5485 Conestoga Court
Boulder, Colorado 80301
Telephone (303) 546-6306
Telecopy: (303) 546-6416
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INTRODUCTION
This Proxy Statement (this "Proxy Statement") serves as a proxy statement
for the special meeting in lieu of annual meeting of the stockholders of
4Health, Inc., a Utah corporation ("4Health"), at which the stockholders of
4Health will consider (a) approval of an Amended and Restated Agreement and Plan
of Merger (the "Merger Agreement"), among 4Health, Irwin Naturals, a California
corporation ("IN"), and Mr. Klee Irwin, the Chief Executive Officer and,
together with his wife, the sole stockholders of IN ("Irwin"), and the
consummation of the transaction contemplated thereby, pursuant to which IN will
be merged with and into 4Health (the "Merger") and, in connection therewith, the
shares of common stock, no par value, of IN ("IN Common 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 15,750,000 shares of the common stock, par value $.01 per share, of
4Health ("4Health Common Stock"), with the effect that each share of outstanding
IN Common Stock will be converted into 241.37931 shares of 4Health Common Stock
(the "Conversion Ratio"),subject to adjustment in the event that the outstanding
shares of IN Common Stock or 4Health Common Stock are changed into a different
number or different class by way of stock dividend, stock split, combination,
recapitalization, subdivision, reclassification, conversion, or exchange of
shares prior to the Effective Time, (b) subject to the consummation of the
Merger, the election of Messrs. R. Lindsey Duncan, Klee Irwin, Anthony Robbins,
Clarke Keough and Jonathan Diamond to the Board of Directors of 4Health, and if
the Merger is not consummated for any reason, the re-election of Ms. Cheryl
Wheeler to the Board of Directors of 4Health, (c) subject to the consummation of
the Merger, the amendment of the Articles of Incorporation and Bylaws of 4Health
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,
nominations for and removal of directors and other management related matters,
and (d) the ratification of Arthur Anderson LLP, independent public accountants,
as 4Health's independent auditors for the year 1998.
THE COMPLETION OF THE MERGER INVOLVES CERTAIN RISKS. SEE "RISK FACTORS."
The 4Health Common Stock is traded on the NASDAQ National Market ("NSM")
under the symbol "HHHH." On June 12, 1998, the closing sales price for the
4Health Common Stock as reported by NSM was $6.75.
This Proxy Statement is first being provided to stockholders of 4Health on
or about June 19, 1998.
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Proxy Statement 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 Proxy Statement, including, without
limitation, those regarding 4Health's or the Surviving Corporation's financial
position, business, marketing and product introduction and development plans and
objectives of management for future operations, are forward-looking statements.
Although 4Health 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 4Health's expectations are
disclosed under "RISK FACTORS," "BUSINESS OF 4HEALTH -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
the Proxy Statement.
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1
<PAGE>
SUMMARY
THE FOLLOWING IS A BRIEF SUMMARY AND IS INTENDED MERELY TO HIGHLIGHT
CERTAIN INFORMATION INCLUDED IN THIS PROXY STATEMENT. THE SUMMARY IS INCOMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT. CAPITALIZED TERMS AND OTHER WORDS USED IN
THE SUMMARY HAVE THE MEANINGS SET FORTH ELSEWHERE AND UNDER THE CAPTION
"DEFINITIONS." SEE ALSO THE DISCUSSION ON PAGE 1 ENTITLED "DISCLOSURE REGARDING
FORWARD - LOOKING STATEMENTS."
THE PARTIES
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."
IN IN was organized in August 1995 and formulates and
distributes nutritional supplements through health
food stores, food, drug and mass retail channels and
internationally. See "BUSINESS OF IN."
THE MERGER The Merger Agreement provides for the merger of IN
with and into 4Health, as the surviving corporation
(the "Surviving Corporation"), pursuant to which:
(a) the shares of IN Common 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 15,750,000
shares of 4Health Common Stock, with the effect
that each share of outstanding IN Common Stock
will be converted into 241.37931 shares of 4Health
Stock ("Conversion Ratio") subject to the right of
Dissenting IN Stockholders to seek an appraisal of
the fair market value thereof as provided in
Section 1300 of the California Law and subject to
adjustment in the event that the outstanding
shares of IN Common Stock or 4Health Common Stock
are changed into a different number or different
class by way of stock dividend, stock split,
combination, recapitalization, subdivision,
reclassification, conversion, or exchange of
shares prior to the Effective Time. See "APPROVAL
OF THE MERGER";
(b) the Board of Directors of 4Health will
be reconstituted with Messrs. R. Lindsey Duncan,
Klee Irwin, Anthony Robbins, Clarke Keough and
Jonathan Diamond as the sole directors. See
"ELECTION OF DIRECTORS"; and
(c) the Articles of Incorporation and Bylaws
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) to adopt various
provisions regarding the composition of the Board
of Directors, nominations for director, removal of
directors and other management related matters.
See "AMENDMENTS OF THE 4HEALTH ARTICLES OF
INCORPORATION AND BYLAWS".
No fractional shares of 4Health Common Stock will be
issued to stockholders of IN, and the Conversion
Ratio shall be appropriately adjusted if necessary so
that only a maximum of 15,750,000 whole shares of
4Health Common Stock are issued in the Merger.
2
<PAGE>
The complete terms and conditions of the Merger are
set forth in the Merger Agreement, a copy of which is
included as Appendix "A" and incorporated herein by
this reference. See "APPROVAL OF THE MERGER."
MANAGEMENT OF THE
SURVIVING CORPORATION Following the Merger, the officers of the Surviving
Corporation shall be R. Lindsey Duncan, Chairman of
the Board and member of the Executive Committee, Klee
Irwin, President and Chief Executive Officer and
member of the Executive Committee, and, Dan Martin,
acting Chief Financial Officer, Treasurer and
Secretary, and the Board of Directors of the
Surviving Corporation will consist of Messrs. Duncan,
Irwin, Anthony Robbins, Clarke Keough and Jonathan
Diamond. See "MANAGEMENT OF THE SURVIVING
CORPORATION."
4HEALTH STOCKHOLDERS'
MEETING
RECORD DATE AND TIME Stockholders of record of 4Health Common Stock as of
the close of business on May 26, 1998 (the "4Health
Record Date"), are entitled to notice of, and to vote
at, the special meeting in lieu of an annual meeting
(the "4Health Stockholders' Meeting") of the 4Health
Stockholders to be held at 1:00 p.m., local time, on
June 30, 1998, at 10549 West Jefferson Blvd., Culver
City, CA.
PURPOSE OF SPECIAL At the 4Health Stockholders' Meeting, the 4Health
MEETING Stockholders will be asked to consider and take action
upon the following:
1. To approve the Merger Agreement and the
consummation of the transactions contemplated
thereby;
2. Subject to the consummation of the Merger,
the election of Messrs. R. Lindsey Duncan,
Klee Irwin, Anthony Robbins, Clarke Keough
and Jonathan Diamond, to the Board of
Directors of 4Health; and if the Merger is
not consummated for any reason, the
re-election of Ms. Cheryl Wheeler to the
Board of Directors of 4Health;
3. Subject to the consummation of the Merger,
the amendment of the Articles of
Incorporation and Bylaws of 4Health 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,
nominations for and removal of directors and
other management related matters;
4. The ratification of Arthur Anderson LLP,
independent public accountants, as 4Health's
independent auditors for the year 1998; and
5. The transaction of such other business as may
properly come before the meeting;
all as more particularly set forth in the official
Notice of Meeting accompanying this Proxy Statement.
VOTE AND QUORUM
REQUIRED The Merger and the amendments to the Articles of
Incorporation of 4Health must be approved by the
holders of a majority of the issued and outstanding
4Health Common Stock. Broker non-votes and
abstentions will be considered a vote against the
Merger. The election of directors must be approved
by a plurality of the votes cast at the 4Health
Stockholders' Meeting. Broker non-votes and
abstentions are not considered. The holders of
6,588,340 shares of 4Health Common Stock, or
approximately 55% of the issued and outstanding
4Health
3
<PAGE>
Common Stock, have orally indicated to officers of
4Health their intention to vote their shares in favor
of the Merger and the election of directors and the
amendments to the Articles of Incorporation of
4Health described above, and, provided 4Health
receives proxies from such individuals and
stockholders, no additional votes will be required.
The Bylaws of 4Health require that at least one-half
of the issued and outstanding 4Health Common Stock be
represented in person or by proxy at the 4Health
Stockholders' Meeting in order to constitute a quorum
for conducting business.
REPRESENTATIVE OF
ACCOUNTANTS It is anticipated that a representative of Arthur
Andersen LLP will be in attendance at the 4Health
Stockholders' Meeting to respond to appropriate
questions from the 4Health Stockholders and, if so
desired, to make a statement.
PRINCIPAL CONDITIONS The Merger is conditioned, among other matters, upon
the approval of the Merger Agreement by the holders
of the majority of the issued and outstanding 4Health
Common Stock and of the written consents of Mr. Irwin
and his wife as the sole stockholders of IN; 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 of letters from
the independent certified public accountants of both
4Health and IN containing certain negative assurances
respecting the financial condition of the respective
companies as of the Effective Time and confirming the
method of accounting for the Merger; the continued
listing of 4Health Common Stock on the NSM, and
certain other miscellaneous conditions. See
"APPROVAL OF THE MERGER -- Principal Conditions."
The Merger could be terminated even after approval by
the 4Health Stockholders and IN 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 IN or 4Health failing to
satisfy certain required conditions, under certain
circumstances the party failing to meet such
conditions shall pay the other party a fee of
$200,000, which shall include the other party's
costs.
Except for filing Merger documents with appropriate
state agencies and compliance with applicable
securities laws, no federal or state regulatory
requirements must be met as a condition to completion
of the Merger.
DISSENTERS' RIGHTS OF
APPRAISAL The Utah Revised Business Corporation Act does not
provide for dissenters' rights in connection with
shares that were listed on the NSM on the record date
fixed to determine the shareholders entitled to
receive notice of the meeting at which the
transaction is to be approved. Since the 4Health
Common Stock was listed on the NSM on the 4Health
Record Date, 4Health Stockholders will not be
entitled to any dissenters' rights in connection with
the Merger.
REASONS FOR THE MERGER
- The Merger should enable 4Health to expand its
current business.
- By virtue of the Merger, 4Health will acquire new,
and expand existing, channels of distribution.
4
<PAGE>
- 4Health and IN are complementary in their strengths,
with 4Health being particularly strong in clinically
supported product formulations, distribution through
health food stores, customer service, and research
and development, and with IN being particularly
strong in marketing, packaging, pricing and
distribution through the food, drug and mass market
channels of distribution, as well as in international
distribution.
- IN has experienced a significant rate of growth
within a relatively short period of operations and,
being substantially debt free, provides a solid
financial base and the prospect for strong income
growth from combined operations of the Surviving
Corporation.
- Since both IN and 4Health are in the same business,
certain economies of scale and efficiencies may be
expected by combining operations, and integrating the
operations of the two companies will not be unduly
difficult.
CONFLICTS OF INTEREST Substantial conflicts of interest were involved in
the determination of the terms of the Merger,
including the Conversion Ratio.
The terms of the Merger and the Conversion Ratio were
negotiated by management of IN and 4Health,
principally Klee Irwin and R. Lindsey Duncan, and
approved unanimously by their Boards of Directors.
At the Effective Time, the Surviving Corporation will
enter into new substantially similar three-year
employment agreements with Klee Irwin and R. Lindsey
Duncan, providing for annual base salaries of
$350,000 and $225,000, respectively, annual bonuses
and the right to participate in employee benefits.
Klee Irwin and R. Lindsey Duncan will be elected to
the Board of Directors of the Surviving Corporation.
4Health has not secured an independent appraisal of
IN or a fairness opinion. See "RISK FACTORS",
"APPROVAL OF THE MERGER -- Determination of Terms"
and "Conflicts of Interest" and "MANAGEMENT OF THE
SURVIVING CORPORATION - Employment Agreements."
COMPARATIVE HISTORICAL AND
PRO FORMA PER SHARE
INFORMATION The following table presents certain comparative per
share data of 4Health and IN 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 Proxy Statement.
5
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Equivalent
4Health IN Pro Forma --------------------
Historical Historical Combined IN(1)
---------- ---------- --------- -----
March 31, 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Book value per share of Common
Stock $0.27 $54.19 $0.19 $45.12
Cash dividends per share of Common
Stock None $4.92 $0.01 $2.79
Income (loss) per common share -
basic -$14.75 $0.04 $8.66
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash dividends per share of
Common Stock None $8.87 $0.02 $5.04
Income (loss) per common share-basic $(0.57) $17.58 $(0.20) $(48.36)
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash dividends per share of Common None None None None
Stock
Income (loss) per common share-basic $(0.26) $11.64 $(0.07) $(16.85)
<CAPTION>
December 31, 1995
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash dividends per share of Common None $2.55 $0.01 $1.64
Stock
Income (loss) per common share-basic $0.08 $1.81 $0.03 $8.16
</TABLE>
- -------------------------
(1) The IN pro forma equivalent information represents the amount attributable
to one share of IN Common Stock, based on the Conversion Ratio of
241.37931, I.E. the "Pro Forma Combined" amount multiplied by 241.37931.
- -------------------------
MARKET VALUE OF
4HEALTH COMMON STOCK The 4Health Common Stock is traded on the
over-the-counter market and is included in the NSM
under the symbol "HHHH." The following table sets
forth the closing sales price for the Common Stock,
as reported by NSM, as of the date preceding the
first public announcement of the proposed Merger,
October 13, 1997, and as of June 12, 1998,
immediately prior to the date of this Proxy
Statement.
<TABLE>
<CAPTION>
4Health Common Stock
Closing Sales Price
--------------------
<S> <C>
October 13, 1997 $5.0625
June 12, 1998 $6.75
</TABLE>
- --------------------
RISK FACTORS Completion of the Merger and the exchange of IN
Common Stock and for shares of 4Health Common Stock
is subject to certain risks (see "RISK FACTORS"),
including the following:
6
<PAGE>
- Conflicts of interest in the negotiation of the
transaction for certain directors of 4Health and
IN.
- No assurance of adequate value for the 4Health
Common Stock
- No assurance as to the trading market for the
4Health Common Stock
- Lack of an independent opinion regarding the
fairness of the terms of the Merger and the
Conversion Ratio
- Substantial and immediate dilution in book value
for the 4Health Stockholders
- Change in control of 4Health
- Potential adverse effect of the Conversion Ratio
on the market price for 4Health Stock
- Negative effects of the proposed amendments to the
Articles of Incorporation and Bylaws that will
govern the Surviving Corporation
- The risks associated with the recent organization
of the businesses of IN and 4Health
- Possible adverse consequences of changes in
governmental regulations concerning the Surviving
Corporation's products
- Risks associated with the planned expansion of the
Surviving Corporation's targeted markets
- The market concentration of the Surviving
Corporation's sales and reliance on certain major
customers
- Reliance of the Surviving Corporation on a limited
number of products
- Competition in the Surviving Corporation's area of
business
- Dependence on certain key members of the Surviving
Corporation's management, especially R. Lindsey
Duncan and Klee Irwin
- Lack of long-term contracts with 4Health's
manufacturers and distributors
- The Surviving Corporation's policy with respect to
returns and customer warranties
- Potential trademark infringements
- Year 2000 issue
VOTE REQUIRED FOR APPROVAL OF THE MERGER--
CONTROL BY OFFICERS AND DIRECTORS
4HEALTH Completion of the Merger is subject to approval by
the holders of a majority of the issued and
outstanding shares of 4Health Common Stock.
Directors, executive officers, and certain
stockholders of 4Health holding an aggregate of
6,588,340 shares, or approximately 55% of the shares
issued and outstanding, have indicated their
intention to vote in favor of the proposals to be
submitted to the stockholders for their
consideration, and, provided 4Health receives proxies
from such individuals and stockholders, the vote of
no other stockholders will be required to
7
<PAGE>
approve the Merger. Broker non-votes and abstentions
will be considered a vote against the Merger.
IN Completion of the Merger is subject to approval by
the holders of a majority of the issued and
outstanding IN Common Stock. Klee Irwin and his wife
hold an aggregate of 65,250 shares of IN Common
Stock, representing all of the shares of IN Common
Stock issued and outstanding. Mr. Irwin has approved
the Merger and has agreed to secure his wife's
consent thereto. Mr. Irwin has also waived any
dissenters' rights he may have under California law
and agreed to secure a similar waiver from his wife.
ACCOUNTING TREATMENT The Merger will be accounted for as a "pooling of
interests" by 4Health and IN. See "APPROVAL OF THE
MERGER -- Accounting for the Merger."
TAX CONSEQUENCES IN 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. See "TAX CONSEQUENCES."
4Health believes the Merger will qualify as a
tax-free reorganization under section 368(a) of the
Internal Revenue Code of 1986, as amended (the
"Code"), and 4Health 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 4Health on the completion of the
Merger.
RESTRICTIONS ON RESALE OF
4HEALTH COMMON STOCK No shares of 4Health Common Stock to be issued to
holders of IN Common Stock will be transferable
unless registered under the Securities Act, or unless
an exemption from the registration requirements of
the Securities Act is available, and the transferring
shareholder shall provide 4Health with an opinion of
counsel, reasonably acceptable to 4Health, to such
effect. Klee Irwin shall have the right to make up
to three demands of the Surviving Corporation to
register for resale the shares of 4Health Common
Stock issuable in the Merger under the Securities
Act. The Surviving Corporation will bear all of the
costs associated with the preparation and filing of
any such registration statement, including all filing
fees, legal, accounting and printing costs but shall
not be required to pay the legal or accounting costs
or underwriting fees and expenses, if any, incurred
by any former IN stockholder. See "APPROVAL OF THE
MERGER -- Restrictions on Transfer of 4Health Common
Stock."
8
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DEFINITIONS
- --------------------------------------------------------------------------------
As used in this Proxy Statement, the following terms have the meanings
indicated below:
CLOSING--The closing of the Merger, to occur 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 the Merger Agreement, or at such other
date, time and place as 4Health and IN may agree.
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.
CONVERSION RATIO--The ratio set forth in the Merger Agreement pursuant to
which each share of IN 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 241.37931 shares of 4Health Common Stock.
EFFECTIVE TIME--A date to be selected by 4Health and IN subsequent to
Closing and the satisfaction or waiver of all the conditions to the Merger set
forth in the Merger Agreement, on which the Merger of IN with and into 4Health
will be completed.
EXCHANGE ACT--The Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
4HEALTH COMMON STOCK--The common stock of 4Health, par value $0.01 per
share.
4HEALTH RECORD DATE--May 26, 1998, 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 annual
meeting of 4Health Stockholders to be held June 30, 1998, for the purpose of
voting on the Merger and other matters.
4HEALTH STOCKHOLDERS--The stockholders of record of 4Health.
LTSIP--The 4Health, Inc. 1996 Long-Term Stock Incentive Plan.
MERGER--The merger of IN with and into 4Health, with 4Health as the
Surviving Corporation.
MERGER AGREEMENT--The Amended and Restated Agreement and Plan of Merger
dated as of December 24, 1997, as amended and restated on April 2, 1998 and May
22, 1998, among 4Health, IN and Irwin.
NSM--The NASDAQ National Market.
SURVIVING CORPORATION--4Health, as the survivor of the Merger, will
continue in existence subsequent to the Effective Time under the name "Irwin
Naturals/4Health, Inc."
TRANSFER AGENT--American Securities Transfer & Trust, Inc. 938 Quail
Street, Suite 101, Lakewood, Colorado 80215. The telephone number of the
Transfer Agent is (303) 234-5300.
9
<PAGE>
- --------------------------------------------------------------------------------
RISK FACTORS
- --------------------------------------------------------------------------------
The Merger involves certain risks to 4Health Stockholders, who should
consider the following cautionary statements which describe all material risks
to 4Health Stockholders, in addition to any negative implications in the
materials set forth elsewhere in this Proxy Statement, in considering the
Merger. See also the discussion on page 1 entitled "Disclosure Regarding
Forward-Looking Statements."
RISKS RELATED TO THE MERGER
CONFLICTS OF INTEREST IN DETERMINING TERMS OF THE TRANSACTION
The terms of the transaction were determined through negotiations between
IN and 4Health management, including R. Lindsey Duncan and Klee Irwin. The
Surviving Corporation will enter into new substantially similar three-year
employment agreements with R. Lindsey Duncan and Klee Irwin that provide, among
other things, for annual base salaries of $225,000 and $350,000, respectively,
annual bonuses, as well as employee health and welfare benefits. As a result,
these individuals, both of whom comprise the managements of 4Health and IN, and
are the principal shareholders of 4Health and IN, respectively, were subject to
substantial conflicts of interest in negotiating the terms of the Merger.
Therefore, the determination of the Conversion Ratio and the other terms of the
Merger should not be considered the result of arm's length negotiation on behalf
of 4Health and IN. The terms of the Merger have been approved unanimously by
the Board of Directors of 4Health, including the non-employee director. See
"APPROVAL OF THE MERGER -- Determination of Terms" and "--Conflicts of
Interest."
CONVERSION RATIO; NO ASSURANCE OF VALUE OF 4HEALTH COMMON STOCK
The Conversion Ratio represents a determination merely for the purpose of
calculating the number of shares of 4Health Common Stock to be issued in
exchange for each outstanding share of IN Common Stock as of the Effective Time.
Such calculation does not, and is not intended to, reflect the value of IN,
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 IN Stockholders of the
4Health Common Stock received by them in the Merger. See "APPROVAL OF THE
MERGER -- Determination of Terms."
POTENTIAL LACK OF NSM TRADING MARKET FOR 4HEALTH COMMON STOCK
4Health's Common Stock is traded on NSM under the symbol "HHHH." 4Health
has applied to NSM to have the listing of the 4Health Common Stock on NSM
maintained following the Merger. There can be no assurance that 4Health's
request will be granted. If the 4Health Common Stock is not included on the NSM
system, 4Health believes that they will be included for trading on the Nasdaq
SmallCap-SM- Market. The lack of inclusion of the 4Health Common Stock on NSM
or any other recognized exchange may adversely affect the price and liquidity of
4Health Common Stock. IN's obligation to complete the Merger is conditioned on,
among other things, 4Health maintaining the NSM listing for the 4Health Common
Stock.
LACK OF AN APPRAISAL OR AN INDEPENDENT OPINION REGARDING FAIRNESS
4Health has not obtained an appraisal of the value of IN and neither
4Health nor IN has obtained an opinion from any qualified independent expert
regarding the fairness of the Merger from a financial point of view to either
4Health or IN or their respective stockholders.
SUBSTANTIAL AND IMMEDIATE DILUTION TO 4HEALTH STOCKHOLDERS
Dilution to the 4Health Stockholders following the Merger will result from
the difference between the net tangible book value of the 4Health Common Stock
prior to the Merger and the book value of the 4Health Common Stock following the
Merger, after giving effect to the Conversion Ratio. As of March 31, 1998,
4Health had a net tangible book value of $2,802,786, or approximately $0.23 per
share. On a pro forma basis after the Merger,
10
<PAGE>
assuming that no IN Stockholders exercise their dissenters' rights, the
Surviving Corporation will have a net tangible book value of $4,717,987, or
approximately $0.17 per share, or approximately a 26% decrease in net tangible
book value per share. See "PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
See "APPROVAL OF THE MERGER -- Dilution and Comparative Data."
The IN Stockholders following the Merger will also experience a decrease in
net tangible book value per share of the IN Common Stock prior to the Merger
relative to the net tangible book value per share of the 4Health Common Stock
following the Merger, after giving effect to the Conversion Ratio. As of March
31, 1998, IN had a net tangible book value attributable to the IN Common Stock
of $3,536,201, or approximately $54.19 per share. On a pro forma basis after
the Merger, assuming that no IN Stockholders exercise their dissenters' rights,
the Surviving Corporation would have a net tangible book value of $4,717,987, or
approximately $0.17 per share of 4Health Common Stock. Inasmuch as, in
accordance with the Conversion Ratio, each share of IN Common Stock will be
converted into 241.37931 shares of 4Health Common Stock, the IN Stockholders
immediately prior to the Effective Time will convert shares that had a net
tangible book value as of March 31, 1998, of $54.19 per share to 241.37931
shares of 4Health Common Stock with a pro forma combined net tangible book value
of $41.07 per share. See "APPROVAL OF THE MERGER -- Dilution and Comparative
Data."
CHANGE IN CONTROL OF 4HEALTH
The 4Health Stockholders who currently hold all of the issued and
outstanding 4Health Common Stock and who are entitled to elect directors and to
vote on such other actions presented to the 4Health Stockholders will, upon and
as a result of the Merger and the 4Health and IN Conversion Ratio, hold only
approximately 43% of the issued and outstanding common stock of the Surviving
Corporation and Klee Irwin and his wife Margarethe Irwin will jointly own
approximately 57% of the issued and outstanding common stock of the Surviving
Corporation. Consequently, the 4Health Stockholders will suffer a substantial
dilution to their voting power and, subject to certain restrictions embodied in
the proposed Amendments to the 4Health Articles of Incorporation and Bylaws,
Klee and Margarethe Irwin will acquire voting control of 4Health. See
"AMENDMENTS OF THE 4HEALTH ARTICLES OF INCORPORATION AND BYLAWS" herein and in
Appendix B attached hereto.
NEGATIVE EFFECTS OF CERTAIN PROPOSED AMENDMENTS TO THE ARTICLES OF
INCORPORATION AND BYLAWS
In connection with the Merger, 4Health will effect certain amendments to
its Articles of Incorporation and Bylaws which are set forth in greater detail
and discussed in "AMENDMENTS OF THE 4HEALTH ARTICLES OF INCORPORATION AND
BYLAWS" herein and Appendix B attached hereto. These provisions may have
significant effects on the ability of the stockholders of the Surviving
Corporation to change the composition of the incumbent Board of Directors.
Accordingly, such provisions may discourage certain types of transactions that
involve an actual or threatened change of control of the Surviving Corporation
by making it more difficult and time-consuming to change majority control of the
Board of Directors. This, in turn, may reduce the possibility of success of
unsolicited offers to acquire the Surviving Corporation and, in such
circumstances, may deprive stockholders of obtaining a premium for their shares.
POTENTIAL DILUTION TO 4HEALTH STOCKHOLDERS DUE TO 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 50,000,000 shares of Common Stock, of which 27,753,484
shares will be issued and outstanding, 748,203 will be reserved for issuance on
the exercise of outstanding options, and 1,250,000 shares will be reserved for
issuance on the potential exercise of outstanding warrants. Accordingly, the
Surviving Corporation will have 5,000,000 shares of Preferred Stock and
20,248,313 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 4Health Common Stock on the NSM, if
such shares are then listed on the NSM. 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,
11
<PAGE>
merger, or similar transaction would increase the number of 4Health's
outstanding shares of common stock and thereby could dilute the proportionate
interest of a party attempting to gain control of 4Health.
RISKS RELATED TO THE BUSINESS OF THE SURVIVING CORPORATION
LIMITED OPERATING HISTORY
Since 4Health was organized in February 1993 and IN was organized in August
1995, each of them has introduced a number of its products and established
initial marketing outlets through health food stores; health care providers;
food, drug and mass market channels of distribution as well as internationally.
These activities, to be conducted by the Surviving Corporation following the
Merger, are anticipated to be expanded substantially, utilizing in part the
capital provided by IN in the Merger to expand current distribution channels,
introduce new products, enter new markets, and in general to expand the
Surviving Corporation's 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 and IN have each been successful in expanding
their respective markets and distributors to date, both of them have been in
operation for a limited amount of time, and there can be no assurance that the
Surviving Corporation will be able to successfully continue to expand in the
future. Further, there can be no assurance that expenditures of funds to expand
current distribution channels, introduce new products, enter new markets, and in
general to expand the Surviving Corporation's activities and operations, will be
successful in generating incremental profitable revenue.
DIFFICULTY OF STRICT COMPLIANCE WITH GOVERNMENTAL REGULATION
The processing, formulation, packaging, labeling and advertising of
4Health's and IN's products are subject to regulation by more than one federal
agency. Congress has 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 limits the jurisdiction of the Food and
Drug Administration (the "FDA") in regulating dietary supplements. Further,
because of the broad language of certain sections of DSHEA and the regulations
which implement it, it is difficult for any company manufacturing or marketing
dietary supplements to remain in strict compliance.
On November 24, 1997, the Commission on Dietary Supplement Labels, a seven
member group appointed by the President of the United States (the "DSL
Commission"), issued a 84 page report (the "Report") which includes many
recommendations for the regulation of label claims and statements for dietary
supplements. The DSL Commission's conclusions and advice are in the form of a
series of Findings and Guidances and its ultimate recommendations are called
Recommendations. Section 12 of DSHEA requires the FDA to publish in the Federal
Register "a notice of any recommendation of the Commission for changes in
regulations of the Secretary for the regulation of dietary supplements and shall
include in such notice a notice of proposed rule-making on such changes together
with an opportunity to present views on such changes."
CONCENTRATION OF CUSTOMERS
4Health and IN each received approximately 6.3% and 12.8%, respectively, of
its revenues from a single customer during 1997, General Nutritional Centers
("GNC"). Neither 4Health nor IN have any long-term contractual relationship
with GNC or any other customer. The loss of this customer would have an adverse
impact on the business of the Surviving Corporation.
RELIANCE ON LIMITED NUMBER OF PRODUCTS
4Health currently offers approximately 35 products and derived more than
12% of its revenues during 1997 from the sale of one product, Ultimate
Cleanse-Registered Trademark-. IN currently offers approximately 34 products
and derived more than 25% of its revenues during 1997 from the sale of Diet
System 6. As a result of the limited number of products from which the
Surviving Corporation will derive its revenue, the risks associated with the
Surviving Corporation's business increase since a decline in market demand for
one or more such products, for any reason, could have a significant adverse
impact on the Surviving Corporation.
12
<PAGE>
STRENGTH OF SURVIVING CORPORATION'S COMPETITORS
Competition in the nutritional supplement industry is vigorous with a large
number of businesses engaged in the industry. Its operations in the mass market
of drug store and grocery store retail outlets will expose the Surviving
Corporation to increased 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 will be available to the
Surviving Corporation, 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 will put the
Surviving Corporation at a competitive disadvantage to better capitalized firms.
If the Surviving Corporation is not successful in competing in this market, it
may not be able to realize its business objectives.
DEPENDENCE ON MANAGEMENT
4Health and IN are, and after the Merger the Surviving Corporation will
continue to be, dependent on its management, particularly R. Lindsey Duncan,
Chairman of the Board, and Klee Irwin, Chief Executive Officer, for
substantially all of its business activities, including the development of new
products and the advancement of the Surviving Corporation's identity and
recognition in the nutritional supplement industry. The loss of the services of
either Mr. Duncan or Mr. Irwin could have a material adverse effect on the
business, operations and financial condition of the Surviving Corporation.
NO LONG-TERM CONTRACTS WITH MANUFACTURERS OR DISTRIBUTORS
4Health and IN each purchase all of their products from third-party
manufacturers pursuant to purchase orders issued from time to time by 4Health
and IN, respectively, but without any long-term manufacturing agreements. In
the event that a current manufacturer is unable to meet the Surviving
Corporation's manufacturing and delivery requirements at some time in the
future, the Surviving Corporation may suffer interruptions of delivery of
certain products while it establishes an alternative source. The selection of
alternative manufacturing sources may be delayed while the Surviving Corporation
completes a review of the proposed manufacturer's quality control, raw material
sources, and manufacturing and delivery capabilities.
CUSTOMER GUARANTY OF SATISFACTION; RIGHT OF RETURN
In an effort to build customer confidence and satisfaction, each of 4Health
and IN 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. There can be no assurance that such a policy
will not result in material product returns in the future as the Surviving
Corporation substantially expands its product lines and enters new markets.
POTENTIAL TRADEMARK INFRINGEMENT
The conduct of 4Health's and IN's business, in common with other sellers of
branded consumer products, may involve from time to time potential liability for
trademark infringement. There can be no assurance that the Surviving
Corporation 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 the Surviving Corporation.
YEAR 2000 ISSUE
4Health and IN have conducted a review of their respective computer systems
to identify the systems that could be affected by the "Year 2000" issue. The
Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the applicable year and equipment with
time-sensitive embedded components. Any of the Surviving Corporation's programs
that have time-sensitive software or equipment that has time-sensitive embedded
components may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations. Although
no assurances can be given because of the potential wide scale manifestations of
this problem which may affect the Surviving Corporation's business, 4Health
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<PAGE>
presently believes that the Year 2000 problem will not pose significant
operational problems for the Surviving Corporation's computer systems and that
the Year 2000 problem will have no material impact on the cost of operation of
the Surviving Corporation.
The Surviving Corporation also may be vulnerable to other companies'
Year 2000 issues. 4Health's current estimates of the impact of the Year 2000
problem on the Surviving Corporation's operations and financial results do not
include costs and time that may be incurred as a result of any vendors' or
customers' failure to become Year 2000 compliant on a timely basis. The
Surviving Corporation will initiate formal communications with all of its
significant vendors and customers with respect to such persons' Year 2000
compliance programs and status. However, there can be no assurance that such
other companies will achieve Year 2000 compliance or that any conversions by
such companies to become Year 2000 compliant will be compatible with the
Surviving Corporation's computer system. The inability of the Surviving
Corporation or any of its principal vendors or customers to become Year 2000
compliant in a timely manner could have a material adverse effect on the
Surviving Corporation's financial condition or results of operations.
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PROPOSAL 1
APPROVAL OF THE MERGER
TERMS OF THE MERGER
On January 7, 1998, 4Health, IN and Klee Irwin executed the Merger
Agreement, dated as of December 24, 1997, that provides for the merger of IN
with and into 4Health. On April 2, 1998 and May 22, 1998, the Merger Agreement
was amended and restated. 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 October 13, 1997, from 4Health and
accepted by IN. The Merger Agreement was approved by the Board of Directors of
4Health by their unanimous consent dated January 7, 1998 and by the Board of
Directors of IN by their unanimous consent dated December 29, 1997, and the
amendments thereto were respectively approved as of April 2, 1998 and May 22,
1998, upon unanimous written consent. The full text of the Merger Agreement, is
attached to this Proxy Statement as Appendix "A" and incorporated herein by
reference. 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 Proxy Statement 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.
The principle executive offices of 4Health are located at 5485 Conestoga
Court, Boulder, Colorado 80301, telephone number: (303) 546-6306. The principle
executive offices of IN are located at 10544 West Jefferson Blvd., Culver City,
CA 90232, telephone number: (310) 253-5305.
Under the Merger Agreement, IN will be merged with and into 4Health, with
the effect that IN, a California corporation, will be dissolved and 4Health will
continue as the surviving corporate entity, with its name changed to "Irwin
Naturals/4Health, Inc."
At the Effective Time, all 65,250 shares of IN Common Stock outstanding
will be converted into an aggregate of 15,750,000 shares of 4Health Common Stock
in accordance with the Conversion Ratio, 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.
No fractional shares of 4Health Common Stock will be issued to stockholders
of IN, and the Conversion Ratio shall be appropriately adjusted if necessary so
that a maximum of 15,750,000 whole shares of 4Health Common Stock are issued in
the Merger.
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 removal of directors and other management related matters.
See "AMENDMENTS OF THE 4HEALTH ARTICLES OF INCORPORATION AND BYLAWS."
Pursuant to the Merger Agreement and the Articles of Merger, and subject to
shareholder approval, if the Merger is consummated the Board of Directors of the
Surviving Corporation will consist of R. Lindsey Duncan, Klee Irwin, Anthony
Robbins, Clarke Keough and Jonathan Diamond. See "ELECTION OF DIRECTORS."
For a discussion of the principal federal income tax consequences of the
Merger to 4Health and its Stockholders, see "TAX CONSEQUENCES."
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<PAGE>
BACKGROUND OF THE MERGER
In mid-1997, 4Health began a search for a strategic partner. 4Health
management believed that 4Health's lack of experience in mass markets was
limiting its future sales growth and reducing 4Health's ability to generate
significant economies of scale with respect to cost of goods sold, due to
increased sales volumes.
In April 1997, R. Lindsey Duncan, Chief Executive Officer and President of
4Health, contacted Mr. Charles Paz, an independent management consultant, to
assist 4Health in identifying potential acquisition candidates and negotiating
the terms of any acquisition. Mr. Paz was aided in his efforts on behalf of
4Health by Mr. Roy E. Dahlen and Mr. Ken Bodger. Both Mr. Dahlen and Mr. Bodger
are long-time business associates of Mr. Paz who have worked with Mr. Paz on
corporate acquisitions in which Mr. Paz has been involved over the past ten
years. Mr. Bodger's principal role is conducting due diligence concerning
potential acquisition or merger candidates, and Mr. Dahlen's principal role is
to assist in tax and accounting issues. Mr. Bodger served as the Vice-Chairman
and a partner of a small leveraged buy-out firm from 1985 to 1993. Mr. Dahlen
has been engaged in private practice as a Certified Public Accountant and
management consultant since 1995. As compensation for their services to 4Health
in negotiating the terms of the Merger, the Surviving Corporation will issue a
promissory note in the amount of $210,000 to each of Messrs. Paz, Dahlen and
Bodger.
In June 1997, 4Health's management had identified eight companies with mass
market distribution as potential strategic partners. Certain of these potential
partners were eliminated from consideration because of unique circumstances,
E.G., two candidates pursued alternate transactions, another was involved in
complex shareholder litigation and another was not interested in a combination
with 4Health. IN was 4Health's first choice of the remaining candidates because
of its significant international and mass market sales and its successful
business operations in comparison to the other identified companies and for the
other reasons listed below.
In July 1997, Messrs. Duncan, Paz and Bodger began discussions with Klee
Irwin, President of IN, concerning a possible merger of the two companies. From
time to time thereafter, representatives of 4Health (Messrs. Duncan, Paz and
Bodger) and IN (Mr. Irwin and Mr. Andrew Vollero, Jr., a financial consultant to
IN) would meet or telephone each other to discuss a business relationship
between the two companies. After numerous discussions between Mr. Duncan and
Mr. Irwin during the second half of 1997 concerning the potential benefits and
terms of a merger between the two companies, 4Health and IN reached agreement
that a merger would be in the best interests of both parties. On October 13,
1997, 4Health and IN entered into a letter of intent setting forth the basic
terms of the Merger. The parties then proceeded to prepare the necessary
documentation to complete the Merger. During the period from late October
through mid December 1997, 4Health and its counsel, Satterlee Stephens Burke &
Burke LLP conducted its due diligence of IN, and IN and its counsel, Gay Harwin,
Esq., conducted its due diligence of 4Health. On January 7, 1998, 4Health, IN
and Klee Irwin executed the Merger Agreement.
Subsequently, first on April 2, 1998 and then on May 22, 1998, the parties
to the Merger Agreement agreed to amend and restate the Merger Agreement to
provide for the election of Messrs. Clarke Keough, Jonathan Diamond and Anthony
Robbins to the Board of Directors of the Surviving Corporation, the appointment
of Dan Martin as acting Chief Financial Officer of the Surviving Corporation,
and to add a provision to the Bylaws enabling either the Chairman of the Board
or the President to seek review and revision by the entire Board of any
decisions of the Executive Committee.
REASONS FOR THE MERGER
4Health believes that the Merger is in the best interests of each of
4Health and its stockholders for the following reasons (which constitute all the
material factors relating to the Merger considered by the Board of Directors of
4Health):
- The Merger should enable 4Health to expand its current business.
- By virtue of the Merger, 4Health will acquire new, and expand
existing, channels of distribution.
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<PAGE>
- 4Health and IN are complementary in their strengths, with 4Health
being particularly strong in clinically supported product
formulations, distribution through health food stores, customer
service, and research and development, and with IN being particularly
strong in marketing, packaging, pricing, distribution through the
food, drug and mass market channels of distribution as well as in
international distribution.
- IN has experienced a significant rate of growth within a relatively
short period of operations and, being substantially debt free,
provides a solid financial base and the prospect for strong income
growth from combined operations of the Surviving Corporation.
- Since both IN and 4Health are in the same business, certain economies
of scale and efficiencies may be expected by combining operations, and
integrating the operations of the two companies should not be unduly
difficult. Economies of scale are expected to be realized primarily
in three areas:
A. STAFF - Virtually all staff positions at the 4Health Boulder, CO
operation are duplicative of identical positions at the IN
operation in Los Angeles. Closing the Boulder operation and
laying off staff there will create a significant savings for the
combined operation. Net savings between the now separate staffs
and the expected new staff of the combined organization are
expected to be in the range of $1.5 million per year.
B. FACILITIES - An elimination of 54,000 square feet of office and
warehouse space in Boulder are expected to yield a savings to the
merged entity of more than $35,000 per month.
C. SERVICE PROVIDERS - Phone, transportation, insurance, accounting,
consulting, utility and various other service providers are
expected to give greater discounts because of the increased
volume. Also, many of the services being purchased by the two
separate organizations are duplicative and will be eliminated.
It is expected that more than $200,000 per year will be saved by
the efficiency in service needs and costs.
- In light of 4Health's and IN's respective present financial and
operating conditions and future prospects, the Conversion Ratio is
fair and reasonable to 4Health's Stockholders.
DETERMINATION OF TERMS
The Conversion Ratio to be utilized in calculating the number of shares of
4Health Common Stock to be issued in the Merger to each holder of IN Common
Stock has been approved unanimously by the Boards of Directors of IN and
4Health.
In accordance with the Merger Agreement, the shares of IN Common 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 15,750,000 shares of 4Health Common Stock. Specifically, each share of IN
Common Stock outstanding immediately prior to the Effective Time will be
converted into the right to receive 241.37931 shares of 4Health Common Stock,
subject to adjustment in the event that the outstanding shares of IN Common
Stock or 4Health Common Stock are changed in the period between execution of the
Merger Agreement and the Effective Time into a different number or different
class by way of stock dividend, stock split, combination, recapitalization,
subdivision, reclassification, conversion, or exchange of shares.
The Conversion Ratio was determined through ongoing negotiations between IN
and 4Health from September 1997 through November 1997, and was based on
4Health's and IN's mutual evaluation of the relative financial strength and
prospects of 4Health and IN and other miscellaneous factors.
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<PAGE>
Neither 4Health nor IN obtained independent appraisals of the respective
values of 4Health and IN or opinions from any qualified independent expert
regarding the fairness of the Merger from a financial point of view to either
4Health or IN 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 4Health and IN Stockholder regarding approval of the Merger.
DILUTION AND COMPARATIVE DATA
The following table sets forth certain information about 4Health and IN,
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 4Health and IN Stockholders in the Surviving Corporation,
and certain other information, all based upon the historical financial
information of 4Health and IN and the pro forma unaudited combined financial
information of the Surviving Corporation as of March 31, 1998, without giving
effect to any changes in the financial condition of either 4Health or IN after
such date. See "PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
<TABLE>
<CAPTION>
Surviving
March 31, 1998 Corporation
---------------------------------- Unaudited
4Health IN Pro Forma
(unaudited) (unaudited) Combined
-------------- -------------- --------------
<S> <C> <C> <C>
Net tangible book value contributed $ 2,802,786 $ 3,536,201 $ 4,717,987
Shares outstanding . . . . . . . . . . 11,979,026 65,250 27,729,026
Net tangible book value contributed
per share. . . . . . . . . . . . . . $0.23 $54.19 N/A
Resulting net tangible book value per
share adjusted to give effect to the
Conversion Ratio . . . . . . . . . . N/A N/A $0.17
Shares of 4Health Common Stock held
after the Merger . . . . . . . . . . 11,979,026 15,750,000 27,729,026
Percentage of Surviving Corporation
ownership. . . . . . . . . . . . . . 43.20% 56.80% 100%
Per share net income (loss) for three
months ended March 31, 1998 - basic
and diluted. . . . . . . . . . . . . -- $14.75 $0.04
Per share dividends for three months
ended March 31, 1998 . . . . . . . . None $4.92 $0.01
</TABLE>
CONFLICTS OF INTEREST
The principal terms of the Merger were negotiated on behalf of 4Health by
R. Lindsey Duncan, Chairman of the Board and Chief Executive Officer of 4Health,
and on behalf of IN by Klee Irwin, Chief Executive Officer of IN, each of whom
will also benefit personally from the Merger. On the effectiveness of the
Merger, the Surviving Corporation will enter into three-year employment
agreements with Mr. Irwin and Mr. Duncan at initial base salaries of $350,000
and $225,000 per annum, respectively; the right to receive an annual bonus equal
to 2% of consolidated earnings before income taxes of the Surviving Corporation
in excess of $6,000,000 (based on the pro forma combined results of operations
of 4Health and IN for the year ended December 31, 1997, no such annual bonus
would have been paid out to either Mr. Irwin or Mr. Duncan for the year then
ended); and the right to participate in all retirement and welfare, benefit,
fringe, perquisite and other plans and programs applicable generally to other
key executives of the Surviving Corporation. Under the Merger Agreement, Mr.
Irwin and Mr. Duncan will be elected to the Board of Directors and the Executive
Committee of the Surviving Corporation for terms expiring at the 2001 annual
meeting of the Surviving Corporation's stockholders. See "ELECTION OF
DIRECTORS" and "MANAGEMENT OF THE SURVIVING CORPORATION -- Employment
Agreements."
18
<PAGE>
As a result of the foregoing economic benefits to be received by Messrs.
Irwin and Duncan, if the Merger is completed, such persons had a substantial
conflict of interest in negotiating the terms of the Merger. The Merger has
been approved unanimously by 4Health's Board of Directors, including its
independent non-employee director.
MANAGEMENT OF THE SURVIVING CORPORATION
Subject to the consummation of the Merger, the Board of Directors of
4Health has nominated the following persons for election 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. See "ELECTION
OF DIRECTORS."
<TABLE>
<CAPTION>
Term Expires
Name Annual Meeting in
----------------------- -----------------
<S> <C>
R. Lindsey Duncan(1)(3) 2001
Klee Irwin(2)(3) 2001
Jonathan Diamond(4) 2000
Clarke Keough(4) 2000
Anthony Robbins(3)(4) 1999
</TABLE>
- -------------------------
(1) Current director and executive officer of 4Health
(2) Current director and executive officer of IN.
(3) Member of the Executive Committee of Surviving Corporation.
(4) Member of the Audit Committee of Surviving Corporation.
- -------------------------
For biographical information for each of the above nominees, see
"MANAGEMENT OF THE SURVIVING CORPORATION."
For a detailed description of the functions and responsibilities of the
Executive Committee, see "Special Articles of Incorporation and Bylaw
Provisions" below.
Pursuant to the terms of the Merger Agreement, the following persons will
be appointed to the positions set forth opposite their names below, each to
serve until his successor is duly elected and qualified:
<TABLE>
<CAPTION>
Name Office
----------------------- ----------------------------------
<S> <C>
R. Lindsey Duncan Chairman of the Board of Directors
and member of the Executive
Committee
Klee Irwin President, Chief Executive Officer
and member of the Executive
Committee
Dan Martin Acting Chief Financial Officer,
Treasurer and Secretary
</TABLE>
VOTING AND REVOCATION OF PROXY
Shares of 4Health Common 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 the proposals of management submitted to the 4Health Stockholders,
including the Merger.
19
<PAGE>
Inasmuch as the Merger requires the affirmative vote of a majority of all
outstanding shares of 4Health Common Stock entitled to vote, 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.
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, as well as abstentions,
while effective to establish a quorum, will have the same 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, CO 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
The solicitation of proxies is being made by 4Health and 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 4HEALTH STOCKHOLDERS' PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED, PRE-ADDRESSED ENVELOPE TO AMERICAN SECURITIES TRANSFER & TRUST, INC.,
938 QUAIL STREET, SUITE 101, LAKEWOOD, COLORADO 80215.
VOTE REQUIRED
Pursuant to Utah Law, the Merger must be approved by holders of a majority
of the shares of 4Health Common Stock outstanding on the 4Health Record Date.
On the 4Health Record Date, there were 12,003,484 shares of 4Health Common Stock
outstanding and entitled to vote. Each share of 4Health Common Stock is
entitled one vote. The Bylaws of 4Health require that at least one-half of the
4Health Common Stock issued and outstanding as of the 4Health Record Date be
represented, in person or by proxy, at the 4Health Stockholders' Meeting in
order to constitute a quorum for the conducting of business.
Directors, executive officers, and certain stockholders of 4Health holding
an aggregate of 6,588,340 shares of 4Health Common Stock, or approximately 55%
of the shares of 4Health Common Stock issued and outstanding, have orally
indicated their intention to vote in favor of the Merger to the directors of
4Health.
RIGHTS OF DISSENTING STOCKHOLDERS
The Utah Revised Business Corporation Act does not provide for dissenters'
rights in connection with shares that were listed on the NSM on the record date
fixed to determine the shareholders entitled to receive notice of the meeting at
which the transaction is to be approved. Since the 4Health Common Stock was
listed on the NSM on the 4Health Record Date, 4Health Stockholders will not be
entitled to any dissenters' rights in connection with the Merger.
20
<PAGE>
ACCOUNTING FOR THE MERGER
The Merger will be accounted for under the "pooling of interests" method of
accounting, in accordance with generally accepted accounting principles. The
pooling-of-interests method of accounting is intended to present as a single
interest the 4Health and IN common stockholder interests that were previously
independent and the combined rights and risks represented by those interests.
That method shows that the stockholder groups neither withdraw nor invest assets
but in effect exchange voting common stock in a ratio that determines their
respective interests in the combined enterprise.
PAYMENT IN LIEU OF ISSUING FRACTIONAL SHARES
No fractional shares of 4Health Common Stock will be issued in connection
with the Merger and the Conversion Ratio shall be appropriately adjusted if
necessary so that only whole shares of 4Health Common Stock are issued in the
Merger.
PRINCIPAL CONDITIONS
BOTH 4HEALTH AND IN
Completion of the Merger is subject, pursuant to the Merger Agreement, to
the satisfaction of certain conditions, including the following:
(a) This Proxy Statement shall have been cleared by the Staff of the
Commission for mailing to 4Health Stockholders;
(b) The Merger shall have been approved and adopted upon written
consent or by the requisite vote of the stockholders of both 4Health and
IN;
(c) No governmental agency or authority shall have taken any action
with the effect of making the Merger illegal or otherwise prohibited;
(d) All approvals, waivers and/or consents required to be issued by
any governmental entity or otherwise respecting the Merger, the Merger
Agreement and the consummations of the transactions contemplated thereby
shall have been timely obtained;
(e) 4Health shall have executed and delivered three substantially
identical promissory notes each in the amount of $210,000 payable to the
respective order of Messrs. Charles Paz, Roy Dahlen and Ken Bodger, as
payment for services rendered in connection with the Merger; and
(f) The officers and directors of the Surviving Corporation who shall
be in office immediately after the Merger shall each receive an Indemnity
Agreement executed and delivered by 4Health.
The foregoing conditions cannot be waived.
4HEALTH
In addition to the foregoing, the obligations of 4Health to effect the
Merger are subject to certain further conditions, including the following:
(a) No dissenters' rights have been asserted by IN Stockholders;
(b) The satisfaction by IN of the representations, warranties,
covenants, and conditions of IN in the Merger Agreement;
21
<PAGE>
(c) 4Health shall have received an opinion of IN's counsel with
respect to certain matters;
(d) 4Health shall have received a letter from the independent public
accountants for IN with respect to certain matters;
(e) IN 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;
(f) The shares of 4Health Common Stock issued in the Merger shall
have been listed for trading on the NSM;
(g) R. Lindsey Duncan shall have received a three year employment
agreement with the Surviving Corporation; and
(h) Compliance with miscellaneous other terms, covenants, and
conditions.
Any of the above conditions may be waived by the Board of Directors of 4Health,
in the exercise of its business judgement; however, the Board has not indicated
that it intends to so do.
IN
The obligations of IN to effect the Merger are subject to certain further
conditions, including the following:
(a) The satisfaction by 4Health of the representations, warranties,
covenants, and conditions of 4Health in the Merger Agreement;
(b) IN shall have received an opinion of 4Health's counsel with
respect to certain matters;
(c) IN shall have received a letter from the independent public
accountants for 4Health with respect to certain matters;
(d) The shares of Common Stock issued in the Merger shall have been
listed for trading on the NSM;
(e) Klee Irwin shall have received a three year employment agreement
with the Surviving Corporation; and
(f) Compliance with miscellaneous other terms, covenants, and
conditions.
Any of the above conditions may be waived by the Board of Directors of IN, in
the exercise of its business judgement; however, it has not indicated that it
intends to do so.
4Health will resolicit proxies in the event of material changes to the
terms of the Merger as disclosed in the Proxy Statement other than any waiver by
4Health or IN of any of the waivable conditions to the Merger set forth in the
Merger Agreement, including in the event of any change to the Conversion Ratio
that would result in the Irwins owning more than 57% of the outstanding shares
of the Surviving Corporation immediately after the Merger.
There are no federal or state regulatory requirements or approvals that
must be complied with or obtained in connection with the Merger, other than
filing the Articles and Plan of Merger with appropriate state agencies and
compliance with applicable securities laws.
22
<PAGE>
EXPENSES OF THE MERGER
Except as described below, in the event the Merger is not consummated all
expenses incurred by 4Health and IN in connection with effecting the Merger will
be borne by the party that has incurred such expenses. 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. In
the event the Merger is terminated due to a party's willful breach of any
representation, warranty, or covenant or the failure of IN's stockholders to
approve the Merger, such party is obligated to pay the other party $200,000 as
liquidated damages, which amount is inclusive of all of the other party's
expenses. 4Health and IN estimate that the expenses of preparing and filing
this Proxy Statement plus printing expenses, accounting, legal, and filing fees,
solicitation costs, and miscellaneous costs associated with the Merger should
aggregate approximately $350,000, exclusive of the fees paid to Messrs. Paz,
Dahlen and Bodger described elsewhere herein.
RESTRICTIONS ON RESALE OF 4HEALTH COMMON STOCK
No shares of 4Health Common Stock to be issued to holders of IN Common
Stock will be transferable unless registered under the Securities Act, or unless
an exemption from the registration requirements of the Securities Act is
available, and the transferring shareholder shall provide the Surviving
Corporation with an opinion of counsel, reasonably acceptable to the Surviving
Corporation, to such effect. Klee Irwin shall have the right to make up to
three demands of the Surviving Corporation to register for resale the shares of
4Health Common Stock issuable in the Merger under the Securities Act. The
Surviving Corporation will bear all of the costs associated with the preparation
and filing of any such registration statement, including all filing fees, legal,
accounting and printing costs but shall not be required to pay the legal or
accounting costs or underwriting fees and expenses, if any, incurred by any
former IN stockholder.
LEGAL MATTERS
The validity of the 4Health Common Stock and certain other legal matters in
connection with the Merger will be passed upon for 4Health by Satterlee Stephens
Burke & Burke LLP, New York, N.Y., in reliance upon the opinion of Holland &
Hart LLP, Salt Lake City, Utah as to certain matters of Utah law.
Certain legal matters in connection with the Merger will be passed upon for
IN by Gay L. Harwin, Esq., Los Angeles, California.
THE BOARD OF DIRECTORS OF 4HEALTH RECOMMENDS
THAT STOCKHOLDERS VOTE "FOR" THE MERGER.
23
<PAGE>
PROPOSAL 2
ELECTION OF DIRECTORS
Pursuant to the 4Health's Articles of Incorporation, as amended, the Board
of Directors is divided into three classes, the terms of which expire
successively over a three-year period. At each Annual Meeting of Shareholders,
successors to directors whose terms expire at the meeting shall be elected for
three-year terms. In 1997, the Board of Directors was constituted with four
members. The term of Ms. Cheryl Wheeler, Class II director, ends at the Annual
Meeting of Shareholders in 1998; the terms of Messrs. R. Lindsey Duncan, and
Rockwell Schutjer, Class III directors, end at the Annual Meeting of
Shareholders in 1999, and the term of Steven B. Beckman, Class I director, ends
at the Annual Meeting of Shareholders in 2000, and, in each case, until
successors shall have been elected and qualified.
Pursuant to the Merger Agreement, the existing directors of 4Health (with
the exception of Mr. Duncan) have agreed to tender their resignations and
4Health has agreed to reconstitute its Board of Directors as described below,
subject to shareholder approval.
Subject to the consummation of the Merger, the Board of Directors of
4Health has nominated 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)(3) 2001
Klee Irwin(2)(3) 2001
Jonathan Diamond(4) 2000
Clarke Keough(4) 2000
Anthony Robbins(3)(4) 1999
</TABLE>
- -------------------------
(1) Current director and executive officer of 4Health
(2) Current director and executive officer of INI.
(3) Member of the Executive Committee of Surviving Corporation.
(4) Member of the Audit Committee of Surviving Corporation.
- -------------------------
Each of such named nominees for director has indicated a willingness to
serve, but in case the Merger Agreement and Articles of Merger shall be amended
by the parties thereto to replace any such individual with a substitute, for
reasons not presently known to 4Health, the proxies named in the enclosed form
of Proxy may vote in favor of the Merger and the election of such substituted
individual in their discretion.
For biographical information for each of the above nominees, see
"MANAGEMENT OF THE SURVIVING CORPORATION."
In the event that the Merger is not consummated for any reason, the terms
of Messrs. Duncan, Schutjer and Beckman will continue and the Board of Directors
of 4Health has nominated Ms. Cheryl Wheeler for re-election as a director, to
serve for a three-year term expiring at the annual meeting for fiscal year
ending March 31, 2001, and until her successor shall have been elected and
qualified. Biographical information about Ms. Wheeler and the other continuing
directors, in the event the Merger is not consummated, are provided below and in
"MANAGEMENT OF THE SURVIVING CORPORATION."
24
<PAGE>
Cheryl Wheeler Secretary and Marketing Manager for
Director since: 1993 4Health since 1993
Term Expires: 2001 Age: 37
Ms. Wheeler, a marketing manager at 4Health, coordinates Mr. Duncan's
industry seminars, speeches, and other public appearances and related marketing
activities. Ms. Wheeler is a nutritionist certified by the National Institute
of Nutritional Education. Before joining 4Health, Ms. Wheeler was a
nutritionist, a professional stuntwoman, and martial arts expert.
Steven B. Beckman President, Achieve Communications, Inc.
Director since: 1997
Term Expires: 2000 Age: 30
Mr. Steven B. Beckman is President of Achieve Communications, Inc., which
he founded in 1996 in Boulder, Colorado. From 1993 through 1996, Mr. Beckman
served as Vice President Sales and Marketing at 4health, Inc. (a predecessor
company) as well as being responsible for accounting and operations functions
from 1993 to 1995. Prior to joining 4Health, Inc., Mr. Beckman's experience was
in sales and marketing functions. He received a bachelor of arts degree from
the University of California at Santa Barbara.
Rockwell D. Schutjer Manager of Surgical Technologies, a division
Director since: 1996 of 4Health
Term Expires: 1999 Age: 52
Mr. Schutjer, co-founded Surgical Technologies, Inc. and served as a
director from 1989 until its merger with 4Health, Inc. Mr. Schutjer currently
serves as Manager of Surgical Technologies, a division of 4Health, Inc. Mr.
Schutjer received his bachelor of science degree in business finance from the
University of Utah. Pursuant to the terms of the merger, Mr. Schutjer was
elected to 4Health's Board of Directors to serve a three year term.
The Board of Directors recommends that the shareholders elect the nominees
named above as directors of 4Health for terms expiring as set forth above and
until their respective successors shall have been elected and qualified. It is
intended that the persons named as proxies in the enclosed form of Proxy will
vote the Proxies received by them for the election of the nominees named above.
The nominees have indicated a willingness to serve, but in case a nominee is not
a candidate at the Annual Meeting, for reasons not presently known to 4Health,
the proxies named in the enclosed form of Proxy may vote for a substitute
nominee in their discretion.
VOTE REQUIRED
The affirmative vote of a plurality of the shares represented at the
4Health Stockholders' Meeting is required for the election of the above-named
nominees as directors. Abstentions and broker non-votes will not be included in
determining the number of votes cast.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF THE NOMINEES.
25
<PAGE>
PROPOSAL 3
AMENDMENTS OF THE 4HEALTH ARTICLES
OF INCORPORATION AND BYLAWS
The Board of Directors of 4Health believes that in connection with the
Merger, and subject to a consummation of the Merger, it would be in the best
interests of the stockholders of the Surviving Corporation that 4Health amend
certain provisions in its Articles of Incorporation and Bylaws (the "Proposed
Amendments"), as set forth in the form of Articles of Merger with related Plan
of Merger attached hereto as Appendix "B", which, among other matters, 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 includes a discussion of all material
provisions of the Proposed Amendments and is qualified in its entirety by the
provisions of the Proposed Amendments attached hereto as Appendix "B." The
Proposed Amendments will only be effected if both approved by the 4Health
shareholders and the Merger is consummated.
The Proposed Amendments to the Articles of Incorporation of 4Health are as
follows:
(i) to change the name of 4Health, Inc. to "Irwin Naturals/4Health,
Inc.";
(ii) to increase the authorized share capital of 4Health to 50,000,000
shares of common stock and 5,000,000 shares of preferred stock;
(iii) to provide for a staggered Board of Directors, each to serve a
three-year term;
(iv) to set the number of directors at between three and five, and to
provide that until after the fifth anniversary of the Effective Time of the
Merger (the "Fifth Anniversary Date"), such number may be increased or decreased
only by the affirmative vote of at least 80% of the outstanding shares of the
capital stock of 4Health, and that after the Fifth Anniversary Date such number
may be increased or decreased by the affirmative vote of a majority of the
outstanding shares of 4Health capital stock;
(v) to provide that until after the Fifth Anniversary Date, newly
created directorships will be filled only by the affirmative vote of at least
three quarters of the remaining directors (and not by stockholders);
(vi) to provide that until after the Fifth Anniversary Date directors
may be removed upon the affirmative vote of at least 80% and, thereafter, at
least a majority of the outstanding capital stock of 4Health;
(vii) to provide that except as expressly otherwise provided in the
Articles of Incorporation or Bylaws of 4Health, the Board of Directors of
4Health will be able to adopt, amend or repeal Bylaws by the affirmative vote of
at least three-quarters of the directors then in office;
(viii) to provide that until after the Fifth Anniversary Date, any
amendment or change to Article VII of the Articles of Incorporation of 4Health
(relating to the Board of Directors) will require the affirmative vote of at
least 80%, and thereafter, a majority, of the outstanding shares of the capital
stock of 4Health; and
(ix) to limit the ability of the stockholders to take action by written
consent without a meeting unless authorized by at least three-quarters of the
incumbent directors, and to provide that, until after Fifth Anniversary Date,
any change to this provision shall require the affirmative vote of at least 80%
of the outstanding shares of the capital stock of 4Health.
The Proposed Amendments to the Bylaws of 4Health are as follows:
26
<PAGE>
(i) to allow the Chairman of the Board to call special shareholder and
Board of Directors meetings;
(ii) to provide for the creation of an Executive Committee to consist of
three members: the Chairman of the Board, the President, and one other
independent, non-employee Class III director. The Executive Committee will have
all of the powers of the Board when the Board is not in session, except for the
right to exercise any of the following powers which will only be exercisable by
the Board of Directors:
1. To adopt an annual budget for the Surviving Corporation;
2. To issue securities;
3. To sell a material portion of the assets of the Surviving
Corporation;
4. To change the business of the Surviving Corporation;
5. To incur any indebtedness by the Surviving Corporation other
than trade payables incurred in the ordinary course;
6. To authorize any merger, consolidation or other business
combination or any recapitalization or reclassification of
any class of securities of the Surviving Corporation;
7. To declare or pay dividends in respect of any securities of
the Surviving Corporation;
8. To amend the Surviving Corporation's Articles of
Incorporation or Bylaws; or
9. To authorize any other matter which under applicable law is
required to be determined by the Board of Directors.
A quorum for the transaction of business by the Executive Committee at any
meeting will require the presence of both the Chairman of the Board and the
President, in person or by telephone conference call, either of whom may object
to the transaction of any business at such meeting, in which case such meeting
shall not be deemed duly convened. Any decision of the Executive Committee may
be reviewed and revised by the Board of Directors at the request of either the
Chairman of the Board or the President at any regular or special meeting of the
Board. Until the Fifth Anniversary Date the Bylaw provisions regarding the
Executive Committee may be amended or repealed only upon the affirmative vote of
at least eighty percent (80%) of the outstanding shares of capital stock of the
Surviving Corporation, and, thereafter, by a majority vote of the directors.
(iii) to provide that nominations for the election of directors may be
made by the Executive Committee of the Board of Directors (the Executive
Committee will not consider nominees recommended by the Surviving Corporation's
Stockholders); and
(iv) to provide for a staggered Board of not less than three or more
than five directors, each to serve a three-year term, until after the Fifth
Anniversary Date, at which time such number of directors may be increased or
decreased by the affirmative vote of a majority of the outstanding shares of the
capital stock of the Surviving Corporation.
Certain provisions of the Proposed Amendments may have significant effects
on the ability of the stockholders of the Surviving Corporation, including the
former IN Stockholders, 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.
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 4Health Board of Directors believes that, as a general rule, such
unsolicited offers are not in the best interests of the Surviving Corporation
and its stockholders.
The Board of Directors of 4Health believes 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 Board of Directors believes that generally the
takeover of the Surviving Corporation without prior negotiation with the
Surviving
27
<PAGE>
Corporation's Board would be detrimental to the Surviving Corporation and its
stockholders. Consequently, 4Health's Board of Directors has 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 may 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 4Health 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 existing anti-takeover
provisions in 4Health's Articles of Incorporation (the so-called "Fair Price"
provisions) which will remain in place, 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.
VOTE REQUIRED
The affirmative vote of a majority of the shares of 4Health Common Stock
outstanding on the 4Health Record Date are required for the approval of the
Proposed Amendments. 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 Proposed
Amendments 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 Proposed Amendments. Accordingly, under Utah Law, a
broker non-vote, as well as abstentions, while effective to establish a quorum,
will have the same effect as a vote against the Proposed Amendments.
IF THE MERGER IS NOT CONSUMMATED FOR ANY REASON, THE PROPOSED AMENDMENTS
WILL NOT BE EFFECTED.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE AMENDMENTS OF THE ARTICLES OF INCORPORATION AND BYLAWS.
PROPOSAL 4
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, acting upon the recommendation of the Audit
Committee, has appointed the firm of Arthur Andersen, LLP, independent public
accountants, as independent auditors to make an examination of the accounts of
4Health for the year 1998. Arthur Andersen, LLP has audited the accounts and
records of 4Health since 1993.
It is anticipated that a representative of Arthur Andersen LLP will be in
attendance at the 4Health Stockholder's Meeting in order to answer appropriate
questions from the 4Health Stockholders and, if they so desire, to make a
statement to the 4Health Stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
THE RATIFICATION OF THE APPOINTMENT OF THE INDEPENDENT AUDITORS.
28
<PAGE>
MARKET PRICE AND DIVIDEND POLICY FOR 4HEALTH COMMON STOCK
- --------------------------------------------------------------------------------
4Health's Common Stock is traded on the NSM under the trading symbol
"HHHH." The following table sets forth high and low closing sale prices for
4Health Common Stock as reported on NSM 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. (4Health's Common stock commenced
trading on the NSM under the stock symbol HHHH on July 17, 1996. Prior to that
date, 4Health was known as Surgical Technologies, Inc. ("Surgical") with stock
trading under the symbol SGTI. The prior market performance history of Surgical
has not been included herein because it does not reflect the results of such
merger or the changed nature of 4Health's business since such merger.)
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1996 High Low
----------------------------------- ---- ---
<S> <C> <C>
Third Quarter $13.00 $5.00
Fourth Quarter $ 7.374 $5.50
<CAPTION>
Fiscal Year Ended December 31, 1997 High Low
----------------------------------- ---- ---
<S> <C> <C>
First Quarter $5.625 $5.25
Second Quarter $6.1875 $5.00
Third Quarter $6.0625 $3.25
Fourth Quarter $7.25 $4.25
<CAPTION>
Fiscal Year Ended December 31, 1998 High Low
----------------------------------- ---- ---
<S> <C> <C>
First Quarter $5.875 $4.50
Second Quarter (through June 12) $4.875 $9.00
</TABLE>
On June 12, 1998, the last reported sales price for 4Health's Common Stock
as reported by NSM was $6.75.
On May 26, 1998, 4Health had 159 stockholders of record (exclusive of
shareholders who hold title to their shares in street name).
4Health has not paid dividends with respect to the 4Health Common Stock.
There are no restrictions on the declaration or payment of dividends in the
Articles of Incorporation or Bylaws of 4Health 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 the
Surviving Corporation will be retained for working capital and investment in
growth and expansion of the business. Consequently, it is not anticipated that
the Surviving Corporation will pay dividends in the foreseeable future.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information combines
the historical statements of operations and balance sheets of 4Health and IN,
including their respective subsidiaries, after giving effect to the Merger. The
Merger results in the shares of common stock, no par value per share, of IN
outstanding immediately prior to the Merger being converted into 15,750,000
shares of 4Health Common Stock. The unaudited pro forma condensed combined
statements of operations for each of the years in the three-year period ended
December 31, 1997 and the three month period ended March 31, 1998, give effect
to the Merger as if 4Health and IN had always been combined. The pro forma
condensed combined balance sheet gives effect to the Merger as if it had
occurred on March 31, 1998. These statements are prepared on the pooling of
interests basis of accounting. The statements are based on the assumptions set
forth in the notes thereto. No adjustments have been made to these pro forma
financial statements to conform the accounting policies of the combining
companies. The nature and extent of such adjustments, if any, are not expected
to be significant.
The information shown below should be read in conjunction with the
historical financial statements of 4Health and IN, including the respective
notes thereto. The pro forma financial statements are presented for
informational purposes only and are also not necessarily indicative of the
combined financial position or results of operations which would have been
realized had the Merger been consummated as of the dates assumed for the
preparation of the unaudited condensed combined pro forma financial statements.
The unaudited condensed combined pro forma financial statements also are not
necessarily indicative of the combined financial position or results of
operations in the future. Upon consummation of the Merger, the actual financial
position and results of operations of the Surviving Corporation will differ,
perhaps significantly, from the pro forma amounts reflected herein due to a
variety of factors, including changes in operating results between the dates of
the pro forma financial information and the date on which the Merger is
consummated.
30
<PAGE>
4HEALTH, INC. AND IRWIN NATURALS
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
IRWIN NATURALS
COMBINED WITH APPLIED
4HEALTH, INC. NUTRITION PRO FORMA
(UNAUDITED) (UNAUDITED) COMBINED
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . $ 3,459,406 $ 5,368,554 $ 8,827,960
Cost of Goods Sold . . . . . . . . . . . . 1,476,836 2,243,712 3,720,548
---------------------- -------------------------- -------------------
Gross Profit . . . . . . . . . . . . . . . 1,982,570 3,124,842 5,107,412
Operating Expenses:
Sales and Marketing . . . . . . . . . . . 1,169,409 750,094 1,919,503
Research and Development . . . . . . . . 72,519 --- 72,519
General and Administrative . . . . . . . 734,399 763,079 1,497,478
---------------------- -------------------------- -------------------
1,976,327 1,513,173 3,489,500
(Loss) Income From
Operations . . . . . . . . . . . . . . . 6,243 1,611,669 1,617,912
Other Income (Expense), Net . . . . . . . . (6,949) (7,968) (14,917)
---------------------- -------------------------- -------------------
Net (Loss) Income Before
Provision For Income Taxes . . . . . . . (706) 1,603,701 1,602,995
Income Tax Benefit
(Provision) . . . . . . . . . . . . . . . 33,560 (641,480) (607,920)
---------------------- -------------------------- -------------------
Net (Loss) Income . . . . . . . . . . . . . 32,854 $ 962,221 $ 995,075
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Net (Loss) Income Per
Common Share-basic and diluted . . . . . $ -- $ 14.75 $ 0.04
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Weighted Average Common
Shares Outstanding - basic . . . . . . . 11,978,439 65,250 27,728,439
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Weighted Average Common
Shares Outstanding - diluted . . . . . . 12,109,944 65,250 27,859,944
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
</TABLE>
See accompanying notes to proforma combined financial statements.
31
<PAGE>
4HEALTH, INC. AND IRWIN NATURALS
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
IRWIN NATURALS
COMBINED WITH APPLIED PRO FORMA
4HEALTH, INC. NUTRITION COMBINED
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . $12,431,670 $17,258,828 $29,690,498
Cost of Goods Sold . . . . . . . . . . . . 6,122,315 7,778,039 13,900,354
---------------------- -------------------------- -------------------
Gross Profit . . . . . . . . . . . . . . . 6,309,355 9,480,789 15,790,144
Operating Expenses:
Sales and Marketing . . . . . . . . . . . 6,197,524 3,493,683 9,691,207
Research and Development . . . . . . . . 418,190 418,190
General and Administrative . . . . . . . 3,031,447 4,085,634 7,117,081
Loss on write-off of assets . . . . . . . 3,202,431 -- 3,202,431
---------------------- -------------------------- -------------------
12,849,592 7,579,317 20,428,909
(Loss) Income From
Operations . . . . . . . . . . . . . . . (6,540,237) 1,901,472 (4,638,765)
Other Income (Expense), Net . . . . . . . . (88,874) 9,995 (78,879)
---------------------- -------------------------- -------------------
Net (Loss) Income Before
Provision For Income Taxes . . . . . . . (6,629,111) 1,911,467 (4,717,644)
Income Tax Benefit
(Provision) . . . . . . . . . . . . . . . - - (764,587) (764,587)
---------------------- -------------------------- -------------------
Net (Loss) Income . . . . . . . . . . . . . $(6,629,111) $1,146,880 $(5,482,231)
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Net (Loss) Income Per
Common Share-basic and diluted . . . . . $(0.57) $17.58 $(0.20)
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Weighted Average Common
Shares Outstanding - basic and
diluted . . . . . . . . . . . . . . . . . 11,615,004 65,250 27,365,004
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
</TABLE>
See accompanying notes to proforma combined financial statements.
32
<PAGE>
4HEALTH, INC. AND IRWIN NATURALS
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
4HEALTH, INC. IRWIN NATURALS COMBINED
----------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . . . . . $17,351,829 $11,463,720 $28,815,549
Cost of Goods Sold . . . . . . . . . . . . . 6,924,473 5,625,196 12,549,669
---------------------- -------------------------- -------------------
Gross Profit . . . . . . . . . . . . . . . . 10,427,356 5,838,524 16,265,880
Operating Expenses:
Sales and Marketing . . . . . . . . . . . . 9,585,232 1,245,670 10,830,902
Research and Development . . . . . . . . . 414,998 414,998
General and Administrative . . . . . . . . 3,080,588 3,237,806 6,318,394
---------------------- -------------------------- -------------------
13,080,818 4,483,476 17,564,294
(Loss) Income From Operations . . . . . . . . (2,653,462) 1,355,048 (1,298,414)
Other Income (Expense), Net . . . . . . . . . 38,106 63,551 101,657
---------------------- -------------------------- -------------------
Net (Loss) Income Before
Provision for Income Taxes . . . . . . . . (2,615,356) 1,418,599 (1,196,757)
Income Tax Benefit
(Provision) . . . . . . . . . . . . . . . . 65,215 (659,098) (593,883)
---------------------- -------------------------- -------------------
Net (Loss) Income . . . . . . . . . . . . . . $(2,550,141) $759,501 $(1,790,640)
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Net (Loss) Income Per
Common Share - basic and diluted . . . . . $(0.26) $11.64 $(0.07)
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
Weighted Average Common
Shares Outstanding - basic and
diluted . . . . . . . . . . . . . . . . . . 9,896,822 65,250 25,646,822
---------------------- -------------------------- -------------------
---------------------- -------------------------- -------------------
</TABLE>
See accompanying notes to proforma combined financial statements.
33
<PAGE>
4HEALTH, INC. AND IRWIN NATURALS
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
4HEALTH, INC. IRWIN NATURALS COMBINED
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . $10,434,022 $2,448,566 $12,882,588
Cost of Goods Sold . . . . . . . . . 3,802,877 1,460,159 5,263,036
---------------------- -------------------------- ------------------
Gross Profit . . . . . . . . . . . . 6,631,145 988,407 7,619,552
Operating Expenses:
Sales and Marketing . . . . . . . . 3,873,466 88,782 3,962,248
Research and Development . . . . . 149,366 149,366
General and Administrative . . . . 1,476,986 688,702 2,165,688
---------------------- -------------------------- ------------------
5,499,818 777,484 6,277,302
(Loss) Income from
Operations . . . . . . . . . . . . 1,131,327 210,923 1,342,250
Other Income (Expense), Net . . . . . (62,925) (13,803) (76,728)
---------------------- -------------------------- ------------------
Net (Loss) Income Before
Provision For Income Taxes . . . . 1,068,402 197,120 1,265,522
Income Tax Benefit
(Provision) . . . . . . . . . . . . (359,723) (78,848) (438,571)
---------------------- -------------------------- ------------------
Net (Loss) Income . . . . . . . . . . $708,679 $118,272 $826,951
---------------------- -------------------------- ------------------
---------------------- -------------------------- ------------------
Net (Loss) Income Per
Common Share - basic and
diluted . . . . . . . . . . . . . . $0.08 $1.81(1) $0.03
---------------------- -------------------------- ------------------
---------------------- -------------------------- ------------------
Weighted Average Common
Shares Outstanding - basic . . . . 8,707,214 65,250 24,457,214
---------------------- -------------------------- ------------------
---------------------- -------------------------- ------------------
Weighted Average Common
Shares Outstanding - diluted . . . 8,833,047 65,250 24,583,047
---------------------- -------------------------- ------------------
---------------------- -------------------------- ------------------
</TABLE>
(1) Represents pro forma net income per common share because it assumes 65,250
shares outstanding for the entire year, even though Irwin Naturals was not
incorporated until August 1995. Irwin Naturals began operations as a sole
proprietorship in October 1994.
See accompanying notes to proforma combined financial statements.
34
<PAGE>
4HEALTH, INC. AND IRWIN NATURALS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
4HEALTH, INC. IRWIN NATURALS PRO FORMA PRO FORMA
(UNAUDITED) (UNAUDITED) ADJUSTMENTS COMBINED
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT ASSETS: (350,000) (D)
Cash and cash equivalents . . . . . . . . . . . . . $ 313,817 $ 938,125 (641,000) (F) $ 260,942
Accounts receivable, net . . . . . . . . . . . . . 1,497,082 3,274,700 4,771,782
Inventories, net . . . . . . . . . . . . . . . . . 1,649,032 681,737 2,330,769
Deferred tax asset . . . . . . . . . . . . . . . . 160,425 --- 160,425
Other assets . . . . . . . . . . . . . . . . . . . 118,343 293,426 411,769
Notes receivable, net . . . . . . . . . . . . . . . 44,378 --- 44,378
-------------------- ------------------ --------------
Total current assets . . . . . . . . . . . . . . 3,783,077 5,187,988 7,980,065
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . 2,238,230 202,158 2,440,388
OTHER ASSETS, NET . . . . . . . . . . . . . . . . . 572,727 --- 572,727
DEFERRED TAX ASSET . . . . . . . . . . . . . . . . 56,365 --- 56,365
NOTES RECEIVABLE . . . . . . . . . . . . . . . . . 68,502 --- 68,502
-------------------- ------------------ --------------
Total assets . . . . . . . . . . . . . . . . . . 6,718,901 5,390,146 11,118,047
-------------------- ------------------ --------------
-------------------- ------------------ --------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . 1,253,278 761,458 2,014,736
Accrued liabilities . . . . . . . . . . . . . . . . 394,877 642,492 1,037,369
Customer deposits . . . . . . . . . . . . . . . . . --- 449,995 449,995
Taxes payable . . . . . . . . . . . . . . . . . . . 41,991 --- 41,991
Notes payable . . . . . . . . . . . . . . . . . . . 30,066 --- (315,000) (E) 345,066
Line of credit . . . . . . . . . . . . . . . . . . 441,073 --- 441,073
-------------------- ------------------ --------------
Total current liabilities . . . . . . . . . . . 2,161,285 1,853,945 4,330,230
NOTES PAYABLE . . . . . . . . . . . . . . . . . . . 1,289,830 --- (315,000) (E) 1,604,830
STOCKHOLDER'S EQUITY:
Common Stock . . . . . . . . . . . . . . . . . . . 120,698 130,500 130,500 (A) 278,198
(157,500) (B)
Additional paid in capital - common stock . . . . . 11,412,297 --- 27,000 (C) 11,385,297
Additional paid in capital - common warrants . . . 372,059 --- 372,059
Treasury stock . . . . . . . . . . . . . . . . . . (50,000) --- (50,000)
(Accumulated deficit) retained earnings . . . . . (8,587,268) 3,405,701 350,000 (D) (6,802,567)
630,000 (E)
641,000 (F)
-------------------- ------------------ --------------
Total stockholders' equity . . . . . . . . . . . . 3,267,786 3,536,201 5,182,987
-------------------- ------------------ --------------
Total liabilities and stockholders' equity $6,718,901 $5,390,146 $11,118,047
-------------------- ------------------ --------------
-------------------- ------------------ --------------
</TABLE>
See accompanying notes to proforma combined financial statements.
35
<PAGE>
NOTES TO PRO FORMA COMBINED BALANCE SHEET
(A) To eliminate the common stock of IN which was converted into 4Health Common
Stock.
(B) To reflect the par value of 15,750,000 shares of 4Health Common Stock
issued to IN in the Merger.
(C) To record the net impact of (A) and (B).
(D) To record the estimated Merger expenses.
(E) To record the promissory notes issued in connection with the Merger.
(F) To record the estimated payment due for taxes to the IN principals related
to IN taxable income for the three months ended March 31, 1998, because of
its S Corporation status.
HISTORICAL AND PRO FORMA PER SHARE INFORMATION
The following table presents certain historical data respecting 4Health
Common Stock as well as comparative data after giving effect to the Merger,
based on the Conversion Ratio.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
Three Months Ended
March 31, 1998 1997
--------------------------------- ----------------------------------------
Historical Pro Forma(1) Historical Pro Forma(1)
----------- ------------ -------------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) per common share-basic -- $0.04 $(0.57) $(0.20)
Cash dividends per share of
common stock . . . . . . . . . . . . . None $0.01 None $ 0.02
Book value per share of common stock . . $0.27 $0.19
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- --------------------------- ------------------------------
Historical Pro Forma(1) Historical Pro Forma(1) Historical Pro Forma(1)
------------ ------------- ----------- ------------- -------------- -------------
<S> <S> <C> <C> <C> <C> <C>
Net income (loss) per common
share-basic . . . . . . . . $(0.26) $(0.07) $0.08 $ 0.03 $(0.02) $0.00
Cash dividends per share of
common stock . . . . . . . . . None None None $ 0.01 None None
Book value per share of common
stock . . . . . . . . . . .
</TABLE>
- ------------------
(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 pro forma
values represent the per share amounts assuming the issuance of shares to
IN in the Merger.
36
<PAGE>
BUSINESS OF 4HEALTH
GENERAL
4Health, Inc., a Utah corporation, formerly known as Surgical Technologies,
Inc. ("Surgical"), is the successor to 4health, Inc., a California corporation
originally formed in February, 1993 by R. Lindsey Duncan, which merged into
Surgical on July 15, 1996, pursuant to which Surgical changed its name to
"4Health, Inc." The merger was recorded as a reverse purchase. (See Note 1 to
the Financial Statements for the year ended December 31, 1996.) 4Health 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 are produced solely from natural ingredients and are
formulated for the purposes of achieving specific dietary or nutritional goals.
PRODUCTS
4Health is of the opinion that its product formulas 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, "non-disclosure/non-competition" agreements with its manufacturers
and employees and trademark protection. The formulations of 4Health's products
were developed by 4Health's founder and chief executive officer, R. Lindsey
Duncan, a nutritionist certified by the National Institute of Nutritional
Education. 4Health trademarks all brand line names and most product names.
4Health further protects its trademarks by taking prompt action against
potential infringements.
4Health's products that are sold through health food stores, under the
proprietary brand name "Nature's Secret-Registered Trademark-", accounted for
approximately 81% of 4Health's 1997 total sales. 4Health also has a proprietary
line of products that it sells to health care practitioners under the "Harmony
Formulas-Registered Trademark-" label. Sales of products under the Harmony
Formulas-Registered Trademark- label comprised approximately 7% of 4Health's
total sales in 1997.
In the Fall of 1996, 4Health introduced a line products directed at the
mass food and drug market. These products are currently marketed under the name
"4Health.-TM-" Sales from the 4Health-TM- line accounted for 12% of 4Health's
total sales in 1997.
In the fourth quarter of 1997, 4Health entered into an agreement with IN
pursuant to which Lindsey Duncan and 4Health assisted with the development of
the formulation of a weight loss product to be sold by IN under the name
PhenSafe-TM-. Under this agreement, which will become effective only if the
Merger with IN is not consummated, 4Health will be entitled to receive 50% of
the net profits from the sale of the product.
COMPETITION
The industry in which 4Health operates is highly competitive. In the
health food stores and practitioners channels of distribution, there are many
relatively small companies which offer products. 4Health's Nature's
Secret-Registered Trademark- and Harmony Formula-Registered Trademark- brand
lines have built strong brand loyalty with retailers, practitioners, and
customers through quality products, excellent customer service and an emphasis
on health through education. 4Health continues to be a leader in internal
cleansing products and uses this success to launch products for other health
concerns.
In the food, drug and mass market, 4Health faces increased competition from
competitors, many of whom are significantly larger and have greater financial
resources than 4Health. In this market it is often difficult and costly to get
new products on store shelves. 4Health believes it can compete successfully in
the food, drug and mass market because of unique formulations and packaging,
strong quality, and good relationships with distributors and store buyers.
37
<PAGE>
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. To date, 4Health has relied
exclusively on domestic manufacturers in order to facilitate quality assurance
monitoring.
4Health places purchase orders with its suppliers for individual product
manufacturing lots for delivery of packaged and labeled products to 4Health's
distribution center in Broomfield, Colorado. 4Health has no long-term
manufacturing agreements with any of its suppliers, but purchases manufactured
lots pursuant to individual purchase orders. Currently, 4Health utilizes eight
separate manufacturers and believes that there are other qualified manufacturers
that would meet 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
seasonal availability to a limited degree.
MARKETING AND SALES
4Health principally markets its products through retail health food stores,
including vitamin and natural foods grocery stores with vitamin aisles, and
alternative health care providers such as chiropractors and nutritionists. In
1996, 4Health also began marketing a distinct new line of products to the mass
food and drug market.
Products are introduced to retail outlets through advertising of 4Health
products in national nutrition magazines, trade magazines, and 4Health's
telemarketing staff and outside sales force which contacts retail outlet
representatives to introduce 4Health's products and to provide continuing
product education and sales support. Through product incentives, 4Health
encourages retail outlet employees 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. Traditionally, 4Health's products have emphasized
quality rather than price, especially with regards to the health food store
market. The products designed for the mass food and drug market have different
formulations which allow the products to be priced for the more value-conscious
buyer.
EMPLOYEES
4Health has 70 employees, including one executive officer, three senior
managers, 19 individuals in general administration, 25 individuals in sales and
marketing, 19 individuals in operations, and three individuals 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 has not experienced any work stoppages or
slow-downs.
PROPERTIES
4Health's principal offices are located at 5485 Conestoga Court, Boulder,
Colorado in a 4Health-owned building which houses all business activities other
than distribution and has excess space for growth. The following table sets
forth information regarding 4Health's facilities:
<TABLE>
<CAPTION>
Location Size Function
-------- ----- ---------
<S> <C> <C>
Boulder, Colorado 28,000 sq. ft. Corporate headquarters
Broomfield, Colorado 22,600 sq. ft. Distribution center and
warehouse
</TABLE>
38
<PAGE>
Prior to March 25, 1997, a re-financing of the Boulder facility was
completed and the new mortgage is carried by Standard Insurance Company. (See
Note 3 to the Financial Statements of 4Health, Inc.) The Broomfield
distribution center is under a three year lease which became effective January
1, 1996 and expires December 31, 1998, at an annual rental of $84,750. The
lease has a renewal option for another three years. 4Health believes both
facilities are adequate in capacity and condition if required to satisfy growth
in the foreseeable future.
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
The processing, formulation, packaging, labeling and advertising of
4Health's products are subject to regulation by several federal and state
agencies. See "Business of IN - Governmental Regulation" for a summary
description of such regulation.
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 Proxy Statement. The selected financial
data of 4Health has been derived from the financial statements of 4Health which
have been audited by Arthur Andersen LLP, independent public accountants. The
financial statements of 4Health at December 31, 1997 and 1996 and for the fiscal
years ended December 31, 1997, 1996 and 1995, together with the report of Arthur
Andersen LLP thereon, appear elsewhere in this Proxy Statement. The selected
financial data of 4Health as of March 31, 1998, and for the three months ended
March 31, 1998 and 1997 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.
39
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
----------------------------- -----------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------
(UNAUDITED)
1998 1997 1997 1996 1995 1994
------------ ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . $3,459 $3,372 $12,432 $17,352 $10,434 $2,077
Gross profit . . . . . . . . . . . . . 1,983 1,322 6,309 10,427 6,631 1,332
Operating (loss) income . . . . . . . 6 (1,408) (6,540) (2,653) 1,131 (131)
Other income (expense), net . . . . . (7) 23 (89) 38 (63) (5)
------------ ----------- ------------ ----------- ------------ ----------
(Loss) income before income
taxes . . . . . . . . . . . . . . (1) (1,385) (6,629) (2,615) 1,068 (136)
Income taxes . . . . . . . . . . . . . 34 141 --- 65 (360) (2)
------------ ----------- ------------ ----------- ------------ ----------
Net (loss) income . . . . . . . . . . $33 $(1,244) $(6,629) $(2,550) $708 $(138)
------------ ----------- ------------ ----------- ------------ ----------
------------ ----------- ------------ ----------- ------------ ----------
PER SHARE DATA:
Net (loss) income per common share-
basic and diluted . . . . . . . . . . $--- $(0.11) $(0.57) $(0.26) $0.08 $(0.02)
Weighted average shares
outstanding - basic . . . . . . 11,978,439 11,374,500 11,615,004 9,896,822 8,707,214 7,334,729
Weighted average shares
outstanding - diluted . . . . 12,109,944 11,374,500 11,615,004 9,896,822 8,833,047 7,334,729
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(FEBRUARY 17, 1993) TO
DECEMBER 31,
------------------------
1993
------------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . . . $270
Gross profit . . . . . . . . . . . . . . . . 182
Operating (loss) income . . . . . . . . . . (7)
Other income (expense), net . . . . . . . . (6)
---------------
(Loss) income before income
taxes . . . . . . . . . . . . . . . . . (13)
Income taxes . . . . . . . . . . . . . . . . 1
---------------
Net (loss) income . . . . . . . . . . . . . $(12)
---------------
---------------
PER SHARE DATA:
Net (loss) income per common share-basic
and diluted . . . . . . . . . . . . . . . . $--
Weighted average shares
outstanding - basic . . . . . . . . . 6,018,680
Weighted average shares
outstanding - diluted . . . . . . . . 6,018,680
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
MARCH 31, 1998 1997 1996 1995 1994 1993
(UNAUDITED)
----------------- ---------------- -------------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . $1,622 $1,529 $3,977 $2,236 $ 670 $ 84
Total assets . . . . . . . . . 6,719 6,363 12,224 5,228 2,670 151
Long-term debt . . . . . . . . 1,290 1,298 1,276 1,296 1,380 84
Shareholders' equity . . . . . 3,268 3,133 9,335 3,043 892 18
</TABLE>
4HEALTH, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR 1995, 1996, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
The following table sets forth, for years 1995, 1996, 1997, and three
months ended March 31, 1998, certain items from 4Health's Statements of
Operations included on page F-4, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------- ---------------------------
1995 1996 1997 1997 1998
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales . . . . . . 36.4% 39.9% 49.2% 60.8% 42.7%
------ ------ ------ ------ ------
Gross Profit . . . . . . 63.6% 60.1% 50.8% 39.2% 57.3%
General and administrative
expenses. . . . . . . . . 14.2% 17.8% 24.3% 24.6% 21.2%
Sales and marketing
expenses . . . . . . . . 37.1% 55.2% 49.9% 51.3% 33.8%
Research and development 1.5% 2.4% 3.4% 5.1% 2.1%
Loss on write-off of
intangible assets . . . . --% --% 25.8% --% --%
------ ------ ------ ------ ------
Income (loss) from
operations . . . . . . . 10.8% (15.3%) (52.6%) (41.8%) 0.2%
Other income (expense),
net . . . . . . . . . . . (0.6%) 0.2% (0.7%) 0.7% (0.2%)
------ ------ ------ ------ ------
Income (loss) before
income taxes . . . . . . 10.2% (15.1%) (53.3%) (41.1%) --%
(Provision) benefit for
income taxes . . . . . . (3.4%) 0.4% ---% 4.2% 0.9%
------ ------ ------ ------ ------
Net income (loss) . . . . 6.8% (14.7%) (53.3%) (36.9%) 0.9%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
COMPARISON OF FIRST QUARTER 1998 TO 1997
Net sales for all company brands for the three months ended March 31, 1998,
increased $88 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-Registered Trademark- brand net sales was
somewhat offset by a decrease in net sales in 1998 in the 4Health-Registered
Trademark- brand of $244 thousand and in the International Division of $101
thousand. The decrease in
41
<PAGE>
4Health-Registered Trademark- 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 4Health's 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 ended
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-Registered Trademark- brand activity, net sales were actually up
30%, or $672 thousand, for the three months ending March 31, 1998 compared to
the same period in 1997. This increase in the first quarter of this year is due
to the success of a new company advertising campaign and the success of new
product introductions. 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
continue as well.
Gross profit increased 50% to $2.0 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 writedown 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 $2.0 million for the three
months ending March 31, 1998 due to the increase in sales of Nature's
Secret-Registered Trademark- products. The gross profit margin increased by
18.1%, 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 gross 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 attributes this decrease in gross profit margin 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 $2.0 million form $2.7 million for the same quarter
in 1997. After 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, advertising agency fees and other related advertising
development costs, marketing related travel costs and company marketing
personnel costs. 4Health's research and development department decreased
spending $101 thousand in the three months ending March 31, 1998 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 increased
$33 thousand, or 6.2% in the first quarter of 1998 to $575 thousand 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 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 $33 thousand, or $.00 per share, for the
three months ended March 31, 1998 compared to a net loss of $1.2 million, or
($.11) per share, for the three months ended March 31, 1997.
42
<PAGE>
COMPARISON OF 1997 TO 1996
Net sales decreased $4.9 million or 28% from $17.4 million in 1996 to $12.4
million in 1997. Net sales in the Nature's Secret-Registered Trademark- brand
decreased $6.3 million or 37%, from $15.6 million to $9.9 million, due primarily
to a large sale to a major customer in 1996. Sales of the 4Health-Registered
Trademark- brand increased $.94 million or 142 % from $.66 million in 1996 to
$1.6 million in 1997 and net sales in the Harmony Formulas-Registered Trademark-
brand decreased $.08 million or 8%, from $.96 million to $.88 million in the
same periods respectively.
Excluding the large sale to a major customer in 1996, overall net sales
were flat in 1997. The Nature's Secret-Registered Trademark- brand saw an
increase in net sales in the last quarter of 1997 when compared to the same
period in 1996. Management anticipates this trend to continue throughout 1998
due to its focused marketing campaign and introduction of new products. 4Health
also feels that the 4Health-TM- and Harmony Formulas-Registered Trademark-
brands will experience flat net sales in 1998. 4Health also experienced
increased international sales activity at the end of 1997 and management expects
foreign sales to increase significantly in 1998.
Gross profit decreased 39% to $6.3 million in 1997 from $10.4 million in
1996. The gross profit margin in 1997 declined 9.3% from 60.1% in 1996 to 50.8%
in 1997. Management attributes 6% of this decline to a $.76 million write-down
of inventory. This inventory was exchanged for $2.3 million of barter credits.
The Company expects to utilize these credits primarily for future advertising
and travel expenses. 1.0% of the decline is attributable to the scrapping of
obsolete inventory primarily related to a packaging changeover in the Nature's
Secret-Registered Trademark- brand, and the balance of the decline is
attributable to a shift in sales to products with gross margins less than
historical averages.
The loss on write-off of assets of $3.2 million was due to the write-off of
the goodwill balance generated in the merger with Surgical Technologies, Inc.
It was determined under Statement of Financial Accounting Standards No. 121 that
this asset had no value at December 31, 1997, and as such, was written-off in
its entirety. General and administrative expenses increased 6.5% from 17.8% in
1996 to 24.3% in 1997 as a percentage of sales. Management attributes this
increase to the expenses related to operating as a publicly held company for an
entire year and legal fees in connection with a dispute with a major customer,
now settled, which significantly exceeded cuts in personnel and other overhead
costs. Sales expenses decreased $.7 million or 26% from $2.7 million in 1996 to
$2 million in 1997. Marketing expenses decreased $2.7 million or 39% from $6.9
million in 1996 to $4.2 million in 1997. As a percentage of sales, sales and
marketing expenses decreased 5.3% from 55.2% in 1996 to 49.9% in 1997.
Reductions in advertising expenses to support the Nature's Secret brand
accounted for most of this decrease.
Research and development costs increased slightly from $.415 million in
1996 to $.418 million in 1997. As a percent of net sales, these expenses
increased 1.0%. Continued development of new products and ongoing clinical
studies related to new and existing products accounted for this spending.
Management expects this department to decrease its expenditures in 1998 as there
are no clinical studies planned for the coming year.
Management implemented an expense reduction program in the second half of
1997 which resulted in a drop in operating expenses of approximately $1 million
in the second half of the year when compared to the first half. The expense
reduction program is still in place in 1998, and management intends to continue
to look for ways to cut costs in the coming year.
1996 COMPARED TO 1995
Net sales increased $6.9 million in 1996 or 66%, from $10.4 million in
1995, to $17.3 million. Net sales in the Nature's Secret-Registered Trademark-
brand increased $5.7 million in 1996 or 37%, from $9.8 million in 1995 to $15.5
million, due primarily to a large sale to a major customer. Sales of the
4Health-TM- brand into the food, drug and mass market amounted to $.65 million
of new business in 1996 and net sales in the Harmony Formulas-Registered
Trademark- brand increased $.3 million or 31%, from $.66 million in 1995 to $.96
million in 1997, due primarily to increased sales and marketing efforts.
Gross profit increased 57% to $3.8 million from $6.6 in 1995 to $10.4
million in 1996. The gross profit margin in 1996 declined 3.5 % from 63.6% in
1995 to 60.1%. Management attributes this decline to introduction of new
products with gross margins less than historical averages and aggressive
discounting on large sales to a major customers.
43
<PAGE>
General and administrative expenses increased 107% to $3.1 million in 1996
compared to $1.5 million in 1995. As a percent of net sales, these expenses
increased 3.5% from 14.2% in 1995 to 17.7% in 1996. Management attributes these
increases to 4Health's decision to build the corporate infrastructure by adding
new executives and managers, expenses related to operating as a publicly held
company and legal fees in connection with a dispute with a major customer.
Additionally, sales and marketing expenses increased $5.7 million or 148% from
$3.9 million in 1995 to $9.6 million in 1996. As a percentage of sales, sales
and marketing expense increased 18.4% from 37.1% in 1995 to 55.4% in 1996.
Increased selling and advertising expenses to support the Nature's
Secret-Registered Trademark- and 4Health-TM- brands accounted for 38% of this
increase. The build-up of the outside sales forces, sales management and the
addition of new marketing management for both brands accounted for another 35%
of the increase. Television advertising related to the large sale to a major
customer explained another 23% of the increase.
Research and development costs increased 178% from $149 thousand in 1995 to
$415 thousand in 1996. As a percent of net sales, these expenses increased less
than 1%. Development of new products and clinical studies related to new and
existing products accounts for this increase.
1995 COMPARED TO 1994
Net sales, for the year ended December 31, 1995, increased 402% to $10.4
million from $2.1 million for the year ended December 31, 1994. This increase
was primarily due to a significant market penetration of health food stores from
approximately 2,000 in 1994 to 5,400 active accounts by the end of 1995.
Included in these stores, is a large chain of approximately 1,600 health food
stores which carries only one of 4Health's products. Sales to this customer
accounted for 12.8% of total revenues in 1995. An additional contributor to
4Health's revenue growth, was the launch of its Ultimate Multi-Registered
Trademark- product in July of 1995 which accounted for 7.5% of total sales to
health food stores.
Gross profit for the year ended December 31, 1995 increased 398% to $6.6
million from $1.3 million for the year ended December 31, 1995. Gross margin
declined .5% to 63.6% in 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 customers orders
are fulfilled and shipped within 24 hours of receipt.
General and administrative expenses increased 143% in the year ended
December 31, 1995 compared to the prior year whereas general and administrative
expenses declined to 14.2% of net sales in 1995 compared to 29.3% in 1994.
Management attributes this increase in spending to building infrastructure to
remain competitive and to provide superior customer service. Sales and
marketing expenses increased 374% in 1995 to $3.9 million up from $.8 million in
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 1995 compared to $.15 million in 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.
Interest expense results from the $1.3 million loan on 4Health's building
which was outstanding for twelve months in 1995 at 7.5% interest compared to
only seven months in 1994 at an interest rate of 3.5%.
LIQUIDITY AND CAPITAL RESOURCES
AT DECEMBER 31, 1997
Since 4Health's inception on February 17, 1993, it has financed its
business growth primarily through operations, common stock sales and short-term
borrowings from stockholders.
In 1995, 4Health raised $1.5 million in cash from the net proceeds of the
sale of preferred stock. In 1994, 4Health raised $1.0 million of cash from the
net proceeds of the sale of Common Stock. 4Health has used the proceeds raised
in 1995 and 1994 to finance its growth and expansion in those years.
44
<PAGE>
During 1996, 4Health used cash of $3.3 million for operations. As a result
of the merger with Surgical, 4Health received cash and cash equivalents of $3.6
million. The bulk of these proceeds were used to fund marketing projects and
increased marketing personnel costs. Sales and marketing expenses increased
$5.7 million in 1996 over 1995. The majority of these expenditures were
discretionary in nature and 4Health plans to curtail these activities unless
they can be supported by ongoing operations. In addition $1.2 million was used
to increase inventory during 1996. 4Health intends to substantially reduce
inventory amounts during 1997 to reduce cash requirements.
4Health's cash and cash equivalents position at December 31, 1997, was $.11
million compared to $1.1 million on December 31, 1996. The $1 million decrease
in cash was due primarily to the cost of national magazine advertising and the
development of an infomercial for the mass market distribution channel in the
first half of 1997. The magazine advertising was not targeted to health food
store shoppers and proved to be ineffective in producing increased revenue and
the infomercial was discontinued after an unsuccessful test. 4Health ended the
latest year with working capital of $1.6 million and a 1.8 to 1 working capital
ratio.
Accounts receivable totaled $1.6 million at December 31, 1997 as compared
to $1.1 million on December 31, 1996. Management attributes the increase to the
longer collection cycle for mass market related sales, as well as an increase of
$.3 million in fourth quarter sales in 1997 when compared to the same period in
1996.
Inventories were valued at $1.3 million at December 31, 1997 as compared to
$2.5 million at December 31, 1996, which represents a 48% decrease or $1.2
million. The decline in inventories was due primarily to a writedown which
reduced inventories $.76 million. Management attributes the rest of the
inventory reduction to better inventory and vendor management.
Notes receivable decreased $.27 million to $.11 million on December 31,
1997 from $.38 million on December 31, 1996 as the result of the payments on
notes receivable acquired by 4Health in the merger with Surgical Technologies,
Inc.
Capital expenditures for the year ended December 31, 1997 were $.08 million
compared to $.53 million for the same period in 1996. Management attributes the
decline in capital expenditures to its efforts to conserve cash and a policy to
aggressively use the existing capital assets acquired in 1995 and 1996.
Other assets as of December 31, 1996 consisted primarily of intangible
assets related to the merger with Surgical Technologies, Inc., including ID
technology and goodwill, with the remainder made up of prepaid expenses and
deposits. The ID technology is primarily the capitalized cost of patents and
trademarks of a medical device used in angioplasty procedures. These intangible
assets decreased $3.0 million in 1997 due primarily to the write-off of the
goodwill in accordance with Statement of Financial Accounting Standards No. 121
which deals with the accounting for impairment of long-lived assets. The
goodwill was recorded in the merger with Surgical Technologies, Inc. in 1996 and
was determined to have no value at December 31, 1997. The balance of other
assets at December 31, 1997 consisted of ID technology, prepaid expenses and
deposits. The Company believes the ID technology to be a viable asset at its
current recorded value of approximately $480,000 at December 31, 1997. In
December 1997, the Company entered into an agreement with InterVentional
Technologies, Inc. ("IVT") to mutually explore the viability of entering into a
joint venture agreement in order to further develop the technology, increase
revenues and earnings, and transfer the ownership of the device to IVT. The
Company believes the new design of the device will be less expensive to produce,
thus allowing the device to compete for U.S. market share, while maintaining
international sales volumes. The Company is currently amortizing this asset
over an eight year useful life.
Accounts payable and accrued liabilities decreased $.3 million due
primarily to borrowing on 4Health's line of credit with Norwest Business Credit,
Inc., which line had a balance of $.7 million at December 31, 1997. Borrowings
have been used primarily to pay vendors and suppliers for inventory needed for
the normal seasonal first quarter increase in sales activity anticipated in 1998
and to finance additional accounts receivable generated in the fourth quarter of
1997. Available borrowing capacity in addition to the amount outstanding on the
revolving line of credit at December 31, 1997 was $.25 million, and at March 27,
1998 was $.93 million.
4Health used cash for operating activities of $3.3 million in 1996 and $2.1
million in 1997. $3.9 million in cash was generated in 1996 from investing
activities, the majority of which came from the Surgical acquisition. This
cash,
45
<PAGE>
together with the cash on hand at the beginning of 1996 of $.9 million and the
additional borrowings from financing activities in 1997 of $.9 million has
allowed 4Health to fund these operating losses and some capital expenditures.
4Health reduced its operating costs over $.95 million in the last six
months of 1997 as compared to the first half of 1997. Although cash used in
operations in the second half of 1997 increased slightly over the first half of
1997, the increase was due to a large reduction of accounts payable using
4Health's line of credit. Cash flow from operations in the first quarter of
1998 continues to improve.
AT MARCH 31, 1998
The Company's cash and cash equivalents position increased $204 thousand
at March 31, 1998, to $314 thousand compared to $110 thousand at December 31,
1997. This increase 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 its 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 Natures
Secret-Registered Trademark- brand, which have a shorter collection cycle than
the 4Health-Registered Trademark- brand, caused a reduction in the average
collections cycle 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-Registered Trademark- brand customer receivables.
Natures Secret-Registered Trademark- brand and 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 a 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 1997 were $64 thousand
as compared to $0 for the same period in 1998. Management has placed a
temporary hold on any capital spending pending the outcome of the proposed
merger with IN.
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 $1.1 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 from 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 outstanding 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 the Company's operations used $694 thousand of cash, a $1.2 million
improvement. The majority of this improvement is due to the successful
efforts 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 in 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.
46
<PAGE>
In January 1998, the Company entered into a merger agreement with IN, a
company also engaged in the nutritional supplement business. The Company
expects the 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 regardless of whether or not the Merger is consummated.
Nevertheless, 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 upon 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.
- --------------------------------------------------------------------------------
The following Financial Statements are filed with this Proxy Statement as
pages F-2 through F-22:
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Notes to Financial Statements
4Health has not made any changes in accountants. 4Health does not have any
disagreement with accountants regarding accounting or financial disclosure.
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BUSINESS OF IN
GENERAL
Irwin Naturals, a California corporation formed in August 1995 by Klee and
Margarethe Irwin is a supplier and formulator of vitamins and nutritional
supplements which are designed and formulated to address the dietary needs of
the general public. IN's products that are sold through health food stores,
mass market outlets and internationally. Applied Nutrition, a Nevada
corporation wholly owned by Klee and Margarethe Irwin, was dissolved in October
of 1997 and the company began the process of transferring the ownership of the
net assets of Applied Nutrition to IN. This transfer is expected to be
completed prior to the consummation of the Merger.
IN's products are produced solely from natural ingredients and are
formulated for the purpose of achieving specific dietary or nutritional goals.
IN attempts to protect its products and formulas with, among other things,
"non-disclosure/noncompetition" agreements with its manufacturers and employees
and with trademark protection.
Certain of IN'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. IN 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 IN's products are manufactured by third party suppliers pursuant to
IN's specifications and proprietary recipes. Prior to selecting a manufacturer
to produce its products, IN reviews the manufacturer's raw material sources,
quality assurance procedures, and reliability to assure that the proposed
manufacturer meets IN's criteria. All of the companies that manufacture for IN
are required to meet strict manufacturing standards required by the FDA, and IN
believes that it benefits from such regulation in the overall quality of the
products manufactured by such regulated entities for IN. To date, IN has relied
exclusively on domestic manufacturers in order to facilitate IN's quality
assurance monitoring function.
IN places purchase orders with its suppliers for individual product
manufacturing lots for delivery of packaged and labeled product to IN's
warehouse in Culver City, CA, for distribution. IN has no long-term
manufacturing agreements with any of its suppliers, but purchases manufactured
lots pursuant to individual purchase orders. Currently, IN utilizes four
separate manufacturers and believes that there are other qualified manufacturers
that would meet IN's quality assurance requirements if alternative manufacturing
sources were required. IN 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 IN'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, IN has marketed its products principally through mass market and
health food stores both domestically and internationally, 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 IN products in national nutrition
magazines, trade magazines, and through IN's telemarketing staff and outside
sales force which contacts retail outlet representatives to introduce IN's
products and to provide continuing product education and sales support. Through
product incentives, IN encourages retail outlet employees--vitamin-aisle
experts--to utilize IN's products personally in order to become familiar with
their use and benefits as a basis for recommending the products to customers.
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Currently, IN products are marketed to approximately 4,000 health food
stores, including 2,000 General Nutrition Corporation ("GNC") stores. Current
arrangements with GNC allow for distribution of IN's products to GNC franchise
stores through GNC distribution centers. Sales to health food stores accounted
for approximately 26% of sales for the year ended December 31, 1997. Sales
through GNC, represented approximately 4.3% of revenues of IN through health
food stores for the year ended December 31, 1997.
IN derives over 20% of its sales from international distribution. Primary
countries in which IN distributes its products include Japan, Brazil, Mexico,
Saudi Arabia, Singapore, Canada, South Africa and Russia. All distributors have
contracts with IN that offer them exclusivity of distribution in their country
in exchange for minimum purchase commitments. Risk for IN in this marketing
channel is low because no money is spent by IN on marketing and all of the
accounts are required to pay in short term financing (30 day terms), letters of
credit or cash prior to shipment. All of IN's international distributors invest
in marketing the products in their county as part of their contractual
distribution agreement. Foreign currency exchange rates affect the sales
performance of IN's products overseas, since its prices to international
distributors are based in US dollars and not in foreign currency. Retail
prices, however, are generally expressed in local currency. Accordingly, an
increase in the value of the U.S. dollar relative to such foreign currency may
force distributors to raise their prices, thereby potentially adversely
affecting sales. However, to date, this has not been a significant problem
since IN's products are usually marketed in other countries as high end imports
to an upper tier of customers who are not sensitive to minor changes in price.
Mass market sales in the United States are also a major part of the IN
business. Currently, IN's largest customers consist of GNC (representing 18.3%
of IN's mass market revenues for the year ended December 31, 1997), Wal-Mart
(11%), Eckerd Drug (5.9%), K-Mart (3.5%), American Drug (2.7%) and CVS (2.5%).
The credit risk on these accounts is very low because they are all highly rated
by Dun & Bradstreet's credit ranking reports. Most credit terms for these
accounts are 30 days. IN sells to these accounts via in-house and contract
broker sales personnel. The primary products sold by IN to the mass market
include DIET SYSTEM 6-Registered Trademark-, DR. LINUS PAULING-REGISTERED
TRADEMARK- VITAMINS and PHENSAFE-TM-. Mass-market sales account for over 50% of
the sales of IN. Promotion and marketing to support these sales is done through
TV, magazine, radio and in-store advertising.
IN also markets its products through alternative health care practitioners
such as non-traditionally oriented medical practitioners, chiropractors,
acupuncturists, nutritionists, and directly to consumers.
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. 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 IN. 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
IN maintains an ongoing effort to develop new products. This effort is
supported by IN's technical staff, which assists through the research of
available ingredients and their combination and effects, and its sales and
marketing staff, which assists with the identification of potential new consumer
demands. An important part of this effort is the development of unique products
with different formulations for marketing through different outlets or intended
markets.
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CURRENT PRODUCTS
All of IN's products are produced from non-artificial herbs, botanicals,
and nutrients, and are formulated by IN with the goal of producing specific sets
of effects. IN's current product offering, includes, but is not limited to:
LINUS PAULING-REGISTERED TRADEMARK- VITAMINS, SYSTEM SIX-REGISTERED TRADEMARK-,
DIET SYSTEM 6-REGISTERED TRADEMARK-, GINZA PLUS-REGISTERED TRADEMARK-, COENZYME
Q10 WITH GINKO, PYCNOGENOL WITH GRAPE SEED EXTRACT AND ESTER C-REGISTERED
TRADEMARK-, GINKGO SMART-REGISTERED TRADEMARK-, YOHIMBE PLUS-TM-, MELATONIN WITH
VALERIAN ROOT, CAT'S CLAW, ECHINACEA WITH GOLDEN SEAL AND ESTER C-REGISTERED
TRADEMARK-, FAMILY-SIZED ECHINACEA 9250, MEMORY SHARP-TM-, ENDLOSS FORMULA,
VITAL FORCE, MOONLIGHT, PHENSAFE-TM- and CHROMIUM PICHOLINATE 500.
PRODUCT WARRANTIES AND RETURNS
IN 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
IN'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 IN, however, are not found to be defective
in manufacture. As a result, most products returned to IN are replaced by it at
its cost.
In addition, IN has an open return policy for retail outlets that grants
the right to such outlets to return any unsold merchandise. IN received returns
under its warranty and return policies equal to approximately 2% of total sales
in the year ended December 31, 1997.
TRADEMARKS AND SERVICE MARKS
As a company selling branded consumer products nationwide, IN 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, IN 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, IN 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.
IN registers trademarks (or licenses registered trademarks owned by others) for
its principal product lines, including DR. LINUS PAULING-REGISTERED TRADEMARK-
VITAMINS and DIET SYSTEM 6-REGISTERED TRADEMARK-, 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, IN 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 IN.
FACILITIES
IN's shipping and distribution functions are located in an approximately
25,000 square foot facility located at its headquarters at 10549 W. Jefferson
Blvd., Culver City, CA 90232 that IN leases at a monthly rental of $15,000.
IN's executive offices are located in an adjacent 12,000 sq. ft. building which
IN also leases at a monthly rental of $15,600.
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EMPLOYEES
IN has 65 employees, including three executive officers, 20 in general
administration, 13 in sales and marketing, and 29 in operations and research and
development.
IN's employees are not represented by a collective bargaining organization,
and IN is not aware of any efforts to organize any such collective bargaining
unit. IN 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 IN 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
IN's business or results of operations.
GOVERNMENTAL REGULATION
GENERAL
The processing, formulation, packaging, labeling and advertising of IN's
(as well as 4Health's) products are subject to regulation by federal agencies
including the FDA, the Federal Trade Commission (the "FTC"), the Consumer
Products Safety Commission, the Department of Agriculture, the Postal Service,
and the Environmental Protection Agency. IN's (and 4Health's) activities are
also subject to regulation by various agencies of the states and localities in
which IN (and 4Health) products are sold. The FDA has been the main agency
regulating the types of products sold by nutritional supplement firms such as
IN, but much of that authority stemmed from the FDA's treatment of dietary
supplements as food additives and drugs. The FDA's jurisdiction 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. The DSHEA 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.
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
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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
Section 4 of the DSHEA sets out new safety standards regulating dietary
supplements. 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.
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 ("H&HS") 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 the authority of the FDA
to regulate dietary supplements has been limited. IN is not able to predict
with certainty the impact of the new regulatory scheme on its activities;
through December 31, 1997, the Secretary of H&HS has not made any imminent
hazard declaration.
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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 Sec. 403B of the FDC
Act, which was created by Sec. 5 of DSHEA, 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.
Through March 31, 1998, no court nor the FDA has interpreted the scope of Sec.
403B in any official action. These provisions of the DSHEA may indirectly
affect IN because they will make it easier for retailers and wholesalers that
sell IN's products to display and sell publications that are related to IN's
business and discuss the benefits of dietary supplements such as the ones that
IN manufactures and distributes; also, IN itself may make Section 5 publications
available to its customers.
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 is first approved by the FDA by regulation. The DSHEA, in Sec. 6,
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 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. The FDA issued a final rule (i.e., a regulation)
implementing this statute effective October 23, 1997.
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, (if there is a proprietary blend, only the total weight of all the
ingredients needs to be listed) be identified as a "dietary supplement," and
identify the part of a plant from which any herb or botanical ingredient is
derived. On September 23, 1997, the FDA issued comprehensive new labeling
regulations which must be followed with respect to all labels affixed to
containers of dietary supplements on and after March 23, 1999.
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MANUFACTURING
The DSHEA did not limit the FDA's ability to regulate manufacturing but
authorized the FDA to prescribe good manufacturing practice ("GMPs") regulations
for dietary supplements which are to be modeled after current good manufacturing
practice regulations for food. IN cannot predict the impact that such
regulations could have on those suppliers that manufacture its products.
However, since many 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 IN or its suppliers. The FDA, in February of
1977, printed in the Federal Register an industry sponsored GMP proposal and
asked for comment about its proposals.
SUMMARY
On November 24, 1997, the Commission on Dietary Supplement Labels ("DSL
Commission"), a seven member group appointed by the President of the United
States, issued a 84 page report ("the Report") which includes many
recommendations for the regulation of label claims and statements for dietary
supplements. The DSL Commission's conclusions and advice are in the form of a
series of Findings and Guidances and its ultimate recommendations are called
Recommendations. Section 12 of DSHEA requires the FDA to publish in the Federal
Register "a notice of any recommendation of the Commission for changes in
regulations of the Secretary for the regulation of dietary supplements and shall
include in such notice a notice of proposed rulemaking on such changes together
with an opportunity to present views on such changes." IN cannot determine or
predict the final effects that the DSHEA will ultimately have on the regulatory
scheme of dietary supplements. Further, IN cannot predict what response the FDA
or the Congress will make to the recommendations of the DSL Commission.
Although the DSHEA is generally beneficial to manufacturers of dietary
supplements, there is no real indication of its ultimate effect.
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SELECTED HISTORICAL FINANCIAL DATA OF IN
The following selected historical financial data should be read in
conjunction with the financial statements of IN and the notes thereto and
"BUSINESS OF IN -- IN Management's Discussion and Analysis of Financial
Condition and Results of Operations" set forth below. The selected financial
data of IN has been derived from the financial statements of IN which (other
than as of and for the period ended December 31, 1994 and March 31, 1997 and
1998), have been audited by Arthur Andersen LLP, independent public accountants.
The financial statements of IN at December 31, 1997, 1996 and 1995 and for the
fiscal years ended December 31, 1997, 1996 and 1995, together with the report of
Arthur Andersen LLP thereon, appear elsewhere in this Proxy Statement. The
selected financial data of IN as of and for the periods ended December 31, 1994
and March 31, 1998 and 1997 is unaudited but gives effect to all adjustments
(all of which were normal recurring accruals) necessary in the opinion of
management of IN 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>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ------------------------------------------------------------
1998 1997 1997 1996 1995 1994
---------- ---------- ----------- ----------- ----------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales. . . . . . . . . . . . . . $5,368,554 $3,903,522 $17,258,828 $11,463,720 $2,448,566 $495,700
Gross profit . . . . . . . . . . . . 3,124,842 2,146,937 9,480,789 5,838,524 988,407 204,936
Operating income . . . . . . . . . . 1,611,669 885,212 1,901,472 1,355,048 210,923 1,729
Other income (expense), net. . . . . (7,968) 9,755 9,995 63,551 (13,803) (1,440)
---------- --------- ---------- ---------- -------- --------
Income before income taxes . . . . . 1,603,701 894,967 1,911,467 1,418,599 197,120 289
Pro forma taxes. . . . . . . . . . . 641,480 357,987 764,587 659,098 (2) 78,848 --
---------- --------- ---------- ---------- -------- --------
Net income . . . . . . . . . . . . . $962,221 $536,980 $1,146,880 $759,501 $118,272 $289
---------- --------- ---------- ---------- -------- --------
---------- --------- ---------- ---------- -------- --------
PER SHARE DATA:
Net income . . . . . . . . . . . . . $14.75 $8.23 $17.58 $11.64 $1.81(1) $ -(1)
Weighted average shares
outstanding-basic and diluted. . . . 65,250 65,250 65,250 65,250 65250 65,250
BALANCE SHEET DATA:
Working capital. . . . . . . . . . . 3,334,043 1,376,507 2,100,256 $865,971 $158,493 --
Total assets . . . . . . . . . . . . 5,390,146 3,573,879 5,015,713 3,607,784 558,148 235,724
Long-term debt . . . . . . . . . . . --- --- - - - --
Shareholders' Equity . . . . . . . . 3,536,201 1,458,012 2,253,499 921,032 161,531 --
</TABLE>
(1) Represents pro forma net income per common share because it assumes 65,250
shares outstanding for the entire year, even though Irwin Naturals was not
incorporated until August 1995. Irwin Naturals began operations as a sole
proprietorship in October 1994.
(2) Represents actual taxes because Irwin Naturals was a C-Corporation in fiscal
year 1996.
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IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
1ST QUARTER 1997 COMPARED TO 1ST QUARTER 1998
Net sales for the quarter ended March 31, 1998 were $5.4 million
compared to $3.9 million for the same period in 1997. This increase of 37.5%
was due primarily to greater market penetration of IN's principal products in
the mass market, specifically the drug and discount chain. Sales to health food
stores, and into the international marketplace also grew significantly.
Cost of sales increased from $1.8 million in 1997 to $2.2 million in
1998 in real dollars, but decreased as a percentage of sales from 45% to 42%,
thereby increasing the gross profit from 55% in 1997 to 58% in 1998. This was
due primarily to a more favorable sales mix, with sales concentrations in higher
margin items during the first quarter of 1998.
Selling expenses increased from $.6 million in 1997 to $.8 million in
1998 in real dollars, but decreased as a percentage of sales from 15.7% in 1997
to 14.0% in 1998. The major reason for the increase in dollars, but decrease as
a percentage of sales was an improved relationship between advertising dollars
expended and the resultant sales. In addition, although there was an increase
in salary and wages, there was a more efficient use of labor, which resulted in
an improved ratio of salary expenses to sales dollars.
General and administrative expenses increased from $.7 million in 1997
to $.8 million in 1998 in real dollars, but decreased as a percentage of sales
from 16.7% to 14.1%. Personnel related costs accounted for the majority of the
dollar expense difference, however the personnel costs decreased as a percentage
of revenues. Legal and accounting expenses decreased in real dollars in 1998
from 1997.
Total operating expenses increased by over $.2 million in 1998 versus
1997, from $1.3 million in 1997 to $1.5 million in 1998; however operating
expenses decreased as a percentage of revenues from 32.3% in 1997 to 28.2% in
1998, an improvement of 5.1% in 1998 over 1997 as a percentage of revenue.
Net operating income, which was $.9 million in 1997, increased to $1.6
million in 1998, and as a percentage of sales increased from 22.7% in 1997 to
30.0% in 1998.
IN elected an 'S' corporation status for all of 1997, and through the
first quarter of 1998, and has used a 40% effective tax rate, so that after-tax
income was $.5 million in 1997 versus $1.0 million in 1998, and increase of $.5
million, and an increase as a percentage of sales from 13.8% in 1997 to 17.9% in
1998, a 4.1% increase.
1996 COMPARED TO 1997
Net sales for the year ended December 31, 1997 were $17.2 million compared
to $11.5 million for the same period in 1996. This increase of 50% was due
primarily to greater market penetration of IN's principal products in the mass
market, specifically the drug and discount chains. Sales to health food stores
and into the international marketplace also grew significantly.
Two customers accounted for 36% of sales in 1997 versus 23% in 1996. Cost
of sales increased from $5.6 million in 1996 to $7.8 million in 1997 on the
higher level of sales.
Gross profit increased from $5.8 million in 1996 to $9.5 million in 1997,
or from 50.93% to 54.93% of sales. This was due primarily to the fact that the
increase in health food and international sales, with their higher profit
margins, was able to offset the growth in mass market volume, with its lower
margins.
56
<PAGE>
Selling expenses increased from $1.2 million in 1996 to almost $3.5 million
in 1997. The major reason for the increase was the growth in advertising and
media expense. This category amounted to less than $800,000 in 1996, but over
$3.1 million in 1997. Over $1.5 million of this amount was for media TV
expenses.
General and administrative expenses totaled slightly over $4 million for
the year ended December 31, 1997 compared to $3.2 million the previous year.
Personnel costs accounted for over $1 million of this difference, as the
company's higher sales level required major increases in personnel. Legal and
professional fees increased by over $200,000, and rent and occupancy charges
rose over $130,000. During the course of 1997, the company increased its
warehouse and administrative facilities from 6500 square feet to almost 23,000
square feet. Officers' compensation declined from almost $1.5 million in 1996
to just over $600,000 in 1997.
Total operating expenses increased by over $3 million in 1997 versus 1996,
from $4.5 million to almost $7.6 million. Operating income, which was $1.4
million in 1996, increased to $1.9 million in 1997. There was an increase of
about $500,000 in pre-tax income between 1996 and 1997, from $1.4 million to
$1.9 million.
As a 'C' corporation, IN paid $660,000 in income taxes in fiscal 1996. For
fiscal 1997, IN elected 'S' corporation status, so that after-tax income for
1996 was $760,000 versus $1.9 million in 1997.
1995 COMPARED TO 1996
Sales for IN in the year ending December 31, 1995, the company's first full
year in operation, were $2.5 million. Sales for the year ending December 31,
1996, were $11.5 million, an increase of $9 million, or 460%.
The increase in sales can be attributed to the following facts:
In 1995, IN had a line of eight products, which it sold to fewer than 2,000
independent health food stores. In 1996, the IN line was increased to 12
products, and the company's customer base grew to 5,000 health food stores.
Also, during the 3rd quarter of 1996, IN entered into a licensing agreement
with the Linus Pauling family, which allowed it the exclusive worldwide
rights to use the Linus Pauling name. It developed a line of six products
bearing the Linus Pauling name, which it began marketing during the 4th
quarter of 1996.
In addition, also in the 4th quarter, IN increased its customer base
through the introduction of a diet product line for the mass market.
Gross Profit in 1995 was $1 million, or 40% of sales versus $5.9 million or
51% of sales in 1996. As IN's product line grew and its customer base
expanded, it was able to seek out more sources of supply, and this
competitive situation reduced product cost and increased gross profit.
Selling, general and administrative expenses in 1995 were $800,000, or 30%
of sales versus $4.5 million in 1996, or 39% of sales. As the sales volume
increased, management found it necessary to increase its payroll and to
find additional office and warehouse facilities. In 1995, IN employed 15
people; in 1996, the number had grown to 50. At the beginning of 1995, IN
was housed in a 2,000-sq. ft. location in Culver City; by the end of the
year, it moved to a 6,500-sq. ft. facility in the same city.
Pretax profit in 1995 was $200,000, or 8% of sales versus $1.4 million, or
12% of sales in 1996. The increased gross profit margin without a
corresponding increase in selling general and administrative expenses
accounted for the difference.
57
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
IN's cash and cash equivalent position as of December 31, 1997 was $527,000
versus $281,000 in 1996. Working capital in 1997 was $2.1 million compared to
just under $900,000 in 1996. The working capital ratio in 1997 was 1.75
compared with 1.32 on December 31, 1996. IN invests its surplus cash in two
interest bearing money market accounts.
Cash provided by operating activities of $860,000 in 1997 is a result of an
increase in net income from $760,000 in 1996 to $1.9 million in 1997 and was
offset by an increase in working capital of $1.2 million. This increase is a
result of sales growth activity and a reduction of income taxes payable by
$667,000 during 1997.
Cash used in investing activities during 1997 relates to capital
expenditures of $132,000 for computer equipment to support the additional
personnel.
Cash used in financing activities of during 1997 $483,000 relates to a
distribution to shareholders of $579,000 primarily for the payment of income tax
liabilities attributable to the operations of IN and a repayment of shareholder
advances of $96,000.
Cash provided by operating activities of $118,000 in 1996 relates to an
increase in net income from $197,000 in 1995 to $759,000 in 1997 and was offset
by an increase in working capital of $641,000. This increase is a result of
sales growth activity.
Cash used in investing activities during 1996 of $54,000 relates to
purchases of computer equipment to support additional personnel.
Cash provided by financing activities during 1996 of $141,000 relates to
customer deposits of $450,000 to secure future purchases of inventory, the
issuance of advances to shareholders of $96,000, and repayment of a note to
shareholders of $213,000.
IN had no long-term debt, either at year-end 1996 or 1997. Shareholder's
equity grew from just over $900,000 at December 31, 1996, to almost $2.3 million
as of December 31, 1997, or an increase of $1.4 million.
Management of IN believes IN's working capital position is adequate for the
near term. There are no near term plans for a major capital expansion or for
major equipment purchases.
IN has established a credit line with a local bank in the amount of
$750,000, which management believes, if utilized, would be adequate for the near
term. It expects to introduce several new products into its marketplace during
1998 and to accompany each product launch with heavy promotion and media
advertising, for which additional working capital may be required. As of both
December 31, 1996 and December 31, 1997, there were no outstanding borrowings
against this credit line.
58
<PAGE>
BUSINESS OF THE SURVIVING CORPORATION
FOLLOWING THE MERGER
The business of the Surviving Corporation will be much the same as the
current businesses of 4Health and IN prior to the Merger. The Surviving
Corporation will utilize IN's strengths in international and mass market
distribution and 4Health's strong background in health food stores. By
generating revenues from three areas of distribution - international, mass
market, and health food stores - the Surviving Corporation will have an
expanded, more diversified revenue base.
Although the Surviving Corporation has no firm commitments or identified
targets for acquisition, the Surviving Corporation plans to grow through a
series of strategic acquisitions during the next two years. Acquisition targets
may include other branded mass market and health food store supplement products
which could benefit from the strong marketing connections and talents of the
Surviving Corporation. Other business options that may be considered by the
Surviving Corporation include expanding into retail distribution and
manufacturing to obtain financial benefits of vertical integration.
The Surviving Corporation also expects to see financial savings due to the
consolidation of the administrative and operation functions. Subsequent to the
closing of the Merger, the Surviving Corporation's headquarters will be
relocated to IN's current offices in Culver City, California. Management also
anticipates consolidating operational staffs and consolidating warehouse and
distribution facilities to achieve greater efficiency through economies of
scale. Consolidation of the sales forces and distributors may also be
considered in the future. Management of the Surviving Corporation believes that
being located in Southern California will provide access to a large, skilled
employee base.
The Surviving Corporation believes that, if needed, it may be possible to
increase its line of credit if supported by increases in profitability and
sales.
59
<PAGE>
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 ("Preferred Stock"), 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, redemption, participation and liquidation rights that may
be senior to 4Health 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.
4HEALTH COMMON STOCK
Following the Merger, the Surviving Corporation will be authorized to issue
50,000,000 shares of 4Health Common Stock, par value $0.01 per share, of which
27,753,484 shares will be outstanding, 748,203 shares will be reserved for the
exercise of outstanding options and 1,250,000 shares will be reserved for
issuance on the potential exercise of outstanding warrants. Holders of 4Health
Common Stock will be entitled to one vote per share on each matter submitted to
a vote at any meeting of stockholders. Shares of 4Health Common Stock will not
carry cumulative voting rights, and therefore, absent the staggered Board
provisions in 4Health Articles of Incorporation, a majority of the shares of
outstanding 4Health Common Stock would 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. Since the
Board consists of three classes of directors, only one-third of all directors
are elected each year. Utah law and the Bylaws provide that a majority of the
issued and outstanding shares of 4Health 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 4Health Common Stock or other securities. The
4Health 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 4Health Common Stock will be entitled to share
equally in corporate assets after satisfaction of all liabilities. The shares
of 4Health Common Stock, when issued, will be fully paid and non-assessable.
Holders of 4Health 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
4Health Common Stock in the Merger, may dilute the book value of the then
existing stockholders and could be used by an incumbent Board to deter
unsolicited takeover proposals.
See "AMENDMENTS OF THE 4HEALTH ARTICLES OF INCORPORATION AND BYLAWS" for a
description of certain changes to 4Health's Articles of Incorporation and
Bylaws.
TRANSFER AGENT
American Securities Transfer & Trust, Inc. ("AST") is and will continue
subsequent to the Merger as the Transfer Agent for the 4Health Common Stock.
AST can be reached at 938 Quail Street, Suite 101, Lakewood, CO 80215,
telephone number (303) 234-5300.
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<PAGE>
MANAGEMENT OF THE SURVIVING CORPORATION
Pursuant to the Surviving Corporation's Articles of Incorporation, as
amended in accordance with the Articles of Merger, at the Effective Time, the
current Board of Directors of 4Health will be replaced in its entirety (other
than R. Lindsey Duncan). The Board of Directors of the Surviving Corporation
shall be comprised of five (5) members, three (3) of which shall be members of
an Executive Committee: R. Lindsey Duncan (Chairman of the Board and member of
the Executive Committee), Klee Irwin (member of the Executive Committee),
Anthony Robbins (member of the Executive Committee and Audit Committee), Clarke
Keough (member of the Audit Committee) and Jonathan Diamond (member of the Audit
Committee). The Board of Directors of the Surviving Corporation will continue
to be divided into three classes, the terms of which expire successively over a
three-year period. At each Annual Meeting of Shareholders, successors to
directors whose terms expire at the meeting shall be elected for three-year
terms. The terms of the two Class I directors (R. Lindsey Duncan and Klee
Irwin) will end at the Annual Meeting of Shareholders in 2001; the terms of the
two Class II directors (Clarke Keough and Jonathan Diamond) will end at the
Annual Meeting of Shareholders in 2000; and the term of the Class III director
(Anthony Robbins) will end at the Annual Meeting of Shareholders in 1999; and
until their respective successors shall have been elected and qualified.
Pursuant to the Articles of Merger, at the Effective Time, the current
officers of 4Health will be replaced. The new officers of the Surviving
Corporation will be as follows:
NAME POSITION
R. Lindsey Duncan Chairman of the Board
Klee Irwin President and Chief Executive Officer
Dan Martin Acting Chief Financial Officer, Treasurer and
Secretary
Each of the named executive officers serves at the pleasure of the Board of
Directors. Messrs. Duncan and Irwin, however, each have three year employment
agreements. See "Employment Agreements" below.
Biographical information concerning each of the individuals who will become
a director or executive officer of the Surviving Corporation at the Effective
Time is set forth below:
CLASS I DIRECTORS
R. LINDSEY DUNCAN
Age: 35
Mr. Duncan has been its Chairman of the Board, President, Chief Executive
Officer and director of 4Health since 1993 and is a nutritionist certified by
the National Institute of Nutritional Education. Since the mid-1980s, he has
owned, operated, and been the principal nutritionist of the Home Nutrition
Clinic, Santa Monica, California. In 1988, Mr. Duncan began formulating his own
nutritional supplements and in 1993, organized 4health, Inc., a California
corporation and a predecessor of 4Health. Mr. Duncan is a member of the
National Nutritional Foods Association, the American Herbal Products
Association, and the Herb Research Foundation and a finalist in Ernst & Young's
national "1996 Entrepreneur of the Year." Mr. Duncan makes numerous appearances
on prime time national and regional television and radio programs such as ABC,
CBS, NBC, CNN, CNBC, and more. He is regularly featured in national and
international magazines.
61
<PAGE>
KLEE IRWIN
Age: 32
Mr. Irwin is the President and chief executive officer of IN, which he
founded in 1995. Prior to his involvement in IN, beginning in 1989, Mr. Irwin
served as a vice president of sales and marketing and general manager of
Helsneva Labs, a division of Pantron I Corp., a privately held consumer products
company.
CLASS II DIRECTORS
CLARKE KEOUGH
Age: 35
Mr. Keough has served Allen & Company Incorporated, an investment
banking company ("Allen & Company"), as a Vice President from January 1992
to June 1993 and as a Director since April 1997. Mr. Keough served Allen
Capital Incorporated, an affiliate of Allen & Company, as a Vice President
from June 1993 to January 1994 and as a Director from January 1994 to April
1997.
JONATHAN DIAMOND
Age: 39
Jonathan Diamond has served as the Chairman and Managing Partner of J.
Diamond Group, L.P., a media and entertainment investment partnership from
January 1993 through June 1995, and as Vice Chairman of N2K Inc., a media and
entertainment company since June 1995.
CLASS III DIRECTOR
ANTHONY ROBBINS
Age: 38
During the past five years, Mr. Robbins has served as the President and
Chief Executive Officer of the Anthony Robbins Companies, a privately held
personal and professional improvement training services company.
OTHER EXECUTIVE OFFICER
DAN MARTIN
Age: 52
Mr. Martin has served as the Acting Chief Financial Officer of IN since
March of 1997. From 1995 until 1997, Mr. Martin had served as the Chief
Financial Officer of Bocchi Laboratories, a contract manufacturer in the skin
and health care industry. From 1993 to 1995, Mr. Martin was the Chief Financial
Officer of Westar Management, a diversified company involved in the real estate,
restaurant and gaming businesses.
EMPLOYMENT AGREEMENTS
Upon consummation of the Merger, each of R. Lindsey Duncan and Klee Irwin
will enter into substantially similar three year employment agreements with the
Surviving Corporation. These agreements provide for annual salaries of $225,000
and $350,000 for Duncan and Irwin, respectively; the right to receive an annual
bonus equal to 2% of the consolidated earnings before income taxes of the
Surviving Corporation in excess of $6,000,000 and the right to participate in
all retirement and welfare, benefit, fringe, perquisite and other plans and
programs applicable generally to other key executives of the Surviving
Corporation in effect at any time. They will both be
62
<PAGE>
entitled to reimbursement for their reasonable business expenses. Mr. Duncan
will be employed as Chairman of the Board and as a member of the Executive
Committee with all duties and responsibilities normally associated with this
position as well as the responsibility of directing public relations; new
product concepts, formulations, and research and development and product
training; quality control and development of product distribution through health
food stores, seminars and public media. Mr. Irwin will be employed as President
and Chief Executive Officer and member of the Executive Committee with all
duties and responsibilities normally associated with these positions including
line item authority respecting the annual operating budget, manufacturing, sales
and distribution of the Surviving Corporation's products, product packaging and
hiring and firing of all employees (other than Duncan). Both Duncan and Irwin
will report to the Board. These agreements are terminable by the Surviving
Corporation for "Cause" and by the employee for "Good Reason." "Cause" is
defined, in brief, to be (i) the willful failure to substantially perform one's
duties; (ii) embezzlement of funds, or (iii) conviction of a felony. "Good
Reason" is defined in brief to be (i) a "Change in Control", (ii) the failure by
the Surviving Corporation to comply with any material provision of the
agreement, (iii) the failure by the Surviving Corporation to comply with the
procedures set forth in the agreement relating to termination, (iv) the
alteration of the executive's duties, (v) the requirement that the executive be
required to relocate more than 20 miles from executive headquarters in Culver
City, California, (vi) the determination by the executive in good faith that the
policies and/or actions of management are reasonably likely to violate legal
requirements or will materially adversely affect the Surviving Corporation or
its shareholders or (vii) disability. "Change of Control" is defined to be a
change of control of a nature required to be reported in response to item 6(e)
of Schedule 14A of Regulation 14A under the Exchange Act, but in any case is
deemed to have occurred if any person (other than an existing officer or
director) is or becomes the beneficial owner of 20% or more of the combined
voting power of the Surviving Corporation's outstanding securities. If an
agreement is terminated with Cause or without Good Reason, the executive is not
entitled to any further payments thereunder. If an agreement is terminated
without Cause or with Good Reason, the executive is entitled to receive all of
the salary, bonus and other benefits due him thereunder for the balance of the
term of the agreement. Unless the agreements are terminated without Cause or
for Good Reason, each of the executives will be subject to covenants regarding
confidentiality, disclosure and assignment of inventions, non-competition and
non interference with the business of the Surviving Corporation, except that Mr.
Duncan will be entitled to maintain his interest in his Home Nutrition Clinics
and his personal publishing and other audio/video activities.
63
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT OF 4HEALTH
The following table includes information as of May 26, 1998 concerning the
beneficial ownership of the holdings of 4Health Common Stock by (i) all persons
who are known by 4Health to hold five percent or more of the outstanding shares
of 4Health Common Stock, (ii) each of the directors of 4Health, (iii) each
executive officer of 4Health, and (iv) all directors and executive officers of
4Health as a group. Except as otherwise indicated, all shares are owned
directly, and the persons named in the table have sole voting and investing
power with respect to shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT
- ------------------------------------ -------------- -------
<S> <C> <C>
Principal Shareholders
- ----------------------
R. Lindsey Duncan
5485 Conestoga Court
Boulder, CO 80301 $ 5,899,153 (4) 49.25%
White Rock Capital Management, L.P.
3131 Turtle Creek Boulevard
Suite 800
Dallas, TX 75219 676,000 (5) 5.63%
White Rock Capital, Inc.
3131 Turtle Creek Boulevard
Suite 800
Dallas, TX 75219 676,000 (5) 5.63%
Thomas U. Barton
3131 Turtle Creek Boulevard
Suite 800
Dallas, TX 75219 676,000 (5) 5.63%
Joseph U. Barton
3131 Turtle Creek Boulevard
Suite 800
Dallas, TX 75219 676,000 (5) 5.63%
Nominee for Director
- --------------------
Jonathan Diamond 40,500 *
Directors and Executive Officers
- --------------------------------
R. Lindsey Duncan(1)(2) ----------See Above----------
Cheryl Wheeler(1)(3) 342,383 (4) 2.86%
Rockwell D. Schutjer(1) 24,701 (4) *
Steven B. Beckman(1) 7,523 (4) *
Scott W. Lusk(3) 9,864 (4) *
All officers and directors as a group (5 people) 6,762,855 (4) 56.34%
- ---------------------------------------
</TABLE>
* Less than 1%
(1) Serves as a director of 4Health.
64
<PAGE>
(2) Serves as an executive officer of 4Health and appears in the Summary
Compensation table.
(3) Serves as an executive officer of 4Health, but does not appear in the
Summary Compensation table.
(4) Includes the following number of shares which could be purchased under
stock options exercisable within 60 days from the date hereof; Mr. Duncan,
401,252 shares; Ms. Wheeler, 61,944 shares; Mr. Beckman, 7,523 shares;
Mr. Lusk,8,512 shares; and all officers and directors as a group, 479,231
shares.
(5) As reported by White Rock Capital Management, L.P. ("White Rock
Management"), White Rock Capital, Inc. ("White Rock, Inc."), Joseph U.
Barton and Thomas U. Barton in a Form 13G filed with the Commission on
April 24, 1998 (the "White Rock 13G") as of April 23, 1998, each of White
Rock, Inc., White Rock Management, Thomas U. Barton and Joseph U. Barton
may be deemed to be the beneficial owner of 676,000 shares of 4Health
Common Stock (the "White Rock Shares"). This number consists of (1) 550,000
shares held for the accounts of White Rock clients, (2) 112,000 shares held
for the account of White Rock Partners, L.P. ("White Rock Partners") and
(3) 14,000 shares held for the account of White Rock Management. According
to the White Rock 13G, the White Rock Shares include shares of 4Health
Common Stock that were acquired by White Rock Management on behalf of
certain institutional clients and shares held for the accounts of White
Rock Partners and White Rock Management. The general partner of White Rock
Partners is White Rock Management, the general partner of which is White
Rock, Inc. Thomas U. Barton and Joseph U. Barton are the shareholders of
White Rock, Inc. In the White Rock 13G, White Rock Management claimed sole
voting and dispositive power with respect to 14,000 White Rock Shares and
shared voting and dispositive power with respect to 662,000 White Rock
Shares, and each of White Rock, Inc., Joseph U. Barton, and Thomas U.
Barton claimed shared voting and dispositive power with respect to 676,000
White Rock Shares and sole voting and dispositive power with respect to
none of the White Rock Shares. In the White Rock 13G, White Rock Partners
expressly disclaims beneficial ownership of any shares of 4Health Common
Stock held for the accounts of the White Rock clients and White Rock
Management, and White Rock clients expressly disclaim beneficial ownership
of any shares of 4Health Common Stock held for the accounts of the White
Rock Partners and White Rock Management.
65
<PAGE>
MANAGEMENT AND EXECUTIVE COMPENSATION OF 4HEALTH DURING 1997
MANAGEMENT OF 4HEALTH
The Board of Directors of 4Health during 1997 was comprised of R. Lindsey
Duncan, Cheryl Wheeler, Todd B. Crosland (resigned effective June 12, 1997),
Rockwell D. Schutjer and Steven B. Beckman. The Board of Directors met 2 times
during 1997 for regular Board of Directors meetings. All directors attended
100% of the aggregate of (i) the total number of meetings of the Board of
Directors held while they were members and (ii) the total number of meetings
held by all Committees of the Board of Directors on which they served as members
except Mr. Crosland, who missed one Board meeting. In addition, on several
occasions, the Board of Directors gave their unanimous written consent on issues
involving normal corporate business. The Board of Directors has three standing
committees, the Audit Committee, the Compensation Committee, and the Long-Term
Stock Incentive Plan Administration Committee ("LTSIP Administration
Committee"). During 1997, the Audit Committee and the LTSIP Administration
Committee were composed of Messrs. Crosland and Beckman. The Audit Committee
did not meet during 1997, the functions of such committee being performed by the
Board of Directors as a whole. The LTSIP Administration Committee met
throughout 1997 as needed to grant stock options. The LTSIP Administration
Committee is responsible for overseeing 4Health's Long-Term Stock Incentive Plan
(the "LTSIP") including, subject to the express terms of the LTSIP, making
awards, interpreting the LTSIP, amending and rescinding rules and other duties
related to the proper implementation of the LTSIP. During 1997, the
Compensation Committee was composed of Messrs. Duncan, Crosland, and Beckman.
The Compensation Committee met once in 1997. The primary responsibility of the
Compensation Committee is to establish and review the compensation policies of
4Health, including those for executives. During 1997, 4Health did not have a
nominating committee, the functions of such a committee being performed by the
Board of Directors as a whole.
The LTSIP, which will remain in effect after the Merger, provides that upon
assuming office, each non-employee director shall be granted a non-qualified
option to acquire 5,000 shares of Common Stock at an exercise price equal to
100% of the fair market value on the date of grant. One-half of the grant shall
become exercisable upon completion of one year of service as a director and the
remaining balance upon completion of two years of service as a director. All
options have a five year expiration term. On April 1, 1997, Mr. Beckman
received 5,000 options under this policy exercisable at a price of $5.00 per
share.
Directors do not receive compensation for attending meetings of the Board
of Directors. Directors are reimbursed for their reasonable travel and lodging
expenses incurred attending meetings.
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the year ending December 31, 1997, the cash
compensation paid by 4Health, as well as certain other compensation paid or
accrued for the year, to R. Lindsey Duncan, 4Health's President and Chief
Executive Officer. No other executive received total cash compensation
exceeding $100,000 during 1997.
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<PAGE>
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------
All
Restricted Securities Other
Stock Underlying LTIP Comp-
Name and Position Year Salary Bonus Other Award Options Payouts ensation
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R. Lindsey Duncan, 1997 $150,000 $0 $0 $0 401,252 $0 $0
President and Chief 1996 150000 0 0 0 331,034 0 0
Executive Officer 1995 84,023 0 0 0 105,329 0 0
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table presents information with respect to the Chief
Executive Officer concerning the exercise of options during 1997 and unexercised
options held as of December 31, 1997:
AGGREGATED OPTION EXERCISES AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In-the-
Options at Money Options at
December 31, 1997 December 31, 1997
----------------------------------------------------------------
Shares Value
Name Exercised(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
R. Lindsey Duncan 0 $0 401,252 35,111 $444,723.24(1) $0.00 (1)
</TABLE>
(1) Based on the closing market price of $5.125 per share for 4Health's Common
Stock as of December 31, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
R. Lindsey Duncan, the President and Chief Executive Officer of 4Health,
served on the Compensation Committee of the Board of Directors during 1997.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors has responsibility for
making recommendations regarding compensation policy for 4Health, including
executives. The Compensation Committee's overall goal is to provide a strong
link among shareholder value, company performance, and executive compensation.
An additional goal is to promote long-term growth and development for 4Health by
attracting and retaining qualified and talented executives. The following
report shall not be deemed incorporated by reference into any filing under the
Securities Exchange Act of 1933 or the Securities Exchange Act of 1934.
4Health uses various compensation surveys, including industry and regional
specific surveys, to develop its compensation strategy and plans. The
Compensation Committee also refers to such surveys for executive compensation,
including that of the Chief Executive Officer.
There is no set policy for adjusting base salary or bonuses subsequent to
initial employment. Such adjustments in the past have occurred due to changes
in job skills, performance, and competitive salary information.
67
<PAGE>
4Health's current stock option plan includes executives, managers and key
employees. Stock options are granted periodically by the LTSIP Administration
Committee of the Board of Directors. The Long-Term Stock Incentive Plan allows
the grant of options, both incentive and non-qualified. Historically, the LTSIP
Administration Committee has granted non-qualified options. For executives, the
options are usually granted with one third vesting after each year of service
with 4Health. Pricing of the options generally begins at the fair market price
on the date of grant for the options vested after one year and increases $1.00
per share for each additional year of service.
The compensation of Mr. Duncan, Chief Executive Officer of 4Health, for
1997 is shown in the Summary Compensation table. The Compensation Committee
believes that Mr. Duncan's compensation adequately reflects his performance as
4Health's President and Chief Executive Officer.
The Compensation Committee has reviewed 4Health's compensation plans with
regard to the deduction limitations under the Omnibus Budget Reconciliation Act
of 1993 (the "Act") and the final regulations interpreting the Act which have
recently been adopted by the Internal Revenue Service and the Department of the
Treasury. Based on this review, the Committee has determined that 4Health's
LTSIP, as previously approved by shareholders, meets the requirements for
deductibility under the Act. The Committee believes that no tax deduction will
be lost as a result of Section 162(m) on compensation paid to Company executives
in 1997.
R. Lindsey Duncan
Todd B. Crosland
Steven B. Beckman
Members of the Compensation Committee
RELATED PARTY TRANSACTIONS
Pursuant to the terms of the LTSIP, upon taking office, each non-employee
director of the Surviving Corporation (i.e., Messrs. Anthony Robbins, Clarke
Keough and Jonathan Diamond), will receive 5,000 non-qualified stock options,
vesting one-half upon completion of one year of service, and one-half upon
completion of two years of service, exercisable at 100% of the fair market value
of the 4Health Common Stock on the date of grant.
It may be anticipated that the officers and others rendering services to
the Surviving Corporation will receive stock options under the LTSIP, if
circumstances warrant such grants, in accordance with the policies to be set by
the Board of Directors of the Surviving Corporation and the LTSIP Administration
Committee.
See also "Employment Agreements" above for a detailed description of
Messrs. R. Lindsey Duncan's and Klee Irwin's proposed new employment agreements.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, executive
officers, directors and 10% shareholders of 4Health are required to file reports
on Form 3, 4 and 5 of their beneficial holdings and transactions in the 4Health
Common Stock. During 1997, all such reports were filed in a timely manner.
STOCK PERFORMANCE
The graph below presents a comparison of the cumulative shareholder return
of 4Health's Common stock over the period July 17, 1996 to December 31, 1997
with the cumulative total return over the same period for The Nasdaq Stock
Market - U.S. Companies Total Return Index and a peer group represented by the
Nasdaq Pharmaceutical Stocks Total return Index (SIC code 283). Both indexes
were prepared for Nasdaq by the Center for Research in Security Prices. The
graph below compares the cumulative total return of 4Health's Common Stock over
the July 17, 1996 to December 31, 1997 period assuming a $100 investment on July
17, 1996 and assuming reinvestment of all dividends. (4Health's Common stock
commenced trading on the Nasdaq National Market tier of The Nasdaq Stock Market
under the stock symbol HHHH on July 17, 1996. Prior to that date, 4Health was
known as Surgical Technologies, Inc. with stock trading under the symbol SGTI.
The prior market performance
68
<PAGE>
history of Surgical has not been included herein because it does not reflect the
results of the merger or the changed nature of 4Health's business since the
merger. The graph is based on daily total return figures from July 17, 1996 and
month-end figures from July 30, 1996 through December 31, 1997.)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter End Values
- ---------------------------------------------------------------------------------------------------------------------------------
7/17/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
4Health $ 100.00 $ 78.95 $ 57.90 $ 58.55 $ 61.84 $ 50.66 $ 53.95
- ---------------------------------------------------------------------------------------------------------------------------------
Nasdaq US Index 100.00 113.16 118.73 112.29 132.88 155.35 145.69
- ---------------------------------------------------------------------------------------------------------------------------------
Nasdaq Pharmaceutical Index 100.00 113.64 110.25 104.70 113.03 126.80 113.92
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
TAX CONSEQUENCES
GENERAL
The following discussion summarizes the material United States federal
income tax consequences of the proposed Merger 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. The following summary does not
include any discussion with respect to the consequences of the Merger under
foreign, state or local taxation laws and regulations. Each holder of 4Health
Common Stock should consult his or her own tax advisor regarding the tax
consequences of the proposed Merger 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 shares 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. NO RULINGS FROM THE IRS OR
OPINION OF COUNSEL AS TO THE TAX CONSEQUENCES OF THE MERGER OR ANY OTHER MATTER
DISCUSSED HEREIN HAS BEEN OR WILL BE REQUESTED OR OBTAINED.
The following discussion is based on 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
4Health believes 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 IN 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 Stockholders as a
result of the Merger.
(d) No gain or loss will be recognized by 4Health or IN as a result
of the Merger.
(e) 4Health's basis in each IN asset received by 4Health in the
Merger generally will be the same as IN's basis in the asset immediately
prior to the Merger.
(f) 4Health's holding period for tax purposes of each IN asset
received by 4Health in the Merger generally will include the holding period
during which the asset was held by IN.
The preceding material is intended to be only a summary of the material
income tax consequences relating to the Merger. 4HEALTH STOCKHOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THEIR OWN PARTICULAR CIRCUMSTANCES.
70
<PAGE>
INDEPENDENT ACCOUNTANTS
The audited balance sheets of 4Health as of December 31, 1997 and 1996, and
the related statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997, included in
this Proxy 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 IN as of December 31, 1997, 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 December 31, 1997, included
in this Proxy 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.
OTHER MATTERS
The Board of Directors of 4Health knows of no matters other than the
foregoing to be brought before the meeting. However, the enclosed Proxy gives
discretionary authority in the event that any additional matters should be
presented.
The Annual Report of 4Health for the past year is enclosed herewith and
contains 4Health's financial statements for the year ended December 31, 1997. A
COPY OF FORM 10-K, THE ANNUAL REPORT FILED BY 4HEALTH WITH THE SECURITIES AND
EXCHANGE COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO ANY SHAREHOLDER WHO
REQUESTS IT IN WRITING FROM 4HEALTH AT THE ADDRESS NOTED ON THE FIRST PAGE OF
THIS PROXY STATEMENT.
STOCKHOLDER PROPOSALS
It is anticipated that the next annual meeting of stockholders will be
held in May of 1999. 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 4Health no later
than February 28, 1999, and are otherwise in compliance with applicable laws and
regulations and the governing provisions of the Articles of Incorporation and
Bylaws of 4Health as the Surviving Corporation.
71
<PAGE>
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
TITLE OF DOCUMENT PAGE
- --------------------------------------------------------------------------------
4HEALTH, INC.
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . F-2
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997
and December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations for the three months ended March 31, 1998 and
1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995. . . . F-4
Statements of Stockholders' Equity for the three months ended March 31,
1998 (unaudited) and the years ended December 31, 1997, 1996 and 1995. . . . F-5
Statements of Cash Flows for the three months ended March 31, 1998 and
1997 (unaudited) and the years ended December 31, 1997, 1996 and 1995. . . . F-7
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . F-9
IRWIN NATURALS
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . .F-23
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-24
Irwin Naturals Statements of Operations for the three months ended
March 31, 1998 and 1997 (unaudited) and the years ended December 31,
1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-25
Irwin Naturals Statements of Changes in Retained Earnings for the
three months ended March 31, 1998 (unaudited) and the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . .F-26
Irwin Naturals Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited) and the years ended December 31,
1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-27
Notes to Financial Statement . . . . . . . . . . . . . . . . . . . . . . . .F-29
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 4Health, Inc.:
We have audited the accompanying balance sheets of 4Health, Inc. (a Utah
corporation) as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997 (as restated - see Note 1). 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 4Health, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado,
February 20, 1998.
F-2
<PAGE>
4Health, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
March 31, --------------------------
1998 1997 1996
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 313,817 $ 109,787 $ 1,086,168
Accounts receivable, net of allowance for doubtful accounts of
$20,340, $13,998 and $23,296, respectively 1,497,082 1,609,692 1,105,207
Inventories 1,649,032 1,329,223 2,534,881
Deferred tax asset 160,425 225,506 313,872
Other assets 118,343 109,893 171,138
Notes receivable, net of allowance of $300,000 44,378 34,817 265,819
----------- ----------- ------------
Total Current Assets 3,783,077 3,418,918 5,477,085
PROPERTY AND EQUIPMENT, NET 2,238,230 2,295,707 2,559,629
OTHER ASSETS, NET 572,727 570,152 4,071,435
DEFERRED TAX ASSET 56,365 - -
NOTES RECEIVABLE 68,502 78,063 116,308
----------- ----------- ------------
Total Assets $ 6,718,901 $ 6,362,840 $12,224,457
----------- ----------- ------------
----------- ----------- ------------
CURRENT LIABILITIES
Accounts payable $ 1,253,278 $ 698,310 $ 484,079
Accrued liabilities 394,877 360,454 878,025
Taxes payable 41,991 60,587 113,833
Notes Payable, current portion 30,066 29,454 20,555
Line of credit 441,073 740,797 -
Capital leases - - 3,733
----------- ----------- ------------
Total Current Liabilities 2,161,285 1,889,602 1,500,225
DEFERRED TAX LIABILITY - 42,376 113,072
NOTES PAYABLE 1,289,830 1,297,629 1,275,716
----------- ----------- ------------
Total Liabilities 3,451,115 3,229,607 2,889,013
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 30,000,000 authorized, 12,069,916,
12,068,798 and 11,460,374 issued, respectively, 90,890 shares
held in treasury 120,698 120,687 114,603
Additional paid-in capital - common stock 11,412,297 11,407,668 11,261,852
Additional paid-in capital - common stock warrants 372,059 275,000 -
Treasury stock, 90,890 shares (50,000) (50,000) (50,000)
Retained deficit (8,587,268) (8,620,122) (1,991,011)
----------- ----------- ------------
Total Stockholders' Equity 3,267,786 3,133,233 9,335,444
----------- ----------- ------------
Total Liabilities and Stockholders' Equity $ 6,718,901 $ 6,362,840 $12,224,457
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
4Health, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31, For the years ended December 31,
--------------------------- -------------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 3,459,406 $ 3,371,803 $12,431,670 $17,351,829 $10,434,022
Cost of goods sold 1,476,836 2,049,486 6,122,315 6,924,473 3,802,877
----------- ----------- ----------- ----------- -----------
Gross profit 1,982,570 1,322,317 6,309,355 10,427,356 6,631,145
Operating expenses:
Sales and marketing 1,169,409 1,727,925 6,197,524 9,585,232 3,873,466
Research and development 72,519 173,803 418,190 414,998 149,366
General and administrative 734,399 828,390 3,031,447 3,080,588 1,476,986
Loss on write-off of intangible
assets - - 3,202,431 - -
----------- ----------- ----------- ----------- -----------
1,976,327 2,730,118 12,849,592 13,080,818 5,499,818
----------- ----------- ----------- ----------- -----------
(Loss) income from operations 6,243 (1,407,801) (6,540,237) (2,653,462) 1,131,327
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income and other 28,697 49,072 51,727 146,592 27,542
Interest expense (35,646) (26,755) (140,601) (108,486) (90,467)
----------- ----------- ----------- ----------- -----------
(6,949) 22,317 (88,874) 38,106 (62,925)
----------- ----------- ----------- ----------- -----------
Net (loss) income before
income tax (provision) benefit (706) (1,385,484) (6,629,111) (2,615,356) 1,068,402
Income tax (provision) benefit 33,560 141,378 - 65,215 (359,723)
----------- ----------- ----------- ----------- -----------
NET (LOSS) INCOME $ 32,854 $(1,244,106) $(6,629,111) $(2,550,141) $ 708,679
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net (loss) income per common
share - basic and diluted $ - $ (.11) $ (.57) $ (.26) $ (.08)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common
shares outstanding - basic 11,978,439 11,374,500 11,615,004 9,896,822 8,707,214
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common
shares outstanding - diluted 12,109,944 11,374,500 11,615,004 9,896,822 8,833,047
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
4Health, Inc.
Statements of Stockholders' Equity
For three months ended March 31, 1998 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Paid-In
Preferred Stock Common Stock Capital Treasury Stock
-------------------------------------------------------------------------- Additional
Paid-In
Capital
Common Stock Common
Equivalent Stock
Shares Amount Shares Amount Amount Shares Amount Warrants
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
December 31, 1994 - $ - 8,703,442 $ 87,034 $ 954,271 - -
Issuance of Series A
Convertible Preferred
stock for cash, net of
offering costs of
$87,229 consisting
of cash and common
stock 376,167 15,000 11,285 113 1,427,658 - -
Net income - - - - - - -
--------------------------------------------------------------------------------------
BALANCES,
December 31, 1995 376,167 $ 15,000 8,714,727 $ 87,147 $ 2,381,929 - - -
Conversion of a $50,000
shareholder note
receivable for Treasury
Stock - - - - - 90,890 (50,000)
Conversion of Series A
Convertible Preferred
Stock (376,167) (15,000) 376,167 3,762 11,238 - -
Common stock issued in
merger with Surgical
Technologies Inc. - - 2,271,108 22,711 8,773,955 - -
Issuance of common stock
to employees, directors
and officers for options
exercised - - 98,372 983 94,730 - -
Net loss
- - - - - - -
--------------------------------------------------------------------------------------
BALANCES,
December 31, 1996 - $ - 11,460,374 $114,603 $11,261,852 90,890 $(50,000) -
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
<CAPTION>
Retained Total
Earnings Stockholders'
(Deficit) Equity
---------------------------
<S> <C> <C>
BALANCES,
December 31, 1994 $(149,549) $ 891,756
Issuance of Series A
Convertible Preferred
stock for cash, net of
offering costs of
$87,229 consisting
of cash and common
stock - 1,442,771
Net income 708,679 708,679
---------------------------
BALANCES,
December 31, 1995 $ 559,130 $ 3,043,206
Conversion of a $50,000
shareholder note
receivable for Treasury
Stock - (50,000)
Conversion of Series A
Convertible Preferred
Stock - -
Common stock issued in
merger with Surgical
Technologies Inc. - 8,796,666
Issuance of common stock
to employees, directors
and officers for options
exercised - 95,713
Net loss (2,550,141) (2,550,141)
---------------------------
BALANCES,
December 31, 1996 $(1,991,011) $9,335,444
---------------------------
---------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
4Health, Inc.
Statements of Stockholders' Equity
For the three months ended March 31, 1998 (unaudited) and the years ended
December 31, 1997, 1996 and 1995
(Continued)
<TABLE>
<CAPTION>
Additional
Paid-In
Preferred Stock Common Stock Capital Treasury Stock
-------------------------------------------------------------------------------------
Common
Stock
Equivalent
Shares Amount Shares Amount Amount Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 - $ - 11,460,374 $114,603 $11,261,852 90,890 $(50,000)
Issuance of common stock to
employees (current and former)
for options exercised - - 108,424 1,084 150,816 - -
Issuance of warrants as
compensation for investment
banking services - - - - - - -
Issuance of common stock to Old
4Health shareholders pursuant to
a realignment of equity interests
(Note 1) - - 500,000 5,000 (5,000) - -
Net loss - - - - - - -
-------------------------------------------------------------------------------------
BALANCES, December 31, 1997 - $ - 12,068,798 $120,687 $11,407,668 90,890 $(50,000)
Issuance of Common Stock to
employees (current and former)
for options exercised - - 1,118 $ 11 $ 4,629 - -
Issuance of warrants as compensation
for investment banking services - - - - - - -
Net income - - - - - - -
-------------------------------------------------------------------------------------
Balances as of March 31, 1998
(unaudited) - $ - 12,069,916 $120,698 $11,412,297 90,890 $(50,000)
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
<CAPTION>
Additional
Paid-In
Capital
Common Retained Total
Stock Earnings Stockholder
Warrants (Deficit) Equity
--------------------------------------------
<S> <C> <C> <C>
BALANCES, December 31, 1996 $ - $(1,991,011) $ 9,335,444
Issuance of common stock to
employees (current and former)
for options exercised - - 151,900
Issuance of warrants as
compensation for investment
banking services 275,000 - 275,000
Issuance of common stock to Old
4Health shareholders pursuant to
a realignment of equity interests
(Note 1) - - -0-
Net loss - (6,629,111) (6,629,111)
--------------------------------------------
BALANCES, December 31, 1997 $275,000 $(8,620,122) $ 3,133,233
Issuance of Common Stock to
employees (current and former)
for options exercised - - $ 4,640
Issuance of warrants as compensation
for investment banking services $ 97,059 - $ 97,059
Net income - $ 32,854 $ 32,854
--------------------------------------------
Balances as of March 31, 1998
(unaudited) $372,059 $(8,587,268) $ 3,267,786
--------------------------------------------
--------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
4Health, Inc.
Statements of Cash Flows
For the three months ended
March 31, For the years ended December 31,
----------------------------------------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ 32,854 $ (1,244,106) $ (6,629,111) $ (2,550,141) $ 708,679
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 66,744 147,123 523,055 334,971 122,401
Bad debt expense 8,151 - 15,788 - -
Loss on disposal of assets 679 1,719 99,148 7,444 33,927
Issuance of warrants for compensation
expense 97,059 - 275,000 - -
Loss on write-off of assets - - 3,202,431 - -
(Increase) decrease in:
Accounts receivable 104,459 (318,701) (520,274) (54,168) (723,462)
Inventory (319,809) 1,184,238 1,205,658 (1,166,483) (584,420)
Other assets (20,972) (510,933) 84,132 (147,580) (52,118)
Deferred tax assets 8,716 (28,406) 88,366 (231,862) (31,005)
Increase (decrease) in:
Accounts payable 554,968 436,740 214,231 (125,252) 311,852
Accrued interest payable (8,403) - - - 4,984
Accrued liabilities 42,826 (212,214) (517,571) 558,913 84,920
Taxes payable (18,596) (35,938) (53,246) 63,868 (24,495)
Deferred tax liability (42,376) (113,072) (70,696) 22,507 32,458
---------------- ---------------- ---------------- ---------------- --------------
Net cash used in operating activities 506,300 (693,550) (2,083,089) (3,287,783) (116,279)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities - - - 524,002 -
Acquisition of Surgical Technologies, Inc. - - - 3,639,257 -
Purchase of fixed assets - (63,727) (84,111) (532,754) (689,030)
Proceeds from asset dispositions - - 600 - 11,205
Proceeds from note receivable - - 269,247 262,062 -
---------------- ---------------- ---------------- ---------------- --------------
Net cash provided by (used in) investing - (63,727) 185,736 3,892,567 (677,825)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Preferred Stock - - - - 1,500,000
Preferred Stock issuance costs - - - - (57,229)
Proceeds from common stock 4,640 45,000 151,900 95,713 -
Surgical Technologies, Inc. acquisition costs - - - (457,551) -
Borrowings on short-term debt 2,674,488 - 2,577,490 - -
Borrowings on long-term debt - - 1,350,000 - -
Repayments on short-term borrowings (2,974,211) - (1,836,693) - -
Repayments on long-term borrowings (7,187) 51,508 (1,319,188) (71,198) -
Repayments on capital leases - (2,619) (2,537) (5,515) (3,413)
---------------- ---------------- ---------------- ---------------- --------------
Net cash provided by (used in) financing (302,270) 93,889 920,972 (438,551) 1,439,358
activities
---------------- ---------------- ---------------- ---------------- --------------
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
4Health, Inc.
Statements of Cash Flows
For the three months ended
March 31, For the years ended December 31,
----------------------------------------------------------------------------------
1998 1997 1997 1996 1995
---------------- ---------------- ---------------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET (DECREASE) INCREASE IN CASH 204,030 (663,388) (976,381) 166,233 645,254
CASH AND CASH EQUIVALENTS, at
beginning of period 109,787 1,086,168 1,086,168 919,935 274,681
---------------- ---------------- ---------------- ---------------- --------------
CASH AND CASH EQUIVALENTS, at end
of period $ 313,817 $ 422,780 $ 109,787 $ 1,086,168 $ 919,935
---------------- ---------------- ---------------- ---------------- --------------
---------------- ---------------- ---------------- ---------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for income taxes $ 100 $ 100 $ 40,871 $ 800 $ 443,769
Cash paid for interest 28,827 27,683 128,190 98,527 83,735
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
<S> <C>
During 1996, assets and liabilities acquired in
connection with the reverse purchase of
Surgical Technologies, Inc. (see Note 1):
Cash and cash equivalents $ 3,639,257
Marketable securities 524,002
Accounts receivable 76,419
Inventories 390,508
Deferred tax asset 51,005
Property and equipment 117,842
Other assets 1,037,257
Notes receivable 644,189
Accounts payable (193,765)
Taxes payable (9,398)
Deferred tax liability (58,107)
-------------
Net assets acquired 6,219,209
Less acquisition costs (457,551)
-------------
Net equity issued $ 5,761,658
-------------
-------------
</TABLE>
During 1996, a $50,000 note receivable from a shareholder was canceled in
exchange for 90,890 shares of common stock received from the shareholder.
During 1995, for services relating to the sale of preferred stock, the Company
issued 11,285 shares of common stock to a director. The fair value was
estimated to be approximately $30,000.
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
4Health, Inc.
Notes to Financial Statements
December 31, 1997 and 1996
(1) ORGANIZATION AND BUSINESS ACTIVITY
ORGANIZATION
4health, Inc. was incorporated in California and commenced operations on
February 17, 1993. 4health, Inc. acquired Nature's Secret, a vitamin and health
food supplement company, on February 17, 1993, by issuing 4,000,000 shares of
common stock to R. Lindsey Duncan, 4health's president, founder and majority
stockholder.
On July 15, 1996, 4health, Inc. ("Old 4Health"), a California corporation,
merged with Surgical Technologies, Inc., ("Surgical") a Utah corporation. The
merger was recorded as a reverse purchase. The merger included a two for four
reverse split of Surgical's common stock. Pursuant to the Merger Agreement,
Surgical continues as the surviving corporate entity, with its name changed to
"4Health, Inc." (the "Company" or "4Health").
The Merger Agreement between Surgical and Old 4Health provided for the merger of
Old 4Health with and into Surgical, pursuant to which: (a) the shares of Old
4Health common stock and the shares of Old 4Health Series A preferred stock were
exchanged for approximately 9,000,000 shares of Surgical common stock, (b) each
four shares of Surgical common stock issued and outstanding were converted into
two shares of Surgical common stock (or 2,271,108 shares) and one warrant to
purchase a share of the Company's common stock at $11.00 per share (or
1,135,554 total shares), (c) the board of directors of the Company was
reconstituted to include five designees of Old 4Health and two designees of
Surgical, and (d) the articles of incorporation of Surgical were amended to (i)
change its name to 4Health, Inc., (ii) increase the authorization of 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 Company
at $0.01 per warrant, provided that the trading price of the underlying common
stock exceeds $13.75 per share for 30 consecutive days.
As part of the merger, all outstanding options to purchase shares of Old 4Health
common stock were converted, pursuant to the Old 4Health conversion ratio
(1.50467:1), into options to purchase shares of the Company at such converted
exercise prices, such that the cash received by the Company upon exercise will
be unchanged.
Outstanding options to purchase an aggregate of 651,000 shares of Surgical
common stock at a weighted average exercise price of $2.23 per share were
converted into options to purchase an aggregate of 325,000 shares of the
Company's common stock, at a weighted average exercise price of $4.45 per share.
In addition, outstanding options to purchase an aggregate of 599,999 shares of
Old 4Health common stock at a weighted average exercise price of $6.70 per share
were converted into options to purchase an aggregate 902,800 shares of the
Company's common stock at a weighted average exercise price of $4.45 per share.
The number of shares of the Company's common stock issuable to the holders of
Old 4Health common stock and Old 4Health Series A preferred stock was subject to
adjustment in the event that the Company did not realize at least $2,000,000 in
earnings, before interest and income taxes, from the ID Technology acquired from
Surgical during the twelve month period following the merger. On September 26,
1997, pursuant to this adjustment clause, 500,000 additional shares of common
stock were issued to the Old 4Health shareholders to realign the equity
interests because of the failure of the acquired assets to produce the required
level of earnings.
PRO FORMA CONDENSED COMBINED OPERATIONS
As a result of the sale of Surgical's specialty metals fabrication business
segment and its disposable surgical pack and drape manufacturing product lines,
both of which occurred prior to the merger, the continuing operations of
Surgical subsequent to the merger were not material compared to the continuing
operations of 4Health. Accordingly, the unaudited pro forma condensed
statements of operations would reflect only the historical operations of
4Health.
F-9
<PAGE>
BUSINESS ACTIVITY
The Company wholesales vitamins and health food supplements developed by Lindsey
Duncan under the brand names of Nature's Secret, Harmony Formulas, and 4Health.
Nature's Secret products are marketed through retail outlets for the health food
industry, Harmony Formulas products are marketed to health care practitioners
throughout the United States, and 4Health products are marketed through the mass
market. The products are formulated to appeal to the general public and address
overall health considerations.
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. The
restatement is a result of the Securities and Exchange Commission's review of
the Company's proxy materials related to the prospective merger with Irwin
Naturals (See Note 9). The restatement effects the accounting treatment of the
purchase price recorded for the Surgical acquisition effective July 15, 1996.
In connection therewith, the Company increased the intangible asset values
recorded for the Surgical acquisition based on the average stock price of
Surgical for the two days before and after the announcement of the Surgical
acquisition by $3,042,000. The remaining intangible assets of $3,202,000 were
subsequently written off in 1997 because the continuing Surgical operations did
not generate sufficient revenue to justify continuing such valuation. The
restatement also included an adjustment to write-down inventory by $758,000 in
connection with an exchange for barter credits in February 1997. These
writedowns were considered corrections of errors under APB No. 20 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:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
As of December 31,
-----------------------------------------------------------------------------------------
Previously As Previously As
Reported Restated Reported Restated
1997 1997 1996 1996
--------------------- ----------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Other assets, net $ 1,317,350 $ 680,045 $ 1,307,669 $ 4,242,573
Deferred tax liability 5,638 42,376 152,112 113,072
Additional paid-in-capital-
common stock 7,904,884 11,407,668 8,226,844 11,261,852
Retained deficit (4,442,387) (8,620,122) (1,929,947) (1,991,011)
<CAPTION>
-----------------------------------------------------------------------------------------
For the years ended December 31,
-----------------------------------------------------------------------------------------
Previously As Previously As
Reported Restated Reported Restated
1997 1997 1996 1996
--------------------- ----------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ 13,189,979 $ 12,431,670 N/A N/A
General and administrative
expenses 2,951,294 3,031,447 $ 2,980,484 $ 3,080,588
Loss on write-off of
intangible assets - 3,202,431 N/A N/A
Income tax benefit 75,778 - 26,175 65,215
</TABLE>
The restatement did not affect the beginning balance in retained earnings for
the year ended December 31, 1996 and decreased beginning of the year retained
earnings by $61,000 for the year ended December 31, 1997. The effect on net
income and related per share amounts for each of the years is as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
For the years ended December 31,
-----------------------------------------------------------------------------------------
Previously As Previously As
Reported Restated Reported Restated
1997 1997 1996 1996
--------------------- ----------------------- ---------------------- -----------------
<S> <C> <C> <C> <C>
Net loss before income
tax benefit $ (2,588,218) $ (6,629,111) $ (2,515,252) $ (2,615,356)
Net loss (2,512,440) (6,629,111) (2,489,077) (2,550,141)
Net loss per common $ (.22) $ (.57) $ (.25) $ (.26)
share-basic and
diluted
</TABLE>
(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 balance 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 has one principal customer which accounted
for approximately 6% of its total revenue for the year ended December 31,
1997, 30% of its total revenue for the year ended December 31, 1996 and 13%
of its total revenue for the year ended December 31, 1995.
OTHER ASSETS
Included in other assets at December 31, 1996 was unamortized goodwill resulting
from the merger (see Note 1) of approximately $3,227,000 and the unamortized ID
Technology acquired from Surgical of approximately $727,000. The ID Technology
is used in angioplasty procedures. These intangible assets are being amortized
using the straight-line method over a period of eight years.
In 1997, the purchase price for Surgical was adjusted downward because of the
failure of the former Surgical assets to produce a specific level of earnings in
the first year (see Note 1). The goodwill arising from the merger was reduced
to $0 and the value of the ID Technology was reduced to $480,000 at December 31,
1997. The Company believes the carrying value of the asset is fully
recoverable.
On February 25, 1997, 4Health entered into a barter credit agreement with Active
Media Services, Inc. Under the terms of the agreement, the Company exchanged
with Active Media Services, Inc. certain inventory with a cost of $758,308 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 to
reduce future advertising, printing, travel and other normal operating
expenditures. This transaction was recorded as a reduction of inventory.
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, 1997 and 1996, all of the Company's inventory consisted of
purchased finished goods.
F-11
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Land $ 270,000 $ 270,000
Buildings and improvements 1,606,527 1,567,444
Machinery and equipment 174,779 201,036
Furniture, fixtures and equipment 760,364 868,757
--------------- ---------------
2,811,670 2,907,237
Less-accumulated depreciation (515,963) (347,608)
--------------- ---------------
$ 2,295,707 $ 2,559,629
--------------- ---------------
--------------- ---------------
</TABLE>
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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable from future undiscounted cash flows. Impairment losses are
recorded for the difference between the carrying value and fair value of the
long-lived asset.
STOCK BASED COMPENSATION PLANS
In October of 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting 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 costs 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 Statement had been applied.
Additionally, certain other disclosures are required with respect to stock
compensation and the assumptions used to determine the pro forma effects of SFAS
No. 123. The Company adopted SFAS No. 123 during 1996. The Company has elected
to make pro forma disclosures as allowed by SFAS No. 123. (See Note 6.)
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
Sales returns and allowances are estimated at each reporting date and a reserve
is established.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, short-term trade
receivables and payables and short-term and long-term debt. The carrying values
of cash and short-term trade receivables, payables and short-term debt
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, 1997 and 1996, approximates the carrying value.
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
F-12
<PAGE>
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. All earnings per share amounts for 1996 and 1995 have been restated to
reflect the adoption of SFAS No. 128.
<TABLE>
<CAPTION>
Years ended December 31,
(in thousands, except per share amounts)
----------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------
Per Per Per
Loss Share Share Loss Share Share Income Share Share
----- ----- ----- ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net (loss) income $ (6,629) 11,615 $ (2,550) 9,897 $ 709 8,707
Basic EPS $ (0.57) $ (0.26) $0.08
Effect of diluted securities:
Convertible preferred
stock 119
Stock options
outstanding 7
----- ----- ----- ----- ----- ------ ------ ------ ------
Net (loss) income $ (6,629) 11,615 $ (2,550) 9,897 $709 8,833
----- ----- ----- ----- ------ ------
----- ----- ----- ----- ------ ------
Diluted EPS $ (0.57) $ (0.26) $0.08
----- ------ ------
----- ------ ------
</TABLE>
Assumed conversions were not included in the calculation for diluted EPS in 1997
and 1996 as they would have been anti-dilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenue, gains and losses) in a full set of general-purpose
financial statements. SFAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The impact of
the adoption of SFAS No. 130 on the Company's financial position and results of
operations is not expected to be material.
In June 1997 the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and service, geographic areas and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application
comparative information for earlier years is to be restated. SFAS No. 131 may
require certain disclosures to be made by the Company, if applicable.
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.
F-13
<PAGE>
ESTIMATES MADE BY MANAGEMENT
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 to prior year balances to conform with
the current year presentation.
(3) NOTES PAYABLE
During 1997, the Company refinanced the corporate headquarters building loan for
$1,350,000 for a five-year term. Payments of principal and interest of $11,503
are due monthly with the remaining balance due at the end of year five.
Interest is calculated at the rate of 8.25% per year.
Also during September 1997, the Company entered into a $1,500,000 three year
revolving credit agreement with Norwest Business Credit, Inc. used for financing
growth in inventory and receivables and other working capital needs. The
agreement allows the Company to borrow up to $1,500,000 if eligible accounts
receivable and inventory are sufficient to warrant such borrowings and contains
certain covenants customary for this type of agreement. Borrowing on the line
is subject to certain limitations and is secured by accounts receivable,
inventory and various other assets. All of the Company's receipts are applied
to the credit facility on a daily basis. The loan bears interest at Minnesota's
Base Rate plus 2.75% and is subject to a minimum interest charge which is
calculated on a quarterly basis.
The maturities of the note payable and the revolving credit agreement are as
follows:
<TABLE>
<S><C>
1998 $ 770,251
1999 31,978
2000 34,718
2001 37,694
2002 1,193,239
-------------
Total $ 2,067,880
-------------
-------------
</TABLE>
(4) NOTES RECEIVABLE
As of December 31, 1997 and 1996 notes receivable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Note receivable from a third party for certain
assets, bearing interest 8%, with interest and
principal due on January 31, 1997. Subsequent to
year ended December 31, 1996, the note receivable
was extended to September 1, 1997, and has been
paid. $ - $ 250,000
Note receivable from a third party for the
purchase of certain assets, bearing interest 10%
through February 16, 1999, secured by purchased
assets 112,880 132,127
Less current portion (34,817) (265,819)
------------ -----------
Long-term notes receivable $ 78,063 $ 116,308
------------ -----------
------------ -----------
</TABLE>
F-14
<PAGE>
(5) 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 was unsecured and bore interest at 7.0% and was due by March 31, 1997.
This loan was paid off in 1996. Interest expense for fiscal 1996 totaled
$2,492.
NOTE RECEIVABLE
In 1996, the Company received treasury stock as payment for a $50,000
shareholder note receivable. (See Note 6.)
(6) STOCKHOLDERS' EQUITY
TREASURY STOCK
In 1996, the note receivable previously outstanding from a shareholder was
exchanged for 60,405 shares of common stock received from the shareholder. (See
Note 5.)
ISSUANCE OF STOCK
During 1995, Old 4Health sold 15,000 shares of Series A Convertible Preferred
Stock ("Preferred Stock"), $1.00 par value, at $100.00 per share for gross
proceeds of $1,500,000. The Company used the funds for working capital and
investment purposes. The Company also issued 7,500 shares of common stock
valued at $30,000 to a director of the Board in exchange for services related to
consummating the Preferred Stock offering effected in 1995.
In 1996, in conjunction with the merger transaction (see Note 1), all 5,731,381
shares of Old 4Health common stock and all 15,000 shares of Old 4Health Series A
Convertible Preferred Stock outstanding were converted into an aggregate of
approximately 9,000,000 shares of common stock, split at a rate of 1.50467 to 1
for common stock and at 25.07782 to 1 for the Preferred Stock. Further,
2,271,108 shares of common stock were issued to holders of Surgical common
stock. Shares of 4Health common stock, Preferred Stock and treasury stock have
been retroactively restated to reflect the equivalent number of shares received
in the merger, as presented in the Statements of Stockholders' Equity.
In 1996 and 1997, common stock was issued as a result of options exercised by
employees, an officer and a director of the Company as well as prior Surgical
employees. The exercise prices ranged from $3.99 to $4.15 per share in 1997 and
from $3.32 to $4.15 per share in 1996. Also during 1997, 500,000 shares of
common stock were issued to old 4health shareholders pursuant to a clause in the
merger agreement related to ID Technology post-merger earnings. (See Note 1)
WARRANTS
In 1997 the Company entered into a three-year contract with Allen & Company to
provide investment banking services. In consideration for these services the
Company issued to Allen & Company warrants to purchase 1,000,000 shares of the
Company's common stock at an exercise price of $6.00 per share and additional
warrants to purchase 250,000 shares of the Company's common stock, at an
exercise price of $4.00 per share, both exercisable up to the fifth anniversary
of the date of issuance. The Company recorded professional service expense of
$275,000 in connection with the issuance of these warrants.
In 1996, as part of the merger transaction, warrants were issued to holders of
Surgical common stock at the rate of one warrant per four shares of Surgical
common stock held. Each warrant entitles the holder to acquire one share of the
Company's common stock at an exercise price of $11.00 per share, for a period of
18 months. Compensation expense of $223,243, as calculated for SFAS No. 123,
related to the warrants, is included in the pro forma information presented
below.
F-15
<PAGE>
STOCK OPTION PLAN
In 1996, upon consummation of the merger, the 1995 Stock Option Plan was
terminated. The Long-Term Stock Incentive Plan ("LTSIP") as previously
sponsored by Surgical was adopted. The LTSIP allows issuance of incentive stock
options and non-qualified stock options and is administered by the Long-Term
Stock Incentive Plan Administration Committee of the Board of Directors. The
LTSIP can authorize an aggregate of 3,250,000 options exercisable into shares of
new common stock. The option price of incentive stock options shall not be less
than the fair market value of the Company's common stock on the date of the
grant.
All outstanding Old 4Health options were canceled/reissued pursuant to the
merger. Options reissued under the LTSIP were issued giving effect to the rate
at which common stock was split, as noted above, times the number of options
previously held.
A summary of stock option activity for the years ended December 31, 1995, 1996
and 1997 is as follows, including retroactive treatment of the stock split:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------- ---------------
<S> <C> <C>
Balance, December 31, 1994 - -
Granted 279,869 $4.57
Exercised - -
Canceled (4,514) $4.15
------------- ---------------
Balance, December 31, 1995 275,355 $4.57
Granted 1,211,814 $4.37
Exercised (172,622) $3.91
Canceled (448,444) $4.93
------------- ---------------
Balance, December 31, 1996 866,103 $4.35
Granted 192,500 $5.92
Exercised (186,396) $4.01
Canceled (129,564) $6.00
------------- ---------------
Balance, December 31, 1997 742,643 $4.57
------------- ---------------
------------- ---------------
Options exercisable at
December 31, 1995 - -
December 31, 1996 498,478 $4.01
December 31, 1997 585,516 $4.24
Weighted average fair value of options
granted during
1995 - $2.29
1996 - $0.56
1997 - $1.62
</TABLE>
F-16
<PAGE>
The following table summarizes information about the options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- --------------------------------------
Weighted Average
Number Remaining Weighted Number Weighted Average
Outstanding Contractual Average Exercisable Exercise
Range of Exercise at December 31, Life Exercise at December 31, Price
Prices 1997 Price 1997
- ---------------------- -------------------- ----------------- -------------- --------------------- ----------------
<S> <C> <C> <C> <C> <C>
$3.32 - $4.98 543,516 2.94 years $ 4.07 543,516 $ 4.07
$5.50 - $7.69 186,127 3.80 years 5.74 32,000 5.79
$8.44 - $8.75 13,000 1.76 years 8.58 10,000 8.63
-------------------- ---------------------
Total 742,643 3.14 years $ 4.57 585,516 $ 4 .24
-------------------- ---------------------
-------------------- ---------------------
</TABLE>
As noted in Note 2, the Company has elected to account for its stock-based
compensation plans for employees and directors under APB 25. The Company
recorded no compensation expense during 1997, 1996 or 1995 related to APB 25.
Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during 1997, 1996
and 1995 using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ----------
<S> <C> <C> <C>
Risk-free interest rate 5.97% 5.60% 6.27%
Expected dividend yield 0.0% 0.0% 0.0%
Expected lives
outstanding 2.2 years 1.5 years 2.7 years
Expected volatility 60.68% 58.44% 58.44%
</TABLE>
To estimate lives of options for this valuation, it was assumed options will be
exercised one year after becoming fully vested. Cumulative compensation costs
recognized in pro forma net income or loss with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture. The expected volatility was based on an
approximation of similar companies' volatility. Actual volatility of the
Company's common stock varies. Fair value computations are highly sensitive to
the volatility factor assumed; the greater the volatility, the higher the
computed fair value of options granted.
The total fair value of options granted was computed to be approximately
$311,857, $1,164,173 and $427,837 for the years ended December 31, 1997, 1996
and 1995, respectively. These amounts are amortized ratably over the vesting
periods of the options or recognized at the date of grant if no vesting period
is required. Pro forma stock-based compensation, net of the effect of
forfeitures, was $281,178, $1,037,949 and $265,069 for 1997, 1996 and 1995,
respectively. If the Company had accounted for its stock-based compensation
plans in accordance with SFAS No. 123, the Company's net (loss) income and pro
forma net (loss) income per common share would have been reported as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Net (loss) income:
As reported $(6,629,111) $(2,550,141) $ 708,679
------------ ----------- -----------
------------ ----------- -----------
Pro forma $(6,910,289) $(3,588,090) $ 443,610
------------ ----------- -----------
------------ ----------- -----------
EPS:
Basic and diluted as
reported (Note 2) $ (0.57) $ (0.26) $ 0.08
------------ ----------- -----------
------------ ----------- -----------
Basic and diluted pro forma $ (0.59) $ (0.36) $ 0.05
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-17
<PAGE>
Weighted average shares used to calculate pro forma net income (loss) per share
were determined as described in Note 2, except in applying the treasury stock
method to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense. Because the SFAS No. 123
method of accounting has not been applied to options granted prior to January 1,
1995, the resulting pro forma compensation costs may not be representative of
that to be expected in future years.
(7) INCOME TAXES
The Company is subject to corporate 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 (liability) is comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
---------------- --------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Allowance for bad debt $ 5,459 $ 9,085
Sales reserve 19,708 156,000
Inventory tax adjustment 26,274 -
Inventory reserve 71,444 50,505
Warrants 107,250 -
Accrued liabilities 164,139 36,733
Net operating loss carryforward 5,642,125 2,433,050
--------------- --------------
Total deferred tax assets 6,036,399 2,685,373
DEFERRED TAX LIABILITIES:
Inventory tax adjustment (49,986) -
Tax over book
depreciation/amortization (161,158) (113,072)
--------------- --------------
Net deferred tax asset
(liability), before
valuation reserve 5,825,255 2,572,301
Valuation reserve (5,642,125) (2,371,501)
--------------- --------------
Net deferred tax asset $ 183,130 $ 200,800
--------------- --------------
--------------- --------------
Current portion $ 225,506 $ 313,872
Long-term portion (42,376) (113,072)
--------------- --------------
$ 183,130 $ 200,800
--------------- --------------
--------------- --------------
</TABLE>
F-18
<PAGE>
The Company provided a valuation allowance to offset the majority of its 1996
and all of its 1997 net operating loss carryforwards primarily due to its
history of operating losses.
The components of the income tax (benefit) provision are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- -------------------- ------------------
<S> <C> <C> <C>
Current:
Federal $ (16,970) $ 143,340 $ 319,568
State (700) 800 38,702
Deferred:
Federal 17,670 (209,355) 1,453
----------------- -------------------- ------------------
Total $ - $ (65,215) $ 359,723
----------------- -------------------- ------------------
----------------- -------------------- ------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State income taxes (5.0) (5.0) 3.6
Utilization of net operating loss - (5.5)
Establishment of valuation 40.0 32.9 -
allowances
Short-year tax provision - 5.7 -
Other (1.0) (2.1) 1.6
----------- ---------- ----------
Effective income tax rate 0.0% (2.5)% 33.7%
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
F-19
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES
The Company entered into certain leases which have various expiration dates.
Rental expense was $134,763, $132,980 and $13,612 for the years ended December
31, 1997, 1996 and 1995, respectively. Future minimum rental payments
applicable to these noncancelable operating leases are as follows for the years
ending December 31:
<TABLE>
<S><C>
1998 126,826
1999 133,560
2000 126,592
2001 96,440
----------
$ 483,418
----------
----------
</TABLE>
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.
(9) SUBSEQUENT EVENT
On January 7, 1998 4Health, Inc. entered into a merger agreement with Irwin
Naturals, a privately held California corporation also engaged in the
nutritional supplement business. 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.
F-20
<PAGE>
(10) SELECTED FINANCIAL DATA - AS RESTATED (UNAUDITED)
The following tables set forth certain unaudited quarterly financial
information:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Quarters Ended
----------------------------------------------------------------------------------------------
1997
----------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
-------------------- ------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Income statement data:
Net sales $ 2,893,448 $ 3,076,185 $ 3,090,234 $ 3,371,803
Gross profit 1,620,188 1,774,857 1,591,994 1,322,317
(Loss) from operations (3,796,684) (392,584) (1,011,090) (1,407,801)
Other (expense) income (36,685) 11,459 (18,042) 22,317
-------------------- ------------------- ------------------ -----------------------
(Loss)income before tax (3,833,369) (381,125) (1,029,132) (1,385,484)
Income tax (provision) benefit (88,408) (52,970) - (b) 141,378(a)
-------------------- ------------------- ------------------ -----------------------
Net (loss) income $ (3,921,777) $ (434,095) $ (1,029,132) $ (1,244,106)
-------------------- ------------------- ------------------ -----------------------
-------------------- ------------------- ------------------ -----------------------
Net (loss) income per common share
- basic and diluted $ (.33) $ (.04) $ (.09) $ (.11)
-------------------- ------------------- ------------------ -----------------------
-------------------- ------------------- ------------------ -----------------------
<CAPTION>
----------------------------------------------------------------------------------------------
Quarters Ended
----------------------------------------------------------------------------------------------
1996
----------------------------------------------------------------------------------------------
December 31 September 30 June 30 March 31
-------------------- ------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Income statement data:
Net sales 2,559,896 3,311,507 8,007,026 3,473,400
Gross profit 1,415,521 2,027,067 4,768,824 2,215,944
(Loss) income from
operations (1,863,097) 852,847 26,671 34,253
Other income (expense) 11,437 52,480 (13,823) (10,429)
-------------------- ------------------- ------------------ -----------------------
(Loss)income before tax (1,851,660) (800,367) 12,848 23,824
Income tax (provision) benefit (26,561) 17,137 86,801 (c) (12,162)
-------------------- ------------------- ------------------ -----------------------
Net (loss) income $ (1,878,221) $ (783,230) $ 99,649 $ 11,662
-------------------- ------------------- ------------------ -----------------------
-------------------- ------------------- ------------------ -----------------------
Net (loss) income per common share
- - basic and diluted $ (.16) $ (.07) $ .01 $ .00
-------------------- ------------------- ------------------ -----------------------
-------------------- ------------------- ------------------ -----------------------
</TABLE>
F-21
<PAGE>
(a) The tax benefit in the first quarter of 1997 was recorded in anticipation
of the Company having net income for the year. The Company recorded a
benefit in the first quarter which they believed would be offset by a
provision booked in subsequent profitable quarters.
(b) There is neither a tax provision or a benefit in the second quarter of 1997
as the Company anticipated having net income for the year. Based on the
tax benefit recorded in the first quarter of 1997 and anticipated
subsequent profitable quarters, they believed no tax benefit or provision
was necessary in order to effectively adjust the year-end income tax
provision.
(c) The tax benefit recorded in the quarter ended June 30, 1996 reflects a tax
refund from 1995. This refund was the result of additional book/tax timing
differences filed on the Company's tax return but not taken into account
when the 1995 income tax provision was recorded.
F-22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Irwin Naturals
and Applied Nutrition:
We have audited the accompanying combined balance sheet of Irwin Naturals, a
California corporation, and Applied Nutrition, a Nevada corporation, as of
December 31, 1997, and the related combined statements of operations, changes in
retained earnings and cash flows for the year then ended and the balance sheets
of Irwin Naturals as of December 31, 1996 and 1995, and the related statements
of operations, changes in retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of Irwin Naturals's
and Applied Nutrition'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 audits 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 combined financial position of Irwin Naturals and
Applied Nutrition as of December 31, 1997 and the results of their operations
and their cash flows for the year then ended and the financial position of Irwin
Naturals as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 27, 1998
F-23
<PAGE>
IRWIN NATURALS AND APPLIED NUTRITION
BALANCE SHEETS
<TABLE>
<CAPTION>
Irwin Naturals Irwin Naturals
and and
Applied Nutrition Applied Nutrition Irwin Naturals Only
----------------- ----------------- -------------------
March 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995
-------------- ----------------- ----------------- -----------------
(combined) (combined)
(unaudited)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 938,125 $ 526,833 $ 281,380 $ 76,968
Trade receivables, less allowance for
doubtful accounts of $326,925, $327,091,
$157,091 and $89,046 and allowance for
returned goods of $100,000, $100,000, $0,
and $33,276 for December 31, 1997, 1996
and 1995, respectively 3,274,700 3,290,170 2,577,330 410,048
Inventory, less allowance for excess and
obsolete inventory of $59,000, $77,315
and $0 for December 31, 1997, 1996 and
1995, respectively 681,737 833,192 477,406 68,094
Note receivable from shareholder - - 96,151 -
Deferred tax asset - - 114,171 -
Prepaid expenses and other 293,426 212,275 6,285 -
------------- ------------- ------------- -------------
5,187,988 4,862,470 3,552,723 555,110
FIXTURES AND EQUIPMENT 202,158 153,243 55,061 3,038
------------- ------------- ------------- -------------
$ 5,390,146 $ 5,015,713 $ 3,607,784 $ 558,148
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
CURRENT LIABILITIES:
Accounts payable $761,458 $1,356,010 $1,186,390 $183,427
Accrued liabilities 642,492 956,209 377,098 -
Customer deposits 449,995 449,995 449,995 -
Deferred tax liability - - 6,322 -
Income taxes payable - - 666,947 -
Note payable to shareholder - - - 213,190
------------- ------------- ------------- -------------
1,853,945 2,762,214 2,686,752 396,617
SHAREHOLDERS' EQUITY:
Common stock, no stated par value,
100,000 shares authorized and 65,250
shares outstanding for March 31, 1998,
December 31, 1997, 1996 and 1995 130,500 130,500 130,500 130,500
Retained earnings 3,405,701 2,122,999 790,532 31,031
------------- ------------- ------------- -------------
3,536,201 2,253,499 921,032 161,531
------------- ------------- ------------- -------------
$ 5,390,146 $ 5,015,713 $ 3,607,784 $ 558,148
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part
of these balance sheets.
F-24
<PAGE>
IRWIN NATURALS AND APPLIED NUTRITION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, For the Years Ended December 31,
------------------------------------- ---------------------------------------------------------
Irwin Naturals Irwin Naturals Irwin Naturals
and and and
Applied Nutrition Applied Nutrition Applied Nutrition Irwin Naturals Only
----------------- ----------------- ----------------- -------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(combined) (combined)
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES $ 5,368,554 $ 3,903,522 $ 17,258,828 $ 11,463,720 $ 2,448,566
OPERATING EXPENSES:
Cost of goods sold 2,243,712 1,756,585 7,778,039 5,625,196 1,460,159
Selling, general and
administrative expenses 1,513,173 1,261,725 7,579,317 4,483,476 777,484
------------- ------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 1,611,669 885,212 1,901,472 1,355,048 210,923
INTEREST EXPENSE (7,463) - (25,887) (8,301) (13,803)
OTHER INCOME (505) 9,755 35,882 71,852 -
------------- ------------- ------------- ------------- -------------
EARNINGS BEFORE TAXES 1,603,701 894,967 1,911,467 1,418,599 197,120
INCOME TAXES - - - 659,098 -
------------- ------------- ------------- ------------- -------------
NET INCOME 1,603,701 894,967 1,911,467 759,501 197,120
PRO FORMA ADJUSTMENT:
Effective tax rate of 40
percent applied reflecting
C-corporation status 641,480 357,987 764,587 - 78,848
------------- ------------- ------------- ------------- -------------
PRO FORMA NET INCOME $ 962,221 $ 536,980 $ 1,146,880 $ 759,501 $ 118,272
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
these statements of operations.
F-25
<PAGE>
IRWIN NATURALS AND APPLIED NUTRITION
STATEMENTS OF CHANGES IN RETAINED EARNINGS
1997 (COMBINED), 1996 AND 1995
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, 1998 For the Years Ended December 31,
--------------------- ---------------------------------------------------------
Irwin Naturals Irwin Naturals
and and
Applied Nutrition Applied Nutrition Irwin Naturals Only
----------------- ----------------- -------------------
(combined) 1997
----
(unaudited) (combined) 1996 1995
---- ----
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 2,122,999 $ 790,532 $ 31,031 $ -
NET INCOME 1,603,701 1,911,467 759,501 197,120
DISTRIBUTIONS TO SHAREHOLDERS (320,999) (579,000) - 166,089
------------- ------------- ------------- -------------
BALANCE AT END OF PERIOD $ 3,405,701 $ 2,122,999 $ 790,532 $ 31,031
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
statements of changes in retained earnings.
F-26
<PAGE>
IRWIN NATURALS AND APPLIED NUTRITION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended March 31, For the Years Ended December 31,
------------------------------------- ---------------------------------------------------------
Irwin Naturals Irwin Naturals Irwin Naturals
and and and
Applied Nutrition Applied Nutrition Applied Nutrition Irwin Naturals Only
----------------- ----------------- ----------------- -------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(combined)
(unaudited) (combined)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,603,701 $ 894,967 $ 1,911,467 $ 759,501 $ 197,120
Adjustments to reconcile
net income to net cash
provided by operating
activities -
Provision for bad
debts (166) - 189,822 180,972 98,076
Depreciation and
amortization 11,591 18,301 34,072 2,422 -
Deferred income taxes - 107,849 107,849 (107,849) -
Decrease (increase) in-
Trade receivables 15,636 (196,750) (694,978) (2,348,254) 23,350
Inventory 151,455 (227,594) (355,786) (409,312) 69,656
Prepaid expenses and
other assets (81,151) 4,167 (205,990) (6,285) -
Increase (decrease) in-
Accounts payable (638,829) 115,437 (82,341) 1,002,963 (151,017)
Accrued liabilities (313,717) (241,927) 585,433 377,098 (50,000)
Income taxes payable 44,277 (666,947) (628,992) 666,947 -
------------- ------------- ------------- ------------- -------------
Net cash provided by
operating activities 792,797 (192,497) 860,556 118,203 187,185
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixtures and
equipment (60,506) (44,745) (132,254) (54,445) (3,038)
Other - - - - 52,750
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by investing activities 60,506 (44,745) 132,254 54,445 49,712
------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from shareholder - 170,887 - - 124,000
Net proceeds from customer
deposits - - - 449,995 -
Payment (issuance) of
shareholder advance 96,151 (96,151) -
Proceeds from (repayment of)
shareholder note payable - (213,190) (117,840)
Distributions to shareholders (320,999) 96,151 (579,000) - (166,089)
------------- ------------- ------------- ------------- -------------
Net cash (used in) provided
by financing activities 320,999 267,038 (482,849) 140,654 (159,929)
------------- ------------- ------------- ------------- -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 411,292 29,796 245,453 204,412 76,968
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 526,833 281,380 281,380 76,968 -
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 938,125 $ 311,176 $ 526,833 $ 281,380 $ 76,968
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
these statements of cash flows.
F-27
<PAGE>
IRWIN NATURALS AND APPLIED NUTRITION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 (COMBINED), 1996 AND 1995
CONTINUED
<TABLE>
<CAPTION>
For the Three Months Ended March 31, For the Years Ended December 31,
------------------------------------- ---------------------------------------------------------
Irwin Naturals Irwin Naturals Irwin Naturals
and and and
Applied Nutrition Applied Nutrition Applied Nutrition Irwin Naturals Only
----------------- ----------------- ----------------- -------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(combined)
(unaudited) (combined)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
INTEREST PAID $7,463 - $4,437 $8,301 $13,803
INCOME TAXES PAID - $666,947 $250,564 $408,534 -
SUPPLEMENTAL NON-CASH ACTIVITIES:
EXCHANGE OF COMMON STOCK
FOR INVENTORY - - - - $130,500
EXCHANGE OF NOTE PAYABLE
TO SHAREHOLDER FOR
OPERATING ASSETS - - - - $207,030
</TABLE>
The accompanying notes are an integral part of
these statements of cash flows.
F-28
<PAGE>
IRWIN NATURALS AND APPLIED NUTRITION
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 (COMBINED), 1996 AND 1995
1. DESCRIPTION OF BUSINESS
Irwin Naturals ("Irwin"), a California corporation, was incorporated on
August 8, 1995. Applied Nutrition ("Applied"), a Nevada corporation, was
incorporated on September 17, 1996. Applied Nutrition operated on a standalone
basis beginning on May 1, 1997. Both Irwin and Applied are primarily engaged in
the wholesale distribution of vitamins and are located in Culver City,
California. Irwin distributes its products primarily to health food stores and
Applied distributes its products primarily to chain drug stores and mass
merchandisers worldwide.
From approximately October 1994 until incorporation in August 1995, Irwin was
operated as a sole proprietorship. The financial statements reflect the
operations of Irwin for the entire year 1995. Operations during the last few
months of 1994 were approximately breakeven, resulting in no beginning retained
earnings at January 1, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
a. The accompanying combined financial statements for the year ended
December 31, 1997 include the accounts of Irwin Naturals and Applied
Nutrition (combined referred to as the "Company").
b. ESTIMATES AND ASSUMPTIONS
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.
c. CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts held in
operating accounts and short-term investments in money market funds
with original maturities of three months or less.
d. INVENTORIES
Inventories are stated at the lower of average cost or market. The
cost of inventory is based on the first-in, first-out (FIFO) method.
e. FIXTURES AND EQUIPMENT
Fixtures and equipment are recorded at cost, while maintenance and
repairs are expensed as incurred. Upon retirement or disposal of
assets, the costs and related accumulated depreciation are removed
from the balance sheet and any gain or loss is reflected in earnings.
F-29
<PAGE>
Depreciation is calculated for financial reporting purposes using the
straight-line method based on the estimated useful lives of the assets
as follows:
Computer equipment 3 years
Office furniture and fixtures 7 years
Leasehold improvements are capitalized and depreciated over the life
of the underlying lease.
f. CUSTOMER DEPOSITS
Customer deposits represent refundable payments made by a customer for
the purpose of purchasing inventory.
g. REVENUE RECOGNITION
Revenues are recorded at the time of shipment of products.
h. ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs
charged to operations were $3,114,029, $793,988, and $77,148 for the
years ended December 31, 1997 (combined), 1996 and 1995, respectively.
i. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily accounts receivable,
uninsured cash balances and cash equivalents. The Company places its
cash deposits with high-credit quality financial institutions. At
times, balances in the Company's cash accounts may exceed the Federal
Deposit Insurance Corporation (FDIC) limit of $100,000.
3. SIGNIFICANT CUSTOMERS
The Company has two customers which represent 22% and 14%, and 13% and 10%,
and 0% and 0% of the Company's revenues for the years ended December 31,
1997 (combined), 1996 and 1995, respectively. The accounts receivable for
the first customer as a percentage of total accounts receivable represents
31%, 18.8%, and 0.4% as of December 31, 1997, 1996 and 1995, respectively.
Accounts receivable for the second customer as a percentage of total
accounts receivable represents 6%, 19.5%, and 0% as of December 31, 1997,
1996 and 1995, respectively. The loss of these customers would have a
material adverse effect on the Company's business.
4. REVENUE FROM FOREIGN SOURCES
Foreign sales represent 22%, 24%, and 7% of the Company's revenues for the
years ended December 31, 1997 (combined), 1996 and 1995, respectively. The
revenues related to the regions of Asia and Europe are $1.0 million and
$1.2 million, or 6% and 7%, of 1997 revenue, and $1.2 million and $.3
million, or 10% and 3%, of 1996 revenue.
F-30
<PAGE>
5. FIXTURES AND EQUIPMENT
Fixtures and equipment consist of the following as of December 31, 1997
(combined), 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computer equipment $ 116,940 $ 57,483 $ 3,038
Furniture and fixtures 15,934 - -
Leasehold improvements 56,863 - -
---------- ---------- ----------
189,737 57,483 3,038
Accumulated depreciation (36,494) (2,422) -
---------- ---------- ----------
$ 153,243 $ 55,061 $ 3,038
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
6. LEASES
The Company leases office and warehouse space for its operations in Culver
City, California, computer equipment, and automobiles under operating
leases. Aggregate minimum future lease payments are as follows as of
December 31, 1997:
<TABLE>
<CAPTION>
Year Ending December 31, Operating Leases
------------------------ ----------------
<S> <C>
1998 $ 399,692
1999 403,888
2000 302,322
2001 24,205
2002 11,325
Thereafter --
----------------
Total minimum lease payments $ 1,141,432
</TABLE>
Operating lease expense for the years ended December 31, 1997 (combined), 1996
and 1995 aggregate to $255,371, $112,677 and $72,207, respectively.
7. INCOME TAXES
Irwin Naturals was incorporated as an S-corporation in 1995. Irwin converted to
a C-corporation for the year ended December 31, 1996. For the year beginning
January 1, 1997, Irwin Naturals and Applied Nutrition elected S-corporation
status.
F-31
<PAGE>
The Company has filed income tax returns for 1995 and 1996. Management believes
that it has adequately provided for all obligations, including interest and
penalties, associated with such returns in the accompanying statements of
operations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
Deferred tax liabilities:
<S> <C>
Depreciation $ (6,322)
---------------
Total deferred tax liabilities $ (6,322)
---------------
---------------
Deferred tax assets:
Bad debt reserve $ 15,055
Excess and obsolete inventory reserve 22,098
Accrued advertising costs 21,774
Accrued interest payable 3,594
Accrued tax expense 51,650
---------------
Total deferred tax asset $ 114,171
---------------
---------------
</TABLE>
As of January 1, 1997, the Company changed its tax status to a non-taxable
S-corporation. In accordance with the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") the
deferred income tax assets and liabilities have been eliminated as of such date
and a charge has been recorded in the amount of $107,849 in the accompanying
statement of operations for the year ended December 31, 1997.
The reconciliation of income tax from continuing operations computed at the U.S.
federal statutory rate to the Company's effective rate as of December 31, 1996,
is as follows:
<TABLE>
<S> <C>
Tax at U.S. federal statutory rate 34.00%
State taxes 6.23
Shareholder personal expenses .40
Meals and entertainment .16
Income tax contingency without Federal benefit 5.67
--------
46.46%
--------
--------
</TABLE>
F-32
<PAGE>
8. RELATED PARTY TRANSACTIONS
On August 20, 1995, Irwin Naturals issued a promissory note to its primary
shareholders in exchange for $331,030. The note was callable on demand,
unsecured, with no stated maturity date and with an annual interest rate of 10%.
The note was repaid in October of 1996.
During 1996, Irwin advanced its shareholders $478,123. Of such amount, $381,972
related to compensation related to services to be performed in 1996 by the
shareholders, which was recorded in the accompanying 1996 statement of
operations for the year ending December 31, 1996. The remainder, or $96,151,
was repaid in August 1997.
The Company paid $46,656 and $10,843 of personal expenses on behalf of its
shareholders for the years ended December 31, 1997 (combined) and 1996.
Distributions to shareholders represent payments to shareholders for income tax
liabilities attributable to the operations of the Company.
The Company paid $622,000, $1,475,000, $0 and for the years ended December 31,
1997, 1996 and 1995, respectively, to the Company's shareholders for salaries
and bonuses.
9. COMMITMENTS AND CONTINGENCIES
Irwin Naturals and Applied Nutrition are subject to lawsuits, investigations and
claims arising out of the conduct of its business. Certain claims, suits and
complaints have been filed or are pending against both companies. Management
believes that the probable resolution of such contingencies will not materially
affect the financial position or results of operations of either Irwin Naturals
or Applied Nutrition.
10. SUBSEQUENT EVENTS
On December 24, 1997, the Company entered into a merger agreement with 4Health,
Inc. ("4Health"), a Utah corporation. Upon the completion of the proposed
transaction, all outstanding shares of Irwin Naturals will be converted into
15,750,000 shares ("Merger Shares") of 4Health common stock, $.01 par value per
share (the "4Health Common Stock"). The shares of 4Health common stock to be
issued in the exchange will be "restricted securities" as defined in Rule 144
under the Securities Act of 1933, as amended (The "Act"), subject to a covenant
to register the Merger Shares under the Act pursuant to a registration statement
to be filed after the closing date. At the closing date, Klee Irwin, President
of Irwin Naturals, will become a director and President and Chief Executive
Officer of 4Health.
Effective January 1998, the Company transferred the ownership of the net assets
of Applied Nutrition to Irwin Naturals and liquidated Applied Nutrition.
In March 1997, the Company entered into a $750,000 line of credit agreement that
expires on March 17, 1998. Interest on outstanding borrowings accrues at the
Bank's prime rate of interest plus one percent. The line of credit is secured
by the Company's accounts receivable, general intangibles, inventory, and
equipment. Based on the eligible accounts receivable at December 31, 1997, the
entire $750,000 of the line of credit was available for borrowing. The credit
agreement contains certain financial covenant requirements. As of February 27,
1998, the Company had borrowed $404,000 under this agreement.
F-33
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APPENDIX A
- --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
among
4HEALTH, INC.
IRWIN NATURALS
and
KLEE IRWIN
May 22, 1998
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<PAGE>
TABLE OF CONTENTS
ARTICLE I
MERGER
SECTION 1.01. The Merger . . . . . . . . . . . . . . . . 2
SECTION 1.02. Closing; Closing Date; Effective Time. . . 2
SECTION 1.03. Effect of the Merger . . . . . . . . . . . 2
SECTION 1.04. Articles of Incorporation; Bylaws. . . . . 3
SECTION 1.05. Directors and Officers . . . . . . . . . . 3
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
SECTION 2.01. Merger Consideration; Conversion and
Cancellation of Securities . . . . . . . . 3
SECTION 2.02. Exchange and Surrender of Certificates . . 5
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF IN AND IRWIN
SECTION 3.01. Organization and Qualification;
Subsidiaries . . . . . . . . . . . . . . . 6
SECTION 3.02. Articles of Incorporation and Bylaws . . . 7
SECTION 3.03. Capitalization.. . . . . . . . . . . . . . 7
SECTION 3.04. Authority. . . . . . . . . . . . . . . . . 8
SECTION 3.05. No Conflict; Required Filings
and Consents . . . . . . . . . . . . . . . 8
SECTION 3.06. Permits; Compliance. . . . . . . . . . . . 9
SECTION 3.07. Financial Statements; Financial Results. . 9
SECTION 3.08. Absence of Certain Changes or Events . . . 10
SECTION 3.09. Absence of Litigation. . . . . . . . . . . 10
SECTION 3.10. Employee Benefit Plans; Labor Matters. . . 11
SECTION 3.11. Taxes. . . . . . . . . . . . . . . . . . . 12
SECTION 3.12. Tax and Accounting Matters.. . . . . . . . 16
SECTION 3.13. Certain Business Practices . . . . . . . . 17
SECTION 3.14. Environmental Matters. . . . . . . . . . . 17
SECTION 3.15. Vote Required. . . . . . . . . . . . . . . 19
SECTION 3.16. Brokers. . . . . . . . . . . . . . . . . . 20
SECTION 3.17. Insurance. . . . . . . . . . . . . . . . . 20
SECTION 3.18. Properties . . . . . . . . . . . . . . . . 20
<PAGE>
SECTION 3.19. Certain Contracts and Restrictions . . . . 21
SECTION 3.20. Futures Trading and Fixed Price Exposure . 21
SECTION 3.21. Information Supplied . . . . . . . . . . . 21
SECTION 3.22. Securities Laws Representations. . . . . . 21
SECTION 3.23. Intellectual Property. . . . . . . . . . . 22
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF 4HEALTH
SECTION 4.01. Organization and Qualifications;
Subsidiaries . . . . . . . . . . . . . . . 23
SECTION 4.02. Articles of Incorporation and Bylaws . . . 24
SECTION 4.03. Capitalization . . . . . . . . . . . . . . 24
SECTION 4.04. Authority. . . . . . . . . . . . . . . . . 25
SECTION 4.05. No Conflict: Required Filings
and Consents . . . . . . . . . . . . . . . 25
SECTION 4.06. Permits; Compliance. . . . . . . . . . . . 26
SECTION 4.07. Financial Statements . . . . . . . . . . . 26
SECTION 4.08. Absence of Certain Changes or Events . . . 27
SECTION 4.09. Absence of Litigation. . . . . . . . . . . 28
SECTION 4.10. Employee Benefit Plans; Labor Matters. . . 28
SECTION 4.11. Taxes. . . . . . . . . . . . . . . . . . . 31
SECTION 4.12. Tax Matters. . . . . . . . . . . . . . . . 32
SECTION 4.13. NSM Listing. . . . . . . . . . . . . . . . 33
SECTION 4.14. Certain Business Practices . . . . . . . . 33
SECTION 4.15. Environmental Matters. . . . . . . . . . . 33
SECTION 4.16. Brokers. . . . . . . . . . . . . . . . . . 34
SECTION 4.17. Insurance. . . . . . . . . . . . . . . . . 34
SECTION 4.18. Properties . . . . . . . . . . . . . . . . 35
SECTION 4.19. Certain Contracts and Restrictions . . . . 35
SECTION 4.20. Easements. . . . . . . . . . . . . . . . . 35
SECTION 4.21. Futures Trading and Fixed Price
Exposure . . . . . . . . . . . . . . . . . 36
SECTION 4.22. Information Supplied . . . . . . . . . . . 36
SECTION 4.23. Intellectual Property. . . . . . . . . . . 36
SECTION 4.24. Pooling of Interests . . . . . . . . . . . 36
SECTION 4.25. Exempt Transaction . . . . . . . . . . . . 36
SECTION 4.26. No Violation of Securities Laws. . . . . . 37
SECTION 4.27. No Investigation . . . . . . . . . . . . . 37
SECTION 4.28. No Convictions . . . . . . . . . . . . . . 37
SECTION 4.29. No Restraint . . . . . . . . . . . . . . . 37
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<PAGE>
ARTICLE V
COVENANTS
SECTION 5.01. Affirmative Covenants of IN. . . . . . . . 37
SECTION 5.02. Negative Covenants of IN . . . . . . . . . 38
SECTION 5.03. Affirmative Covenants and Consent of Irwin 41
SECTION 5.04. Affirmative and Negative
Covenants of 4Health.. . . . . . . . . . . 42
SECTION 5.05. Access and Information.. . . . . . . . . . 45
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. Stockholder Approvals. . . . . . . . . . . 46
SECTION 6.02. Registration Statement; Information. . . . 47
SECTION 6.03. Appropriate Action; Consents;
Filings; Indemnification.. . . . . . . . . 50
SECTION 6.04. Tax and Accounting Treatment . . . . . . . 53
SECTION 6.05. Public Announcements . . . . . . . . . . . 53
SECTION 6.06. NSM Listing. . . . . . . . . . . . . . . . 53
SECTION 6.07. Stock Resale Agreement.. . . . . . . . . . 53
SECTION 6.08. No Interference. . . . . . . . . . . . . . 53
SECTION 6.09. Form D Filing. . . . . . . . . . . . . . . 53
ARTICLE VII
CLOSING CONDITIONS
SECTION 7.01. Conditions to Obligations of
Each Party Under This Agreement. . . . . . 53
SECTION 7.02. Additional Conditions to
Obligations of 4Health . . . . . . . . . . 54
SECTION 7.03. Additional Conditions to
Obligations of IN. . . . . . . . . . . . . 56
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.01. Termination. . . . . . . . . . . . . . . . 58
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<PAGE>
SECTION 8.02. Effect of Termination. . . . . . . . . . . 59
SECTION 8.03. Amendment. . . . . . . . . . . . . . . . . 59
SECTION 8.04. Waiver . . . . . . . . . . . . . . . . . . 59
SECTION 8.05. Fees, Expenses and Other Payments. . . . . 59
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. Effectiveness of Representations,
Warranties and Agreements. . . . . . . . . 60
SECTION 9.02. Notices. . . . . . . . . . . . . . . . . . 61
SECTION 9.03. Certain Definitions. . . . . . . . . . . . 61
SECTION 9.04. Headings . . . . . . . . . . . . . . . . . 62
SECTION 9.05. Severability . . . . . . . . . . . . . . . 63
SECTION 9.06. Entire Agreement . . . . . . . . . . . . . 63
SECTION 9.07. Assignment . . . . . . . . . . . . . . . . 63
SECTION 9.08. Parties in Interest. . . . . . . . . . . . 63
SECTION 9.09. Failure or Indulgence
Not Waiver; Remedies Cumulative. . . . . . 63
SECTION 9.10 Governing Law. . . . . . . . . . . . . . . 63
SECTION 9.11 Counterparts . . . . . . . . . . . . . . . 63
iv
<PAGE>
SCHEDULES
Schedule 1.04 Changes to 4Health Articles and Bylaws
Schedule 1.05 Directors and Officers of Surviving Corporation
IN DISCLOSURE SCHEDULE
Schedule 3.01 Subsidiaries
Schedule 3.03(a) Reservation of IN Common Stock
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 3.07 Contingent Liabilities
Schedule 3.08 Certain Changes
Schedule 3.09 Litigation
Schedule 3.10(d) Severance Agreements
Schedule 3.11(a) Tax Exceptions
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 Intellectual Property
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
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Schedule 4.06 Notifications from Governmental Entities
Schedule 4.08 Certain Changes
Schedule 4.09 Litigation
Schedule 4.10(a) Employee Benefit Plans
Schedule 4.10(b) Employee Benefit Liabilities
Schedule 4.10(c) Labor Matters
Schedule 4.10(d) Employment Agreement
Schedule 4.10(e) Medical Benefits
Schedule 4.10(f) Multiemployer Plans
Schedule 4.10(g) Changes to Benefit Plans
Schedule 4.11 Taxes
Schedule 4.15 Environmental Matters
Schedule 4.16 Brokers
Schedule 4.17 Insurance
Schedule 4.19 Material Contracts
Schedule 4.23 Intellectual Property
COVENANTS
Schedule 5.02(a) Employee Matters
Schedule 5.02(b) Distributions
Schedule 5.02(f) Asset Dispositions
Schedule 5.02(k) Obligations
Schedule 5.02(p) Affiliate Transactions
Schedule 5.02(q) Commitments
Schedule 5.03(b)(v) Asset Dispositions
Schedule 5.03(b)(xiv) Affiliate Transactions
Schedule 5.04(b)(i) Increase in Benefits
Schedule 5.04(b)(vi) Asset Sales
Schedule 5.04(b)(xi) Obligations
Schedule 5.04(b)(xvi) Affiliate Transactions
Schedule 5.04(b)(xvii) Commitments
Schedule 6.02(a) Plan of Distribution
EXHIBITS
Exhibit A Articles of Merger
Exhibit B Stock Legend
Exhibit C Form of Sale Restriction Agreements
Exhibit D Form of Note
Exhibit E Form of Indemnity Agreement
Exhibit F Duncan Employment Agreement
Exhibit G Irwin Employment Agreement
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<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, effective as of May
22, 1998 (this "Agreement"), amending and restating the Amended and Restated
Agreement and Plan of Merger dated as of April 2, 1998, by and among 4Health,
Inc., a Utah corporation ("4Health"), Irwin Naturals, a California corporation
("IN") and Mr. Klee Irwin, an individual resident in California and the Chief
Executive Officer and a principal shareholder of IN ("Irwin"), originally
entered into as of December 24, 1997.
RECITALS
A. IN, 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 4Health (the "Merger"), and pursuant
thereto, the shares of common stock, no par value per share of IN ("IN Common
Stock"), issued and outstanding immediately prior to the Effective Time (as
defined herein) of the Merger, not owned directly or indirectly by IN or 4Health
or their respective subsidiaries, will be converted at the Effective Time into
the right to receive an aggregate of 15,750,000 shares of common stock, par
value $.01 per share, of 4Health ("4Health Common Stock"), subject to the right
of holders of such shares of IN Common Stock (each a "Dissenting IN
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. The Board of Directors of IN has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of IN and
is fair to, and in the best interests of, IN and its stockholders and has
approved and adopted the Merger, this Agreement, and the other transactions
contemplated hereby, and has recommended approval of this Agreement by the
stockholders of IN.
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
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<PAGE>
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 its stockholders.
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").
E. It is intended that the Merger qualify for the "pooling of interests"
method of accounting as provided in Accounting Principles Board Opinion No. 16
of the American Institute of Certified Public Accountants and the
interpretations issued thereunder as presently in effect.
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 I
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, IN shall be merged with and into 4Health (each a "Constituent
Corporation"). As a result of the Merger, the separate corporate existence of
IN shall cease and 4Health shall continue as the surviving corporation of the
Merger (the "Surviving Corporation"). 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 IN at 10549 West Jefferson Boulevard, Culver City, CA 90232 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 IN 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 executing and filing Articles of Merger, in
substantially 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 IN 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.
2
<PAGE>
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 4Health, as amended by the Articles of Merger
attached hereto as Exhibit A to make the amendments set forth on Schedule 1.04
attached hereto, 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
4Health, as amended by the Articles of Merger to make the changes set forth in
Schedule 1.04 attached hereto, 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. Immediately after the Effective
Time, the directors of the Surviving Corporation shall be the four individuals
identified in Schedule 1.05, classified as set forth opposite their names and a
fifth individual who shall be classified as a Class III director with a one year
term of office and who will be designated by IN and 4Health no later than the
date on which definitive Proxy Materials (as such term is hereinafter defined)
are first filed with the Commission (as hereinafter defined) for its review.
The officers of the Surviving Corporation shall be the individuals identified in
Schedule 1.05, each of the directors and officers to hold office in accordance
with the articles of incorporation and bylaws of the Surviving Corporation, in
each case until his successor is duly elected or appointed and qualified.
3
<PAGE>
ARTICLE II
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, IN, or their respective stockholders:
(a) Subject to the other provisions of this Article II, each share of
IN Common Stock issued and outstanding immediately prior to the Effective Time
(excluding any IN Common Stock described in Section 2.01(c) of this Agreement
and shares held by any Dissenting IN Stockholder shall be converted into the
right to receive 241.37931 shares of 4Health Common Stock (the "Exchange
Ratio"). Notwithstanding the foregoing, if between the date of this Agreement
and the Effective Time the outstanding shares of IN Common Stock or 4Health
Common 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 Ratio shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, conversion, recapitalization, split, combination
or exchange of shares.
(b) Notwithstanding any provision of this Agreement to the contrary,
each share of IN Common Stock and held in the treasury of IN, and each share of
IN Common Stock, owned by 4Health or any direct or indirect wholly owned
subsidiary of 4Health immediately prior to the Effective Time shall be canceled
and extinguished without any conversion thereof and no payment shall be made
with respect thereto.
(c) Subject to the provisions of Section 2.01(e), all shares of IN
Common Stock, shall cease to be outstanding and shall automatically be cancelled
and retired, and each certificate previously evidencing IN Common Stock,
immediately prior to the Effective Time (other than IN Common Stock, described
in Section 2.01(b) 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(d) of this Agreement, that number of shares of
4Health Common Stock determined pursuant to Section 2.01(a) hereof (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 4Health Common Stock upon the
surrender of such Converted Share Certificates in accordance with the provisions
of Section 2.02 of this Agreement, without interest.
(d) All shares of 4Health Common Stock issued to holders of IN Common
Stock, in the Merger shall be issued in a transaction intended to qualify for
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Securities
4
<PAGE>
Act") and Regulation D promulgated thereunder ("Regulation D") and shall be
deemed "restricted securities" as defined in Rule 144 promulgated under the
Securities Act.
(c) Notwithstanding anything in this Agreement to the contrary, any
issued and outstanding shares of capital stock of IN held by a Dissenting IN
Stockholder, who has not voted in favor of nor consented to the Merger and who
complies with all the provisions of California Law 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 IN Stockholder pursuant to California Law; PROVIDED, HOWEVER, that
shares of IN Common Stock outstanding immediately prior to the Effective Time
and held by a Dissenting IN Stockholder, who shall, after the Effective Time,
withdraw his demand for appraisal or lose his right of appraisal, in either case
pursuant to California Law shall be deemed to be converted as of the Effective
Time, into the right to receive 4Health Common Stock.
SECTION 2.02 EXCHANGE AND SURRENDER OF CERTIFICATES.
(a) Immediately after the Effective Time, 4Health shall deliver to
each registered holder of a Converted Share Certificate against delivery by such
holder of all of his Converted Share Certificates representing issued and
outstanding shares of IN Common Stock a certificate representing that number of
whole shares of 4Health Common Stock which such holder has the right to receive
in exchange for the Converted Share Certificates 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. The certificate representing the 4Health Common
Stock shall bear a restrictive legend in the form set forth in Exhibit B. 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 4Health Common Stock into which the Converted Shares represented by
such Converted Share Certificate have been converted as provided in this Article
II.
(b) After the Effective Time, there shall be no further registration
of transfers of IN Common Stock. If, after the Effective Time, certificates
representing shares of IN Common Stock are presented to the Surviving
Corporation, they shall be canceled and exchanged for the Merger Consideration
provided for in this Agreement in accordance with the procedures set forth
herein.
(c) Any portion of the Merger Consideration that remains unclaimed by
the holders of shares of IN 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 IN Common 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
IN Common Stock. Notwithstanding the foregoing, the Surviving Corporation shall
not be liable
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<PAGE>
to any holder of Converted Shares for any amount paid to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(d) No dividends, interest or other distributions with respect to
shares of 4Health 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, 4Health
shall pay, without interest, all dividends and other distributions payable in
respect of such shares of 4Health Common Stock on a date subsequent to, and in
respect of a record date after, the Effective Time.
(e) No fractional shares or certificates or scrip evidencing
fractional shares of 4Health Common Stock shall be issued in the Merger or upon
the surrender for exchange of Converted Share Certificates, and the Exchange
Ratio shall be appropriately adjusted if necessary so that only whole shares of
4Health Common Stock are issued in the Merger to holders of Converted Share
Certificates.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF IN AND IRWIN
IN and Irwin, jointly and severally hereby represent and warrant to 4Health
that:
SECTION 3.01 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of IN
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 an IN Material Adverse
Effect. The term "IN 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 IN and its subsidiaries, taken as a whole.
Schedule 3.01 of the disclosure schedule to be delivered to 4Health by IN and
attached hereto and made a part hereof (the "IN Disclosure Schedule") as
provided in Section 7.02(i) hereof, sets forth, as of the date hereof, a true
and complete list of all IN'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 IN or another subsidiary of IN, 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 IN Disclosure Schedule, neither IN nor any of its subsidiaries nor
Irwin owns an equity interest in any other partnership or joint venture
arrangement or other
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business entity that is material to the assets, liabilities, financial
condition, results of operations or current or future business of IN and its
subsidiaries, taken as a whole. IN is the registered and beneficial owner of
all of the issued and outstanding shares of voting capital stock of Applied
Nutrition Inc. and Irwin Naturals International, Inc.
SECTION 3.02 ARTICLES OF INCORPORATION AND BYLAWS. IN 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 IN and each of its subsidiaries. Neither IN 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 IN consists of One Hundred
Thousand (100,000) shares of IN Common Stock, of which Sixty Five Thousand Two
Hundred Fifty (65,250) shares are issued and outstanding, and Thirty Four
Thousand Seven Hundred Fifty (34,750) shares are held in treasury by IN. No
shares of capital stock of IN are reserved for any purpose. Each of the
outstanding shares of capital stock of, or other equity interests in, each of IN
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 IN or any of its subsidiaries, or any agreement to
which IN or any of its subsidiaries is a party or bound, and such outstanding
shares or other equity interests owned by IN or a subsidiary of IN are owned
free and clear of all security interests, liens, claims, pledges, agreements,
limitations on IN's or such subsidiaries' voting rights, charges or other
encumbrances of any nature whatsoever.
(b) There are no options, warrants or other rights (including
registration rights), agreements, arrangements or commitments of any character
to which IN or any of its subsidiaries or Irwin is a party relating to the
issued or unissued capital stock of IN or any of its subsidiaries or obligating
IN or any of its subsidiaries or Irwin to grant, issue or sell any shares of the
capital stock of IN or any of its subsidiaries, by sale, lease, license or
otherwise. There are no obligations, contingent or otherwise, of IN or any of
its subsidiaries or Irwin to repurchase, redeem or otherwise acquire any shares
of IN Common Stock or other capital stock of IN, or the capital stock or other
equity interests of any subsidiary of IN; 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 IN or any other person. Except as described in Schedule
3.03(b)(iii) to the IN Disclosure Schedule, neither IN nor any of its
subsidiaries or Irwin (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 IN set forth in Schedule 3.01 to the IN
Disclosure Schedule).
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Except as set forth in Schedule 3.03(b)(iv) to the IN 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 IN or any of its subsidiaries. Except as contemplated hereby,
there are no voting trusts, proxies or other agreements or understandings to
which IN or any of its subsidiaries or Irwin is or will be a party or by which
IN or any of its subsidiaries or Irwin is or will be bound with respect to the
voting of any shares of capital stock of IN or any of its subsidiaries.
SECTION 3.04 AUTHORITY. IN and Irwin each have all requisite corporate
power and authority and legal capacity, respectively, to execute and deliver
this Agreement, to perform its and his obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by IN and the consummation by IN of the transactions contemplated
hereby have been duly authorized by all necessary corporate action and no other
corporate proceedings on the part of IN are necessary to authorize this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by IN and Irwin, and, assuming the due
authorization, execution and delivery thereof by 4Health, constitutes the legal,
valid and binding obligation of IN and Irwin enforceable against IN and Irwin 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 IN and Irwin
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 IN 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 IN or any of its subsidiaries or Irwin or by or to which any of their
respective properties is bound or subject or except as described in Schedule
3.05 to the IN 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 IN 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 IN or any of its subsidiaries or Irwin is a party or by
or to which IN or any of its subsidiaries or Irwin 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
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cancellation, payment obligations or liens or encumbrances described in
clause (iii) that would not have an IN Material Adverse Effect.
(b) The execution and delivery of this Agreement by IN and Irwin does
not, and consummation of the transactions contemplated hereby will not, require
IN or Irwin 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 appropriate merger documents as
required by California and Utah Laws; 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 IN's performance of its obligations under
this Agreement and would not have an IN Material Adverse Effect.
SECTION 3.06 PERMITS; COMPLIANCE. Each of IN and its subsidiaries and,
to IN's and Irwin's knowledge, each third party operator of any of IN'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 "IN
Permits"), and there is no action, proceeding or investigation pending or, to
the knowledge of IN or Irwin, threatened regarding suspension or cancellation of
any of the IN Permits, except where the failure to possess, or the suspension or
cancellation of, such IN Permits would not have an IN Material Adverse Effect.
Neither IN nor any of its subsidiaries is in conflict with, or in default or
violation of any Law applicable to IN or any of its subsidiaries or by or to
which any of their respective properties is bound or subject, including, without
limitation, the provisions of the Dietary Supplemental Health Education Act of
1994, all consumer product safety Laws, all product labeling Laws and all truth
in advertising Laws, or any of the IN Permits, except for any such conflicts,
defaults or violations that would not have a IN Material Adverse Effect. During
the period commencing on September 30, 1997 and ending on the date hereof,
neither IN 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 IN Disclosure
Schedule and except for written notices relating to possible conflicts, defaults
or violations that would not have an IN Material Adverse Effect.
SECTION 3.07 FINANCIAL STATEMENTS; FINANCIAL RESULTS. (a) IN's audited
consolidated financial statements (including the related notes thereto) for the
fiscal years ended December 31, 1995 and December 31, 1996 and the nine months
ended September 30, 1997 (the "IN Financial Statements") to be furnished to
4Health pursuant to Section 5.01(d) will (i) have been prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved ("GAAP") (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 IN 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 interim financial statements were or
will be
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subject to normal and recurring year-end adjustments and (y) any pro forma
financial information contained in such financial statements will not
necessarily be indicative of the financial position of IN as of the respective
dates thereof and the results of operations and cash flows for the periods
indicated. Except as set forth in Schedule 3.07 of the IN Disclosure Schedule,
IN has no liabilities or obligations that will be of any nature (whether known
or unknown and whether accrued or contingent) except for liabilities or
obligations reflected or reserved against in the audited balance sheet dated as
of September 30, 1997 including the notes thereto (the "IN Balance Sheet") to be
furnished to 4Health pursuant to Section 5.01(d) and current liabilities
incurred in the ordinary course of business consistent with past practice since
the date of the IN Balance Sheet.
(b) IN's gross revenues, calculated in accordance with GAAP, earned
during the twenty-one (21) month period ended September 30, 1997 exceeded
$22,000,000 in the aggregate.
(c) The sum of (i) IN's earnings before income taxes, depreciation
and amortization charges, calculated in accordance with GAAP, plus (ii) any
amounts paid by IN to its officers as salary, in each case during the twenty-one
(21) month period ended September 30, 1997, exceeded $4,500,000.
SECTION 3.08 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as
contemplated by this Agreement or as set forth in Schedule 3.08 to the IN
Disclosure Schedule, since September 30, 1997 IN 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 IN or any of its subsidiaries; any material change by
IN 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 IN Common Stock or the shares of stock of,
or other equity interests in, any subsidiary of IN, or any redemption, purchase
or other acquisition by IN or any of its subsidiaries of any of IN's securities
or any of the securities of any subsidiary of IN; 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 IN or its
subsidiaries; any revaluation by IN 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 IN or any of its
subsidiaries into any commitment or transaction material to IN 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 an IN Material Adverse Effect.
SECTION 3.09 ABSENCE OF LITIGATION. Except as set forth in Schedule 3.09
to the IN Disclosure Schedule, there is no claim, action, suit, litigation,
proceeding, arbitration or, to the
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knowledge of IN or Irwin, investigation of any kind, at law or in equity
(including actions or proceedings seeking injunctive relief), pending or, to the
knowledge of IN or Irwin, threatened against IN or any of its subsidiaries or
any properties or rights of IN or any of its subsidiaries (except for claims,
actions, suits, litigation, proceedings, arbitrations or investigations which
would not have an IN Material Adverse Effect), and neither IN 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 IN or
Irwin, 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 an IN Material Adverse Effect.
SECTION 3.10 EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) Neither IN nor any member of any ERISA Group has maintained or
contributed to any employee benefit plan (as such term is defined in ERISA
Section 3(3)) during the past five years and neither IN nor any member of its
ERISA Group has any liability under Sections 4063, 4069, 4212(c) or 4204 of
ERISA with respect to any such employee benefit plan, and IN does not maintain
and has not contributed to any other retirement, pension, stock option, stock
appreciation rights, profit sharing, incentive compensation, deferred
compensation, savings, thrift, vacation pay, severance pay, insurance, health,
welfare or other employee compensation or benefit plan, agreement, practice, or
arrangement, whether written or unwritten, whether or not legally binding
(collectively, the "IN 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 IN is or may be a member.
(b) No event has occurred and, to the knowledge or IN or Irwin, there
exists no condition or set of circumstances, in connection with which IN or any
member of its ERISA Group could be subject to any liability under the terms of
any IN Benefit Plans, ERISA, the Code or any other applicable Law which would
have an IN Material Adverse Effect.
(c) Neither IN 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 IN or any of its subsidiaries. There is no
pending or threatened labor dispute, strike or work stoppage against IN or any
of its subsidiaries which may interfere with the respective business activities
of IN or any of its subsidiaries. None of IN, 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 IN or
its subsidiaries, and there is no pending or threatened charge or complaint
against IN or any of its subsidiaries by the National Labor Relations Board or
any comparable state agency. IN and its subsidiaries are in compliance with all
applicable wage and hours Laws, age, race, religious and gender
anti-discrimination Laws, employee health and safety Laws and all immigration
Laws as regards their respective employees and, there is no pending or,
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to IN's and Irwin's knowledge, threatened claim, investigations or proceeding
involving any alleged violation of any such Law.
(d) Neither IN 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 IN
Disclosure Schedule sets forth, and IN has made available to 4Health true and
correct copies of, all employment agreements with officers or IN or its
subsidiaries; all agreements with consultants of IN or its subsidiaries
obligating IN or any subsidiary to make annual cash payments in an amount
exceeding $25,000; all non-competition agreements with IN or a subsidiary
executed by officers of IN; and all plans, programs, agreements and other
arrangements of IN or its subsidiaries with or relating to its directors.
(e) Neither IN nor any member of its ERISA Group provides retiree
medical or retiree life insurance benefits to any person and (y) neither IN 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 IN Benefit Plan or arrangement may be amended or terminated by IN
or its subsidiaries at any time without liability.
(f) Neither IN 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.
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 IN
in excess of $10,000 in the case of a representation known to IN or Irwin to be
untrue or incorrect or $25,000 in the case of a representation not known to IN
or Irwin to be untrue or incorrect:
(a) Except as set forth in Schedule 3.11(a) of the IN Disclosure
Schedule:
(1) Except to the extent that the applicable statute of
limitations has expired, all Returns required to be filed by or on behalf of IN
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 IN 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;
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(2) IN 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) IN 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 IN with respect
to Taxes, other than liens for Taxes not yet due and payable for Taxes that are
being contested in good faith through appropriate proceedings and for which
appropriate reserves have been established;
(5) IN 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 IN is the common parent corporation;
(6) Except to the extent that the applicable statute of
limitations has expired, IN 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 IN for all
periods since the formation of IN (or any predecessor in interest) and all such
tax returns of Irwin with respect to the business of IN for periods prior to the
formation of IN, and (ii) all tax audit reports, work papers statements of
deficiencies, closing or other agreements received by Irwin (with respect to the
business of IN) or IN or on its behalf or relating to Taxes; and
(7) IN 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 IN Disclosure
Schedule:
(1) There is no audit of any Returns of IN or Irwin (with
respect to the business of IN by a governmental or taxing authority in process,
pending or, to the knowledge of IN or Irwin, threatened (formally or informally)
and no Governmental Entity of any jurisdiction in which IN does not file a
Return has claimed that IN is or may be subject to tax in that jurisdiction;
(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
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Irwin (with respect to the business of IN) or IN, and no notice (either formally
or informally) has been received by Irwin or IN that he or it has not filed a
Return or paid Taxes required to be filed or paid by it;
(3) IN 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 IN;
(5) No action has been taken that would have the effect of
deferring any liability for Taxes for IN 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 IN;
(7) No power of attorney has been granted by IN, with respect to
any matter relating to Taxes;
(8) IN is not and has never been included in an affiliated group
of corporations, within the meaning of Section 1504 of the Code;
(9) IN is not (nor has it ever been) a party to any tax
allocation or sharing agreement between affiliated corporations; and
(10) The amount of liability for unpaid Taxes of IN 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 IN Balance Sheet.
(c) Except as disclosed on Schedule 3.11(c) of the IN Disclosure
Schedule:
(1) IN 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) IN has not issued or assumed any corporate acquisition
indebtedness that is subject to Sections 279(a) and (b) of the Code;
(3) IN has not entered into any compensatory agreements with
respect to the performance of services under which payment would result in a
nondeductible expense
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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 IN and no action has been taken that would result in any income tax
liability to IN 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 IN;
(6) IN 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) IN has not disposed of any property that is presently being
accounted for under the installment method;
(8) IN is not a party to any interest rate swap or currency
swap;
(9) IN has not participated in any international boycott as
defined in Code Section 999;
(10) IN is not subject to any joint venture, partnership or other
arrangement or contract that is treated as a partnership for federal income tax
purposes;
(11) IN 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; and
(12) IN 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.
(d) The books and records of IN, including the Returns of IN made
available to 4Health, contain accurate and complete information with respect to:
(1) All material tax elections in effect with respect to IN;
(2) The current tax basis of the assets of IN;
(3) The current and accumulated earnings and profits of IN, if
any;
(4) The net operating losses of IN by taxable year, if any;
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(5) The net capital losses of IN by taxable year, if any;
(6) The tax credit carry overs of IN, if any; and
(7) The overall foreign losses of IN under Section 904(f) of the
Code that are subject to recapture, if any.
(e) The Returns provided by IN to 4Health contain accurate and
complete information with respect to any net operating losses and net operating
loss carry forwards, if any, and other tax attributes of IN, 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 IN from utilizing these net operating losses, net operating loss carry
forwards or other tax attributes, if any, 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 "IN" in this Section 3.11 shall include
all subsidiaries of IN and where appropriate in this Section 3.11, the singular
shall include the plural.
SECTION 3.12 TAX AND ACCOUNTING MATTERS.
(a) Neither IN nor, to the knowledge of IN or Irwin, 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.
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(b) IN has no plan or intention to acquire the 4Health Common Stock
issued in the Merger.
(c) Subject to Section 8.05(a), IN and the holders of IN Common Stock
will each pay their respective expenses, if any, incurred in connection with the
Merger.
(d) There is no intercorporate indebtedness existing between IN and
4Health that was issued, acquired or will be settled at a discount.
(e) IN 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, IN will take no action
prior to the Effective Time to cease operations or, except in the ordinary
course of business, dispose of any of its assets of any of its subsidiaries or
current lines of business.
(g) Neither IN nor any of its subsidiaries or affiliates has taken in
the last two years or will take any action prior to the Effective Time which
will adversely affect or invalidate the ability of 4Health to account for the
Merger using the pooling of interests method of accounting as provided in
Accounting Principles Board Opinion No. 16 of the American Institute of
Certified Public Accountants and the interpretations issued thereunder as
presently in effect ("APB 16").
SECTION 3.13 CERTAIN BUSINESS PRACTICES. To the best of its knowledge,
none of IN, any of its subsidiaries or any directors, officers, agents or
employees of IN 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 IN
Disclosure Schedule and except for matters that would not have or are reasonably
not likely to have an IN Material Adverse Effect, to the best knowledge of IN or
Irwin:
(i) The properties, operations and activities of IN 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.
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(ii) IN and its subsidiaries and the properties and operations
of IN and its subsidiaries are not subject to any existing, pending, or, to IN'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.
(iii) IN 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 IN or any of its subsidiaries under any
Environmental Laws in connection with any aspect of the business of IN 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 IN and its
subsidiaries are in compliance with the terms and conditions of all such
notices, permits, licenses and similar authorizations.
(v) IN and its subsidiaries have not received any notice of
noncompliance with respect to any financial responsibility requirements
applicable to their operations and imposed by any Governmental Entity under any
Environmental Laws.
(vi) There are no physical or environmental conditions existing
on any leased property of IN or its subsidiaries or resulting from IN'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 IN 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 IN 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.
(ix) No release or clean up of Hazardous Materials has occurred
at IN and its subsidiaries' leased 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
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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) The operations of each third party operator of any of IN
or its subsidiaries' properties are in compliance with the terms of this Section
3.14.
(b) IN 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 IN or its
subsidiaries relating to any of the present or prior properties or operations of
IN 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,
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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 or written consent of the
holders of any class or series of IN capital stock necessary to approve the
Merger and adopt this Agreement is the affirmative vote or written consents from
the holders of at least a majority of the outstanding shares of IN Common Stock.
SECTION 3.16 BROKERS. Except as set forth in Schedule 3.16 to the IN
Disclosure Schedule and the Notes payable to the order of Messrs. Charles Paz,
Roy Dahlen and Ken Bodger, 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 IN. IN has made or will make available prior to Closing to 4Health
a complete and correct copy of all agreements referenced in Schedule 3.16 to the
IN Disclosure Schedule pursuant to which such firm or individual will be
entitled to any payment relating to the transactions contemplated by this
Agreement.
SECTION 3.17 INSURANCE. Schedule 3.17 to the IN Disclosure Schedule will
set 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 IN 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 IN 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 IN or any of its property, assets, or
activities, past or present. To the knowledge of IN or Irwin, 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 IN.
SECTION 3.18 PROPERTIES. Except as set forth in Schedule 3.18 to the IN
Disclosure Schedule, except for liens arising in the ordinary course of business
after the date hereof and assets disposed of in the ordinary course of business
after the date of the IN Balance Sheet, IN and its subsidiaries have good and
marketable title free and clear of all liens, the existence of which would have
an IN Material Adverse Effect, to all their material assets, whether tangible or
intangible, personal or mixed, reflected in the IN Balance Sheet as being owned
by IN 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 held under
leases by any of IN or its subsidiaries, are held under valid instruments
enforceable by IN or its subsidiaries in accordance with their respective terms.
Substantially all of IN's and its subsidiaries' equipment in regular use has
been well maintained and is in good and serviceable
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condition, reasonable wear and tear excepted. Neither IN nor any of its
subsidiaries own any real property and all of IN's and its subsidiaries'
interests in real property are subject to valid and binding leases, all of which
are in full force and effect, are not in breach by IN or its subsidiaries or, to
IN's or Irwin's knowledge, by the lessor thereunder.
SECTION 3.19 CERTAIN CONTRACTS AND RESTRICTIONS. Other than agreements,
contracts or commitments listed elsewhere in the IN Disclosure Schedule,
Schedule 3.19 to the IN Disclosure Schedule lists, as of the date hereof, each
agreement, contract or commitment (including any amendments thereto) to which IN
or any of its subsidiaries is a party or by which IN 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 IN
and its subsidiaries, taken as a whole. As of the date of this Agreement and
except as indicated on the IN Disclosure Schedule, (i) IN has fully complied
with all material terms and conditions of all agreements, contracts and
commitments listed in the IN Disclosure Schedule and all such agreements,
contracts and commitments are in full force and effect, (ii) IN and Irwin have
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 FUTURES TRADING AND FIXED PRICE EXPOSURE. Neither IN nor
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 3.21 INFORMATION SUPPLIED. Without limiting any of the
representations and warranties contained herein, the representations and
warranties of IN contained in this Agreement and the information set forth in
the IN 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 3.22 SECURITIES LAWS REPRESENTATIONS. Without limiting any of
the representations and warranties of 4Health contained herein, Irwin hereby
acknowledges and agrees with 4Health that he is familiar with 4Health's assets,
business, financial condition, results of operations, and prospects. He is aware
of the risks attendant to an investment in the 4Health Common Stock. He has
relied solely upon the independent investigations made by him and his
representatives and 4Health's representations and warranties set forth herein in
making a decision to approve the Merger and to acquire the 4Health Common Stock
and has a full understanding and appreciation of the risks inherent in such a
speculative investment. In connection with such investigation, he and his
advisors, if any, have had the opportunity to ask, to the extent he considered
necessary, questions of, and have received answers from, officers of 4Health
concerning the affairs of 4Health and have had access to reports filed by
4Health with the Commission (as hereinafter defined), all documents, records,
books and additional information
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which he has deemed necessary to make an informed investment decision to acquire
the 4Health Common Stock. He recognizes that the offer and sale by 4Health to
him of the 4Health Common Stock has not been registered under the Securities Act
or any other domestic or foreign securities laws (the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any such
other applicable domestic and foreign securities laws are hereinafter
collectively referred to herein as the "Securities Laws") and, except as set
forth in 6.02 hereof, will not be registered under any such Securities Laws, in
reliance upon exemptions from the registration requirements thereof. He is
acquiring the 4Health Common Stock solely for his own account for investment and
not with a view to, or for offer or resale in connection with, a distribution
thereof in violation of any Securities Laws. He understands that the effect of
such representations and warranties is that such Stock must be held indefinitely
unless the sale or transfer thereof is subsequently registered under applicable
Securities Laws or an exemption from such registration is available at the time
of the proposed sale or transfer thereof. Except as provided in Section 6.02
hereof, 4Health is under no obligation to file a registration statement under
the Securities Act covering the sale or transfer of the 4Health Common Stock or
otherwise to register such Stock for sale under applicable Securities Laws.
Irwin represents and warrants that he has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of approving the Merger and investing in the 4Health Common Stock; he is
an "accredited investor" as defined in Rule 501 of Regulation D; and that the
statements contained in this Section 3.23 are true, correct and complete in all
material respects and do not omit any material fact necessary to make such
statements not misleading. Irwin shall make no sale or other disposition of his
4Health Common Stock unless (a) 4Health shall have received an opinion of
counsel satisfactory in form and substance to it that the sale or other
disposition may be made without registration under the then applicable
provisions of the Securities Laws and the rules and regulations promulgated
thereunder, or (b) such Stock is included in a currently effective registration
statement under the Securities Act. Neither Irwin, his wife nor any holder of a
Converted Share has been convicted of any felony or misdemeanor in connection
with the purchase and sale of any security or involving the making of any false
filing with the Securities and Exchange Commission ("Commission"). Neither
Irwin, his wife nor any holder of a Converted Share nor IN or any subsidiary of
IN, nor any officer, director and/or shareholder of IN or any subsidiary of IN,
is subject to any order, judgment or decree of any court of competent
jurisdiction, temporarily or preliminarily restraining or enjoining, or subject
to any order, judgment or decree of any court of competent jurisdiction,
permanently restraining or enjoining, such person from engaging in or continuing
any conduct or practice in connection with the purchase and sale of any security
or involving the making of any false filing with the Commission. Irwin agrees
to secure and furnish to 4Health prior to the Effective Time investment
representation letters from his wife and any other holder of Converted Shares,
if any, addressed to 4Health containing the same representations and warranties
made by Irwin in this Section 3.23.
SECTION 3.23 INTELLECTUAL PROPERTY. Schedule 3.23 lists all the
registered patents, trademarks, service marks, copyrights, trade names and
applications for any of the foregoing owned by IN or any to its knowledge, its
subsidiaries as of the date of this Agreement (the "Registered Intellectual
Property"). To its knowledge, IN has good and marketable title to the
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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 3.23. 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. Except as set forth in Schedule 3.23, there are no claims or
proceedings pending or, to IN's or to Irwin's knowledge, threatened, against IN
asserting that IN or any of its subsidiaries is infringing or engaging in the
unauthorized use of any Intellectual Property of any other person or entity.
Schedule 3.23 sets forth all agreements and arrangements (i) pursuant to which
IN 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 IN 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 3.23 (w) are
in full force and effect in accordance with their terms and neither IN nor Irwin
is aware that any default exists thereunder by IN 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. IN has delivered to 4Health true
and complete copies of all agreements and arrangements set forth on Schedule
3.23. There are no royalties, license fees, charges or other amounts payable
by, or on behalf of IN or any of its subsidiaries in respect of any Intellectual
Property other than as set forth on Schedule 3.23.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF 4HEALTH
4Health hereby represents and warrants to IN and Irwin that:
SECTION 4.01 ORGANIZATION AND QUALIFICATIONS; SUBSIDIARIES. 4Health is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Utah and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as 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
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likely to be materially adverse to the assets, liabilities, financial condition,
results of operations or current or future business of 4Health and its
subsidiaries, taken as a whole. Except as set forth in Schedule 4.01 to the
disclosure schedule to be delivered to IN by 4Health and which is attached
hereto and is made a part hereof (the "4Health Disclosure Schedule") as provided
in Section 7.03(g), 4Health does not own an equity interest in any other
corporation, 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 OF INCORPORATION AND BYLAWS. 4Health has
heretofore furnished to IN 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) Except as set forth in Schedule 4.03(a) or as contemplated by
this Agreement, the authorized capital stock of 4Health consists of 30,000,000
shares of 4Health Common Stock as of the date hereof, of which 11,911,658 shares
are issued and outstanding, 50,000 shares are held in treasury by 4Health and up
to 2,139,323 shares are reserved for future issuance pursuant to stock options
and warrants; and (ii) 5,000,000 shares of series preferred stock, par value
$1.00 per share, none of which 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)
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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 IN complete and correct copies of
(i) its Long Term Stock Incentive 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 all 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. The execution
and delivery of this Agreement by 4Health and the consummation by 4Health of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and, except for securing the approval of 4Health's
stockholders, no other corporate proceedings on the part of 4Health are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
4Health and, assuming the due authorization, execution and delivery thereof by
IN and Irwin, 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
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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 or any of its
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 Merger 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
appropriate merger documents as required by California and Utah Laws; (ii) for
filing Proxy Materials (as defined herein) and Form D with the Commission; (iii)
if required by the National Association of Securities Dealers, Inc. ("NASD"), a
listing application listing the shares of 4Health's Common Stock on the NASDAQ
National Stock Market ("NSM"); and (iv) 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.
(a) Since March 31, 1991, 4Health and its subsidiaries have filed
all forms, reports, statements and other documents required to be filed with (A)
the Commission including,
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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 "4Health Commission 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 4Health 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 "4Health
Reports"). The 4Health Reports, including all 4Health Reports filed after the
date of this Agreement and prior to the Effective Time, (x) were or will be
prepared in accordance with the requirements of applicable Law (including, with
respect to 4Health Commission Reports, the Securities Act and the Exchange Act,
as the case may be, and the rules and regulations of the Commission thereunder
applicable to such 4Health Commission 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 4Health Commission Reports filed
prior to the Effective Time, have been or will be prepared in accordance with
the published rules and regulations of the Commission 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 4Health Commission 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 4Health 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 4Health and its subsidiaries as of the respective dates
thereof and the consolidated 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 Commission Reports, or 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 September 30, 1997, 4Health has conducted its
business in the ordinary course of business consistent with past practice.
Since September 30, 1997, 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,
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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 or any of 4Health's subsidiaries of any
of 4Health's securities or any of the securities of any subsidiary of 4Health;
(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 seeking injunctive
relief) pending or, to the knowledge of 4Health, threatened, against 4Health or
any of its properties or rights (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. EMPLOYEE BENEFIT PLANS; LABOR MATTERS.
(a) Schedule 4.10(a) to the 4Health 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 4Health or any member
of its ERISA Group or with respect to which 4Health 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, insurance, health, welfare 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"). 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 4Health is a member. 4Health has made available to IN
correct and complete copies of all 4Health Benefit Plans (including a detailed
written description of any 4Health Benefit Plan that is unwritten, including a
description of eligibility criteria, participation, vesting, benefits, funding
arrangements and assets and any other provisions relating to 4Health) and, with
respect to each 4Health Benefit Plan, a copy of each of the following, to the
extent each is applicable to each 4Health 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
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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 4Health Benefit Plan that describes the terms of the 4Health
Benefit Plan.
(b) With respect to the 4Health Benefit 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 Benefit Plans,
ERISA, the Code or any other applicable Law which would have an 4Health Material
Adverse Effect. Except as otherwise set forth on Schedule 4.10(b) to the
4Health Disclosure Schedule:
(i) As to any 4Health Benefit Plan intended to be qualified
under Section 401 of the Code, such 4Health Benefit Plan satisfies the
requirements of such Section and there has been no termination or partial
termination of such 4Health Benefit Plan within the meaning of Section 411(d)(3)
of the Code and 4Health 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 4Health, threatened
against, or with respect to, any of the 4Health Benefit Plans or their assets,
any plan sponsor, or any fiduciary (as such term is defined in Section 3(21) of
ERISA), and 4Health 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 4Health
Benefit Plans pursuant to their terms and provisions have been made timely;
(iv) As to any 4Health 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 4Health Benefit Plan has been
given under Section 4041 of ERISA, no proceeding has been instituted under
Section 4042 of ERISA to terminate the 4Health Benefit Plan, and no liability to
the Pension Benefit Guaranty Corporation or to the Plan has been incurred;
(v) Neither 4Health 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 4Health to any liability; and
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(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 4.10(c) to the 4Health Disclosure
Schedule, neither 4Health 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 4Health or any of its subsidiaries. There is
no pending or threatened labor dispute, strike or work stoppage against 4Health
or any of its subsidiaries which may interfere with the respective business
activities of 4Health or any of its subsidiaries. None of 4Health, 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 4Health or its subsidiaries, and there is no pending or
threatened charge or complaint against 4Health or any of its subsidiaries by the
National Labor Relations Board or any comparable state agency. 4Health and its
subsidiaries are in compliance with all applicable wage and hours Laws, age,
race, religious and gender anti-discrimination Laws, employee health and safety
Laws and all immigration Laws as regards their respective employees and, there
is no pending or, to 4Health's knowledge, threatened claim, investigations or
proceeding involving any alleged violation of any such Law.
(d) Except as disclosed in Schedule 4.10(d) to the 4Health Disclosure
Schedule and as contemplated by this Agreement, neither 4Health nor any of its
subsidiaries is a party to or is bound by any severance agreements, programs or
policies. Schedule 4.10(d) to the 4Health Disclosure Schedule sets forth, and
4Health has made available to IN true and correct copies of, all employment
agreements with officers or 4Health or its subsidiaries; all agreements with
consultants of 4Health or its subsidiaries obligating 4Health or any subsidiary
to make annual cash payments in an amount exceeding $25,000; all
non-competition agreements with 4Health or a subsidiary executed by officers of
4Health; and all plans, programs, agreements and other arrangements of 4Health
or its subsidiaries with or relating to its directors.
(e) Except as provided in Schedule 4.10(e) to the 4Health Disclosure
Schedule, (x) no 4Health Benefit Plan provides retiree medical or retiree life
insurance benefits to any person and (y) neither 4Health 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 4Health
Benefit Plan or arrangement may be amended or terminated by 4Health or its
subsidiaries at any time without liability.
(f) Except as set forth in Schedule 4.10(f) to the 4Health Disclosure
Schedule, neither 4Health 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
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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 4.10(g), 4Health has not amended, or taken any actions with respect to,
any of the 4Health Benefit Plans or any of the plans, programs, agreements,
policies or other arrangements described in Section 4.10(d) of this Agreement
since September 30, 1997.
(h) 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 4.11. 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 duly filed on a timely basis with the appropriate Governmental Entities and
such Returns are true, correct and complete. Except to the extent that the
applicable statute of limitations with respect thereto has expired, all Taxes
have been duly paid in full or a provision has been made 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. 4Health has disclosed on its income tax returns all positions
taken therein which could give rise to a substantial understatement penalty
within the meaning of Code Section 6662. No waiver or extension of any statute
of limitations is in effect with respect to Taxes or Returns of 4Health.
(b) 4Health has complied in all respects 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 audit of any of the Returns of 4Health by a
Governmental Entity in process or threatened and 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. There are no liens on
any assets of 4Health with respect to Taxes, other than liens set forth in
Schedule 4.11 of the 4Health Disclosure Schedule for Taxes that are being
contested in good faith through appropriate proceedings and for which
appropriate reserves have been established.
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(d) 4Health has made available to IN complete copies of (i) all
federal income tax returns of 4Health for all periods open under the statute of
limitations for assessments and (ii) examination reports, and statements of
deficiencies assessed against 4Health.
(e) No consent under Section 341(f) of the Code has been filed with
respect to 4Health.
(f) 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.
(g) 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.
(h) 4Health has not issued or assumed any corporate acquisition
indebtedness that is subject to Sections 279(a) and (b) of the Code.
(i) 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 filed in Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 1997 (the "4Health Balance Sheet").
(j) The tax returns provided by 4Health to IN 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 4Health from
utilizing these net operating losses, net operating loss carryforwards or other
tax attributes as so limited if sufficient income were realized.
(k) 4Health is not required to treat any of its 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. TAX MATTERS. Neither 4Health, nor, to the knowledge of
4Health, any of 4Health's 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.
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SECTION 4.13 NSM LISTING. The 4Health Common Stock is traded in the NSM,
and, 4Health has not received any current notice from the NSM or the NASD that
it intends to delist the 4Health Common Stock from the NSM.
SECTION 4.14 CERTAIN BUSINESS PRACTICES. To the best of 4Health's
knowledge, 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 4.15 ENVIRONMENTAL MATTERS (a) Except as disclosed in
Schedule 4.15 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 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 not received any notice of noncompliance with
respect to any financial responsibility requirements applicable to its
operations and imposed by any Governmental Entity under any Environmental Laws.
(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
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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 4.15.
(b) 4Health has made available to IN 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 4.16. BROKERS. Except as set forth in Schedule 4.16 of the
4Health Disclosure Schedule and the Notes payable to the order of Messrs.
Charles Paz, Roy Dahlen and Ken Bodger, 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 IN a complete and correct copy of all agreements
referenced in Schedule 4.16 pursuant to which any such firm will be entitled to
any payment related to the transactions contemplated by this Agreement.
SECTION 4.17. INSURANCE. Schedule 4.17 to the 4Health Disclosure Schedule
will set 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 4Health 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 4Health has not received any outstanding notice of
cancellation or termination with respect to any policy of fire, products or
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environmental or pollution control liability, general liability, vehicle,
workers' compensation, directors' and officers' liability, title and other
insurance owned or held by or covering 4Health or any of its property, assets,
or activities, past or present. To the knowledge of 4Health, 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 4Health.
SECTION 4.18. 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 4Health 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 the 4Health 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 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 4.19 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. 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.
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SECTION 4.21 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 4.22 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 4.23 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"). To its knowledge,
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. 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. 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 IN in respect of any 4Health
Intellectual Property other than as set forth on Schedule 4.23.
SECTION 4.24 POOLING OF INTERESTS. Neither 4Health, nor any of its
officers, directors and/or shareholders has taken in the last two years or will
take prior to the Effective Time any action which would interfere with the
ability of 4Health to account for the Merger under the "pooling of interests"
method of accounting.
SECTION 4.25 EXEMPT TRANSACTION. Assuming the accuracy and completeness
of IN's and Irwin's representations and warranties hereunder, and assuming
further that IN and IN stockholders have not taken and will not take any action
that would render unavailable the exemption from registration under the
Securities Act provided by Rule 506 of Regulation D and Section 4(2) thereof and
applicable state securities laws, the shares of 4Health Common Stock issued as a
result of the Merger will be offered and sold pursuant to the registration
exemption provided by Rule 506 of Regulation D and Section 4(2) of the
Securities Act as a transaction not
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involving a public offering and the requirements of the applicable state
securities laws of the State of California and respective rules and regulations
thereunder.
SECTION 4.26 NO VIOLATION OF SECURITIES LAWS. No injunction, stop order,
cease and desist order or other judgment, writ, or decree denying, revoking or
suspending the registration of shares of 4Health Common Stock or prohibiting or
restricting the offer or sale of shares of 4Health Common Stock has been issued
and except as disclosed in Schedule 4.09 to the 4Health Disclosure Schedule, to
the knowledge of 4Health, there are no private or governmental suits, actions,
investigations or other proceedings pending or threatened, seeking such a
judgment, order, writ or decree or alleging any violation of Federal or state
securities laws.
SECTION 4.27 NO INVESTIGATION. No formal or informal investigation or
examination by the Commission or by the securities adminsitrator of any state is
pending, or to the knowledge of 4Health, threatened against 4Health, or any
director, officer or shareholder of 4Health, or any of its subsidiaries.
SECTION 4.28 NO CONVICTIONS. Neither 4Health nor any officer, director
or shareholder of 4Health or any of its subsidiaries, has been convicted of any
felony or misdemeanor in connection with the purchase and sale of any security
or involving the making of any false filing with the Commission.
SECTION 4.29 NO RESTRAINT. Neither 4Health nor any subsidiary of
4Health, nor any officer, director and/or shareholder of 4Health or any
subsidiary of 4Health, is subject to any order, judgment or decree of any court
of competent jurisdiction, temporarily or preliminarily restraining or
enjoining, or subject to any order, judgment or decree of any court of competent
jurisdiction, permanently restraining or enjoining, such person from engaging in
or continuing any conduct or practice in connection with the purchase and sale
of any security or involving the making of any false filing with the Commission.
ARTICLE V
COVENANTS
SECTION 5.10 AFFIRMATIVE COVENANTS OF IN. IN 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, IN will and will cause
its subsidiaries to:
(a) continue to operate its business in all material respect in the
usual and ordinary course, consistent with prior practice and to 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;
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(b) 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 in quantities consistent with its
customary business practice;
(c) 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;
(d) furnish to 4Health copies of the IN Financial Statements and IN
Balance Sheet, certified by IN's independent auditors, and the IN Disclosure
Schedule no later than 10 days prior to the Closing Date; and
(e) 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.
SECTION 5.02. NEGATIVE COVENANTS OF IN. 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, IN will not do, and will not permit
any of its subsidiaries to do, any of the foregoing:
(a) (i) except as set forth on in Schedule 5.02(a) to the IN
Disclosure Schedule, increase the compensation payable to or to become
payable to any director or executive officer; (ii) grant any severance or
termination pay to, or enter into or amend any employment or severance
agreement with, any director, officer or employee; (iii) establish, adopt
or enter into any employee benefit plan or arrangement; or (iv) except as
may be required by applicable law, adopt, amend, or take any other actions
with respect to, any IN Benefit Plans or any of the plans, programs,
agreements, policies or other arrangements described in Section 3.10(d) of
this Agreement;
(b) except as set forth on Schedule 5.02(b) to the IN Disclosure
Schedule, declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
direct or indirect wholly owned subsidiary of IN to IN or another wholly owned
subsidiary of IN;
(c) except as contemplated by this Agreement, (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 IN 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); (ii)
effect any reorganization or recapitalization; or (iii) split, combine or
reclassify
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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 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) and 2.01(b) 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 IN
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 IN 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 IN or any of its subsidiaries or any investment banker, financial
advisor, attorney, accountant or other representative retained by IN or any of
IN's subsidiaries to take any such action, and IN shall promptly notify 4Health
of all relevant terms of any such inquiries and proposals received by IN 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, IN 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
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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.
(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 enforce any such agreement in all material respects;
(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
September 30, 1997, 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, 1996, except
in each case, as may be required by Law or generally accepted accounting
principles;
(k) except as set forth in Schedule 5.02(k) of the IN Disclosure
Schedule, 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 IN or substantially less
advantageous to IN than arrangements, agreements or contracts existing on the
date hereof;
(m) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other material
reorganization of IN or any of its subsidiaries;
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(n) 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
IN Balance Sheet (including the notes thereto) of IN 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;
(o) knowingly take, or agree to commit to take, any action that would
make any representation or warranty of IN contained herein inaccurate in any
respect at, or as of any time prior to, the Effective Time;
(p) other than between or among wholly-owned subsidiaries of IN which
remain wholly-owned or between IN and its wholly-owned subsidiaries which remain
wholly-owned or except to the extent described in Schedule 5.02(p) of the IN
Disclosure Schedule, neither IN 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 IN'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 5.02(p) of the IN Disclosure Schedule) or as disclosed in writing to
4Health on the date hereof or which are contemplated under this Agreement;
provided, that IN provides 4Health with all information concerning any such
agreement, arrangement or understanding that 4Health may reasonably request;
(q) except as may be set forth in Schedule 5.02(q) to the IN
Disclosure Schedule, agree to or approve any commitment, including any
authorization for expenditure or agreement to acquire property, obligating IN
for an amount in excess of $10,000;
(r) engage in any futures or options trading or be a party to any
price or currency swaps, hedges, futures or derivative instruments; or
(s) agree in writing or otherwise to do any of the foregoing.
SECTION 5.03. AFFIRMATIVE COVENANTS AND CONSENT OF IRWIN. In lieu of a
meeting of stockholders, the Merger, this Agreement and the transactions
contemplated hereby shall be approved upon written consent, without a meeting,
in accordance with the provisions of California Law, and the execution and
delivery of this Agreement by Irwin shall constitute his written consent to the
Merger, this Agreement and the consummation of the transactions contemplated
hereby for all purposes required by the applicable provisions of California Law
in order to approve and effectuate the Merger. Irwin hereby irrevocably waives
any and all rights to assert any dissenters' rights granted under the provisions
of any Law with respect to the Merger, this Agreement or the transactions
contemplated hereby. IN hereby agrees to secure similar proxies and written
consents from all other IN stockholders, if any, and deliver them to 4Health
prior to
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the Effective Time in sufficient time to meet all applicable procedural
requirements of California Law regarding stockholder approval of mergers or
other business combinations.
SECTION 5.04 AFFIRMATIVE AND NEGATIVE COVENANTS OF 4HEALTH.
(a) 4Health 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 IN, 4Health will:
(i) continue to 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 services 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 the affirmative votes at a duly convened
shareholders meeting, from shareholders of 4Health owning in excess of fifty
percent (50%) of the issued and outstanding shares of 4Health Common Stock
approving the Merger, this Agreement and the transactions contemplated hereby;
and
(vi) 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) except as set forth on in Schedule 5.04(b)(i) to the
4Health 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, adopt,
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amend, or take any other actions with respect to, any 4Health Benefit Plans or
any of the plans, programs, agreements, policies or other arrangements described
in Section 4.10(d) of this Agreement;
(ii) declare or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock;
(iii) 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;
(iv) 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) and 2.01(b) 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;
(v) 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);
(vi) except as discussed in Schedule 5.04(b)(vi) 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, except for the
sale of inventory or other dispositions in the ordinary course;
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(vii) 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 IN 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 IN a
copy of such inquiry or proposal;
(viii) 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 enforce any such agreement in all material respects;
(ix) 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;
(x) (A) change any of its methods of accounting in effect at
September 30, 1997, 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, 1996, except
in each case, as may be required by Law or generally accepted accounting
principles;
(xi) except as set forth in Schedule 5.04(b)(xi) of the 4Health
Disclosure Schedule, 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;
(xii) 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 4Health or substantially less
advantageous to 4Health than arrangements, agreements or contracts existing on
the date hereof;
(xiii) adopt a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring, recapitalization or other
material reorganization of 4Health;
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(xiv) 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 4Health Balance Sheet (including the notes thereto) (y)
incurred in the ordinary course of business consistent with past practice or (z)
which are legally required to be paid, discharged or satisfied;
(xv) 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;
(xvi) except to the extent described in Schedule 5.04(b)(xvi) of
the 4Health Disclosure Schedule, 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
Schedule 5.03(b)(xvi) of the 4Health Disclosure Schedule) or as disclosed in
writing to IN on the date hereof or which are contemplated under this Agreement;
provided, that 4Health provides IN with all information concerning any such
agreement, arrangement or understanding that IN may reasonably request;
(xvii) except as may be set forth in Schedule 5.04 (b)(xvii) to
the 4Health Disclosure Schedule, agree to or approve any commitment, including
any authorization fee, expenditure or agreement to acquire property, obligating
4Health for an amount in excess of $10,000;
(xviii) engage in any futures or options trading or be a party to
any price or currency swaps, hedges, futures or derivative instruments; or
(xix) agree in writing or otherwise to do any of the foregoing.
SECTION 5.05. ACCESS AND INFORMATION.
(a) IN 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 IN 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 IN and its
subsidiaries (including, without limitation, financial, operating
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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 IN and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, the "IN 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 IN and IN 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 IN or such Representatives.
(c) Notwithstanding the foregoing provisions of this Section 5.05,
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 5.05(a) and (b)
shall be deemed to be "Proprietary Information" for purposes of those certain
Letter Agreements dated October 16, 1997 and December 5, 1997, between IN and
4Health (collectively, the "Letter Agreements"), the provisions of which shall
survive the execution, delivery and termination of this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. STOCKHOLDER APPROVALS.
(a) IN and 4Health each shall, promptly after the date hereof, take
all actions necessary in accordance with California and Utah Laws, respectively,
and their respective articles of incorporation and bylaws to convene a special
meeting of stockholders or, in IN's case, to solicit written consents of
stockholders, to act on this Agreement. IN and 4Health shall solicit from
stockholders of IN and 4Health, respectively, proxies or, in IN's case written
consents, in favor of the approval and adoption of this Agreement and to secure
the vote of stockholders required by California and Utah Laws and their
respective articles of incorporation and bylaws to approve and adopt this
Agreement, the Merger and the consummation of the transactions contemplated
hereby.
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(b) 4Health shall, promptly after the date hereof, prepare a proxy
statement and proxy (the "Proxy Materials") and file them with the Commission
and comply with the requirements of Regulation 14A under the Exchange Act. IN
will cooperate with 4Health in connection with the preparation of the Proxy
Materials and will furnish 4Health for insertion in the Proxy Materials all such
information regarding IN and its subsidiaries and their respective businesses
and financial condition as is required to be contained in the Proxy Materials
under the provisions of Regulation 14A and the rules promulgated thereunder.
Promptly upon clearance of the Proxy Materials by the Staff of the Commission,
4Health shall mail or cause to be mailed to 4Health's stockholders, the Proxy
Materials, including a notice of special meeting of stockholders, and take all
actions necessary in accordance with Utah Law and its articles of incorporation
and bylaws to convene a special meeting of 4Health's stockholders to act on this
Agreement and the transactions contemplated hereby.
SECTION 6.02. REEGISTRATION STATEMENT; INFORMATION.
(a) As promptly as practicable after the receipt of a written demand
from Irwin (provided he continues to hold beneficially at least 10% of the
issued and outstanding shares of Common Stock and such shares are not freely
transferable under Rule 144 without any discount in price due to the volume or
other limitations imposed by such Rule), 4Health shall prepare and file with the
Commission a registration statement on Form S-1, S-2 or S-3 (the "Registration
Statement") registering the shares of 4Health Common Stock issued in connection
with the Merger. 4Health shall use its best efforts to cause such Registration
Statement to be declared effective by the Commission as promptly as practicable
and shall furnish each holder of 4Health Common Stock whose shares are being
registered (a "Selling Stockholder") with a reasonable number of copies of the
prospectus included in such Registration Statement for use in connection with
any sales of its Stock as soon as practicable after such Registration Statement
is declared effective by the Commission. 4Health agrees to bear all of the
costs associated with the preparation and filing of such Registration Statement,
including all filing fees, legal, accounting and printing costs but shall not be
required to pay the legal or accounting costs or underwriting fees and expenses,
if any, incurred by any Selling Stockholder. If such Registration Statement is
on Form S-1 or S-2, 4Health shall prepare and file with the Commission all
Post-Effective Amendments necessary to keep such Registration Statement current
for the period ending on the earlier of (i) the sale of all the shares of
4Health Common Stock included in such Registration Statement or (ii) the second
anniversary of the Effective Time. The inclusion of any such shares of 4Health
Common Stock in such Registration Statement shall be contingent upon the receipt
from the Selling Stockholder all such information required to be disclosed in a
registration statement under the Securities Act by selling stockholders pursuant
to applicable rules and regulations promulgated by the Commission. In the event
that such shares of 4Health Common Stock are to be included in an underwritten
offering by 4Health, the amount of shares that may be included in such offering
shall be subject to a pro rata reduction if, in the opinion of the managing
underwriter, such reduction is advisable in order to permit an orderly
distribution, but not below 25% of the total number of shares comprising such
underwritten offering. Irwin shall be entitled to make no more than three such
demands for registration, provided that all of the shares sought
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to be registered under the first such demand were not sold as provided in such
Registration Statement within the time provided therefor. At Irwin's election
any Prospectus to be included in any such Registration Statement shall contain
the disclosure set forth in Schedule 6.02(a) attached hereto.
(b) 4Health hereby represents and warrants to IN and Irwin that the
information contained in the Registration Statement, the Proxy Materials (other
than information to be furnished by IN or the Selling Stockholders) shall not,
at the time the Registration Statement is declared effective by the Commission
and the Proxy Materials are mailed to 4Health stockholders 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, in light of
the circumstances under which they were made, not misleading. All documents
that 4Health is responsible for filing with the Commission 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) IN and Irwin jointly and severally represent and warrant to
4Health that the information to be supplied by IN and Irwin for inclusion in the
definitive Proxy Materials, at the time the Proxy Materials are mailed to
4Health stockholders and by Irwin for inclusion in the Registration Statement,
shall not 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, in light of the circumstances under which they were made,
not misleading.
(d) 4Health agrees to indemnify and hold harmless, to the full extent
permitted by law, IN, its officers, directors, stockholders (including, without
limitation, Irwin), employees, agents, attorneys, investment advisers and
underwriters, and each Person who controls IN within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under
common control with, or is controlled by, IN, together with the partners,
officers, directors, stockholders, employees and agents of such controlling
Person (collectively, the "Indemnified Persons"), from and against all losses,
claims, damages, liabilities and expenses (including without limitation any
legal or other fees and expenses incurred by an Indemnified Person in connection
with defending or investigating any action or claim in respect thereof)
(collectively, the "Damages") to which an Indemnified Person may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such Damages
(or proceedings in respect thereof) arise out of or are based upon any untrue or
alleged untrue statement of material fact contained in any Registration
Statement (or any amendment thereto) including, without limitation, any
Prospectus or Supplement thereto contained therein, pursuant to which any
4Health Common Stock issued in the Merger was registered under the Securities
Act, or in any Proxy Materials furnished to 4Health stockholders in connection
herewith and any supplements or amendments thereto, including all documents
incorporated therein by reference, or caused by any omission or alleged omission
to state therein a material fact necessary to make the statements therein in
light of the circumstances under which they were made not misleading, except
insofar as such Damages arise out of or are based upon any such untrue statement
or omission based upon information furnished in writing
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to 4Health by the Indemnified Person expressly for use therein; PROVIDED,
HOWEVER, that 4Health shall not be liable to the Indemnified Person under this
Section 6.02(d) to the extent that any such Damages were caused by the fact that
the Indemnified Person sold 4Health Common Stock to a person as to whom it shall
be established that there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus as then amended or
supplemented if, and only if, 4Health has previously furnished copies of such
amended or supplemented Prospectus to such Indemnified Person.
(e) IN and Irwin, jointly and severally, agree to indemnify and hold
harmless 4Health, its directors, officers, stockholders, agents, attorneys and
investment advisers and each person, if any, who controls 4Health within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act to the same extent as the foregoing indemnity from 4Health to the
Indemnified Persons, but only with reference to information relating to the
Indemnified Persons furnished to 4Health in writing by any Indemnified Person
expressly for use in any Registration Statement, Prospectus or Proxy Materials
(or any amendment or supplement thereto); PROVIDED, HOWEVER, that the
Indemnified Persons shall not be obligated to provide such indemnity to the
extent that such Damages result from the failure of 4Health to promptly amend or
take action to correct or supplement any such Registration Statement,
Prospectus, or Proxy Materials on the basis of corrected or supplemental
information provided in writing by the Indemnified Person to 4Health expressly
for such purpose.
(f) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to either paragraph (d) or (e) above, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceedings
and shall pay the fees and disbursements of such counsel relating to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be at
the expense of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel,
or (ii) the indemnifying party fails promptly to assume the defense of such
proceeding or fails to employ counsel reasonably satisfactory to such
indemnified party or parties, or (iii) (A) the named parties to any such
proceeding (including any impleaded parties) include both such indemnified party
or parties and any indemnifying party or an affiliate of such indemnified party
or parties or of any indemnifying party, (B) there may be one or more defenses
available to such indemnified party or parties or such affiliate of such
indemnified party or parties that are different from or additional to those
available to any indemnifying party or such affiliate of any indemnifying party
and (C) such indemnified party or parties shall have been advised by such
counsel that there may exist a conflict of interest between or among such
indemnified party or parties or such Affiliate of such indemnified party or
parties and any indemnifying party or such affiliate of any indemnifying party,
in which case, if such indemnified party or parties notifies the indemnifying
party or parties in writing that it elects to
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employ separate counsel of its choice at the expense of the indemnifying
parties, the indemnifying parties shall not have the right to assume the defense
thereof and such counsel shall be at the expense of the indemnifying parties, it
being understood, however, that unless there exists a conflict among indemnified
parties, the indemnifying parties shall not, in connection with any one such
proceeding or separate but substantially similar or related proceedings in the
same jurisdiction, arising out of the same general allegations or circumstances,
be liable for the fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for such indemnified party
or parties. The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent but, if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party or parties from and against any
loss or liability by reason of such settlement or judgment. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened proceeding in respect of which such
indemnified party is a party, and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such proceeding.
SECTION 6.03. APPROPRIATE ACTION; CONSENTS; FILINGS; INDEMNIFICATION.
(a) IN and 4Health shall each use, and IN 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 IN 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 IN
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.
IN 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, without limitation, all information required to be included in
the Registration Statement and the Proxy Materials) in connection with the
transactions contemplated by this Agreement.
(b) 4Health and IN 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
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(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 IN 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 IN shall not be required
to take any action which would or could reasonably be expected to have an IN
Material Adverse Effect.
(c) (i) Each of IN and 4Health shall give (or IN 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 an IN 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 IN 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 IN 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 IN 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 IN (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.
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(e) (i) In the event of any threatened, pending or completed
claim, action, suit, investigation or any legal, administrative or other
proceeding ("proceeding") by any governmental entity or other person which
questions the validity or legality of the transactions contemplated by this
Agreement or seeks to enjoin, restrain or prohibit such transactions, or seeks
damages in connection therewith, whether before or after the Effective Time of
the Merger, 4Health and IN agree, to the fullest extent permissible by law, to
vigorously defend and respond thereto.
(ii) 4Health as the Surviving Corporation agrees (1) not to
change for seven (7) years from the Effective Time, the provisions of its
articles of incorporation and bylaws or applicable indemnification agreements in
effect on the Effective Time in each case relating to indemnification of each
existing officer and director (and their respective successors) of 4Health and
the Surviving Corporation (together, with any successor by operation of law,
referred to in this Section as, individually, an "Indemnified Party" and
collectively, "Indemnified Parties") in a manner which adversely affects the
rights of such Indemnified Party to indemnification thereunder, and (ii) to
perform its obligations thereunder, or exercise any discretionary authority
thereunder, to the fullest extent permissible by law to provide such Indemnified
Party with all rights to indemnification available thereunder. Notwithstanding
the foregoing, nothing in this Agreement shall constitute a waiver of, or
otherwise operate to adversely affect, the existing rights of the Indemnified
Parties under the articles or bylaws of 4Health or IN in effect on the date
hereof and the indemnification agreements relating to the indemnification of any
Indemnified Party.
(iii) 4Health agrees that, for seven (7) years after the
Effective Time, 4Health shall maintain officers' and directors' liability
insurance policies indemnifying and holding harmless the Indemnified Parties
with respect to any actions or omissions occurring prior to the Effective Time,
providing at least $10,000,000 insurance coverage on terms no less advantageous
to the Indemnified Parties than 4Health's existing policy; provided that in the
event any claim is asserted or made within such seven year period, coverage
under such insurance shall be continued in respect thereof until final
disposition of such claim.
(iv) In the event the foregoing indemnities or insurance
policies referred to in clauses (ii) and (iii) above become unavailable or
unenforceable for any reason, 4Health agrees to indemnify and hold harmless the
Indemnified Parties to the same extent as if such indemnities and insurance were
available and in full force and effect.
(v) The provisions of this Section 6.03(e) shall survive the
consummation of the transactions contemplated hereby.
SECTION 6.04. TAX AND ACCOUNTING 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
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from qualifying, as a reorganization under the provisions of section 368(a) of
the Code or from qualifying for the "pooling of interests" method of accounting
as provided in APB 16.
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.
SECTION 6.06. NSM LISTING. Each party hereto shall use all reasonable
efforts to cause the shares of 4Health Common Stock to be issued in the Merger
to be approved for listing (subject to official notice of issuance) on the NSM
or other national securities exchange prior to the Effective Time.
SECTION 6.07. STOCK RESALE AGREEMENT. IN agrees to deliver, on or prior
to the Effective Time, the agreement, in substantially the form of Exhibit C
attached hereto, of Margarethe Irwin not to effect any sales of the 4Health
Common Stock except in compliance with Rule 144 and upon her shares becoming
registered under the Securities Act not in excess of the volume limitations
specified in Rule 145(d) promulgated under the Securities Act. Thereafter,
affiliates of the IN will continue to be subject to the requirements of Rule 145
and Rule 144 as provided therein.
SECTION 6.08. NO INTERFERENCE. Pending the Closing, neither party shall
take any action which would unreasonably be expected to interfere with the
business or operations of the other.
SECTION 6.09 FORM D FILING. At or immediately after the Closing, 4Health
shall file with the Commission an appropriately completed, dated and executed
Form D reflecting the issuance of the Merger Consideration.
ARTICLE VII
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) 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.
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(b) SECURITIES LAWS. The Proxy Materials shall have been cleared by
the Staff of the Commission for mailing to 4Health stockholders.
(c) STOCKHOLDER APPROVAL. The Merger, this Agreement and the
consummation of the transactions contemplated hereby shall have been approved
and adopted upon written consent or by the requisite vote of the stockholders of
IN and 4Health, respectively.
(d) GOVERNMENTAL APPROVALS. All approvals, waivers and/or consents
required to be issued by any Governmental Entity or otherwise respecting the
Merger, this Agreement and the consummations of the transactions contemplated
hereby shall have been timely obtained.
(e) PROMISSORY NOTES. 4Health shall have executed and delivered
three substantially identical promissory notes each in the principal amount of
$210,000 and each substantially in the form of Exhibit D hereto payable to the
respective order of Messrs. Charles Paz, Roy Dahlen and Ken Bodger.
(f) INDEMNITY AGREEMENTS. The officers and directors of 4Health who
shall be in office immediately after the Closing shall each receive an Indemnity
Agreement executed and delivered by 4Health and dated the Closing Date, each in
substantially the form of Exhibit E.
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 IN and Irwin 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 IN and Irwin, dated the Closing
Date, to such effect.
(b) AGREEMENTS AND COVENANTS. IN and Irwin 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, including,
without limitation, the receipt of the approval and adoption by the requisite
vote of the IN stockholders of the Merger, this Agreement and the consummation
of the transactions contemplated thereby. 4Health shall have received a
certificate of the President and the Chief Financial Officer of IN and Irwin,
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
IN or any of its subsidiaries having or
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reasonably likely to have, individually or in the aggregate, an IN Material
Adverse Effect. 4Health shall have received a certificate of the President and
the Chief Financial Officer of IN, 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 IN, which imposes any condition or restriction upon 4Health or the
business or operations of IN which, in the reasonable business judgment of
4Health, would be materially burdensome in the context of the transactions
contemplated by this Agreement.
(e) IN COUNSEL'S OPINION. 4Health shall have received from Gay L.
Harwin, Esq., counsel to IN, a favorable opinion dated the Closing Date in form
and substance reasonably satisfactory to 4Health and its counsel.
(f) WITHHOLDING. IN 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.
(g) COMFORT LETTER. 4Health shall have received a letter from Arthur
Anderson LLP, dated as of a date within five days of the Closing Date and in a
form reasonably satisfactory to 4Health, 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 financial
statements prepared by IN and inquiries of officers of IN 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 financial statements furnished to 4Health
in connection herewith were not prepared in accordance with generally accepted
accounting principles and practices applied on a consistent basis, (ii) during
the period from September 30, 1997 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 IN, and (iii) the Merger should not
qualify for the "pooling of interests" method of accounting as provided in APB
16.
(h) DISSENTERS' RIGHTS. No dissenters' rights have been asserted by
any IN stockholders.
(i) IN FINANCIAL STATEMENTS AND BALANCE SHEET. IN shall have
furnished 4Health with the IN Financial Statements and IN Balance Sheet, each
certified by IN's independent auditors, and the IN Disclosure Schedule at least
10 days prior to the Closing Date which shall be reasonably satisfactory in form
and substance to 4Health.
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(j) EMPLOYMENT AGREEMENT. 4Health shall have executed and delivered
to R. Lindsey Duncan at the Closing an Employment Agreement, dated the Closing
Date, in substantially the form of Exhibit F.
(k) NSM LISTING. The shares of Common Stock issued in the Merger
shall have been listed for trading on the NSM.
SECTION 7.03 ADDITIONAL CONDITIONS TO OBLIGATIONS OF IN. The obligations
of IN 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 IN, 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). IN 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. IN 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. IN 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 IN, to the continuing operation of the current or future business of
4Health, which imposes any condition or restriction upon IN or the business or
operations of 4Health which, in the reasonable business judgment of IN, would be
materially burdensome in the context of the transactions contemplated by this
Agreement.
(e) SSB&B OPINION. IN shall have received from Messrs. Satterlee
Stephens Burke & Burke LLP, counsel to 4Health, a favorable opinion dated the
Closing Date, in form and substance reasonably satisfactory to IN and its
counsel. In rendering their opinion, Messrs.
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Satterlee Stephens Burke & Burke LLP shall be entitled to rely on the opinion of
Utah counsel as to matters involving Utah Law.
(f) COMFORT LETTER. IN shall have received a letter from Arthur
Anderson LLP, dated as of a date within five days of the Closing Date and in a
form reasonably satisfactory to IN. 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 4Health's Quarterly Report on Form 10-Q for the third
quarter ended September 30, 1997 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 4Health's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and (ii) except as may have been disclosed in the
4Health Disclosure Schedule, during the period from September 30, 1997 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.
(g) 4HEALTH DISCLOSURE SCHEDULE. 4Health shall have furnished IN
with the 4Health Disclosure Schedule which shall be reasonably satisfactory in
form and substance to IN.
(h) EMPLOYMENT AGREEMENT. 4Health shall have executed and delivered
to Klee Irwin at the Closing an Employment Agreement, dated the Closing Date, in
substantially the form of Exhibit G.
(i) NSM LISTING. The shares of Common Stock issued in the Merger
shall have been listed for trading on the NSM.
(j) RESIGNATIONS. 4Health shall have received the resignations of
Cheryl Wheeler, Steven B. Beckman and Rockwell Schutjer as directors of 4Health,
effective on or prior to the Effective Time.
ARTICLE VIII
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 IN and 4Health:
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(a) by mutual consent of 4Health and IN;
(b) by 4Health, upon a material breach of any representation,
warranty, covenant or agreement on the part of IN set forth in this Agreement,
or if any representation or warranty of IN 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
February 15, 1998 (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 IN, 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, (a) or Section 7.03(b)
of this Agreement, as the case may be, would be incapable of being satisfied by
February 15, 1998 (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 IN, 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; or
(e) by either 4Health or IN, if the Merger shall not have been
consummated before February 15, 1998; provided, however, that this Agreement may
be extended by written notice of either 4Health or IN to a date not later than
March 6, 1998, if the Merger shall not have been consummated as a direct result
of IN or 4Health having failed by February 15, 1998 to receive all required
regulatory approvals or consents with respect to the Merger;
(f) by 4Health or IN, if this Agreement and the Merger shall fail to
be approved and adopted by the requisite numbers of stockholders of IN and
4Health in accordance with California and Utah Laws and the requirements of the
NSM or NASD.
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 IN to the other and all
rights and obligations of any party hereto shall cease, except that nothing
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herein shall relieve any party of any liability for any material 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 at any time prior to the Effective Time; provided, however, that, after
approval of the Merger by the stockholders of IN and 4Health, no amendment,
which under applicable Law may not be made without the approval of the
stockholders of IN or 4Health, may be made without such approval, and no
amendment, which under the applicable rules of the NSM or NASD, may not be made
without the approval of the stockholders of IN or 4Health, 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; 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 4Health.
(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 solicitation of stockholder approvals and all
other matters related to the consummation of the transactions contemplated
hereby.
(c) IN agrees that if this Agreement is terminated pursuant to:
(i) Section 8.01(b) and such termination is the result of a
wilful breach of any representation, warranty, covenant or agreement of IN
contained herein; or
(ii) Section 8.01(f) and such termination is the result of the
failure of IN to secure the requisite stockholder consent to the Merger and this
Agreement; then IN shall pay
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to 4Health as liquidated damages an amount equal to $200,000, which amount is
inclusive of all of 4Health's Expenses.
(d) 4Health agrees that if this Agreement is terminated pursuant to
Section 8.01(c) and such termination is the result of a wilful breach of any
representation, warranty, covenant or agreement of 4Health contained herein;
then 4Health shall pay to IN as liquidated damages an amount equal to $200,000,
which amount is inclusive of all of IN's Expenses.
(e) 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 IN or 4Health, as the case may be.
ARTICLE IX
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 3.23, 6.02, 6.04 and 6.07 shall survive the Effective Time
and those set forth in Sections 5.05(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 facsimile transmission to the
telecopier number specified below (to be followed promptly by personal or air
courier delivery or mailing as hereinafter provided):
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(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 IN or Irwin, to:
10549 W. Jefferson Blvd.
Culver City, CA 90232
Attn: Mr. Klee Irwin
Facsimile Number: (310) 202-9454
with copy to: Law Offices of Gay L. Harwin
10940 Wilshire Boulevard, Suite 1600
Los Angeles, CA 90024
Attn: Gay L. Harwin, Esq.
Facsimile Number: (310) 443-4121
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 IN 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, IN 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.
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(c) "business day" means any day other than a day on which banks in
the State of Colorado and/or the State of California 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 IN 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 person 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 IN, 4Health, or any other
person, means any corporation, partnership, joint venture or other legal entity
of which IN, 4Health 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.
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SECTION 9.06. ENTIRE AGREEMENT. Except as provided in that certain
Agreement respecting a dietary supplement product entitled "PhenSafe", this
Agreement (together with the Exhibits, the IN Disclosure Schedule and the
4Health Disclosure Schedule) constitutes the entire agreement of the parties,
and supersedes all prior agreements and undertakings, including that certain
Letter of Intent dated October 13, 1997, both written and oral, among the
parties or between any of them, with respect to the subject matter hereof.
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. 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 9.10. 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 9.11. 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.
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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:
------------------------------------
Name R. Lindsey Duncan
Title: President
IRWIN NATURALS
By:
------------------------------------
Name: Klee Irwin
Title: President
---------------------------------------
Klee Irwin
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APPENDIX B
ARTICLES OF MERGER
OF
IRWIN NATURALS
(A CALIFORNIA CORPORATION)
WITH AND INTO
4HEALTH, 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 Irwin Naturals, a California
corporation, with and into 4Health, Inc., a Utah corporation, and changing the
name of the surviving corporation to "Irwin Naturals/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) Irwin Naturals ("Irwin Naturals"), which is incorporated
under the laws of the State of California.
(b) 4Health, Inc. ("4Health"), which is incorporated under the
laws of the State of Utah.
2. 4Health shall continue in existence after the merger as the
surviving corporation.
3. The articles of incorporation and bylaws of 4Health, shall, on
the merger becoming effective, be and constitute the articles of incorporation
and bylaws of the surviving corporation with the following amendments:
(a) Article I of the Articles of Incorporation of 4Health shall
be amended to read in its entirety as follows:
"The name of the Corporation shall be: Irwin
Naturals/4Health, Inc."
<PAGE>
(b) The first sentence of Article III of the Articles of
Incorporation of 4Health shall be amended to read as follows:
"The Corporation shall have the authority to issue an
aggregate of 55,000,000 shares, of which 5,000,000 shares
shall be preferred stock, $0.01 par value ("Preferred
Stock"), and 50,000,000 shares shall be common stock, $0.01
par value ("Common Stock")."
(c) Article VII of the Articles of Incorporation of 4Health
shall be amended to read in pertinent part as follows:
"B. Until after ________, 2003 [being the fifth anniversary
of the Effective Time], 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 five directors and,
thereafter, such larger or lesser number as may be
determined by the affirmative vote of a majority of the
outstanding shares of voting capital stock then entitled to
vote generally in the election of directors, voting together
as a single class."
"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 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 2001; each initial director in
Class II shall hold office until the annual meeting of
stockholders in 2000; 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 C., each director shall serve until his
successor is duly elected and qualified or until his death,
resignation, or removal."
"D. Until after ________, 2003 [being the fifth anniversary
of the Effective Time], the number of directors may be
increased or decreased within the limits above prescribed by
the affirmative vote at least of eighty percent (80%) of the
outstanding shares of voting capital stock of the
Corporation then entitled to vote generally in the election
of directors, voting together as a single class, and,
thereafter, the number of directors may be so increased or
decreased within the limits above prescribed by a majority
vote of the directors. In the event of any increase or
decrease in the authorized
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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. Until after ________, 2003 [being the fifth anniversary
of the Effective Time], 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 at least
three quarters of the remaining directors then in office
(and not by stockholders), even though less than a quorum of
the board of directors, from among one or more nominees
designated by the Executive Committee of the board of
directors (acting in its capacity as a nominating committee
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 in
which there is a vacancy which is being filled by such
elected director."
"F. Until after ________, 2003 [being the fifth
anniversary of the Effective Time], directors may be removed
from office with or without cause upon the affirmative vote
of at least eighty percent (80%), and, thereafter, at least
a majority, of the outstanding shares of the voting capital
stock of the Corporation then entitled to vote generally in
the election of directors, voting as a single class."
"G. Except as expressly provided herein or in the Bylaws of
the Corporation to the contrary, the board of directors
shall have authority to adopt, amend, or repeal Bylaws,
including the right to adopt, amend, or repeal Bylaws fixing
or increasing their compensation, by the affirmative vote of
at least three quarters of the directors then in office."
"H. Until after __________, 2003 [being the fifth
anniversary of the Effective Time], any amendment, change,
or repeal of this Article VII or any provision hereof shall
require the affirmative vote of the holders of at least
eighty percent (80%), and, thereafter, at least a majority,
of the outstanding shares of the voting capital stock of the
Corporation then entitled to vote generally in the election
of directors, voting as a single class."
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<PAGE>
(d) Article X of the Articles of Incorporation of 4Health shall
be amended to read in its entirety as follows:
"No action required or permitted to be taken at 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 unless at least three quarters
of the incumbent directors authorize the Corporation to take
action upon such written consent. Upon receipt of such
authorization, 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 or by the Bylaws of the
Corporation 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 the vote of
at least three quarters of the incumbent directors, 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. As used herein,
the term "incumbent directors" means any directors who were
directors prior to the time that the relevant action is
required or permitted to be taken by the board of directors.
Until after __________, 2003 [being the fifth anniversary of
the Effective Time], any amendment, change, or repeal of
this Article X or any provision hereof shall require the
affirmative vote of the holders of at least eighty percent
(80%), and, thereafter, at least a majority, of the
outstanding shares of the voting capital stock of the
Corporation then entitled to vote generally in the election
of directors, voting as a single class."
(e) Article II - Section 2.2 of the Bylaws of 4Health shall be
amended to insert the words "..., the Chairman of the Board ..." after
the words "... called by the president..."
(f) Article II - Section 2.17 of the Bylaws of 4Health shall be
amended by inserting the words "... the Executive Committee of ..."
after the words "... made by ..." and before the words "... or by any
shareholder ..." in the second line.
(g) Article III - Section 3.2 of the Bylaws of 4Health shall be
amended
4
<PAGE>
to delete therefrom the first five sentences and substitute therefor
the following:
"Until after ________, 2003 [being the fifth anniversary of
the Effective Time], 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 five directors and,
thereafter, such larger or lesser number as may be
determined by the affirmative vote of a majority of the
outstanding shares of voting capital stock then entitled to
vote generally in the election of directors, voting together
as a single class. 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 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 2001;
each initial director in Class II shall hold office until
the annual meeting of stockholders in 2000; 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 C., each director
shall serve until his successor is duly elected and
qualified or until his death, resignation, or removal."
(h) Article III - Section 3.4 of the Bylaws of 4Health shall be
amended to insert the words "..., the Chairman of the Board..." after
the words "... of the president ..." in the second line thereof.
(i) Article III - Section 3.13 of the Bylaws of 4Health shall be
amended to insert the following words as a lead in:
"Except as otherwise provided in Section 3.14 hereof:..."
(j) Article III - A new Section 3.14 shall be added to Article
III of the Bylaws of 4Health to read in its entirety as follows:
"Section 3.14 EXECUTIVE COMMITTEE.
(a) CREATION. The board of directors shall create an
Executive Committee consisting of three members: the Chairman of the
Board, the president, and one other independent, non-employee Class
III director. The Committee shall have all of the powers of the board
when the board is not in session, except for the right to exercise any
of the following powers which shall only be exercisable by the board:
5
<PAGE>
1. To adopt an annual budget for the Corporation;
2. To issue securities;
3. To sell a material portion of the assets of the Corporation;
4. To change the business of the Corporation;
5. To incur any indebtedness by the Corporation other than
trade payables incurred in the ordinary course;
6. To authorize any merger, consolidation or other business
combination or any recapitalization or reclassification of
any class of securities of the Corporation;
7. To declare or pay dividends in respect of any securities of
the Corporation;
8. To amend the Corporation's Articles of Incorporation or
Bylaws; or
9. To authorize any other matter which under applicable law is
required to be determined by the Board of Directors.
(b) REQUIRED PROCEDURES. In addition to and in
substitution of the relevant provisions of Section 3.13(c), the
Executive Committee shall adopt and comply with the following special
procedures:
(i) A meeting of the Executive Committee may be called
on twenty four (24) hours notice orally (to be followed immediately
with written or facsimile notice) or in a writing personally delivered
or sent by facsimile to each of the members thereof.
(ii) A quorum for the transaction of business by the
Executive Committee at any meeting shall require the presence, in
person or by means of conference telephone call, wherein all the
participants can hear each other, of both the Chairman of the Board
and the President, either of whom may object to the transaction of any
business at such meeting, in which case such meeting shall not be
deemed duly convened.
(c) REVIEW OF DECISIONS. Any decision of the Executive
Committee shall be subject to review and revision by the Board of
Directors at a regular meeting of the Board or at any special meeting
convened by the Chairman of the Board or the President.
(d) AMENDMENT. Until after ______, 2003 [being the fifth
anniversary of the Effective Time], the provisions of this Section
3.14 may be amended or repealed only upon receipt of the affirmative
vote of at least eighty percent (80%) of the outstanding shares of
voting capital stock of the Corporation then entitled to vote
generally on the election of directors, voting together as a single
class, and, thereafter, by a majority vote of the directors."
6
<PAGE>
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 4Health, with _____________ shares voting
in favor of the merger, ___ shares voted against, and ___ shares abstaining;
2. By the holders of the __________ issued and outstanding shares of
scommon stock, no par value, of Irwin Naturals, with _____________ shares voting
in favor of the merger, ___ against, and ___ abstaining; and
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 __________, 1998.
4HEALTH, INC.
Attest:
By By
----------------------------- --------------------------------------
Secretary R. Lindsey Duncan, President
IRWIN NATURALS
Attest:
By By
----------------------------- --------------------------------------
Secretary Klee Irwin, President
7
<PAGE>
ATTACHMENT TO ARTICLES OF MERGER
PLAN OF MERGER
THIS PLAN OF MERGER (the "Plan") dated as of the _____ day of _______,
1998, is entered into by and between IRWIN NATURALS, a California corporation
("IN"), and 4HEALTH, INC., a Utah corporation ("4Health," and together with IN,
the "Constituent Corporations").
RECITALS
WHEREAS, 4Health is a corporation duly organized and existing under the
laws of the State of Utah, having authorized capital of (i) 30,000,000 shares of
common stock, par value $.01 per share (the "4Health Common Stock"), of which,
as of the date hereof, ___________ shares are issued and outstanding, 50,000
shares are held in treasury by 4Health and up to ____________ shares are
reserved for future issuance pursuant to stock options and warrants; and (ii)
5,000,000 shares of series preferred stock, par value $1.00 per share, none of
which are issued and outstanding as of the date hereof;
WHEREAS, IN is a corporation duly organized and existing under the laws of
the State of California, having an authorized capital of 100,000 shares of
common stock (the "IN Common Stock"), of which ___________ shares are issued and
outstanding as of the date hereof;
WHEREAS, IN, 4Health and Klee Irwin have entered into an Agreement and Plan
of Merger (the "Merger Agreement") dated as of December 24, 1997, setting forth
certain representations, warranties, covenants, agreements, and conditions in
connection with the merger of IN with and into 4Health (the "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 IN with and into 4Health, with 4Health as the surviving corporation,
after changing its name to "Irwin Naturals/4Health, Inc.," all as authorized by
the statutes of the States of California and Utah.
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 the Merger and the manner and basis of causing the shares of
IN Common Stock to be converted into shares of 4Health 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:
<PAGE>
ARTICLE I
MERGER AND NAME OF SURVIVING CORPORATION
On the Effective Time (as hereinafter defined) of the Merger, IN shall
cease to exist separately and IN shall be merged with and into 4Health, which is
hereby designated as the "Surviving Corporation". The name of the Surviving
Corporation shall be "Irwin Naturals/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 Time of the Merger:
(i) IN shall be merged into 4Health to form a single
corporation, and 4Health shall be designated herein as the Surviving
Corporation.
(ii) The separate existence of IN 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 choses 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.
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<PAGE>
(b) On the Effective Time of the Merger, the board of directors of
the Surviving Corporation shall consist of the persons set forth on
Schedule 1.05 to the Merger Agreement, 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 California.
(c) On the Effective Time of the Merger, the officers of the
Surviving Corporation shall be as set forth on Schedule 1.05 to the Merger
Agreement.
(d) If on the Effective Time of the Merger, one or more vacancies
shall exist in the board of directors or in any of the offices of the
Surviving Corporation, any such vacancies 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 immediately prior
to the Effective Time of the Merger shall continue to be outstanding
immediately after the Effective Time of the Merger.
(b) Each share of IN Common Stock outstanding on the Effective Time
of the Merger shall, without any action on the part of the holder thereof,
be converted into the right to receive 241.37931 shares of 4Health Common
Stock (the "Exchange Ratio"), which shall be upon such conversion, validly
issued and outstanding, fully paid, and nonassessable. No fractional
shares or certificates or scrip evidencing fractional shares of 4Health
Common Stock shall be issued in the Merger or upon the surrender for
exchange of certificates evidencing IN Common Stock, and the Exchange Ratio
shall be appropriately adjusted if necessary so that only whole shares of
4Health Common Stock are issued in the Merger to IN stockholders.
(c) All shares of IN Common Stock held by IN as treasury stock shall
be cancelled and of no further force and effect.
(d) After the Effective Time of the Merger, each holder of a
certificate which prior thereto represented outstanding shares of IN Common
Stock shall be entitled, on surrender thereof to the transfer and exchange
agent of 4Health, to receive in exchange therefor a certificate or
certificates representing the number of whole shares of 4Health Common
Stock to which the holder is entitled as set forth in subsection (b) above.
Until
3
<PAGE>
so surrendered, each such outstanding certificate shall for all purposes
evidence the ownership of the shares of 4Health Common Stock into which the
shares of IN Common Stock shall have been converted; PROVIDED THAT,
dividends or other distributions which are payable with respect to such
shares of 4Health 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 4Health
Common Stock. On surrender, such holder shall be entitled to receive the
dividends or other distributions previously withheld, without payment of
interest.
(e) The shares of 4Health Common Stock into which shares of the IN
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 IN.
(f) If any certificate for shares of 4Health 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 4Health any transfer or
other taxes required by reason of the issuance of a certificate of shares
of 4Health 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 of 4Health that such tax has been paid
or is not payable.
ARTICLE IV
ARTICLES OF INCORPORATION AND BYLAWS
1. The articles of incorporation of 4Health, 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 4Health, as amended by the Articles of Merger, shall, on
the Merger becoming effective, be and constitute the bylaws of the Surviving
Corporation until amended in the manner provided by law.
4
<PAGE>
ARTICLE V
APPROVAL AND EFFECTIVE TIME 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.
(b) This Plan, or Articles of Merger in the form required, executed
in accordance with the laws of the State of Utah shall be filed with the
Division of Corporations and Commercial Code of the State of Utah.
The date and time on which such actions are completed and such Merger is
effected is herein referred to as the "Effective Time."
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 IN acquired or to be acquired by, or as
a result of, the Merger, the officers and directors of IN 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 States of California and Utah.
5. This Plan cannot be altered or amended, except pursuant to an
instrument in writing signed on behalf of the parties hereto.
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<PAGE>
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, the president and secretary of
4Health and IN do hereby execute this Plan of Merger as of the date first above
written.
4HEALTH, INC.
a Utah corporation
Attest:
By By
------------------------------- -------------------------------
Secretary R. Lindsey Duncan
President
IRWIN NATURALS
a California corporation
Attest:
By By
------------------------------- -------------------------------
Secretary Klee Irwin
President
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ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
proxy statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
and
Los Angeles, California,
June 19, 1998.
<PAGE>
4HEALTH, INC.
5485 CONESTOGA COURT
BOULDER, COLORADO 80301
PROXY FOR THE SPECIAL MEETING IN LIEU OF ANNUAL MEETING
OF SHAREHOLDERS TO BE HELD
JUNE 30, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints R. LINDSEY DUNCAN and CHERYL WHEELER and
each of them, attorneys and proxies, with full power of substitution, and
authorizes each of them to vote all shares of Common Stock of 4HEALTH, INC., a
Utah corporation ("4Health"), held of record by the undersigned on May 26, 1998,
at the Special Meeting in Lieu of Annual Meeting of Shareholders to be held on
June 30, 1998, and any adjournments thereof, hereby revoking all previous
proxies, with all powers the undersigned would possess if present, on all
matters mentioned in the Notice of Special Meeting dated June 19, 1998, as
follows:
INSTRUCTIONS: MARK ONLY ONE BOX FOR EACH NUMBERED MATTER
The following matters have been proposed by the Company:
(1) To approve the merger (the "Merger") of Irwin Naturals, a California
corporation ("IN"), with and into 4Health, Inc., pursuant to the terms of the
Amended and Restated Agreement and Plan of Merger dated as of May 22, 1998 (the
"Merger Agreement"), among 4Health, Inc., IN and Mr. Klee Irwin, Chief Executive
Officer and President of IN, and the consummation of the transactions
contemplated thereby, including, in connection therewith, the conversion, at the
Effective Time (as defined in the Merger Agreement) of the Merger, of the shares
of common stock, no par value, of IN ("IN Common Stock") issued and outstanding
immediately prior to the Effective Time, into the right to receive an aggregate
of 15,750,000 shares of the common stock, par value $.01 per share, of 4Health
("4Health Common Stock"), with the effect that each share of outstanding IN
Common Stock will be converted into 241.37931 shares of 4Health Common Stock,
subject to adjustment upon any change in the number or class of the outstanding
shares of IN Common Stock or 4Health Common Stock by reason of any stock
dividend, subdivision, reclassification, conversion, recapitalization, split,
combination or exchange of shares.
/ / FOR / / AGAINST / / ABSTAIN
(2) Subject to the consummation of the Merger, to elect Messrs. R. Lindsey
Duncan, Klee Irwin, Anthony Robbins, Clarke Keough and Jonathon Diamond, to the
Board of Directors of 4Health; and if the Merger is not consummated for any
reason, to re-elect Ms. Cheryl Wheeler to the Board of Directors of 4Health.
/ / FOR ALL NOMINEES listed / / WITHHOLD AUTHORITY to vote
nominees listed below for all nominees listed below
(except as marked to the contrary)
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK THE
BOX NEXT TO THE NOMINEE'S NAME BELOW.
/ / R.L. DUNCAN / / K. IRWIN / / A. ROBBINS
/ / C. KEOUGH / / J. DIAMOND / / C. WHEELER
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(3) Subject to the consummation of the Merger, to amend the Articles of
Incorporation and Bylaws of 4Health 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, nomination for and removal of directors
and other management related matters.
/ / FOR / / AGAINST / / ABSTAIN
(4) To ratify Arthur Anderson LLP, independent public accountants, as 4Health's
independent auditors for the year 1998.
/ / FOR / / AGAINST / / ABSTAIN
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Special Meeting.
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" ITEMS 1, 2, 3 AND 4.
Please mark, date, sign and return this Proxy promptly, using the enclosed
envelope.
Dated:____________________, 1998
Month Day
Signature:_________________________________
Signature:_________________________________
Please sign exactly as name appears hereon,
indicating official position or representative
capacity, if any. If shares are held jointly,
both owners must sign.
I plan to attend the meeting.
/ / YES / / NO
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
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