-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JDdClP1Znq5iIFPpMEbRbbh55rvcYRtFflLvkgE13lMoyvDHlbiZ9KE61VZpTGLb 2Veb1qt6cyxxV5EE3klYwg== 0000912057-97-011262.txt : 19970401 0000912057-97-011262.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011262 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 4 HEALTH INC CENTRAL INDEX KEY: 0000857353 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 870468225 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18160 FILM NUMBER: 97569970 BUSINESS ADDRESS: STREET 1: 5485 CONESTGA COURT CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3035466306 MAIL ADDRESS: STREET 1: 5485 CONESTOGA COURT CITY: BOULDER STATE: CO ZIP: 80301 FORMER COMPANY: FORMER CONFORMED NAME: SURGICAL TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PINNACLE ENVIRONMENTAL INC DATE OF NAME CHANGE: 19920220 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO 4HEALTH, INC. (Exact name of registrant as specified in its charter) Utah 87-046822 ------------------------ ----------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 5485 Conestoga Court Boulder, Colorado 80301 (Address of principal executive offices) Registrant's telephone number: (303) 546-6306 Commission file number 0-18160 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ___X___ No: _______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 21, 1997, 11,382,801 shares of the registrant's Common Stock, par value $0.01, were outstanding. The aggregate market value of the Common Stock held by non-affiliates of the registrant (i.e., excluding shares held by executive officers, directors, and control persons as defined in Rule 405) on that date was $30,054,101 (computed based upon the closing price for the Common Stock on the Nasdaq National Market on that date.) DOCUMENTS INCORPORATED BY REFERENCE The registrant's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 6, 1997 (the "Proxy Statement") is incorporated by reference in Part III of this Form 10-K to the extent stated herein. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as a part hereof. 1 4HEALTH, INC. INDEX TO FORM 10-K Page PART I. ---- - ------- Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II. - -------- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure PART III - -------- Item 10. Directors of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV - ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Signature Page 2 PART I This Annual Report on Form 10-K 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 Annual Report, including, without limitation, those regarding the Company's financial position, business, marketing and product introduction and development plans and objectives of management for future operations, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed under "Risks Related to the Business of 4Health," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in the Annual Report. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company, are expressly qualified in their entirety by the Cautionary Statements. ITEM 1. BUSINESS General 4Health, Inc.("4Health" or the "Company"), 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, 1997, 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.) The Company 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. The Company 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 the Company's founder and chief executive officer, R. Lindsey Duncan, a nutritionist certified by the National Institute of Nutritional Education. 3 4Health's products that are sold through health food stores, under the proprietary brand name "Nature's Secret-Registered Trademark-", accounted for approximately 90% of 4Health's 1996 total sales. The Company also has a proprietary line of products that it sells to health care practitioners under the "Harmony Formulas-Registered Trademark-" label. Sales of Harmony Formulas-Registered Trademark- comprised approximately 6% of the Company's total sales in 1996. In the Fall of 1996, 4Health introduced a line a products directed at the mass food and drug market. These products are currently marketed under the name "Lindsey Duncan's Home Nutrition.-TM-" Sales from the Lindsey Duncan's Home Nutrition-TM- line accounted for 4% of 4Health's total sales in 1996. Manufacturing and Supply Sources All of 4Health's products are manufactured by third party suppliers pursuant to the Company'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 the Company's criteria. All of the companies that manufacture for 4Health are required to meet strict manufacturing standards required by the FDA, and the Company believes that it benefits from such regulation in the overall quality of the products manufactured by such regulated entities. To date, the Company 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 the Company'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, the Company utilizes six 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 the Company'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, the Company also began marketing a distinct new line of products to the mass food and drug market. 4 Products are introduced to retail outlets through advertising of 4Health products in national nutrition magazines, trade magazines, and the Company'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, the Company'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 94 employees, including 4 executive officers, 27 individuals in general administrative, 38 individuals in sales and marketing, 21 individuals in operations, and 5 individuals in research and development. The Company'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. Risks Related to the Business of 4Health Limited Operating History Since 4Health was organized in February of 1993, it has introduced a number of its products and established initial marketing outlets through health food stores and health care providers. The Company anticipates to substantially expand current distribution channels, introduce new products, enter new markets, and in general to expand its activities and operations. Because of the nature of any such expansion, the accompanying results of operations for previous periods may not necessarily be indicative of the results of operations in the future. While 4Health has been successful in expanding its markets and distributors to date, it has been in operation for a limited amount of time, and there can be no assurance that it will be able to successfully continue to expand in the future. Government Regulations The processing, formulation, packaging, labeling and advertising of 4Health's products are subject to regulation by one or more agencies. Although Congress has recently recognized the potential impact of dietary supplements in promoting good health by enacting the Dietary Supplement Health Education Act of 1994 ("DSHEA") which severely limits the Food and Drug Administration's ("FDA")jurisdiction in regulating dietary supplements, there is no way to predict the potential effect of DSHEA. Further, because of the technical requirements imposed by DSHEA, it is 5 difficult for any company manufacturing or making dietary supplements to remain in strict compliance. The FDA has recently proposed regulations with the purpose of implementing DSHEA and proposals have been made to modify or change the provisions of DSHEA. It is impossible to predict whether those regulations or proposed changes will become law or the effect that such regulations or proposed changes, if implemented, will have on the business and operations of 4Health. Expanded 4Health Marketing Effort 4Health has been expanding marketing activities to increase the level of awareness of the Company's products, to increase the number of specialty health food stores, health care providers and food, drug and mass merchandisers that carry its products, and to introduce new products into distribution channels. 4Health will devote management and financial resources to this marketing expansion, and there can be no assurance that this marketing effort will result in sufficient increases in revenues to overcome related costs or result in a financial return to 4Health. Concentration of Customers 4Health received approximately 30% of its revenues from a single customer during 1996, General Nutritional Centers ("GNC"). 4Health does not have any long-term contractual relationship with GNC or any other customers. The loss of this customer would have a serious adverse impact on the business of 4Health. (See "Item 3. Legal Proceedings" herein.) Reliance on Limited Number of Products 4Health currently offers approximately 20 products and derived more than 35% of its revenues during 1996 from the sale of one product, Ultimate Cleanse-TM-. As a result of the limited number of products from which the Company derives its revenue, the risks associated with 4Health's business increase since a decline in market demand for one or more products, for any reason, could have a significant adverse impact on the Company. Competition Competition in the nutritional supplement industry is vigorous with a large number of businesses engaged in the industry. In connection with an anticipated expansion into the food, drug and mass merchandise market, 4Health will face competition from vitamin and other health related products that will be competing for the same shelf space. Many of the competitors have established reputations for successfully developing and marketing nutritional supplement products. Many of such companies have greater financial, managerial, and technical resources than 4Health, which may put the Company at a competitive disadvantage. If 4Health is not successful in competing in those markets, it may not be able to recognize its business objectives. 6 Dependence on Management 4Health is dependent on its management, particularly R. Lindsey Duncan, founder and chief executive officer, for all of its business activities, including the development of new products and the advancement of 4Health's identity and recognition in the nutritional supplement industry. Except for an intellectual property and non-compete agreement with Mr. Duncan, 4Health has no long-term agreement with any executive officer or key employee. No Long-Term Contracts with Manufacturers or Distributors 4Health purchases all of its products from third-party manufacturers pursuant to purchase orders issued from time to time by 4Health but without any long-term manufacturing agreements. In the event that a current manufacturer is unable to meet the Company's manufacturing and delivery requirements at some time in the future, 4Health may suffer interruptions of delivery of certain products while it establishes an alternative source. Customer Guaranty of Satisfaction; Right of Return In an effort to build customer confidence and satisfaction, 4Health warrants satisfaction and grants to its customers the right of return for full credit any product that is unsatisfactory to the customer or that is shelf-worn or stale merchandise. Although the Company has had this policy since its inception and experienced product returns of only approximately 3% of gross sales in 1996, there can be no assurance that such a policy will not result in additional product returns in the future as 4Health expands and enters new markets. Potential Trademark Infringement The conduct of 4Health's business, in common with other sellers of branded consumer products, may involve from time to time potential liability for trademark infringement. The Company is engaged on a continuing basis in developing brand names for its new products, securing trademark protection for brand names and copyright protection for associated materials, policing its existing marks, and enforcing its legal rights in cases of potential infringement by third parties of its legally protected marks and copyrights. Prior to commencing advertising and sales of products under a newly developed brand name, 4Health seeks to minimize the risks of potentially infringing the rights of third parties by conducting trade and service mark searches and other inquiries in addition to filing publicly for trademark protection of the brand name and copyright protection for associated advertising materials and labeling. The Company registers for its principal product lines as well as its principal products. Notwithstanding such efforts, there can be no assurance that the Company will not suffer adverse financial consequences as a result of 7 legally established third party claims to first use of trade or service marks used by 4Health. (See "Item 3. Legal Proceedings.") ITEM 2. PROPERTIES The Company's principal offices are located at 5485 Conestoga Court, Boulder, Colorado in a Company owned building which houses all business activities other than distribution and has excess space for growth. The following table sets forth information regarding the Company's facilities: Location Size Function -------- ---- -------- Boulder, Colorado 28,000 sq. ft. Corporate headquarters Broomfield, Colorado 22,600 sq. ft. Distribution center and warehouse During fiscal year 1996, the Boulder facility was mortgaged through the previous owner. Pursuant to its terms, this mortgage was scheduled to expire on March 25, 1997. A re-financing of the Boulder facility was completed prior to that date and the new mortgage is carried by Standard Insurance Company. (See Note 3 to the Financial Statements.) 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 to satisfy growth in the foreseeable future. ITEM 3. LEGAL PROCEEDINGS In May of 1996, the Company became aware of the use of the trademark "Take Charge", for which the Company had applied for a federally registered trademark (the "Mark"), by a company in Virginia, Ultra Nutrition International, Inc. On July 3, 1996, the Company filed an action, 4Health, Inc. vs. Ultra Nutrition International, Inc. (96-2-1618), in the United States District Court for the District of Colorado for a declaratory judgment to establish the Company's right to continue using the Mark. On July 19, 1996, Ultra Nutrition International, Inc., filed an action, Ultra Nutrition International, Inc. vs. 4Health, Inc.(96-0048-C), in the United States District Court for the Western District of Virginia, alleging that the Company's use of the Mark was in violation of the rights of Ultra Nutrition International, Inc., and seeking damages relating to the use of the Mark by the Company and injunctive relief to prohibit use of the Mark by the Company. On August 9, 1996, Ultra Nutrition International, Inc., amended its complaint to add as a defendant one of the Company's customers, General Nutrition, Inc., ("GNC"). Thereafter, GNC filed a cross-claim against the Company for breach of contract and fraud, asserting its rights to damages and recission with respect to those items of product bearing the Mark which GNC had purchased from the Company. The Company tendered defense of the action to its insurance carrier, U.S. Fire, and the carrier 8 accepted the defense of the action, reserving its rights under the applicable policy. The Company answered the amended complaint, asserting that its rights to the Mark were superior to those of Ultra Nutrition International, Inc., that it acted in good faith and that no damages or other relief was available. With respect to the cross-claim of GNC, the Company filed an answer asserting that the Company did not violate any obligations toward GNC and that GNC is not entitled to any relief. On October 8, 1996, the Company entered into a negotiated settlement with Ultra Nutrition International, Inc., which involved the payment of certain funds to Ultra Nutrition International, Inc. by the Company's insurance carrier, and the immediate cessation by the Company of the use of the Mark in certain advertisements, and the cessation (after ten months) of the sale of products bearing the Mark to retailers. The settlement provides for a dismissal with prejudice of the action against the Company by Ultra Nutrition International, Inc. In February, 1997, the Company entered into a negotiated settlement with GNC which involved supplying certain 4Health products free of charge to GNC, taking back certain inventory from GNC, and abandoning certain claims brought against GNC in a separate lawsuit filed by 4Health in Colorado on January 30, 1997. In return, GNC agreed to dismiss certain of its cross-claims with prejudice and agreed to a covenant not to sue with respect to the remaining claims. As a consequence, all claims between GNC and 4Health have now been resolved. 4Health has demanded that its insurance carrier, U.S. Fire, reimburse it for the costs associated with the settlement. To date, U.S. Fire has denied any obligation to 4Health in connection with the GNC claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1996. Executive Officers of the Registrant The following table lists the names, ages, and positions of the Company's executive officers and other significant employees. - -------------------------------------------------------------------------------- Name Age Position - -------------------------------------------------------------------------------- R. Lindsey Duncan 34 Chairman of the Board, Chief Executive Officer, President Cheryl M. Wheeler 36 Secretary and Director Scott W. Lusk 39 Controller Rockwell D. Schutjer 50 Director and Director of the Surgical Technologies Division 9 R. LINDSEY DUNCAN, the founder of 4Health, is a nutritionist certified by the National Institute of Nutritional Education, an industry accrediting body. Since the mid-1980s, he has owned, operated, and been the principal nutritionist of Home Nutrition Clinic, Santa Monica, California. In January 1988, Mr. Duncan began formulating his own nutritional supplements. In 1993, he organized 4Health and contributed the nutritional supplements to it in exchange for Common Stock. Mr. Duncan is a member of the National Nutritional Foods Association, the American Herbal Products Association, and the Herb Research Foundation. CHERYL M. WHEELER, a marketing manager at the Company, coordinates Mr. Duncan's industry seminars, speeches, and other public appearance and related marketing activities. Ms. Wheeler is a nutritionist certified by the National Institute of Nutritional Education. For in excess of five years prior to her joining the Company, Ms. Wheeler was a nutritionist, a professional stuntwoman, and martial arts expert. SCOTT W. LUSK, has held the position of Controller at 4Health since September of 1995. He has fifteen years of experience in wholesale, distribution, retail sales, and computer networking. Mr. Lusk received a bachelor of science degree in accounting from the University of Northern Colorado and is a certified public accountant. ROCKWELL D. SCHUTJER, a co-founder of Surgical Technologies, Inc., has served as a director since its inception. Mr. Schutjer currently serves as Director of Surgical Technologies, a division of 4Health, Inc. Mr. Schutjer received his bachelor of science degree in business finance from the University of Utah. After the Merger, Mr. Schutjer was elected to 4Health's board of directors. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 4Health's Common Stock commenced trading on the Nasdaq National Market tier of The Nasdaq Stock Market under the stock symbol HHHH on July 16, 1996. (Prior to that date, the Company was known as Surgical Technologies, Inc. with stock trading under the symbol SGTI. The prior trading history of Surgical has not been included herein because it does not reflect the results of the merger or the changed nature of the Company's business since the merger. See Note 1. to the Financial Statements.) The range of high and low stock prices reported for the period between July 16, 1996 and the end of the fiscal year on December 31, 1996 appear in the following table: Fiscal Year Quarter High Low ----------- ------- ---- --- 1996 3rd $17.125 $5.00 1996 4th $7.375 $5.375 10 As of March 21, 1997, there were approximately 175 record holders of the Company's Common Stock. This relatively small number is probably the result of a large number of shares being held in "street name." The market price of the Company's Common Stock has fluctuated significantly in the third quarter and early in the fourth quarter of 1996 since the merger with Surgical in July 1996. The market price of Common Stock could be subject to significant fluctuations in the future based on factors such as announcements of new products by the Company or its competitors, quarterly fluctuations in the Company's financial performance, the results of the Company's marketing and sales efforts, general conditions in the dietary and nutritional supplements industry, changes in analysts' estimates of the Company's financial performance, conditions in the financial markets or other factors which are currently unforeseen by management. There can be no assurance that the market price for the Common Stock will not decline from current levels, or otherwise not be subject to significant fluctuations in the future. Dividend Policy 4Health has never paid any cash dividends. For the foreseeable future, the Board of Directors intends to retain all of the Company's earnings for use in the expansion of the Company's business. Registrar and Transfer Agent Effective February 13, 1997, 4Health terminated the services of Zions First National Bank as transfer agent for the Common Stock as well as warrant agent for the Company's warrants (stock symbol HHHHW) which are publicly traded the Nasdaq National Market tier of The Nasdaq Stock Market. 4Health has appointed as the new transfer and warrant agent American Securities Transfer and Trust, 938 Quail Street, Suite 101, Lakewood, CO, 80215-5513, telephone number (303)234-5300. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for each of the four years in the period ended December 31, 1996 (from inception on February 17, 1993) have been derived from the audited financial statements of the Company included herein ("Financial Statements".) The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and notes thereto included elsewhere in this Annual Report. Years ending December 31, from inception (February 17, 1993) (in thousands, except per share data) ------------------------------------- 11 1993 1994 1995 1996 INCOME STATEMENT DATA Net sales $ 270 $ 2,076 $10,434 $17,352 Gross profit 182 1,332 6,631 10,427 Operating (loss) income (7) (131) 1,131 (2,553) Interest expense, net (6) (5) (63) 38 ------------------------------------------- (Loss)income before income taxes (13) (136) 1,068 (2,515) Income taxes 1 (2) (360) 26 ------------------------------------------- Net (loss) income (12) (138) 708 (2,489) ------------------------------------------- ------------------------------------------- PER SHARE DATA Net (loss) income (.002) (.019) .08 (.25) Weighted average shares outstanding 6,018,680 7,334,729 8,707,214 9,896,822 Years ending December 31, ----------------------------- BALANCE SHEET DATA 1995 1996 ----------------------------- Working capital $ 2,237 $ 3,977 Total assets 5,228 9,290 Long-term debt 1,296 1,276 Shareholders' equity 3,043 6,362 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following table sets forth, for years 1994, 1995 and 1996, certain items from the Company's Statements of Operations included elsewhere herein, expressed as a percentage of net sales. Years ending December 31, -------------------------------------- 1994 1995 1996 ---- ---- ---- Net Sales 100.0% 100.0% 100.0% Cost of sales 35.9% 36.4% 39.9% ------- ------- ------- Gross Profit 64.1% 63.6% 60.1% General and administrative expenses 29.3% 14.2% 17.1% Sales and marketing expenses 39.4% 37.1% 55.4% Research and development 1.7% 1.5% 2.3% ------- ------- ------- Income (loss) from operations (6.3%) 10.8% (14.7%) Other income (expense), net (0.2%) (0.6%) 0.2% ------- ------- ------- Income (loss) before income taxes (6.5%) 10.2% (14.5%) (Provision) benefit for income taxes (0.1%) (3.4%) 0.2% ------- ------- ------- 12 Net income (loss) (6.6%) 6.8% (14.3%) ------- ------- ------- ------- ------- ------- 1996 Compared to 1995 Net sales increased $6.9 million or 66%, from $10.4 million to $17.3 million. Net sales in the Nature's Secret-Registered Trademark- brand increased $5.7 million or 58%, from $9.8 million to $15.5 million, due primarily to a large sale to a major customer. Sales of the Lindsey Duncan's Home Nutrition-TM- brand into the mass retail channel was $.7 million of new business in 1996 and net sales in the Harmony Formulas-Registered Trademark- brand increased $.3 million or 43%, from $.7 million to $1.0 million, due primarily to increased sales and marketing efforts. Gross profit increased 57% or $3.8 million from $6.6 million 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. General and administrative expenses increased 100% to $3.0 million in 1996 compared to $1.5 million in 1995. As a percent of net sales, these expenses increased 3% from 14.1% in 1995 to 17.1% in 1996. Management attributes these increases to the Company'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 18.3% from 37.1% in 1995 to 55.4% in 1996. Increased selling and advertising expenses to support the Nature's Secret and Home Nutrition brands accounted for 38% of this increase. The build-up of the outside sales forces, sales management and personnel for both brands accounted for another 35% of the increase. Selling and marketing expenses, such as television advertising and large scale demonstrations related to the large sale to a major customer explained another 23% of the increase. Research and development costs increased 178% from $.1 million in 1995 to $.4 million 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. Management expects this department to increase its expenditures again in 1997 in order to do continued research and develop new products. 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 13 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-TM- 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 same period for 1994, however, as a percentage of sales, 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%. 1994 Compared to the Period from Inception (February 17, 1993) to December 31, 1993 (fiscal 1993) Net sales increased 670% in the year ended December 31, 1994 to $2.1 million from $.3 million in the year ended December 31, 1993. 4Health attributes its growth in 1994 to rapid penetration in health food stores, an increase in new products offered and rapid acceptance of its primary product, Ultimate Cleanse. 4Health accomplished this through increasing its inside sales force. Gross profits increased 631% in 1994 to $1.3 million from $.2 million in fiscal 1993. Profit margins declined to 64.1% in 1994 from 67.6% in fiscal 1993 as a natural result of a change of product mix when new products were added in 1994. 14 General and administrative costs, sales and marketing costs, and research and development costs all increased significantly in 1994 compared to 1993 primarily as a result of building infrastructure to accommodate supporting activities to sales growth. Such 1994 activities include moving to a larger facility in the spring of 1994, increasing advertising expenditures, increasing the sales force and the accounting department, and increasing 4Health's computer and telephone facilities. Interest expense increased in 1994 as a result of adding the mortgage loan to 4Health's balance sheet in the Spring of 1994, which bore interest at 3.5%. 4Health does not believe that any recently enacted or presently pending proposed environmental legislation will have a material adverse effect on its results of operations. Certain of 4Health's products have seasonal popularity, with somewhat increased appeal in the first two quarters of each year with some decline in volume in the fourth quarter of the calendar year. The Company 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. 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. The Company believes that inflation does not have a material effect on the sale of 4Health products. Liquidity and Capital Resources In 1996, as a result of the merger with Surgical, the Company received cash and cash equivalents of $3.6 million. In 1995, the Company raised $1.5 million of cash from the net proceeds of the sale of preferred stock. In 1994, the Company raised $1.0 million of cash from the net proceeds of the sale of Common Stock. The Company has used these proceeds to finance its growth and expansion in those years. The Company's cash and cash equivalents position at December 31, 1996, was $1.1 million compared to $.9 million on December 31, 1995. The Company has working capital of $3.9 million with a 3.7 to 1 working capital ratio at December 31, 1996. Inventories were valued at $2.5 million at December 31, 1996 as compared to $1.0 million at December 31, 1995, which represents a 150% increase or $1.5 million. The growth in inventories is due primarily to a 15 build-up for anticipated future sales growth, entry into the mass market distribution channel and inventory acquired in the merger with Surgical. The Company has a deferred tax asset that increased 912% to $.3 million at December 31, 1996. This increase is due primarily to an increase in accrued liabilities. Notes receivable increased $.2 million to $.3 million on December 31, 1996 from $.1 million on December 31, 1995 as a result of the merger with Surgical. Capital expenditures for the year ended December 31, 1996 were $.6 million compared to $.7 million in 1995. For the year ended December 31, 1994, capital expenditures were $1.6 million of which $1.3 million was related to the purchase of land and its corporate headquarters building. The Company borrowed $1.3 million for the purchase of these facilities and the note including principal and any unpaid interest was due March 25, 1997. On February 20, 1997, the Company refinanced this debt for an additional five years. Accordingly, this note will be due on February 20, 2002 including any unpaid principal and interest. Other assets, totaling $1.0 million at December 31, 1996, consists primarily of goodwill related to the merger with Surgical. Accounts payable and accrued liabilities increased $.6 million and is related primarily to amounts due suppliers for inventory, unpaid advertising and promotion costs, and unpaid legal fees. An additional $12.5 million in cash could be generated for the Company if Common Stock Purchase Warrants issued to former Surgical stockholders are exercised. A total of 1,135,554 Warrants were issued with an exercise price of $11.00. These Warrants expire 18 months from the issuance date of July 15, 1996 and the likelihood of them being exercised is dependent on the performance of the Company's Common Stock. The likelihood of exercise will increase as the stock price exceeds $11.00 per share. Currently, the stock is trading at approximately $5.50 per share. The Company's future capital requirements will depend on many factors, including the nature and timing of orders from customers, the expansion of sales and marketing efforts, costs associated with entering into new channels of distribution, the ability of the Company to increase sales beyond the break even point and the status of competitive products. Management believes that its working capital may not be sufficient to fund anticipated sales growth over the next 12 months. Accordingly, management will seek sources of additional capital via financial institution borrowing or sale of debt or equity securities or a combination thereof. While Management believes additional capital will be available, there can be no assurance that additional financing will be available at acceptable terms to the Company. The inability to obtain such financing 16 could have a material adverse effect on the Company's business, financial condition, and results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Financial Statements are filed with this report as pages F-1 through F-20 following the signature page. Report of Independent Public Accountants Balance Sheet Statements of Operations Statements of Shareholders' Equity Statements of Cash Flows Notes to Financial Statements ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not made any changes in accountants. The Company does not have any disagreement with accountants regarding accounting or financial disclosure. PART III ITEM 10. DIRECTORS OF THE REGISTRANT Information required by Item 10 of Form 10-K relating to directors appears under the caption "Election of Directors" in the definitive Proxy Statement for the 1997 Annual Meeting of Shareholders ("Proxy Statement") as filed with the Securities Exchange Commission (the "Commission") is hereby incorporated herein by reference. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 appearing under the caption "Compliance With Reporting Requirements" in the Proxy Statement as filed with the Commission within 120 days after the close of the year ended December 31, 1996 is hereby incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information contained under the caption "Executive Compensation" contained in the Proxy as filed with the Commission within 120 days after the close of the year ended December 31, 1996 is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the caption "Securities Ownership of Management" contained in the Proxy Statement as filed with the Commission within 120 days after the close of the year ended December 31, 1996 is hereby incorporated herein by reference. 17 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the caption "Certain Relationships and Related Transactions" contained in the Proxy Statement as filed with the Commission within 120 days after the close of the year ended December 31, 1996 is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements. See Index to Financial Statements (and Financial Statement Schedules) at page 24 of this Form 10-K. (2) Financial Data Schedule. All other schedules required by Form 10-K Annual Report have been omitted because they were not applicable, were included in the notes to the financial statements, or were not required under the instructions contained in Regulation S-X. (3) Exhibits. See Exhibit Index at page 20 of this Form 10-K. (b) No reports on Form 8-K were filed for the three-month period ended December 31, 1996. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: March 27, 1997 4HEALTH, INC. By: /s/ R. Lindsey Duncan ------------------------ R. Lindsey Duncan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ R. Lindsey Duncan - ------------------------- R. Lindsey Duncan Director and Chairman of March 27, 1997 the Board, President and Chief Executive Officer (Principal Executive Officer) /s/ Scott W. Lusk - ------------------------- Scott W. Lusk Controller (Principal March 27, 1997 Financial and Accounting Officer) /s/ Cheryl M. Wheeler - ------------------------- Cheryl M. Wheeler Director and Secretary March 27, 1997 /s/ David A. Melman - ------------------------- David A. Melman Director March 27, 1997 /s/ Todd B. Crosland - ------------------------- Todd B. Crosland Director March 27, 1997 - ------------------------- Rockwell D. Schutjer Director March 27, 1997 19 EXHIBIT INDEX SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------- Plan of Acquisition, Reorganization, Item 2. Liquidation, or Succession - ----------------------------------------------------------------------------- 2.01 2 Agreement and Plan of Merger dated Incorporated by April 10, 1996, by and between Reference (2) 4health, Inc., and Surgical Technologies, Inc. as amended June 4, 1996 2.02 2 Asset Purchase Agreement dated Incorporated by November 30, 1995, by and between Reference (1) Microtek Medical, Inc., and Surgical Technologies, Inc. 2.03 2 Acquisition Agreement dated effective Incorporated by January 1, 1996, by and between Rex Reference (1) Industries Acquisition Corporation and Rex Industries, Inc. Item 3. Articles of Incorporation and Bylaws - ----------------------------------------------------------------------------- 3.01 3 Articles of Incorporation of Surgical Incorporated by Subsidiary, Inc., a Utah Corporation Reference (4) now known as Surgical Technologies, Inc. 3.02 3 Articles of Merger and related Plan of Incorporated by Merger Reference (4) 3.03 3 Bylaws Incorporated by Reference (4) 3.04 3 Articles of Merger and related Plan of Incorporated by Merger Reference (2) Instruments Defining the Rights of Item 4. Security Holders - ----------------------------------------------------------------------------- 4.01 4 Form of Warrant Agreement between Incorporated by 4Health, Inc. and Zions First National Reference (2) Bank with related form of Warrant 4.02 4 Form of Sale Restriction Agreement Incorporated by respecting shareholders of both Reference (2) Surgical Technologies, Inc., and 4Health, Inc. 20 SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------- 4.03 4 Form of Consent, Approval, and Incorporated by Irrevocable Proxy respecting certain Reference (2) Surgical stockholders with related schedule 4.04 4 Form of Consent, Approval, and Incorporated by Irrevocable Proxy respecting certain Reference (2) 4Health stockholders with related schedule 4.05 4 Specimen Common Stock Certificate Incorporated by Reference (2) 4.06 4 Specimen Warrant Certificate Incorporated by Reference (2) Item 10. Material Contracts - ----------------------------------------------------------------------------- 10.01 10 Form of Directors' Options Incorporated by Reference (1)* 10.02 10 Stock Option and Stock Award Plan Incorporated by Reference (1)* 10.03 10 1991 Directors' Stock Option Plan Incorporated by Reference (1)* 10.04 10 Directors' Stock Option Plan Incorporated by Reference (3)* 10.05 10 Technology Purchase Agreement between Incorporated by Ellis E. Williams, Professional Reference (4) Medical, Inc., and Surgical Technologies, Inc., dated February 4, 1993 10.06 10 Patent Cross-License Agreement between Incorporated by Utah Medical Products, Inc., and Reference (4) Professional Medical, Inc., dated February 9, 1993 10.07 10 Form of Promissory Note in the amount Incorporated by of $1,000,000 payable to First Reference (5) Interstate Bank, dated August 16, 1994 21 SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------- 10.08 10 Deed of Trust Note and related Deed of Incorporated by Trust, Assignment of Rents, Security Reference (4) Agreement, and Fixture Filing, dated April 8, 1994, in the principal amount of $1,000,000 due Standard Insurance Company 10.09 10 Stock Purchase Agreement dated May 6, Incorporated by 1994, between Surgical Technologies, Reference (4) Inc., and Benitex, A.G. 10.10 10 Real Estate Contract dated February 2, Incorporated by 1994, between Surgical Technologies, Reference (4) Inc. and Rex Crosland related to the facilities at 2801 South Decker Lake Lane, Salt Lake City, Utah 10.11 10 Asset Purchase Agreement between Incorporated by Milwaukee Acquisition Company, Reference (4) Insulation Distributors, Inc., and Surgical Technologies, Inc., effective September 30, 1993 10.12 10 All-Inclusive Promissory Note and Incorporated by related All-Inclusive Trust Deed, Reference (5) relating to sale of building and property, dated March 31, 1995, in the principal amount of $981,375.32 10.13 10 1996 Long-Term Stock Incentive Plan Incorporated by Reference (2) 10.14 10 Form of $2.00 option granted to Incorporated by Surgical directors, officers, and Reference (2)* employees with related schedule 10.15 10 Form of Option granted to Todd B. Incorporated by Crosland Reference (2)* 10.16 10 Form of Option granted to Rockwell D. Incorporated by Schutjer Reference (2)* 22 SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------- 10.17 10 Form of Proprietary Information, Incorporated by Inventions, and Non-Competition Reference (2) Agreement between 4Health and R. Lindsey Duncan 10.18 10 Form of Employment Agreement between Incorporated by the Surviving Corporation and Rockwell Reference (2) * D. Schutjer 10.19 10 Deed of Trust Note and related Deed of Appendix A Trust, Assignment of Rents, Security Agreement, and Fixture Filing, dated February 20, 1997, in the principal amount of $1,350,000 due Standard Insurance Company Item 27. Financial Data Schedule - ----------------------------------------------------------------------------- 27.01 27 Financial Data Schedule Appendix A - ------------------ (1) Incorporated by reference from Surgical's registration statement on Form S-1 filed with the Commission, SEC file number 33-31863. (2) Incorporate by reference from Surgical's registration statement on Form S-4 filed with the Commission, SEC file number 33-03243. (3) Incorporated by reference from Surgical's report on Form 10-K for the year ended March 31, 1992. (4) Incorporated by reference from Surgical's report on Form 10-K for the year ended March 31, 1994. (5) Incorporated by reference from Surgical's report on Form 10-Q for the quarter ended December 31, 1995. * Represents a management contract, compensatory plan or arrangement required to be filed as an exhibit. 23 INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Public Accountants . . . . . . . . . . . . . . . F-1 Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . F-3 Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . F-4 Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . F-6 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-8 24 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of 4Health, Inc.: We have audited the accompanying balance sheets of 4Health, Inc. (a Utah corporation) as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 4Health, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Denver, Colorado March 11, 1997 F-1 4Health, Inc. Balance Sheets As of December 31, 1996 and December 31, 1995 12/31/96 12/31/95 ---------- ---------- CURRENT ASSETS Cash and cash equivalents $1,086,168 $ 919,935 Accounts receivable, net of allowance for doubtful accounts of $23,296 and $30,859, respectively 1,105,207 974,621 Inventories 2,534,881 977,890 Deferred tax asset 313,872 31,005 Prepaid expenses 171,138 129,205 Note receivable, related party - 50,000 Notes receivable, net allowance of $300,000 265,819 - ---------- ---------- Total Current Assets 5,477,085 3,082,656 PROPERTY AND EQUIPMENT, NET 2,559,629 2,124,227 OTHER ASSETS, NET 1,136,531 20,745 NOTES RECEIVABLE 116,308 - ---------- ---------- Total Assets $9,289,553 $5,227,628 ---------- ---------- ---------- ---------- CURRENT LIABILITIES Accounts payable $ 484,079 $ 609,331 Accrued liabilities 878,025 125,349 Taxes payable 113,833 40,567 Note Payable, related party - 71,198 Note Payable, current portion 20,555 - Capital leases 3,733 - ---------- ---------- Total Current Liabilities 1,500,225 846,445 DEFERRED TAXES 152,112 32,458 NOTE PAYABLE 1,275,716 1,296,271 CAPITAL LEASES - 9,248 COMMITMENTS AND CONTINGENCIES (Note 8 and 9) STOCKHOLDERS' EQUITY Common stock 114,603 87,147 Additional paid in capital 8,226,844 2,381,929 Preferred stock - 15,000 Treasury stock (50,000) - Retained (deficit) earnings (1,929,947) 559,130 ---------- ---------- Total Stockholders' Equity 6,361,500 3,043,206 ---------- ---------- Total Liabilities and Stockholders' Equity $9,289,553 $5,227,628 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these balance sheets. F-2 4Health, Inc. Statements of Operations For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ------------ ----------- ---------- Net sales $17,351,829 $10,434,022 $2,076,902 Cost of goods sold 6,924,473 3,802,877 744,584 ------------ ----------- ---------- Gross profit 10,427,356 6,631,145 1,332,318 Operating expenses: Sales and marketing 9,606,085 3,873,466 817,766 Research and development 414,998 149,366 37,061 General and administrative 2,959,631 1,476,986 608,182 ------------ ----------- ---------- 12,980,714 5,499,818 1,463,009 ------------ ----------- ---------- (Loss) income from operations (2,553,358) 1,131,327 (130,691) Other income (expense): Interest income 146,592 27,542 43,371 Interest expense (108,486) (90,467) (48,117) ------------ ----------- ---------- 38,106 (62,925) (4,746) ------------ ----------- ---------- Net (loss) income before provision for income taxes (2,515,252) 1,068,402 (135,437) Income tax benefit (provision) 26,175 (359,723) (2,183) ------------ ----------- ---------- NET (LOSS) INCOME $ (2,489,077) $ 708,679 $ (137,620) ------------ ----------- ---------- ------------ ----------- ---------- Net (loss) income per common share $ (.25) $ .08 $ (.019) ------------ ----------- ---------- ------------ ----------- ---------- Weighted Average Common Shares Outstanding 9,896,822 8,707,214 7,334,729 The accompanying notes are an integral part of these statements. F-3 4Health, Inc. Statements of Stockholders' Equity For the years ended December 31, 1996, 1995, and 1994
Additional Preferred Common Paid-in Treasury Stock Stock Capital Stock Total ---------------------------------------------------------------------- Stock- Common Stock Retained holders' Equivalent Earnings Equity Shares Amount Shares Amount Amount Shares Amount (Deficit) (Deficit) --------------------------------------------------------------------------------------------------- BALANCES, December 31, 1993 - $ - 6,018,680 $ 60,187 $(30,187) - $ - $(11,929) $ 18,071 Issuance of stock for cash net of offering costs of $41,467 - - 2,579,435 25,794 932,739 - - - 958,533 Stock grants for prior and future services - - 60,187 602 22,731 - - - 23,333 Issuance of stock to a director for services - - 45,140 451 28,988 - - - 29,439 Net loss - - - - - - - (137,620) (137,620) --------------------------------------------------------------------------------------------------- BALANCES, December 31, 1994 - - 8,703,442 87,034 954,271 - - (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 376,167 15,000 11,285 113 1,427,658 - - - 1,442,771 Net income - - - - - - - 708,679 708,679 --------------------------------------------------------------------------------------------------- BALANCES, December 31, 1995 376,167 15,000 8,714,727 87,147 2,381,929 - - 559,130 3,043,206
F-4 4Health, Inc. Statements of Stockholders' Equity For the years ended December 31, 1996, 1995, and 1994 Continued
Additional Preferred Common Paid-in Treasury Stock Stock Capital Stock Total ---------------------------------------------------------------------- Stock- Common Stock Retained holders' Equivalent Earnings Equity Shares Amount Shares Amount Amount Shares Amount (Deficit) (Deficit) --------------------------------------------------------------------------------------------------- BALANCES, December 31, 1995 376,167 15,000 8,714,727 87,147 2,381,929 - - 559,130 3,043,206 Conversion of a $50,000 share-holder note receivable for Treasury Stock - - - - - 90,890 (50,000) - (50,000) Conversion of Series A Convertible Preferred (376,167) (15,000) 376,167 3,762 11,238 - - - - Common stock issued in merger with Surgical Technologies Inc - - 2,271,108 22,711 5,738,947 - - - 5,761,658 Issuance of common stock to employees for options exercised for cash - - 15,043 150 62,301 - - - 62,451 Issuance of common stock to director for options exercised in a cashless swap - - 66,250 662 (662) - - - - Issuance of common stock to officer for options exercised for cash and options swapped - - 17,079 171 33,091 - - - 33,262 Net loss - - - - - - - (2,489,077) (2,489,077) --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- BALANCES, December 31, 1996 - $ - 11,460,374 $114,603 $8,226,844 90,890 $(50,000) $(1,929,947) $6,361,500 --------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. F-5 4Health, Inc. Statements of Cash Flows For the years ended December 31, 1996, 1995 and 1994 1996 1995 1994 ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (income) $(2,489,077) $ 708,679 $ (137,620) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 234,867 122,401 31,927 Loss on disposal of assets 7,444 33,927 6,420 (Increase) decrease in: Accounts receivable (54,168) (723,462) (254,672) Inventory (1,166,483) (584,420) (326,867) Prepaid expenses and other assets (147,580) (52,118) (85,537) Deferred income tax assets (231,862) (31,005) 2,183 Increase(decrease) in: Accounts Payable (125,252) 311,852 260,156 Accrued interest payable - 4,984 11,750 Accrued liabilities 558,913 84,920 12,798 Taxes payable 63,868 (24,495) 63,845 Deferred income liability 61,547 32,458 - ----------- ---------- ---------- Net cash used in operating activities (3,287,783) (116,279) (415,617) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable securities 524,002 - - Acquisition of Surgical 3,639,257 - - Technologies Purchase of fixed assets (532,754) (689,030) (1,608,958) Proceeds from asset dispositions - 11,205 Proceeds from note receivable 262,062 - - ----------- ---------- ---------- Net cash from (used in) investing activities 3,892,567 (677,825) (1,608,958) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Preferred Stock - 1,500,000 - Preferred Stock issuance costs - (57,229) - Proceeds from common stock 95,713 - 1,011,305 Acquisitions costs (457,551) - - Borrowings on long-term debt - - 1,607,368 Repayments on borrowings (71,198) - (324,373) Repayments on capital leases (5,515) (3,413) - ----------- ---------- ---------- Net cash (used in) from financing activities (438,551) 1,439,358 2,294,300 ----------- ---------- ---------- NET INCREASE IN CASH 166,233 645,254 269,725 CASH AND CASH EQUIVALENTS, at beginning of period 919,935 274,681 4,956 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, at end of period $1,086,168 $919,935 $274,681 ----------- ---------- ---------- ----------- ---------- ---------- The accompanying notes are an integral part of these statements. F-6 4Health, Inc. Statements of Cash Flows For the years ended December 31, 1996, 1995 and 1994 Continued
1996 1995 1994 ----------- ---------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 800 $443,769 - Cash paid during the year for interest 98,527 83,735 25,308 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: 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 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. During 1994, the Company entered into capital leases totaling $13,485 for the lease of new equipment.
The accompanying notes are an integral part of these statements. F-7 4Health, Inc. Notes to Financial Statements December 31, 1996 and 1995 (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"). 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 F-8 599,999 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 from exploitation of Surgicals ID Techonology. 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 is subject to adjustment in the event that the Company does not realize at least $2,000,000 in earnings, before interest and income taxes, during the twelve month period following the merger. The adjustment, if any, will increase the number of shares of the Company's common stock issuable to the former Old 4Health stockholders, on a pro rata basis based on the number of shares of the Company's common stock issued to them in the merger, in an amount equal to the quotient calculated by dividing (a) the amount by which $2,000,000 exceeds the ID Technology earnings by (b) $4.00. Historical financial statements presented are those of 4Health, Inc., with historical shareholders' equity retroactively restated for the equivalent number of shares received in the merger. Earnings per share for periods prior to the merger are restated to reflect those equivalent shares. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed statements of operations are based only on 4Health's historical statements of operations for the 12 months ended December 31, 1996 and 1995, because, as a result of the sale of Surgical's specialty metals fabrication business segment and its disposable surgical pack and drape manufacturing product lines, the continuing operations of Surgical subsequent to the Merger will be relatively insignificant compared to the continuing operations of 4Health. Accordingly, the accompanying unaudited pro forma condensed statements of operations reflect only the historical operations of 4Health, adjusted for the impact of the Merger. The adjustment to the accompanying unaudited pro forma condensed statement of operations reflects a $69,600 amortization of intangibles for both 1996 and 1995, related to the Merger, based upon a 15 year estimated life. The unaudited pro forma condensed combined financial statements give effect to the transaction using the purchase method of accounting, with 4Health treated as the acquiring entity for financial reporting purposes. The unaudited pro forma condensed combined statement of operations presents the results of operations of the Surviving Corporation, assuming the merger was completed on January 1, 1995. Unaudited Pro Forma Condensed Statements of Operations For the Twelve Months Ended December 31, 1996 and 1995 1996 1995 -------------- --------------- Revenues $ 17,351,829 $ 10,434,022 F-9 Cost of revenues 6,924,473 3,802,877 -------------- --------------- Gross margin 10,427,356 6,631,145 Selling, general, and administrative costs 13,025,782 5,569,418 Other income (expense), net 38,106 (62,925) -------------- --------------- Income before income taxes (2,560,320) 998,802 Income tax benefit (provision) 26,175 (359,723) -------------- --------------- Net (loss) income $ (2,534,145) $ 639,079 -------------- --------------- -------------- --------------- Net (loss) income per common share $ (.26) $ .07 -------------- --------------- -------------- --------------- Weighted average shares 9,896,822 8,707,214 outstanding BUSINESS ACTIVITY The Company wholesales vitamins and health food supplements developed by Lindsey Duncan under the brand names of Nature's Secret-Registered Trademark-, Harmony Formulas-Registered Trademark-, Lindsey Duncan's Home Nutrition-TM-, and Martial Arts Nutrition-TM-. 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 U.S., and Lindsey Duncan's Home Nutrition products are marketed through the mass market. The products are formulated to appeal to the general public and address overall health considerations. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company considers all highly liquid cash investments with original maturity dates of three months or less to be cash equivalents. CONCENTRATION OF CREDIT RISK The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash 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 had one principal customer which accounted for approximately 30% of its total revenue for the year ending December 31, 1996 and 13% for the year ending December 31, 1995. OTHER ASSETS F-10 Included in other assets is unamortized goodwill resulting from the Merger (see Note 1) of approximately $269,000 and the ID Technology acquired from Surgical valued at approximately $750,000. These intangible assets are being amortized using the straight line method over a period of 15 years. Related amortization expense totaled $24,532 for the year ending December 31, 1996. 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, 1996 and 1995, all of the Company's inventory consisted of purchased finished goods. PROPERTY AND EQUIPMENT Property and equipment additions, as well as major renewals and improvements to property and equipment, are capitalized at cost while repairs and maintenance costs which do not improve or extend the life of the respective assets are expensed when incurred. Depreciation and amortization is provided using the straight-line method at rates based on estimated useful lives which range from 3.5 to 39 years. Property and equipment consisted of the following at December 31: 1996 1995 ------------ ------------ Land $ 270,000 $ 270,000 Buildings and improvements 1,567,444 1,390,219 Machinery and equipment 201,036 52,078 Furniture, fixtures and equipment 868,757 552,772 ------------ ------------ 2,907,237 2,265,069 Less-Accumulated depreciation (347,608) (140,842) ------------ ------------ $ 2,559,629 $ 2,124,227 ------------ ------------ ------------ ------------ 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. RECENTLY ISSUED ACCOUNTING STANDARDS In October of 1995, the Financial Accounting Standards Board 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 employees 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 F-11 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.) In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement, effective for the Company in 1996, establishes standards for the measurement of impairment of long-lived assets to be held and used, and those to be disposed of. In the opinion of management, the adoption of SFAS No. 121 was not material to the results of operation or net assets of the Company. REVENUE RECOGNITION The Company recognizes revenue from product sales at the time of shipment. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term trade receivables and payables and long-term debt. The carrying values of cash and short-term trade receivables and payables approximate fair value. The fair value of long-term notes payable is estimated based on current rates available for debt with similar credit risk, yield and maturity and at December 31, 1996 and 1995 approximate the carrying value. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. The effect of outstanding options and other common stock equivalents are immaterial for 1995 and antidillutive for 1996 and are thus not considered. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ESTIMATES MADE BY MANAGEMENT The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the F-12 financial statements and the reported amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made in the 1995 financial statements to conform with the 1996 presentation. (3) NOTE PAYABLE On March 25, 1994, the Company borrowed a total of $1,296,271 for the purchase of the land and corporate headquarters building. The loan was secured by the deed of trust. Payments of interest only were payable monthly at a rate of 3% per annum for the first year of the loan and at a rate of 7.5% per annum thereafter until three years from the date of the loan. Subsequent to year end, the Company refinanced the building loan for five years. 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. The amount of the note payable maturing in the next five years is as follows: 1997 $ 20,555 1998 29,455 1999 31,978 2000 34,718 2001 37,693 Thereafter 1,141,872 ------------ Total $ 1,296,271 ------------ ------------ (4) NOTES RECEIVABLE As of December 31, 1996, notes receivable consisted of the following: Note receivable from a third party for certain assets, interest bearing at 8%, with interest and principal due on January 31, 1997. $ 250,000 Subsequent to year end, the note receivable was extended to be due on September 1, 1997, as mutually agreed by the parties. Note receivable from a third party for the purchase of certain assets, interest bearing at 10% through February 16, 1999, secured by purchased assets 132,127 ------------- $ 382,127 Less current portion 265,819 ------------- Long-term Notes Receivable $ 116,308 ------------- ------------- F-13 (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. At December 31, 1995, $71,198 was outstanding. The remaining balance was paid in 1996. Interest expense of $2,492 and $4,983 has been recorded during fiscal 1996 and 1995, respectively. NOTE RECEIVABLE In January 1995, the Company loaned $50,000 to a shareholder which remained outstanding at December 31, 1995, but for which the Company received treasury stock during 1996. (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 and 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. Subsequent to the merger, 98,372 shares were issued as a result of options exercised by employees, an officer and a director of the Company, at exercise prices ranging from $3.32 to $4.15 per share. F-14 WARRANTS 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. STOCK OPTION PLAN In 1995, the Company adopted the 1995 Stock Option Plan (the "Option Plan"), whereby certain eligible employees were granted options. The Option Plan allowed issuance of incentive stock options and non-qualified options. The Option Plan was administered by a committee designated by the Board of Directors. The exercise price of incentive stock options was not to be less than the stock's fair market value on the date of grant. The Option Plan allowed the granting of up to an aggregate of 600,000 options which were generally to become exercisable over a one-year period. Upon consummation of the merger, the aforementioned 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 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 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 options activity for the years ended December 31, 1995 and 1996 is as follows, including retroactive treatment of the stock split: Number of Weighted Average Shares Exercise Price ------------- ---------------- Balance, December 31, 1994 - - Granted 279,869 $4.57 Exercised - - Canceled 4,514 $4.15 ------------- Balance, December 31, 1995 275,355 $4.57 F-15 Granted 1,211,814 $4.37 Exercised 172,622 $3.91 Canceled 448,444 $4.93 ----------- Balance, December 31, 1996 866,103 $4.35 ----------- ----------- Options exercisable at December 31, 1995 - - December 31, 1996 498,478 $4.01 Weighted average fair value of granted options during 1995 - $2.29 1996 - $0.56 The following table summarizes information about the options outstanding at December 31, 1996: Options Outstanding Options Exercisable ------------------------------------ -------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Prices at 12/31/96 Life Price at 12/31/96 Price - ------------ ----------- ------------ ---------- ------------- ----------- $3.32 - $4.98 757,860 4.17 years $ 4.08 494,718 $ 3.98 $5.50 - $8.13 105,243 4.01 years 6.23 3,760 7.98 $8.44 3,000 4.72 years 8.44 - - ----------- ------------- Total 866,103 4.36 years 4.35 498,478 $ 4.01 ----------- ------------- ----------- ------------- 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 1996 and 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 1996 and 1995, using the Black-Scholes pricing model and the following weighted average assumptions: 1996 1995 ------------ ------------ Risk-free interest rate 5.60% 6.27% Expected dividend yield 0.0% 0.0% Expected lives outstanding 1.5 years 2.7 years Expected volatility 58.44% 58.44% 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 F-16 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 $1,164,173 and $427,837 for the years ended December 31, 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 $1,037,949 and $265,069 for 1996 and 1995, respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net (loss) income and pro forma net (loss) income per common share would have been reported as follows: 1996 1995 ------------ ----------- Net (loss) income: As reported $ (2,489,077) $708,679 ------------ ----------- ------------ ----------- Pro forma $ (3,527,026) $532,938 ------------ ----------- ------------ ----------- EPS: As reported (Note 2) $ (.25) $ .08 ------------ ----------- ------------ ----------- Pro forma (Note 2) $ (.35) $ .06 ------------ ----------- ------------ ----------- 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: 1996 1995 --------- ---------- DEFERRED TAX ASSETS: Allowance for bad debt $ 9,085 $ 12,035 Accrued liabilities 36,733 18,970 Inventory reserve 50,505 - F-17 Sales reserve 156,000 - Net operating loss carryforward 2,433,050 - --------- ---------- Total deferred tax assets 2,685,373 31,005 DEFERRED TAX LIABILITIES: Tax over book depreciation/amortization (152,112) (32,458) --------- ---------- Net deferred tax asset (liability), 2,533,261 (1,453) before valuation reserve Valuation reserve (2,371,501) - --------- ---------- Net deferred tax asset (liability) $ 161,760 $ (1,453) --------- ---------- --------- ---------- The change in beginning and ending deferred tax asset and liability accounts does not equal the current year deferred tax benefit as a result of deferred tax assets acquired in the merger. As of December 31, 1995, the Company had no net operating loss carryforward. The Company provided a valuation allowance to offset the majority of its 1996 net operating carryforwards primarily due to its history of operating losses. The components of the income tax (benefit) provision are as follows: December 31, ---------------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Current Federal $ 143,340 $ 319,568 - State 800 38,702 - Deferred Federal (170,315) 1,453 - ---------- ---------- ---------- Total before valuation reserve $ (26,175) $ 359,723 - ---------- ---------- ---------- ---------- ---------- ---------- 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: 1996 1995 1994 ------ ------ ------ Statutory federal income tax rate (34.0%) 34.0% (34.0%) State income taxes (5.0) 3.6 (4.0) Utilization of net operating loss 34.2 (5.5) 38.0% Short-year tax provision 6.0 - - Other (2.2) 1.6 - ------ ------ ------ Effective income tax rate (1.0%) 33.7 % - ------ ------ ------ ------ ------ ------ F-18 (8) COMMITMENTS AND CONTINGENCIES The Company entered into certain leases which have various expiration dates. Rental expense was $132,980, $13,612, and $5,141 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum rental payments applicable to these noncancelable operating leases are as follows for the years ending December 31: 1997 $ 135,612 1998 126,826 1999 133,560 2000 126,592 2001 96,440 ---------------- $ 619,030 ---------------- ---------------- 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 In February, 1997, the Company entered into a negotiated settlement with General Nutrition Corporation, Inc., ("GNC") to settle all pending litigation between the two parties. The terms of the settlement include the Company supplying GNC with certain 4Health products free of charge and taking back certain other 4Health products. Estimated costs related to this settlement have been accrued by 4Health as of December 31, 1996. Further, the Company abandoned certain claims brought against GNC in Colorado on January 30, 1997 and GNC agreed to dismiss certain of its claims against the Company with prejudice and agreed to a covenant not to sue with respect to the remaining claims. On February 25, 1997, 4Health entered into a barter agreement with Active Media Services, Inc. Under the terms of the agreement, the Company will sell to Active Media certain inventory with an approximate cost of $780,000 for which the Company will receive $2,300,000 in barter credits. The Company plans to use the barter credits through Active Media to pay for certain normal business expenditures, including but not limited to, media advertising and promotion, travel, capital purchases, and printing. These barter credits expire on August 31, 2001. (10) SELECTED FINANCIAL DATA (UNAUDITED) The following tables set forth certain unaudited quarterly financial information:
Quarters Ended ------------------------------------------------------------ 1996 ------------------------------------------------------------ December 31 September 30 June 30 March 31 ----------- ------------ ---------- ---------- F-19 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 (1,808,129) (807,712) 26,671 34,253 Other income (expense) 11,437 52,480 (13,823) (10,429) ----------- ------------ ---------- ---------- (Loss)income before tax (1,796,692) (755,232) 12,848 23,824 Income tax (provision) benefit (65,601) 17,137 86,801 (12,162) ----------- ------------ ---------- ---------- Net (loss) income $(1,862,293) $ (738,095) $ 99,649 $ 11,662 ----------- ------------ ---------- ---------- ----------- ------------ ---------- ---------- Quarters Ended ------------------------------------------------------------ 1995 ------------------------------------------------------------ December 31 September 30 June 30 March 31 ----------- ------------ ---------- ---------- Income statement data: Net sales $ 2,652,617 $ 3,148,956 $3,083,441 $1,549,008 Gross profit 1,670,561 1,982,896 1,977,431 1,000,257 (Loss) income from operations (343,530) 337,062 944,003 193,792 Other expense (8,329) (18,449) (25,157) (10,990) ----------- ------------ ---------- ---------- (Loss)income before tax (351,859) 318,613 918,846 182,802 Income tax benefit (provision) 99,200 (101,842) (297,706) (59,375) ----------- ------------ ---------- ---------- Net (loss) income $ (252,659) $ 216,771 $ 621,140 $ 123,427 ----------- ------------ ---------- ---------- ----------- ------------ ---------- ---------- Quarters Ended ------------------------------------------------------------ 1994 ------------------------------------------------------------ December 31 September 30 June 30 March 31 ----------- ------------ ---------- ---------- Income statement data: Net sales $ 1,035,261 $ 640,802 $ 221,785 $ 179,054 Gross profit 647,415 409,165 152,325 123,413 Income (loss) from operations 70,075 (33,877) (139,990) (26,899) Other income (expense) 30,881 (10,001) (20,963) (4,663) ----------- ------------ ---------- ---------- Income (loss) before tax 100,956 (43,878) (160,953) (31,562) Income tax (provision) (2,183) - - - ----------- ------------ ---------- ---------- Net (income) loss $ 98,773 $ (43,878) $ (160,953) $ (31,562) ----------- ------------ ---------- ---------- ----------- ------------ ---------- ----------
F-20 APPENDIX A EX-10.19 2 EXH 10.19 Exhibit 10.19 DEED OF TRUST NOTE SIC Loan No. 961227O2 DO NOT DESTROY THIS NOTE: When paid, this Note, with the Deed of Trust securing it, must be surrendered to Trustee to enable the lien of the Deed of Trust securing this Note to be released or partially released, as applicable, from record. $1,35O,OOO.OO February 1O, 1997 1. Payment; Interest Calculations. FOR VALUE RECEIVED, the undersigned ("Maker"), jointly and severally, promises to pay in lawful money of the United States, to the order of STANDARD INSURANCE COMPANY, an Oregon corporation ("Holder"), at its office in Portland, Oregon, or such other place as Holder may designate, the principal of a loan of one Million Three Hundred Fifty Thousand and No/lOOths Dollars ($1,35O,OOO.OO) obtained from Holder, and interest thereon, in Sixty (6O) equal monthly payments of Eleven Thousand Five Hundred Three and No/lOOths Dollars ($11,5O3.OO) payable on the first day of each month, commencing with the first day of April, 1997, together with such other sums as may become due hereunder or under any instrument securing this Note, until the entire indebtedness is fully paid, except that any remaining indebtedness if not sooner paid shall be finally due and payable on the first day of March, 2OO2, which is the maturity date of this Note. The interest included in the aforesaid payments, unless increased as otherwise provided in this Note, shall be calculated at the rate of Eight and one-quarter (8.25%) percent per annum (the "Note Rate"), based on a 36O-day year, upon the unpaid balance of principal of this Note. Maker, jointly and severally, also promises to pay interest at the Note Rate from the date of disbursement of the loan proceeds evidenced by this Note (the "Disbursement Date") to the date from which interest is included in the first payment previously described. Every payment received with respect hereto shall be applied, in any order that may be determined by Holder in its sole discretion, to sums under this Note, including, without limitation: (a) late charges; (b) expenses paid or funds advanced by Holder with interest thereon at the Default Rate when applicable (as hereinafter defined); (c) any prepayment premiums due with respect to any payment and any other premiums which may remain unpaid; (d) accrued interest on the principal balance from time to time remaining unpaid; and (e) subject to the prepayment provisions herein, the principal balance hereunder. 2. Waiver. To the extent permitted by law, each and every maker, surety, guarantor, endorser or signator to this Note and any other party now or hereafter liable for the payment of this Note, in whatever capacity, whether in whole or in part hereby (a) waives notice of intent to demand, presentment for payment, notice of demand, demand, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of intent to accelerate, notice of acceleradon, and all other notices, filing of suit, and diligence in collecting this Note and/or enforcing any of the security herefor; (b) agrees that Holder shall not be required first to institute suit or exhaust its remedies against Maker or others liable or to become liable hereon or against the Trust Property (as hereinafter defined), it being understood that Holder may exercise its rights hereunder and pursue its remedies in any order and at any time it desires, and may, without notice to or consent of any such person, and without in any way diminishing the obligations of any such person; (c) consents to Holder dealing with any such person with reference to this Note by way of forbearance, extension, modificadon, compromise or otherwise; (d) consents and agrees to any and all extensions, releases, renewals, partial payments, surrenders, exchanges, subsitutions of security herefor, compromises, discharges or modifications and any other indulgence with respect to any of any right or obligation secured by or provided by the Deed of Trust securing this Note (the "Deed of Trust") or any other instrument securing this Note, before or after the maturity of this Note, without notice thereof to any of them; or (e) take any other action which Holder may deem reasonably appropriate to protect its security interest in the property securing this Note (the "Trust Property"). Any such acdon(s) taken under the preceding sentence may be taken against one, all, or some of such persons, and Holder may take any such action against one differently than another of such persons, in Holder's sole discretion. 3. Default; Default Rate. Time is material and of the essence hereof with respect to the payment of any sums of any nature by and the performance of all duties or obligations of the Maker. Each of the following shall be an Event of Default under this Note: (a) failure to make any payment of principal and/or interest or any other payment required by the provisions of this Note or of any instrument securing this Note on the date such payment or payments are due; (b) failure to perform any other provision of this Note or of any instrument securing this Note; or (c) falsity in any material respect of the warranties in the Deed of Trust or of any representation, warranty or informadon furnished by Maker or its agents to Holder in connecdon with the loan evidenced by this Note (the "Loan"). Upon the occurrence of any Event of Default, any sum not paid as provided in this Note or in any instrument securing this Note, shall, at the option of Holder, without notice, bear interest from such due date at a rate of interest (the "Default Rate") equal to four (4) percentage points per annum greater than the Note Rate, or the maximum rate of interest permitted by law, whichever is the lesser, and, at the option of Holder, the unpaid balance of principal, accrued interest, plus any other sums due under this Note, or under any instrument securing this Note shall at once become due and payable, without nodce except as described in paragraph 11, and shall bear interest at the Default Rate. If an Event of Default occurs during a period of time in which prepayment is permitted only on payment of a prepayment charge, such charge shall be computed as if the sum declared due on default were a prepayment and shall be added to the sums due and payable hereunder. 4. Late Charges. If any payment is not received by Holder (or by the correspondent if a correspondent has been designated by Holder to receive payments) within five (5) calendar days after its due date, Holder, at its option, may assess a late charge equal to five cents for each $1.OO of each overdue payment or the maximum late charge permitted by the laws of the state in which the Trust Property is located, whichever is less. Such late charge shall be due and payable on demand, and Holder, at its option, may (a) refuse to accept any late payment or any subsequent payment unless accompanied by such late charge, (b) add such late charge to the principal balance of this Note or (c) treat the failure to pay such late charge as demanded as an Event of Default hereunder. If such late charge is added to the principal balance of this Note, it shall bear interest at the Default Rate. The late charge is compensation for damages suffered by Holder and does not constitute interest. 5. Prepayment Restrictions, CHARGES. Additional charges for the privilege of prepaying sums owing hereunder will be imposed in the following amounts, or in such amounts as permitted by law, whichever is less: (a) During the first five (5) Loan Years, amounts paid during any one (1) Loan Year in excess of ten percent (1O%) of the original principal Loan balance shall include an additional payment equal to one (l) year's interest on such excess amount; and (b) Thereafter, amounts paid during any one (1) Loan Year in excess of 1O% of the original principal loan balance shall include an additional payment equal to six (6) months' interest on such excess amount. As used in this Note, "Loan Year" means a period of time beginning on the Disbursement Date or on any anniversary of the Disbursement Date and ending one year thereafter. Notwithstanding the foregoing, Maker may prepay all sums owing under this Note without the imposition of a prepayment charge at any time within one Hundred Eighty (18O) days of the maturity date of this Note. 6. Acknowledgments Regarding Default Rate, Late Charges and Prepayment Charges. (a) Maker acknowledges and agrees that (i) a default in making the payments herein agreed to be paid when due will result in the Holder incurring additional expense in servicing the loan, loss to Holder of the use of the money due, and frustration to Holder in meeting its other commitments, (ii) if for any reason it fails to pay any amounts due hereunder, Holder shall be entitled to damages for the detriment caused thereby, but that it is extremely difficult and impractical to ascertain the extent of such damages, and (iii) the Default Rate and the late charge described in this Note are a reasonable estimate of such damages. (b) Maker acknowledges and agrees that (i) prepayment prior to the maturity date may result in loss to Holder, (ii) the amount of the loss will depend on the interest rates at the time of prepayment, the amount of principal prepaid and the length of time remaining between the prepayment date and the scheduled maturity date, (iii) prepayment is most likely to occur when interest rates have dropped below the Note Rate, and (iv) because it is extremely difficult and impractical to ascertain now the amount of loss Holder may suffer in the event of prepayment, (A) Holder shall be entitled to damages for the loss caused by prepayment and (B) the prepayment charge described in this Note is a reasonable measure of such damages. Maker agrees that the prepayment charge described in this Note shall be imposed, to the extent permitted by law, whether the prepayment is voluntary, involuntary or by operation of law, in connection with an Event of Default, or required by Holder in connection with a transfer or contract to transfer the Trust Property, provided that no prepayment charge shall be added to sums prepaid with casualty insurance proceeds or condemnation awards. (c) Maker expressly (i) waives any right to prepay the Loan without payment of the prepayment charge described above in connection with a transfer or contract to transfer the Trust Property by Maker, or a successor in interest of the undersigned, and (ii) agrees to pay such prepayment charge as provided above in connection with such a transfer or contract to transfer. (d) Maker represents that it is a knowledgeable real estate investor and fully understands the effect of the charges, waivers and agreements contained above. Maker acknowledges and agrees that the making of the loan by Holder at the interest rate and with the other terms described herein is sufficient consideration for such charges, waiver and agreement, and that Holder would not make this loan on these terms without such charges, waiver and agreement. 7. Expenses and Attorney Fees. If Holder refers this Note to an attorney for collection or seeks legal advice following a default alleged in good faith under this Note; if Holder is the prevailing party in any litigation instituted in connection with this Note; or if Holder or any other person initiates any judicial or nonjudicial action, suit or proceeding, including but not limited to a foreclosure sale, in connection with this Note or the security therefor, and an attorney is employed by Holder to (a) appear in any such action, suit or proceeding, (b) reclaim, seek relief from a judicial or statutory stay, sequester, protect, preserve or enforce Holder's interest in this Note, the Deed of Trust, or any other security for this Note (including but not limited to proceedings at appellate levels, under federal bankruptcy law, in eminent domain, under probate proceedings, or in connection with any stateor federal tax lien), or (c) assist Holder in any foreclosure sale, then, in any such event, Maker shall pay attorney's fees and costs and expenses incurred by Holder and/or its attorney in connection with the above-mentioned events and any appeals related to such events, including but not limited to costs incurred in searching records, the cost of title reports, the cost of appraisals, and the cost of surveyors' reports. If not paid within ten days after such fees, vests and expenses become due and written demand for payment is made upon Maker, such amount may, at Holder's option, be added to the principal of the Note and shall bear interest at the Default Rate. 8. No Usury. In no event shall any payment of interest or any other sum payable hereunder both (a) violate the usury laws of the state in which the Trust Property is located and (b) allow Maker to bring a claim for usury or raise usury as a defense in any astion on this Note. If it is established that both (a) and (b) have occurred, and any payment exceeding lawful limits has been received, Holder shall refund such excess or, at its option, credit the excess amount to principal, but such payments shall not affect the obligation to make periodic payments required herein. 9. Security. The indebtedness evidenced by this Note is secured by the Deed of Trust of even date and may be secured by other security instruments. 10. Due on Sale or Encumbrance. (a) Generally. The Loan is personal to Maker and not assignable. In making it, Holder has relied on Maker's credit, Maker's interest in the Trust Property, and the financial market conditions at the time the Loan is made. Except as described in paragraph lO(f) below, in the event of a sale, conveyance, transfer or encumbrance of the title to or possession of all or part of the Trust Property, directly or indirectly, either voluntarily, involuntarily or by operation of law, Holder may declare the entire balance of this Loan immediately due and payable. In such event, and to the extent permitted by law, a prepayment charge calculated in accordance with the prepayment provisions of this Note shall be added to the sum due and payable. (b) One Time Permitted Third-Partv Transfer. Holder will waive its right under the foregoing provisions of this paragraph one time during the term of this loan, if the Loan is not then in default and the following conditions are met: (i) The purchaser of the Trust Property, the financial statements, financial strength, tax returns and credit history of the purchaser, the sale agreement and related documents, and all aspects of the sale are completely satisfactory to Holder. (ii) The purchaser evidences a history of property management satisfactory to Holder or contracts for management of the Trust Property with a property management firm satisfactory to Holder. (iii) If the amount then due on the Note exceeds seventy-five percent (75%) of the sale price of the Trust Property, the balance due on the Note, at the Holder's election, shall be reduced to an amount which does not exceed seventy-five percent (75%) of the sales price. (iv) Maker furnishes to Holder, at Maker's expense, an endorsement to Holder's ALTA title insurance policy insuring the continued validity, enforceability, and priority of the Deed of Trust following the assumption. The form and content of the endorsement shall be satisfactory to Holder. If required by the Holder or the title insurer, the Maker shall furnish subordination agreements from tenants of the Trust Property and other necessary parties in form and substance acceptable to the Holder and the title insurer. (v) In the event the Loan was made with a requirement imposed upon the Maker to complete any specified repairs of the Trust Property, the Maker shall not be entitled to a consent by Holder pursuant to the terms of this provision until such repairs have been completed to Holder's satisfaction. (vi) The Holder may, at its option, require tax reserves as referred to in paragraph A.7 of the Deed of Trust, whether or not previously waived conditionally or otherwise as a condition to its consent. (vii)Unless Holder, in its sole discretion, otherwise agrees in writing at that time, no such sale or assumption shall release Maker or any guarantor or other person from liability, or otherwise affect the liability of Maker or any such guarantor or other person, for payment of the indebtedness secured hereby. (viii) Holder is paid an administrative fee equal to the greater of $1,OOO.OO or reimbursement of Holder's reasonable administrative and legal fees. (ix) Holder is paid a lump sum compensation equal to one percent (1%) of the loan balance and, in Holder's sole discretion the Note Rate is increased to a rate not in excess of the then current market rates for comparable loans under comparable circumstances (the amount of the increase to be determined sole by Holder). (x) The payment of a transfer fee to Holder's designated servicing agent in an amount equal to one percent ( 1 %) of the then outstanding loan balance. (xi) The provisions in the Note, the Deed of Trust and any other instrument securing the Note regarding the maturity, amortization or prepayment of this Loan shall be modified, at Holder's sole option, to conform to provisions being offered by Holder in similar loans at the time Holder's waiver is sought, or in the event Holder is not offedng similar loans at such time, on such reasonable terms as Holder may determine. Without limiting the generality or effect of the foregoing, waiver by Holder of its right to accelerate the Loan upon any transfer or contract to transfer, or to require satisfaction of the conditions set forth in this subparagraph (b), shall not be deemed a waiver by Holder of its dght to accelerate the Loan upon any other transfer or contract to transfer or of its dght upon such transfer or contract to transfer to require satisfaction of the conditions set forth above in this subparagraph (b). (c) Permitted Intra-family Transfer. Holder will also waive its right to the provisions of paragraph lO(a) if the Loan is not then in default and the following conditions are met: (i) Holder is paid a lump sum fee of $1,OOO.OO; (ii) the proposed transferees assume full personal liability for payment and performance of the Note, the Deed of Trust, and any other security instruments secuhng the Note; and (iii) the proposed transferee is (a) the spouse or issue of Maker, or the trustee(s) of a testamentary trust for the benefit of such spouse or issue, that succeeded to Maker's interest upon Maker's death, divorce or legal separation, or (b) the trustee(s) of an inter vivos trust established by Maker for estate planning purposes, provided that Maker is a trustee of such trust at the time of transfer. (d) Changed Terms. Any changes in the provisions in this Note, the Deed of Trust, or any other instrument securing this Note resulting from the satisfaction of the conditions set forth in paragraph lO(b) above shall entitle Holder to increase the amount of the monthly installment to an amount determined by Holder to be sufficient to amortize this Loan within the remainder of the amortization period originally used by Holder to establish the original monthly payment amount for this Loan. (e) Transfer Examples. For the purpose of, and without limiting the generality of the foregoing, the occurrence at any time of any of the following events, without Holder's prior written consent, shall be deemed to be a transfer of title to the Trust Property: (i) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, all or any part of the legal and/or equitable title to the Trust Property; (ii) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, any share of stock of Maker; (iii) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, any general partnership interest in Maker; or (iv) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, any member's interest in Maker if Maker is a limited liability company. (f) Holder hereby consents to the following transfers, provided that the Loan is not then in default and Maker promptly provides Holder with written notice of such transfer: (i) The sale of all or part of the shares of 4Health, Inc. (g) No Release. Notwithstanding anything contained in this paragraph 10 to the contrary, assumption shall NOT release Maker or successor in interest from personal liability for payment and performance of the terms and conditions of this Note, the Deed of Trust, and other instruments securing this Note. 11. Notice and opportunity to Cure. Notwithstanding any other provision of this Note, Holder shall not accelerate the sums evidenced hereby because of a nonmonetary default (defined below) by Maker unless Maker fails to cure the default within fifteen (15) days of the earlier of the date on which Holder mails or delivers written notice of the default to Maker. For purposes of this Note, the term "nonmonetary default" means a failure by Maker or any other person or entity to perform any obligation contained in the Note or any other Loan document, other than the obligation to make payments provided for in the Note or any other Loan document. If a nonmonetary default is capable of being cured and the cure cannot reasonably be completed within the fifteen (15) day cure period, the cure period shall be extended up to sixty (6O) days so long as Maker has commenced action to cure within the fifteen (15) day cure period, and in Holder's opinion, Maker is proceeding to cure the default with due diligence. No notice of default and no opportunity to cure shall be required if during any 12-month period Holder has already sent a notice to Maker concerning default in the performance of the same obligation. None of the foregoing shall be construed to obligate Holder to forebear in any other manner from exercising its remedies and Holder may pursue any other rights or remedies which Holder may have because of a default. 12. Commercial Purpose. The obligation evidenced by this Note is exclusively for commercial or business purposes. 13. Governing Law. The law of the state where the Trust Property is located shall govern the validity, interpretation, construction and performance of this Note. 14. Successors and Assigns. Whenever used herein, the words "undersigned", "Maker" and "Holder" shall be deemed to include their respective heirs, executors, administrators, personal representatives, successors and assigns. NOTICE TO THE BOROWER DO NOT SIGN THIS NOTE BEFORE YOU READ 1T. THIS NOTE PROVIDES FOR THE PAYMENT OF A CHARGE IF THE NOTE IS REPAID PRIOR TO THE DATE PROVIDED FOR REPAYMENT IN THE NOTE AND OTHER CHARGES IF PAYMENTS ARE LATE. IF YOU HAVE ANY QUESTIONS ABOUT THIS NOTE, YOU SHOULD CONSULT YOUR ATTORNEY. 4Health, Inc., a Utah corporation By: /s/ R. Lindsey Duncan R. Lindsey Duncan Its: President By: (Print Name) Its: Controller WHEN RECORDED RETURN TO: STANDARD INSURANCE COMPANY POST OFFICE BOX 7 L 1 PORTLAND, OR 972O7 ATTN: Jeff Gray, P7E SIC LOAN No. 96122702 DEED OF TRUST, ASSIGNMENT OF RENTS, SECURITY AGREEMENT AND FIXTURE EILING THIS DEED OF TRUST made this 10th day of February, 1997, is among 4Health, Inc., a Utah corporation, ("Trustor"), and The Public Trustee of the County of Boulder, State of Colorado ("Trustee"), and STANDARD INSURANCE COMPANY, an Oregon corporation, ("Beneficiary"). Notice to Recorder: THIS DOCUMENT CONSTITUTES A FIXTURE FLING IN ACCORDANCE WITH THE UNIFORM COMMERCIAL CODE. Trustor grants, bargains, sells and conveys to Trustee, with power of sale, that property in the County of Boulder, State of Colorado (herein referred to as the "Property") and more particularly described as follows: LOT 4, ARAPAHOE PARK EAST, FIRST ADDITION, EXCEPT THAT PORTION OF SUBJECT PROPERTY CONVEYED TO THE CTRY OF BOULDER IN THE DEED RECORDED JULY 27, 184 ON FILM 1314 AS RECEPTIO NO. 636442, COUNTY OF BOULDER, STATE OF COLORADO. Together with (a) all rents, income, contract rights, issues and profits now due or which may become due under or by virtue of any lease, rental agreement or other contract, whether written or oral, for the use or occupancy of the Property, or any part thereof, together with all tenant security deposits, subject, however, to the right, power and authority hereinafter given to and conferred upon Trustor to collect and apply such rents, issues, income, contract rights, security deposits and profits prior to any default hereunder; (b) all buildings and improvements now or hereafter thereon, and all appurtenances, easements, rights in party walls, water and water rights, pumps and pumping plants and all shares of stock evidencing the same; (c) all fixtures and property now or hereafter attached to or used in the operation of the Property, including but not limited to machinery, equipment, appliances and fixtures for generating or distributing air, water, heat, electricity, light, fuel or refrigeration, or for ventilating or sanitary purposes, or for the exclusion of vermin or insects, or for the removal of dust, refuse or garbage, all wallbeds, wallsafes, built-in furniture and installations, shelving, lockers, partitions, door stops, vaults, elevators, dumbwaiters, awnings, window shades, venetian blinds, light fixtures, fire hoses and brackets and boxes for same, fire sprinklers, alarm systems, drapery rods and brackets, screens, linoleum, carpets, plumbing, laundry tubs and trays, ice boxes, refrigerators, heating units, stoves, water heaters, incinerators, communication systems and all installations for which any such building is specifically designed; (d) all awards, compensation and settlements in lieu thereof made as a result of the taking by power of eminent domain of the whole or any part of the Property; (e) all trade names by which all or any part of the Property is known, any books and records relating to the use and operation of all or any portion of the Property, all present and future plans and specifications and contracts relevant to the design, construction, management or inspection of any construction of any improvements on the Property and all present and future licenses, permits, approvals and agreements with or from any municipal corporation, county, state or other governmental or quasigovernmental entity relevant to the development, improvement or use of all or any portion of the Property; (f) all rights of Trustor in and to any escrow or withhold agreements, surety bonds, warranties, management contracts, leasing or sales agreements with any real estate agents or brokers, and service contracts with any entity, which are in any way relevant to the development, improvement, leasing, sale or use of the Property or any personal property located thereon and; (g) all present and future policies of insurance in force or effect insuring any part of the improvements, fixtures or other personal property located upon the Property, the rents derived from and/or the leases on any portion of the Property; and all of said items whether now or hereafter installed being hereby declared to be, for all purposes of this Deed of Trust, a part of the realty; and all the estate, interest or other claim or demand, including insurance, in law as well as in equity, which Trustor now has or may hereafter acquire, in and to the aforesaid property; the specific enumerations herein not excluding the general. The Property and all of the foregoing shall constitute the "Trust Property". This Deed of Trust is made for the purpose of securing, in such order of priority as Beneficiary may elect: (a) payment of the indebtedness in the sum of $1,350,000.00 evidenced by that certain Deed of Trust Note of even date herewith made by Trustor, delivered to Beneficiary and payable to its order, with final payment due on the first day of March, 2002, which is the maturity date of this Deed of Trust, and any and all modifications, extensions or renewals thereof, whether hereafter evidenced by the Note or otherwise (the "Note"); (b) payment of interest on said indebtedness according to the terms of the Note; (c) payment of all other sums, with interest as herein provided, becoming due and payable under the provisions hereof to Trustee or Beneficiary; (d) performance of each and every condition, obligation, covenant, promise and agreement of Trustor contained herein, or in the Note, or in any loan agreement relative to any indebtedness evidenced by the Note, or in any security agreement or deed of trust at any time given to secure any indebtedness hereby secured or any part thereof; and (e) payment of such additional sums with interest thereon as may be hereafter advanced by or borrowed from the Beneficiary, its successors or assigns, by the then record owner or owners of the Trust Property when evidenced by another promissory note or notes which are by the terms thereof secured by this Deed of Trust. To the extent permitted by law, any sums hereafter advanced by or borrowed from Beneficiary, its successors or assigns, shall have the same priority as the original sums advanced by Beneficiary and secured hereby. Trustor's Covenants and Waranties. Trustor hereby warrants that: (a) Trustor is the owner in fee simple absolute of the Property and every part thereof; (b) the Trust Property is free, and will be kept free, from all liens and encumbrances, except those accepted by Beneficiary in writing, and Trustor will defend the title hereby granted to and in favor of Trustee and Beneficiary as against all and every person claiming or to claim the same; (c) the loan proceeds are not for use primarily for personal, family or household purposes; (d) to the best of Trustor's knowledge after due inquiry into previous ownership and use of the Trust Property, there are no Hazardous Substances (as defined below) located on the Trust Property and Trustor will not place or permit to be placed on the Trust Property any Hazardous Substances (as defined below), except in minor quantities as necessary for the operation and maintenance of the Trust Property, used and stored in accordance with applicable law, or in the form of consumer products held for retail sale in sealed containers; (e) the Property is zoned for the existing or contemplated use of the Property; (f) the Property is in compliance with all zoning, subdivision, and environmental laws, regulations, and ordinances applicable thereto; all deed restrictions, subdivision and building ordinances and other applicable governmental laws (including the Fair Housing Act and the Americans With Disabilities Act, as each is amended from time to time) have been fully complied with; and Trustor has all licenses and permits required by governmental authorities with respect to the Trust Property, its operation, improvement and use; (g) the Trust Property has indefeasible access to public rights of way as now improved and open to public passage, and is not encroached upon by improvements or rights of others, nor do the improvements on the Property encroach upon the property of others; (h) there are no actions, lawsuits, or other proceedings pending or threatened against or affecting the Trust Property or Trustor which might adversely affect the ability of Trustor to perform its obligations under the Note or other loan documents, or which might adversely affect the priority of Beneficiary's first lien on the Trust Property; (i) consummation of the loan secured hereby and performance under the loan documents will not conflict with or result in a breach of any law, regulation or court order applicable to Trustor or the Trust Property; (j) no condemnation proceeding is pending or, to the knowledge of Trustor, threatened with respect to the Trust Property; (k) there has been no material adverse change in the financial condition of Trustor which might adversely affect the ability of Trustor to perform its obligations under the loan documents, or which might adversely affect the priority of Beneficiary's first lien on the Trust Property; (l) all services and utilities, such as water, electricity and sewer, are available to the Trust Property; and (m) with respect to each Trustor who is an individual, no part of the Trust Property constitutes any part of Trustor's business homestead or residential homestead. As used in this Deed of Trust, Hazardous Substances means: (a) any "hazardous waste" as defined in the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et seq.), as amended from time to time, and regulations promulgated thereunder; (b) any "hazardous substance" as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 198O (42 U.S.C. Section 96O1 et seq.), as amended from time to time, and regulations promulgated thereunder; (c) radon, asbestos, polychlorinated biphenyls (PCB's), explosives, radioactive substances, and material quantities of petroleum products; (d) any substance the presence of which on the Trust Property is regulated by any federal, state or local law relating to the protection of the environment or public health; and (e) any other substance which by law requires special handling in its collection, storage, treatment or disposal. 1. Payment of Indebtedness; Performance of Covenants. Trustor shall pay each and every installment of principal and interest on the Note and all other indebtedness secured hereby, as and when the same shall become due, and perform and observe all of the covenants, agreements and provisions contained herein, in the Note and any other instrument given as security for the payment of the Note. 2. Maintenance; Compliance; Inspection. Trustor shall: keep the Trust Property in good condition and repair; not permit or suffer any extraordinary repairs or removal or demolition of, or a structural change in any building, fixture, equipment, or other improvement on the Trust Property; comply with all laws, ordinances, regulations, covenants, conditions and restrictions affecting the Trust Property or requiring any alteration or improvements to be made thereon (including the Fair Housing Act and the Americans With Disabilities Act, as each is amended from time to time); not commit or permit waste thereon; not commit, suffer or permit any act upon the Trust Property in violation of law; cultivate, irrigate, fertilize, prune and do all other acts which from the character or use of the Trust Property may be reasonably necessary, the specific enumeration herein not excluding the general; and keep the Trust Property free from all encumbrances, except those accepted by Beneficiary in writing. Trustor shall permit Beneficiary, or its agents, upon reasonable prior notice, to inspect the Trust Property, including the interior of any structure. 3. Hazardous Waste and Substances; Environmental Requirements. (a) Trustor shall comply with all laws, governmental standards and regulations applicable to Trustor or to the Trust Property in connection with occupational health and safety, hazardous waste and substances, and environmental matters. Trustor shall promptly notify Beneficiary of its receipt of any notice of: (i) a violation of any such law, standard or regulation; (ii) all claims made or threatened by any third party against Trustor or the Trust Property relating to any loss or injury resulting from any Hazardous Substances; and (iii) Trustor's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Trust Property that could cause the Trust Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of the Trust Property under any environmental law. The use, generation, storage, release, threatened release, discharge, disposal or presence on, under or about the Trust Property of Hazardous Substances by Trustor, Trustor's agents, or any tenant or sublessee occupying part or all of the Trust Property, except in minor quantities as necessary for the operation and maintenance of the Trust Property, used and stored in accordance with applicable law, or in the form of consumer products held for retail sale in sealed containers, shall be an event of default under this Deed of Trust, and Trustor shall not engage in or permit such activities or events to occur upon the Trust Property. (b) Trustor shall defend, indemnify and hold Beneficiary, its directors, officers, employees, agents, successors and assigns harmless from all loss, cost, damage, claim and expense (including attorney fees and costs, whether at trial, on appeal or otherwise) incurred by Beneficiary in connection with the falsity in any material respect of the covenants contained herein or of Trustor's failure to perform the obligations of this paragraph 3. (c) Trustor agrees that a receiver may be appointed to enable Beneficiary to enter upon and inspect the Trust Property for the purpose of determining the existence, location, nature and magnitude of any past or present release or threatened release of any hazardous substance into, onto, beneath or from the Trust Property. Any costs incurred by Beneficiary in obtaining the appointment of a receiver and performing the inspections, including reasonable attorney fees, shall be paid by Trustor. If not paid within ten (1O) days after such fees, costs and expenses become due and written demand for payment is made upon Trustor, such amount may, at Beneficiary's option, be added to the principal of the Note and shall bear interest at the Default Rate (defined below). 4. Casualty Loss/Restoration Construction. Unless Beneficiary determines, pursuant to the provisions in paragraph 5(e), to apply the insurance proceeds to the reduction of the indebtedness, Trustor shall promptly commence and diligently pursue to completion the repair, restoration and rebuilding of any portion of the Trust Property that has been partially damaged or destroyed in full compliance with all legal requirements and to the same condition, character and at least equal value and general utility as nearly as possible to that existing prior to such damage or destruction. Trustor further agrees: to complete same in accordance with plans and specifications satisfactory to Beneficiary, to allow Beneficiary to inspect the Trust Property at all times during construction and to replace any work or materials unsatisfactory to Beneficiary within fifteen (15) days after notice from Beneficiary of such fact. If said work upon the construction or restoration of the building or buildings shall be discontinued for a period of fifteen (15) days, Beneficiary may, at its option, also enter into and upon the Trust Property and complete the construction or restoration of said building or buildings. Trustor hereby gives to Beneficiary full authority and power to make such entry and to enter into such contracts or arrangements as may be necessary to complete or restore said building or buildings and all monies expended by Beneficiary in connection with such completion or restoration shall be added to the principal theretofore advanced under the Note and secured by these presents and shall be payable by Trustor on demand with interest at the Default Rate. Trustee, upon presentation to it of an affidavit signed by Beneficiary setting forth facts showing a default by Trustor under this numbered paragraph or under any other provision of this Deed of Trust, is authorized to accept as true and conclusive all facts and statements therein, and to act thereon hereunder. 5. Insurance. (a) Property and other Insurance. Trustor shall obtain and maintain in full force and effect during the term of this Deed of Trust fire and all risk property insurance together with endorsements for replacement cost coverage, inflation adjustment, and vandalism and malicious mischief coverage, all in amounts not less than the full replacement cost of all improvements including the cost of debris removal, and comprehensive general liability insurance with limits, coverages, risks insured and waiver of subrogation clauses acceptable to Beneficiary. Trustor shall also maintain comprehensive liability insurance with limits of $2,000,000 for general aggregate liability, with a single limit of $1,000,000 and property damage limit of $50,000. Trustor shall obtain and maintain such other insurance as Beneficiary from time to time shall require, including without limitation rent and rental interruption insurance (equal to twelve (12) months annualized income), earthquake and flood insurance. If any portion of the fire and other risks insured as provided herein are reinsured, the policies shall contain a socalled "cut-through" endorsement. (b) Insurance Companies and Policies. All such insurance shall be written by a company or companies acceptable to Beneficiary with an A- or better rating by Best's, shall contain a Beneficiary clause in favor of Beneficiary with loss proceeds under any policy payable to Beneficiary, shall be satisfactory to Beneficiary as to form, substance, and, except as specifically designated above, amount, shall provide for thirty (3O) days' prior written notice of cancellation to Beneficiary, shall contain endorsements that no act or negligence of Trustor or any occupant, and no occupancy or use of the Trust Property for purposes more hazardous than permitted by the terms of the policy will affect the validity or enforceability of such insurance as against Beneficiary, shall be in full force and effect as of the date of this Deed of Trust, shall contain such additional provisions as Beneficiary deems necessary or desirable to protect its interest, and shall be accompanied by proof of premiums paid for the current policy year. All such insurance shall be written in amounts sufficient to prevent Trustor from becoming a co-insurer under the applicable policies. Trustor shall provide proof of insurance to Beneficiary thirty (3O) days prior to any policy expiration date. (c) Blanket Policy. If a blanket policy is issued, Trustor shall furnish Beneficiary with a certified copy of said policy, together with a certificate indicating that Beneficiary is the insured under said policy in the proper designated amount. (d) Notice of Loss. In the event of loss, Trustor shall immediately notify Beneficiary. Beneficiary may make proof of loss if it is not made promptly by Trustor. (e) Insurance Proceeds. All insurance proceeds may be applied by Beneficiary upon any indebtedness secured hereby and in such order as Beneficiary may determine, without regard to whether or not its security is impaired or, at the sole and absolute option of Beneficiary, the entire amount so collected or any part thereof may be released to Trustor, but in any event Beneficiary may deduct and retain from the proceeds of such insurance the amount of all expenses incur ed by it in connection with the collection and/or payment of such proceeds. Such application or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (f) Insurance obtained bv Third Party. If insurance is provided to Beneficiary by a tenant or any party other than Trustor, there is a lapse in coverage, coverage is not with a company acceptable to Beneficiary with an A- or better rating, coverage is not in an amount equal to the full replacement value of the improvements, or coverage does not in any other way meet conditions required by Beneficiary, Trustor will provide coverage within thirty (3O) days of being notified by Beneficiary of any inadequacy in coverage. If Beneficiary does not receive proof of such coverage within thirty (3O) days, Beneficiary will force place insurance until proof of coverage which meets the conditions of the loan is received. Premiums for this force place coverage are at rates higher than Trustor could obtain, and payment will be the responsibility of Trustor, provided that at Beneficiary's sole option, Beneficiary may add the cost of such premiums to the principal balance of the loan. 6. Defense. Trustor shall appear in and defend any action or proceeding purporting to affect the Trust property or any other security for the Note or the rights or powers of Beneficiary or of Trustee and shall pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding, or appeal therefrom, in which Beneficiary or Trustee may appear. 7. Taxes and Assessments. Trustor shall pay, at least ten (1O) days before the due date, all taxes and assessments affecting the Trust Property or upon this Deed of Trust or the debt secured thereby, or against Beneficiary by reason of the ownership of this Deed of Trust and the Note, or either of them, including assessments on appurtenant water stock. Trustor shall also pay, when due, all encumbrances, charges and liens, with interest, on the Trust Property or any part thereof, which appear to be prior or superior hereto and shall deliver to Beneficiary upon request the official receipt or receipts showing payment thereof and recorded releases therefor, and shall pay all costs, fees and expenses of this Deed of Trust. The foregoing shall not in any way constitute the consent of Beneficiary to Trustor placing, or allowing to be placed, any encumbrances, charges, or liens against the Trust Property, whether superior or inferior to the liens, rights, and security interests created in this Deed of Trust. 8. Monthly Deposits. Unless this covenant is prohibited by law or waived in writing by Beneficiary, Trustor shall pay each year to Beneficiary, together with and in addition to the monthly payments of principal and interest payable under the terms of the Note, until the Note is fully paid, in equal monthly installments, the estimated amount of the annual property taxes, assessments, insurance premiums and similar charges next payable, as estimated by Beneficiary. If at any time Beneficiary determines that such payments will not be sufficient to account for each such charge on its due date (and in the case of annual property taxes, on the due date of the first installment thereof), Trustor shall pay to Beneficiary, upon demand, additional sums as necessary to account for such deficiency. Beneficiary may retain the sums received under this paragraph 8 and apply them to such charges when they (and in the case of annual property taxes, the first installment thereof) become due. Sums received shall not earn interest and may be commingled with other funds of Beneficiary. If Beneficiary is required by law to pay interest on these sums, Beneficiary may, to the extent permitted by law, impose a charge for holding and disbursing such funds. In the event of a default under the Note, this Deed of Trust or any other instryment securing the Note, Beneficiary may apply the sums required under this paragraph 8 (without prepayment charge and without limiting the privilege, if any, to prepay any amounts secured hereby) first to accrued interest and then to the principal balance secured hereby. As an additional covenant hereof, and in any event if the foregoing provision for prepayment is at any time prohibited by law, or waived in writing by Beneficiary, or Trustor fails to make payments in the full amount required under this paragraph 8, Trustor shall pay such charges when they (and in the case of annual property taxes, the first installment thereof are due and, upon demand, provide Beneficiary with satisfactory evidence of payment and coverage. 9. Leases. Trustor shall fully perform all the terms and conditions on Trustor's part to be performed in any existing or future lease with respect to which Trustor is lessor covering all or a portion of tne Trust Property. Trustor shall not, without the prior consent of Beneficiary, terminate, cancel or accept the surrender of, or suffer or permit the termination, cancellation or surrender of such lease, except upon the expiration of the term thereof, or materially modify or alter, or suffer or permit the material modification or alteration of such lease. Trustor further covenants and agrees not to enter into any lease for a term in excess of three (3) years for fifteen percent (15%) or more of the net rentable area of the Trust Property without the prior written consent of Beneficiary. 10. Payment of Premiums. Trustor shall pay all premiums upon any life insurance policy which may be held by Beneficiary as additional security for the debt herein referred to. 11. Fees for Information. Trustor shall pay Beneficiary, to the extent permitted by law, a reasonable fee, as determined by Beneficiary, for providing to Trustor or a third party a statement concerning the obligations secured by this Deed of Trust or any other information requested by Trustor or the third party. 12. Security Agreement. (a) Grant of Securitv Interest. With respect to any portion of the Trust Property which constitutes personal property or fixtures governed by the Uniform Commercial Code of the State where the Trust Property is located (the "Code"), this Deed of Trust shall constitute a security agreement between Trustor as Debtor and Beneficiary as Secured Party, and Trustor hereby grants to Beneficiary a security interest in such portion of the Trust Property. Cumulative of all other rights of Beneficiary hereunder, Beneficiary shall have all of the rights conferred upon secured parties by the Code. Trustor shall execute and deliver to Beneficiary all financing statements that may from time to time be required by Beneficiary to establish and maintain the validity and priority of the security interest of Beneficiary, or any mod)fication thereof, and shall bear all costs and expenses of any searches reasonably required by Beneficiary. (b) Rights of Beneficiary. Beneficiary may exercise any or all of the remedies of a secured party available to it under the Code with respect to such property, and it is expressly agreed that if, upon default, Beneficiary shall proceed to dispose of such property in accordance with the provisions of the Code, ten (1O) days written notice by Beneficiary to Trustor shall be deemed to be reasonable notice under any provision of the Code requiring such notice; provided, however, that Beneficiary may, at its option, dispose of such property in accordance with Beneficiary's rights and remedies with respect to the real property pursuant to the provisions of this Deed of Trust, in lieu of proceeding under the Code. (c) Change in Trustor's Name. Trustor shall give advance notice in writing to Beneficiary of any proposed change in Trustor's name, identity, or corporate structure and shall execute and deliver to Beneficiary, prior to or concurrently with the occurrence of any such change, all additional financing statements that Beneficiary may require to establish and maintain the validity and priority of Beneficiary's security interest with respect to any Trust Property described or referred to herein. (d) Fixture Filing. With respect to those items of the Trust Property that are or will become fixtures upon the Property and those items, if any, specifically described in Exhibit "B" {Intentionally omitted}, this Deed of Trust shall be effective as a financing statement filed as a fixture filing from the date of its filing for record in the real estate records of the county in which the Trust Property or Exhibit "B" property is situated. Information concerning the security interest created by this instrument may be obtained from Beneficiary, as Secured Party, at the address of Beneficiary stated below. The mailing address of Trustor, as Debtor, is as stated below. 13. Restrictive Uses. Trustor shall not, without Beneficiary's prior written consent, change the general nature of the occupancy of the Trust Property, initiate, acquire or permit any change in any public or private restrictions (including without limitation a zoning reclassification) limiting the uses which may be made of the Trust Property, or take or permit any action which would impair the Trust Property or Beneficiary's lien or security interest in the Trust Property. 14. Changes In Use. If Trustor or a related entity or person occupies or leases the Trust Property, Trustor shall make no change in the use or occupancy of the Trust Property or otherwise limit the uses which may be made of the Trust Property without Beneficiary's prior written consent. It is mutually agreed that: 1. Proceeds of Condemnation, Injury to Trust Property. The proceeds of any award or claim for damages, direct or consequential, in connection with any condemnation or other taking of or damage or injury to the Trust Property, or any part thereof, or for the conveyance in lieu of condemnation thereof, are hereby assigned to and shall be paid to Beneficiary. In addition, all causes of action, whether accrued before or after the date of this Deed of Trust, and all claims for damages or injury to the Trust Property or any part thereof, including without limitation causes of action arising in tort or contract and causes of action for fraud or concealment of a material fact, are hereby assigned to Beneficiary and the proceeds shall be paid to Beneficiary. Beneficiary may elect, in its sole discretion, without regard to whether its security is impaired, to apply such sums to the indebtedness secured by this Deed of Trust, whether then matured or subsequently to mature, or to release such sums or any part thereof to Trustor. 2. Non-Waiver. No, waiver of any default on the part of Trustor or breach of any of the provisions of this Deed of Trust or of any other instrument executed in connection with the indebtedness secured hereby shall be considered a waiver of any other or subsequent default or breach, and no delay or omission in exercising or enforcing the rights and powers herein granted shall be construed as a waiver of such rights and powers, and likewise no exercise or enforcement of any rights or powers hereunder shall be held to exhaust such rights and powers, and every such right and power may be exercised from time to time. 3. Release. When all sums secured hereby have been paid, and upon surrender of this Deed of Trust and the note for cancellation and retention, Beneficiary shall release the lien of the Deed of Trust. 4. Assignment of Rents. Trustor hereby assigns to Beneficiary absolutely, not only as collateral, the present and future rents, income, issues and profits of the Trust Property and herebygives to and confers upon Beneficiary the right, power and authority, during the continuance of this Deed of Trust, to collect the rents, income, issues and profits of the Trust Property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, income, issues and profits as they become due and payable. Upon any such default, Beneficiary may, at any time, without notice, either in person, by agent, or by a receiver to be appointed by a court upon an ex parse hearing to be held without notice to Trustor, and without regard to the adequacy of any security for the indebtedness hereby secured, the solvency of Trustor, or the presence of waste or danger of loss or destruction of the Trust Property, enter upon and take possession of the Trust Property, or any part thereof, and any personal property in which Beneficiary has a security interest as additional security for the indebtedness secured by this Deed of Trust, and may, in its own name, sue for or otherwise collect such rents, income, issues and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorneys fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. In the exercise of any of the foregoing rights and powers, Beneficiary shall not be liable to Trustor for any loss or damage thereby sustained unless due solely to the willful misconduct of Beneficiary. The entering upon and taking possession of the Trust Property, the collection of such rents, income, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. To the extent the provisions of this paragraph are inconsistent with the terms of a separate Assignment of Lessor's Interest in Leases, if any, the terms of the Assignment of Lessor's Interest in Leases shall control. 5. Beneficiary's Right to Cure and Defend. Should Trustor fail to make any payment or to do any act as provided in this Deed of Trust, in the Note or in any other instrument securing the Note, Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, and Trustor authorizes Beneficiary or Trustee to enter upon the Trust Property for such purpose. Beneficiary andlor Trustee may, at any time prior to full payment of all sums secured by this Deed of Trust: appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest or compromise any encumbrance, charge or lien which, in the judgment of eithe,r, appears to be prior or superior to the liens, rights and security interests created in this Deed of Trust; and, in exercising any power conferred by this Deed of Trust, pay necessary expenses, employ counsel and pay reasonable fees therefor (including fees on appeal). Trustor agrees to repay immediately and without demand all sums so expended by Beneficiary or Trustee with interest from date of expenditure at the Default Rate as herein provided. 6. Default; Acceleration; Default Rate. Time is material and of the essence hereof with respect to the payment of any sums of any nature by and the performance of all duties or obligations of Trustor. Each of the following shall be an Event of Default under this Deed of Trust: (a) failure of Trustor to make any payment of principal and/or interest or any other payment required by the provisions of the Note, this Deed of Trust, or any other instrument securing the Note on the date such payment or payments are due; (b) failure to perform any other provision of the Note, this Deed of Trust, or any other instrument securing the Note; (c) a proceeding under any bankruptcy, receivership or insolvency law is instituted by or against Trustor; (d) the making of an assignment for the benefit of creditors by Trustor; (e) the imposition upon Beneficiary, under any laws, of what Beneficiary may deem to be a substantial tax upon Beneficiary by reason of its interest in this Deed of Trust (unless Trustor may lawfully pay such tax and does so); or (f) if any warranty contained in this Deed of Trust is false in any material respect or any representation, warranty or information furnished by the Trustor or its agents to Beneficiary in connection with the indebtedness secured hereby is false in any material respect Any default under this Deed of Trust shall constitute a default under the Note and under all other security instruments securing the Note. Any default under such other security instruments shall constitute a default under this Deed of Trust upon default, Beneficiary may declare all sums secured hereby immediately due and payable, without notice except as described in paragraph 21. Any sum not paid as provided herein or in the Note or any other security instrument securing the Note shall bear interest from such due date at a rate of interest four (4) percentage points per annum greater than the Note Rate (as defined in the Note) or the maximum rate permitted by law, whichever is lesser (the "Default Rate"). If a default occurs during a period of time in which prepayment is permitted only on payment of a prepayment charge, such charge shall be computed as if the sum declared due on default were a prepayment and shall be added to the sums due and payable under the Note. 7. Foreclosure; Power of Sale. Beneficiary may foreclose this Deed of Trust like a mortgage and obtain a decree foreclosing Trustor's interest in all or any part of the Trust Property. Beneficiary may also direct Trustee, and Trustee shall be empowered, to foreclose the Trust Property by advertisement and exercise of sale under applicable law. In the event of a default, Beneficiary may declare a violation of this Deed of Trust and elect to advertise the Trust Property for sale by filing a written notice of election and demand for sale with Trustee, together with such documents as are required by law to be provided, including the original Note or, in lieu thereof, a bond in one and one/half of the face amount of the Note and a list specifying the names and addresses to which all notices required by Colorado law must be mailed. Upon receipt of such notice of election and demand for sale, Trustee shall cause a copy of notice of election and demand for sale to be recorded in the book kept by Trustee for that purpose and in the Clerk and Recorder's office for the County in which the Property is located. It shall then be lawful for Trustee to sell and dispose of the Trust Property (en masse or in separate parcels as permitted by law), and all the right, title and interest of Trustor, its successors or assigns, at public auction at a place specified by Trustee in the Notice of Sale for the highest and best cash price. Trustee shall give four weeks' prior public notice of the time and place of such sale by advertisement, weekly, in some newspaper of general circulation in the County in which the Property is located. A copy of such Notice of Sale shall be mailed within ten (10) days from the date of first publication of such Notice of Sale to Trustor at the address herein given, to such other person or person who appear to have acquired a subsequent record interest in the Trust Property (such notice to be sent to the address given in the recorded instrument), and to such other persons, in such manner, as may at that time be required by law. 8. Attorney Fees; Proceeds of Sale. If foreclosure be made by Trustee, reasonable attorney fees for services in the supervision of foreclosure proceedings shall be allowed by Trustee as part of the costs of foreclosure. After deducting all costs, fees and expenses of Trustee and of this Deed of Trust, including cost of evidence of title in connection with sale, Trustee shall apply the proceeds of sale to payment of all sums expended under the terms hereof, not then repaid, with accrued interest at the Default Rate as herein provided; all other sums then secured hereby; and the remainder, if any, to the person or persons legally entitled thereto. 9. Expenses and Attorney Fees. If Beneficiary refers the Note to an attorney for collection or seeks legal advice following a default alleged in good faith under the Note; if Beneficiary is the prevailing party in any litigation instituted in connection with the Note; or if Beneficiary or any other person initiates any judicial or nonjudicial action, suit or proceeding in connection with the Note, the indebtedness evidenced thereby or the security therefor (including, but not limited to, an action to recover possession of the Trust Property after foreclosure), and an attorney is employed by Beneficiary to (a) appear in any such action, suit or proceeding, or (b) reclaim, seek relief from a judicial or statutory stay, sequester, protect, preserve or enforce Beneficiary's interest in the Note, the Deed of Trust or any other security for the Note (including but not limited to proceedings under federal bankruptcy law, in eminent domain, under probate proceedings, appellate reviews, or in connection with any state or federal tax lien), then, in any such event, to the extent allowed by law, Trustor shall pay attorney fees and costs and expenses incurred by Beneficiary and/or its attorney in connection with the above-mentioned events and any appeals related to such events, including but not limited to costs incurred in searching records, the cost of title reports, the cost of appraisals, the cost of surveyors' reports and the cost of environmental surveys. Trustor acknowledges and agrees that such fees and expenses shall be deemed to be advances to protect Beneficiary's interest in the Trust Property, and may be charged and collected from Trustor in connection with a reinstatement following a default hereunder. If not paid within ten (10) days after such fees, costs and expenses become due and written demand for payment is made upon Trustor, such amount may, at Beneficiary's option, be added to the principal of the Note and shall bear interest at the Default Rate. 10. Binding Effect; Waiver of Defenses; Interpretation. This Deed of Trust applies to, inures to the benefit of, and binds all parties hereto, their heirs, legatees, devises, administrators, executors, successors and assigns. The right to plead any Statute of Limitations in any suit brought upon the Note or the indebtedness thereby evidenced or to foreclose or enforce this Deed of Trust or arising therefrom or by reason of any default of Trustor, is hereby waived to the full extent permissible by law. The term Beneficiary shall mean the owner and holder, including pledgees, of the Note secured hereby, whether or not named as Beneficiary herein. In this Deed of Trust, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. 11. Due on Sale or Encumbrance. (a) Generally. The loan evidenced by the Note (the "Loan") is personal to Trustor and not assignable. In making it, Beneficiary has relied on Trustor's credit, Trustor's interest in the Trust Property, and the financial market conditions at the time the Loan is made. Except as described in paragraph ll(f) below, in the event of a sale, conveyance, transfer or encumbrance of the title to or possession of all or part of the Trust Property, directly or indirectly, either voluntarily, involuntarily or by operation of law, Beneficiary may declare the entire balance of this Loan immediately due and payable. In such event, and to the extent permitted by law, a prepayment charge calculated in accordance with the prepayment provisions of the Note shall be added to the sum due and payable. (b) One Time Permitted Third-Partv Transfer. Beneficiary will waive its right under the foregoing provisions of the paragraph one time during the term of this loan, if the Loan is not then in default and the following conditions are met: (i) The purchaser of the Trust Property, the financial statements, financial strength, tax returns and credit history of the purchaser, the sale agreement and related documents, and all aspects of the sale are completely satisfactory to Beneficiary. (ii) The purchaser evidences a history of property management satisfactory to Beneficiary or contracts for management of the Trust Property with a property management firm satisfactory to Beneficiary. (iii) If the amount then due on the Note exceeds seventy-five percent (75%) of the sale price of the Trust Property, the balance due on the Note, at the Beneficiary's election, shall be reduced to an amount which does not exceed seventy-five percent (75%) of the sales price. (iv) Trustor furnishes to Beneficiary, at Trustor's expense, an endorsement to Beneficiary's ALTA title insurance policy insuring the continued validity, enforceability, and priority of the Deed of Trust following the assumption. The form and content of the endorsement shall be satisfactory to Beneficiary. If required by the Beneficiary or the title insurer, the Trustor shall furnish subordination agreements from tenants of the Trust Property and other necessary parties in form and substance acceptable to the Beneficiary and the title insurer. (v) In the event the Loan was made with a requirement imposed upon the Trustor to complete any specified repairs of the Trust Property, the Trustor shall not be entitled to a consent by Beneficiary pursuant to the terms of this provision until such repairs have been completed to Beneficiary's satisfaction. (vi) The Beneficiary may, at its option, require tax reserves as referred to in paragraph A.7 of this Deed of Trust, whether or not previously waived conditionally or otherwise as a condition to its consent. (vii) Unless Beneficiary, in its sole discretion, otherwise agrees in writing at that time, no such sale or assumption shall release Trustor or any guarantor or other person from liability, or otherwise affect the liability of Trustor or any such guarantor or other person, for payment of the indebtedness secured hereby. (viii) Beneficiary is paid an administrative fee equal to the greater of $1,000.00 or reimbursement of Beneficiary's reasonable administrative and legal fees. (ix) Beneficiary is paid a lump sum compensation equal to one percent (1%) of the loan balance and, in Beneficiary's sole discretion the Note Rate is increased to a rate not in excess of the then current market rates for comparable loans under comparable circumstances (the amount of the increase to be determined sole by Beneficiary). (x) The payment of a transfer fee to Beneficiary's designated servicing agent in an amount equal to one percent (1%) of the then outstanding loan balance. (xi) The provisions in the Note, the Deed of Trust and any other instrument securing the Note regarding the maturity, amortization or prepayment of this Loan shall be modfied, at Beneficiary's sole option, to conform to provisions being offered by Beneficiary in similar Loans at the time Beneficiary's waiver is sought, or in the event Beneficiary is not offering similar loans at such time, on such reasonable terms as Beneficiary may determine. Without limiting the generality or effect of the foregoing, waiver by Beneficiary of its right to accelerate the Loan upon any transfer or contract to transfer, or to require satisfaction of the conditions set forth in this subparagraph (b), shall not be deemed a waiver by Beneficiary of its right to accelerate the Loan upon any other transfer or contract to transfer or of its right upon such transfer or contract to transfer to require satisfaction of the conditions set forth above in this subparagraph (b). (c) Permitted Intra-familv Transfer. Beneficiary will also waive its right to the provisions of paragraph 1 1 (a) if the Loan is not then in default and the following conditions are met: (i) Beneficiary is paid a lump sum fee of $1,000.00; (ii) the proposed transferees assume full personal liability for payment and performance of the Note, the Deed of Trust, and any other security instruments securing the Note; and (iii) the proposed transferee is (a) the spouse or issue of Trustor, or the trustee(s) of a testamentary trust for the benefit of such spouse or issue, that succeeded to Trustor's interest upon Trustor's death, divorce or legal separation, or (b) the trustee(s) of an inter vivos trust established by Trtor for estate planning purposes, provided that Trustor is a trustee of such trust at the time of transfer. (d) Changed Terms. Any changes in the provisions in the Note, this Deed of Trust, or any other instrument securing the Note resulting from the satisfaction of the conditions set forth in paragraph 1 l(b) above shall entitle Beneficiary to increase the amount of the monthly installment payment due on the Note to an amount determined by Beneficiary to be suffficient to amortize this Loan within the remainder of the amortization period originally used by Beneficiary to establish the original monthly payment amount for this Loan. (e) Transfer Examples. For the purpose of, and without limiting the generality of the foregoing, the occurrence at any time of any of the following events, without Beneficiary's prior written consent, shall be deemed to be a transfer of title to the Trust Property: (i) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, all or any part of the legal and/or equitable title to the Trust Property; (ii) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, any share of stock of Trustor; (iii) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, any general partnership interest in Trustor; or (iv) Any sale, conveyance, assignment or other transfer of, or the grant of a security interest in, any member's interest in Trustor if Trustor is a limited liability company. (f) Beneficiary hereby consents to the following transfers, provided that the Loan is not then in default and Trustor promptly provides Beneficiary with written notice of such transfer: (i) The sale of all or part of the shares of 4Health, Inc. (g) No Release. Notwithstanding anything contained in this paragraph 11 to the contrary, assumption shall NOT release Trustor or successor in interest from personal liability for payment and performance of the terms and conditions of the Note. 12. Late Charges. The Note provides that if any payment is not received by Beneficiary (or by the correspondent if a correspondent has been designated by Beneficiary to receive payments) within five (5) calendar days after its due date, Beneficiary, at its option, may assess a late charge equal to five cents for each $1.OO of each overdue payment or the maximum late charge permitted by the laws of the state where the Trust,groperty is located, whichever is less. Such late charge shall be due and payable on demand, and Beneficiary, at its option, may (a) refuse any late payment or any subsequent payment unless accompanied by such late charge, (b) add such late charge to the principal balance of the Note, or (c) treat the failure to pay such late charge as demanded as a default hereunder. If such late charge is added to the principal balance of the Note, it shall bear interest at the Default Rate. 13. Deficiency. Trustor consents to a personal deficiency judgment for any part of the debt hereby secured which shall not be paid by the sale of the Trust Property, unless such judgment is prohibited by law. Any Trustor who is a married person hereby expressly agrees that recourse may be had against his or her other property, however owned, but without hereby creating any lien or charge thereon, for any deficiency due after sale of the Trust Property; except that this provision shall not apply in the case of a Trustor who executes this Deed of Trust but not the Note secured hereby. 14. Waiver of Rights Regarding Property. To the extent permitted by law, Trustor hereby releases and waives: (a) all rights to any homestead exemption in the Trust Property; (b) all rights of dower and curtesy in the Trust Property; and (c) all rights to possession of the Trust Property during any period allowed by law for redemption. 15. Waiver of Right to Marshal. Trustor, for Trustor and for all persons hereafter claiming through or under Trustor or who may at any time hereafter become holders of liens junior to the lien of this Deed of Trust, hereby expressly waives and releases all rights to direct the order in which any of the Trust Property shall be sold in the event of any sale or sales pursuant hereto and to have any of the Trust Property and/or any other property now or hereafter constituting security for any of the indebtedness secured hereby marshaled upon any foreclosure of this Deed of Trust or of any other security for any of said indebtedness. 16. Severability. In the event any provision contained in this Deed of Trust shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Deed of Trust, but this Deed of Trust shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 17. Signature on Deed of Trust only. Notwithstanding any other provision of this Deed of Trust, any person who executes this Deed of Trust, but not the Note secured hereby, shall have no personal liability on the Note or for any deficiency judgment which may be obtained upon foreclosure of this Deed of Trust. Such persons jointly and severally waive presentment, demand, protest, notice of intent to accelerate the Note, notice of acceleration of the Note, and all notices and agree that Beneficiary, without notice to them or their consent, and upon such terms as Beneficiary may deem advisable, and without affecting in any way Beneficiary's rights hereunder as against the Trust Property, may: (a) Extend, release, surrender, exchange, compromise, discharge or modify any right or obligation secured by or provided by this Deed of Trust or any other instrument securing the Note, or (b) Take any other action which Beneficiary may deem reasonably appropriate to protect its security interest in the Trust Property. 18. Governing Law. The law of the State where the Trust Property is located shall goven the validity, interpretation, construction and performance of this Deed of Trust. 19. Financial Statements. Within one hundred twenty (12O) days of the close of each fiscal year of Trustor. Trustor shall fumish Beneficiary, at Trustor's expense, all in a form satisfactory to Beneficiary and certified by Trustor or guarantors, as the case may be, with (a) annual statement of operations of the Trust Property, stating that such annual statement presents fairly the financial condition of the Trust Property being reported upon and has been prepared in accordance with sound accounting principles consistently applied, (b) the financial statement for any tenants in whom Trustor has a controlling interest, and (c) Trustor's financial statement. The annual operating statement shall include an annual rent schedule, and a schedule of gross receipts of each tenant who is obligated to pay additional rent based on a percentage of gross receipts. 20. Prepayment Charges. Prepayment charges will be imposed, as specified in the Note, to the extent permitted by law, whether the prepayment is (a) voluntary, involuntary, or by operation of law, (b) in connection with a default in performance of the payment obligations or any other obligations under the Note or under any instrument securing the Note, or (c) required by Beneficiary as provided herein in connection with a transfer or contract to transfer the Trust Property, provided that no prepayment charges shall be added to sums prepaid with casualty insurance proceeds or condemnation awards, or when the Note is prepaid within one Hundred Eighty (18O) days of its maturity date. 21. Notice and opportunity to Cure. Notwithstanding any other provision of this Deed of Trust, Beneficiary shall not accelerate the sums secured hereby because of a nonmonetary default (defined below) by Trustor unless Trustor fails to cure the default within fifteen (15) days of the earlier of the date on which Beneficiary mails or delivers written notice of the default to Trustor. For purposes of this Deed of Trust, the term "nonmonetary default" means a failure by Trustor or any other person or entity to perform any obligation contained in the Note or any other Loan document, other than the obligation to make payments provided for in the Note or any other Loan document. If a nonmonetary default is capable of being cured and the cure cannot reasonably be completed within the fifteen (15) day cure period, the cure period shall be extended up to sixty (6O) days so long as Trustor has commenced action to cure within the fifteen (15) day cure period, and in Beneficiary's opinion, Trustor is proceeding to cure the default with due diligence. No notice of default and no opportunity to cure shall be required if during any 12-month period Beneficiary has already sent a notice to Trustor concerning default in the performance of the same obligation. None of the foregoing shall be construed to obligate Beneficiary to forebear in any other manner from exercising its remedies and Beneficiary may pursue any other rights or remedies which Holder may have because of a default. 22. Notice. Trustee accepts this trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law. The undersigned Trustor requests that a copy of any notice of default and of any notice of sale hereunder be mailed to Trustor. Trustee is not obligated to notify any party her,eto of pending sale under any other deed of trust or of any action or proceeding in which Trustor, Beneficiary or Trustee shall be a party unless brought by Trustee. Except as otherwise provided in this Deed of Trust, all notices and consents required or permitted under this Deed of Trust shall be in writing and may be telecopied, telexed, cabled, delivered by hand, or mailed by first class registered or certified mail, return receipt requested, postage prepaid, and addressed as follows: If to Trustor/Debtor: 4Health, Inc. S485 Conestoga Court Boulder, co 8O301 If to Beneficiary/Secured Party: Standard Insurance Company Mortgage Loan Servicing P7D P. O. Box 711 Portland, OR 972O7 If to Trustee: The Public Trustee of the County of Boulder, State of Colorado Changes in the respective addresses to which such notices may be directed may be made from time to time by any party by notice to the other parties. Notices and consents given by mail in accordance with this paragraph shall be deemed to have been given on the date of dispatch; notices and consents given by any other means shall be deemed to have been given when received. 23. Entire Agreement. This Deed of Trust, the Note and any other security agreements securing the Note constitute the entire and complete agreement of the parties with respect to the subject matter hereof, and supersede all pnor or contemporaneous understandings, arrangements and commitments, all of which, whether oral or written, are merged herein. This Deed of Trust shall bind and inure to the benefit of the parties to this Deed of Trust and any heir, executor, administrator, successor or assignee thereof acquiring an interest hereunder consistent with paragraph B. 11 above. Signature of Trustor 4Health, Inc., a Utah corporation By:/s/R. Lindsey Duncan R. Lindsey Duncan Its: President By: (Print Name) Its: Controller AFFIX ACKNOWLEDGMENT FOR EACH TRUSTOR. STATE OF COLORADO COUNTY OF BOULDER The foregoing instrument was acknowledged before me this 20th day of February, 1997, by R. Lindsey Duncan, President of 4Health, Inc., a Utah Corparation. Witness my hand and official seal. /s/Ardelle Anderson Notary public My commission expires: 11-16-1999. EX-27 3 EXHIBIT 27 FDS
5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 1,086 0 1,128 23 2,535 5,477 2,907 347 9,290 1,500 1,276 0 0 114 6,248 9,290 17,352 17,352 6,924 12,981 (38) 0 108 (2,515) (26) (2,489) 0 0 0 (2,489) (.25) (.25)
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