-----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, GRWdoGJMChDyhiIZhHYs9DTTqovJOerWHFNSFvdJOLOzZ6OnYQm7KSTkORr5SiIW 6PQpUwPNpHXUPv0T/OJ1SA== 0001047469-98-024694.txt : 19980622 0001047469-98-024694.hdr.sgml : 19980622 ACCESSION NUMBER: 0001047469-98-024694 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980619 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: 4HEALTH INC CENTRAL INDEX KEY: 0000857353 STANDARD INDUSTRIAL CLASSIFICATION: FABRICATED PLATE WORK (BOILER SHOPS) [3443] IRS NUMBER: 870468225 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-18160 FILM NUMBER: 98650917 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: 4 HEALTH INC DATE OF NAME CHANGE: 19961011 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/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 TO ANNUAL REPORT [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR the transition period from ____ to ____ Commission file number 0-18160 4HEALTH, INC. (Exact name of registrant as specified in its charter) Utah 87-046822 ------------------------ ------------------------------------ (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 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 February 27, 1998, 11,979,026 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 $31,048,738 (computed based upon the closing price for the Common Stock on the Nasdaq National Market on that date.) DOCUMENTS INCORPORATED BY REFERENCE None 4HEALTH, INC. INDEX TO FORM 10-K PART I. Page - ------- ---- Item 1. Business 3 Item 2. Properties 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 PART II. - -------- Item 5. Market for the Registrant's Common Stock and Related 10 Stockholder Matters Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and 12 Results of Operations Item 8. Financial Statements and Supplementary Data 17 Item 9. Changes in and Disagreements With Accountants on Accounting and 17 Financial Disclosure PART III - -------- Item 10. Directors of the Registrant 18 Item 11. Executive Compensation 20 Item 12. Security Ownership of Certain Beneficial Owners and Management 23 Item 13. Certain Relationships and Related Transactions 23 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24 Exhibit Index 25 Index to Financial Statements 28 Financial Statements F-1 Signature Page
2 4Health, Inc. hereby amends and restates in its entirety its Annual Report on From 10-K for the fiscal year ended December 31, 1997 as filed with the Securities and Exchange Commission on April 15, 1998. (See Note 2 of the Notes to Financial Statements included herewithin.). 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 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. 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, 1996, pursuant to which Surgical changed its name to "4Health, Inc." The merger was recorded as a reverse purchase. (See Note 1 to the Financial Statements.) 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 dietary or nutritional goals. In mid-1997, the Company began a search for a strategic partner. 4Health management believed that the Company's lack of experience in the food, drug and mass market was limiting its future sales growth and reducing the Company's ability to generate significant economies of scale with respect to the cost of goods sold. As a result of this search, 4Health agreed to merge with Irwin Naturals, a California corporation ("IN"). IN was organized in August 1995 and formulates and distributes nutritional supplements through the food, drug and mass market, internationally and through health food stores. The Company chose IN as a strategic partner because of IN's significant international and mass market sales in comparison to other potential partners. 3 On October 13, 1997, 4Health and IN entered into a letter of intent setting forth the basic terms of the merger. On January 7, 1998, 4Health, IN and Klee Irwin, president of IN, executed a merger agreement, dated as of December 24, 1997 and amended and restated on April 2, 1998 and May 22, 1998 (the "Merger Agreement"), providing for the merger of IN with and into 4Health (the "Merger"). The Merger Agreement was approved by the board of directors of 4Health by their unanimous consents dated January 7, 1998, April 2, 1998, and May 22, 1998. Under the Merger Agreement, IN will be merged with and into 4Health, with the effect that IN will be dissolved and 4Health will continue as the surviving corporate entity, with its name changed to "Irwin Naturals/4Health, Inc." At the effective time of the Merger (the "Effective Time"), all 65,250 shares of IN Common Stock outstanding will be converted into an aggregate of 15,750,000 shares of 4Health Common Stock (representing approximately 56.8% of the issued outstanding capital stock of the surviving company) in accordance with the conversion ratio for the Merger, which provides that 241.37931 shares of 4Health Common Stock will be issued for each share of IN Common Stock outstanding at the Effective Time. As part of the Merger, the articles of incorporation of 4Health will be amended to (i) change its name to "Irwin Naturals/4Health, Inc.," (ii) increase the authorization of 4Health Common Stock to 50,000,000 shares and (iii) adopt various provisions regarding the composition of the board of directors, the nominations for and the removal of directors and other management related matters. Pursuant to the Merger Agreement and the related Articles of Merger, and subject to shareholder approval, if the Merger is consummated the board of directors of the surviving corporation will consist of R. Lindsey Duncan, Klee Irwin, Anthony Robbins, Clarke Keough and Jonathan Diamond. 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. The Company trademarks all brand line names and most product names. The Company further protects its trademarks by taking prompt action against potential infringements. 4Health's products that are sold through health food stores, under the proprietary brand name "Nature's Secret-Registered Trademark-", accounted for approximately 81% of 4Health's 1997 total sales, 90% of 1996 total sales, and 94% of 1995 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- products comprised approximately 7% of the Company's total sales in 1997. 4 In the Fall of 1996, 4Health introduced a line of products directed at the mass food and drug market. These products are currently marketed under the name "4Health-TM-." Sales from the 4Health-TM- line accounted for 12% of 4Health's total sales in 1997. 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 Food and Drug Administration ("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 eight separate manufacturers and believes that there are other qualified manufacturers that would meet quality assurance requirements if alternative manufacturing sources were required. 4Health maintains an inventory of approximately 60 to 90 days of anticipated demand and to date has not experienced material shortages of manufactured products for delivery. All ingredients in 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. 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. 5 COMPETITION The industry in which the Company operates is highly competitive. In the health food stores and practitioners channels, there are many relatively small companies which offer products. 4Health's Nature's Secret-Registered Trademark- and Harmony Formula-Registered Trademark- brand lines have built strong brand loyalty with retailers, practitioners and customers through quality products, excellent customer service and an emphasis on health through education. The Company continues to be the leader in internal cleansing products and uses this success to launch products for other health concerns. In the food, drug and mass market, the Company faces increased competition where many of the competitors are significantly larger and have greater financial resources. The Company believes it will be able to compete successfully in the food, drug and mass market because of unique formulations and packaging, better quality, and good relationships with distributors and store buyers. EMPLOYEES 4Health has 70 employees, including one executive officer, three senior managers, 19 individuals in general administration, 25 individuals in sales and marketing, 19 individuals in operations, and 3 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 expanding current distribution channels, introducing new products, entering new markets, and in general expanding 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. Further, there can be no assurance that expenditures of funds to expand current distribution channels, introduce new products, enter new markets, and in general to expand the Company's activities and operations will be successful in generating incremental profitable revenue. DIFFICULTY OF STRICT COMPLIANCE WITH GOVERNMENT REGULATIONS The processing, formulation, packaging, labeling and advertising of 4Health's products are subject to regulation by more than one federal agency. Congress has recognized the potential 6 impact of dietary supplements in promoting the health of US citizens by enacting the Dietary Supplement Health Education Act of 1994 ("DSHEA") which severely limits the jurisdiction of the FDA in regulating dietary supplements. Further, because of the broad language of certain sections of DSHEA and the regulations which implement it, it is difficult for any company manufacturing or making dietary supplements to remain in strict compliance. On November 24, 1997, the Commission on Dietary Supplement Labels, a seven member group appointed by the President of the United States (the "DSL Commission"), issued an 84 page report (the "Report") which includes many recommendations for the regulation of label claims and statements for dietary supplements. The DSL Commission's conclusions and advice are in the form of a series of Findings and Guidelines and its ultimate recommendations are called Recommendations. Section 12 of DSHEA requires the FDA to publish in the Federal Register "a notice of any recommendation of the Commission for changes in regulations of the Secretary for the regulation of dietary supplements and shall include in such notice a notice of proposed rulemaking on such changes together with an opportunity to present views on such changes." CONCENTRATION OF CUSTOMERS 4Health received approximately 6.3% of its revenues from a single customer during 1997, 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 an adverse impact on the business of 4Health. RELIANCE ON LIMITED NUMBER OF PRODUCTS 4Health currently offers approximately 35 products and derived more than 12% of its revenues during 1997 from the sale of one product, Ultimate Cleanse-Registered Trademark-. 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. STRENGTH OF 4HEALTH'S COMPETITORS Competition in the nutritional supplement industry is vigorous with a large number of businesses engaged in the industry. Operations in the food, drug and mass market exposes the Company to increased competition from vitamin and other health related products that compete for the same shelf space. Many of these 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. 7 DEPENDENCE ON MANAGEMENT 4Health is dependent on its management, particularly R. Lindsey Duncan, founder and president, for substantially 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. The loss of the services of Mr. Duncan could have a material effect on the business, operations and financial condition of the Company. 4Health maintains a key-man life insurance policy on the life of Mr. Duncan in the amount of $5,000,000. 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. The selection of alternative manufacturing sources may be delayed while the Company completes a review of the proposed manufacturer's quality control, raw material sources, and manufacturing and delivery capabilities. CUSTOMER GUARANTY OF SATISFACTION; RIGHT OF RETURN In an effort to build customer confidence and satisfaction, 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 1997, there can be no assurance that such a policy will not result in additional product returns in the future as 4Health expands its product lines 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 8 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 legally established third party claims to first use of trade or service marks used by 4Health. YEAR 2000 4Health has conducted a review of its respective computer systems to identify the systems that could be affected by the "Year 2000" issue. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time-sensitive software or equipment that has time-sensitive embedded components may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. While some upgrades will be necessary, the Company presently believes that the Year 2000 problem will not pose significant operational problems for the Company's computer systems. Additionally, the Year 2000 problem is not expected to have a material effect on the cost of operation of the Company. The Company also may be vulnerable to other companies' Year 2000 issues. The Company's current estimates of the impact of the Year 2000 problem on its operations and financial results do not include costs and time that may be incurred as a result of any vendors' or customers' failure to become Year 2000 compliant on a timely basis. The Company intends to initiate formal communications with all of its significant vendors and customers with respect to such persons' Year 2000 compliance programs and status. However, there can be no assurance that such other companies will achieve Year 2000 compliance or that any conversions by such companies to become Year 2000 compliant will be compatible with the Company's computer system. The inability of the Company or any of its principal vendors or customers to become Year 2000 complaint in a timely manner could have a material adverse effect on the Company's financial condition or results of operations. 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 1997, the Boulder facility was re-financed and the new mortgage is carried by Standard Insurance Company. 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. 9 ITEM 3. LEGAL PROCEEDINGS From time to time the Company is a party to legal proceedings that it considers routine litigation incidental to its business. Management believes that the likely outcome of such litigation will not have a material adverse effect on 4Health's business or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1997. 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 17, 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.) 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. The range of high and low stock prices reported for the period between July 17, 1996 and the end of the fiscal year on December 31, 1997 appear in the following table: Fiscal Year Quarter High Low ----------- ------- ---- --- 1996 3rd $ 13.000 $ 5.000 1996 4th $ 7.375 $ 5.500 1997 1st $ 5.625 $ 5.250 1997 2nd $ 6.1875 $ 5.000 1997 3rd $ 6.0625 $ 3.250 1997 4th $ 7.250 $ 4.250
10 As of February 27, 1998, there were approximately 185 stockholders of record of the Company's Common Stock, exclusive of stockholders who hold title to their shares in street name. DIVIDEND POLICY The Company has never paid dividends with respect to the 4Health Common Stock. There are no restrictions on the declaration or payment of dividends in the articles of incorporation or bylaws of the Company, however, 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 The registrar and transfer and warrant agent for the Company is 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 five years in the period ended December 31, 1997 (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 ended December 31, from inception (February 17, 1993) (in thousands, except per share data) -------------------------------------------------------------------- 1993 1994 1995 1996 1997 INCOME STATEMENT DATA Net sales $ 270 $ 2,077 $ 10,434 $ 17,352 $ 12,432 Gross profit 182 1,332 6,631 10,427 6,309 Operating (loss) income (7) (131) 1,131 (2,653) (6,540) Other income (expense), net (6) (5) (63) 38 (89) -------------------------------------------------------------------- (Loss)income before income taxes (13) (136) 1,068 (2,615) (6,629) Income taxes 1 (2) (360) 65 - -------------------------------------------------------------------- Net (loss) income $ (12) $ (138) $ 708 $ (2,550) $ (6,629) -------------------------------------------------------------------- -------------------------------------------------------------------- PER SHARE DATA Net (loss) income per common share - basic and diluted $ - $ (0.02) $ 0 .08 $ (0.26) $ (0.57) Weighted average common shares outstanding - basic 6,018,680 7,334,729 8,707,214 9,896,822 11,615,004 Weighted average common shares outstanding - diluted 6,018,680 7,334,729 8,833,047 9,896,822 11,615,004
Years ended December 31, --------------------------------------- 1995 1996 1997 ---------- ---------- ---------- BALANCE SHEET DATA Working capital $ 2,236 $ 3,977 $ 1,529 Total assets 5,228 12,224 6,363 Long-term debt 1,296 1,276 1,298 Shareholders' equity 3,043 9,335 3,133
11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION REFERENCE IS HEREBY MADE TO THE DISCLOSURE REGARDING "FORWARD-LOOKING" STATEMENTS ON PAGE 2. The following table sets forth, for years 1995, 1996 and 1997, certain items from the Company's Statements of Operations included elsewhere herein, expressed as a percentage of net sales. Years ended December 31, ------------------------------------ 1995 1996 1997 ----- ----- ----- Net Sales 100.0% 100.0% 100.0% Cost of sales 36.4% 39.9% 49.2% ----- ----- ----- Gross Profit 63.6% 60.1% 50.8% General and administrative expenses 14.2% 17.8% 24.3% Sales and marketing expenses 37.1% 55.2% 49.9% Research and development 1.5% 2.4% 3.4% Loss on write-off of intangible assets - - 25.8% ----- ----- ----- Income (loss) from operations 10.8% (15.3%) (52.6%) Other income (expense), net (0.6%) 0.2% (0.7%) ----- ----- ----- Income (loss) before income taxes 10.2% (15.1%) (53.3%) (Provision) benefit for income taxes (3.4%) 0.4% - ----- ----- ----- Net income (loss) 6.8% (14.7%) (53.3%) ----- ----- ----- ----- ----- -----
1997 COMPARED TO 1996 Net sales decreased $4.9 million or 28% from $17.4 million in 1996 to $12.4 million in 1997. Net sales in the Nature's Secret brand decreased $6.3 million or 37%, from $15.6 million to $9.9 million, due primarily to a large sale to a major customer in 1996. This large sale to a major customer in 1996 was related to the initial purchase of the Nature's Secret weight loss product line, as well as the purchase of products already carried by this customer. The customer received discount incentives due to the large volume of this order. The customer chose not to continue to carry the weight loss line of products and resumed ordering other Nature's Secret products in 1997 based on normal ordering cycles and sales volume. Sales of the 4Health brand increased $.94 million or 142% from $.66 million in 1996 to $1.6 million in 1997 and net sales in the Harmony Formulas brand decreased $.08 million or 8%, from $.96 million to $.88 million in the same periods respectively. Excluding the large sale to a major customer in 1996, overall net sales were flat in 1997. The Nature's Secret brand saw an increase in net sales in the last quarter of 1997 when compared to the same period in 1996. Management anticipates this trend to continue throughout 1998 due to its focused marketing campaign and introduction of new products. The Company also feels 12 that the 4Health and Harmony Formulas brands will experience flat net sales in 1998. The Company also experienced increased international sales activity at the end of 1997 and management expects foreign sales to increase significantly in 1998. Gross profit decreased 39% to $6.3 million in 1997 from $10.4 million in 1996. The gross profit margin in 1997 declined 9.3% from 60.1% in 1996 to 50.8% in 1997. Management attributes 6% of this decline to a $.76 million write-down of inventory. This inventory was exchanged for $2.3 million of barter credits. The Company expects to utilize these credits primarily for future advertising and travel expenses. Another 1.0% of this decline was due to the scrapping of obsolete inventory primarily related to a packaging changeover in the Nature's Secret brand, and the balance of this decline is attributable to a shift in sales to products with gross margins less than historical averages. The loss on write-off of assets of $3.2 million was due to the write-off of the goodwill balance generated in the merger with Surgical Technologies, Inc. It was determined under Statement of Financial Accounting Standards No. 121 that this asset had no value at December 31, 1997, and as such was written off in its entirety. General and administrative expenses increased 6.5% from 17.8% in 1996 to 24.3% in 1997. Management attributes this increase to the expenses related to operating as a publicly held company for an entire year and legal fees in connection with a dispute with a major customer, now settled, which significantly exceeded cuts in personnel and other overhead costs. Sales expenses decreased $.7 million or 26% from $2.7 million in 1996 to $2 million in 1997. Marketing expenses decreased $2.7 million or 39% from $6.9 million in 1996 to $4.2 million in 1997. As a percentage of sales, sales and marketing expenses decreased 5.3% from 55.2% in 1996 to 49.9% in 1997. Reductions in advertising expenses to support the Nature's Secret brand accounted for most of this decrease. Research and development costs increased slightly from $.415 million in 1996 to $.418 million in 1997. As a percent of net sales, these expenses increased 1%. Continued development of new products and ongoing clinical studies related to new and existing products accounted for this spending. Management expects this department to decrease its expenditures in 1998 as there are no clinical studies planned for the coming year. Management implemented an expense reduction program in the second half of 1997 which resulted in a drop in operating expenses of approximately $1 million in the second half of the year when compared to the first half. The expense reduction program is still in place in 1998, and management intends to continue to look for ways to cut costs in the coming year. 1996 COMPARED TO 1995 Net sales increased $6.9 million in 1996 or 66%, from $10.4 million in 1995, to $17.3 million. Net sales in the Nature's Secret brand increased $5.7 million in 1996 or 37%, from $9.8 million in 1995 to $15.5 million, due primarily to a large sale to a major customer. Sales of the 4Health brand into the food, drug and mass market amounted to $.65 million of new business in 1996 and net sales in the Harmony Formulas brand increased $.3 million or 31%, from $.66 million in 1995 to $.96 million in 1997, due primarily to increased sales and marketing efforts. 13 Gross profit increased 57% to $3.8 million from $6.6 in 1995 to $10.4 million in 1996. The gross profit margin in 1996 declined 3.5% from 63.6% in 1995 to 60.1%. Management attributes this decline to introduction of new products with gross margins less than historical averages and aggressive discounting on large sales to a major customers. General and administrative expenses increased 107% to $3.1 million in 1996 compared to $1.5 million in 1995. As a percent of net sales, these expenses increased 3.5% from 14.2% in 1995 to 17.7% in 1996. Management attributes these increases to 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 18.4% from 37.1% in 1995 to 55.4% in 1996. Increased selling and advertising expenses to support the Nature's Secret and 4Health brands accounted for 38% of this increase. The build-up of the outside sales forces, sales management and the addition of new marketing management for both brands accounted for another 35% of the increase. Television advertising related to the large sale to a major customer explained another 23% of the increase. Research and development costs increased 178% from $149 thousand in 1995 to $415 thousand in 1996. As a percent of net sales, these expenses increased less than 1%. Development of new products and clinical studies related to new and existing products accounts for this increase. 1995 COMPARED TO 1994 Net sales, for the year ended December 31, 1995, increased 402% to $10.4 million from $2.1 million for the year ended December 31, 1994. This increase was primarily due to a significant market penetration of health food stores from approximately 2,000 in 1994 to 5,400 active accounts by the end of 1995. Included in these stores, is a large chain of approximately 1,600 health food stores which carries only one of the Company'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 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. The Company incurred $1.4 million in advertising expenditures in 1995 compared to $.15 million in 1994 and increased the staffing and 14 infrastructure of the sales and marketing departments by increasing the outside sales force and adding other supporting activities. 4Health's research and development spending increased $.1 million. Only one new product was launched in 1995. Interest expense results from the $1.3 million loan on 4Health's building which was outstanding for twelve months in 1995 at 7.5% interest compared to only seven months in 1994 at an interest rate of 3.5%. LIQUIDITY AND CAPITAL RESOURCES Since the Company's inception on February 17, 1993, it has financed its business growth primarily through operations, common stock sales and short-term borrowings from stockholders. In 1995, the Company raised $1.5 million in cash from the net proceeds of the sale of preferred stock. In 1994, 4Health raised $1.0 million of cash from the net proceeds of the sale of Common Stock. The Company used the proceeds raised in 1995 and 1994 to finance its growth and expansion in those years. During 1996, the Company used cash of $3.3 million for operations. As a result of the merger with Surgical, the Company received cash and cash equivalents of $3.6 million. The bulk of these proceeds were used to fund marketing projects and increased marketing personnel costs. Sales and marketing expenses increased $5.7 million in 1996 over 1995. The majority of these expenditures were discretionary in nature and the Company plans to curtail these activities unless they can be supported by ongoing operations. An additional $1.2 million was used to increase inventory during 1996. The Company intends to substantially reduce inventory amounts during 1997 to reduce cash requirements. The Company's cash and cash equivalents position at December 31, 1997, was $.11 million compared to $1.1 million on December 31, 1996. The $1 million decrease in cash was due primarily to the cost of national magazine advertising and the development of an infomercial for the mass market distribution channel in the first half of 1997. The magazine advertising was not targeted to health food store shoppers and proved to be ineffective in producing increased revenue and the infomercial was discontinued after an unsuccessful test. The Company ended the latest year with working capital of $1.6 million and a 1.8 to 1 working capital ratio. Accounts receivable totaled $1.6 million at December 31, 1997 as compared to $1.1 million on December 31, 1996. Management attributes the increase to the longer collection cycle for mass market related sales, as well as an increase of $.3 million in fourth quarter sales in 1997 when compared to the same period in 1996. Inventories were valued at $1.3 million at December 31, 1997 as compared to $2.5 million at December 31, 1996, which represents a 48% decrease or $1.2 million. The decline in inventories was due primarily to a write-down which reduced inventories $.76 million. Management attributes the rest of the inventory reduction to better inventory and vendor management. Notes receivable decreased $.27 million to $.11 million on December 31, 1997 from $.38 million on December 31, 1996 as the result of the payments on notes receivable acquired by 4Health in the merger with Surgical Technologies, Inc. Capital expenditures for the year ended December 31, 1997 were $.08 million compared to $.53 million for the same period in 1996. Management attributes the decline in capital expenditures to its efforts to conserve cash and a policy to aggressively use the existing capital assets acquired in 1995 and 1996. 15 Other assets as of December 31, 1996 consisted primarily of intangible assets related to the merger with Surgical Technologies, Inc., including ID Technology and goodwill, with the remainder made up of prepaid expenses and deposits. The ID Technology is primarily the capitalized cost of patents and trademarks of a medical device used in angioplasty procedures. The intangible assets decreased $3 million in 1997 due primarily to the write- off of the goodwill in accordance with Statement of Financial Accounting Standards No. 121 which deals with the accounting for impairment of long-lived assets. The goodwill was recorded in the merger with Surgical Technologies, Inc. in 1996 and was determined to have no value at December 31, 1997. The balance of other assets at December 31, 1997 consisted of ID Technology, prepaid expenses and deposits. The Company believes the ID Technology to be a viable asset at its current recorded value of approximately $480,000 at December 31, 1997. In December 1997, the Company entered into an agreement with InterVentional Technologies, Inc. ("IVT") to mutually explore the viability of entering into a joint venture agreement in order to further develop the technology, increase revenues and earnings, and transfer the ownership of the device to IVT. The Company believes the new design of the device will be less expensive to produce, thus allowing the device to compete for U.S. market share, while maintaining international sales volumes. The Company is currently amortizing this asset over an eight year useful life. Accounts payable and accrued liabilities decreased $.3 million due primarily to borrowing on the Company's line of credit with Norwest Business Credit, Inc., which line had a balance of $.7 million at December 31, 1997. Borrowings have been used primarily to pay vendors and suppliers for inventory needed for the normal seasonal first quarter increase in sales activity anticipated in 1998 and to finance additional accounts receivable generated in the fourth quarter of 1997. Available borrowing capacity in addition to the amount outstanding on the revolving line of credit at December 31, 1997 was $.25 million, and at March 27, 1998 was $.93 million. The Company used cash for operating activities of $3.3 million in 1996 and $2.1 million in 1997. $3.9 million in cash was generated in 1996 from investing activities, the majority of which came from the Surgical acquisition. This cash, together with the cash on hand at the beginning of 1996 of $.9 million and the additional borrowings from financing activities in 1997 of $.9 million has allowed the Company to fund these operating losses and some capital expenditures. The Company reduced its operating costs over $.95 million in the last six months of 1997 as compared to the first half of 1997. Although cash used in operations in the second half of 1997 increased slightly over the first half of 1997, the increase was due to a large reduction of accounts payable using the Company's line of credit. Cash flows from operations in the first quarter of 1998 continues to improve. The Company is not anticipating significant future capital requirements. Such investment will depend on many factors, including, but not limited to, 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. The Company believes, however, that the timing of any required expenditures will be somewhat discretionary. 16 In January 1998, the Company entered into a merger agreement with Irwin Naturals, a company also engaged in the nutritional supplement business. The Company expects the anticipated merger to substantially increase its revenue stream and its cash flow generated from operations with minimal additional cost. Management believes that its working capital and borrowing capacity will be sufficient to satisfy anticipated sales growth and operating requirements over the next 12 months. Nevertheless, because of its anticipated sales growth, the Company continues to explore sources of additional capital for future needs. There can be no assurance, however, that the Company will not require additional financing earlier than anticipated. Further, there can be no assurance that additional financing will be available at acceptable terms to the Company or at all. The inability to obtain such financing could have a material adverse effect on the Company's business, financial condition, and results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Financial Statements are filed with this report as pages F-1 through F-22. The Index to Financial Statements appears on page 13. Report of Independent Public Accountants Balance Sheet Statements of Operations Statements of Shareholders' Equity Statements of Cash Flows Notes to Financial Statements 17 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 AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the names, ages, and positions of the Company's directors, executive officers and other significant employees. - ---------------------------------------------------------------------------------------- Officer Director Name Age Since Since Position - ---------------------------------------------------------------------------------------- R. Lindsey Duncan 35 1993 1993 Chairman of the Board, Chief Executive Officer, President Cheryl M. Wheeler 37 1993 1993 Secretary, Director, Marketing Manager Scott W. Lusk 40 1997 - Director of Finance Rockwell D. Schutjer 51 1996 1996 Director, Manager of the Surgical Technologies Division Steven B. Beckman 30 - 1997 Director
R. LINDSEY DUNCAN, the founder of 4Health, is a nutritionist certified by the National Institute of Nutritional Education, an industry accrediting body. Since 1993, Mr. Duncan has been the President, Chief Executive Officer, and Chairman of the Board of 4Health, Inc. 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 and in 1993, he organized 4health, Inc. (a California corporation and a predecessor to the Company.) Mr. Duncan is a member of the National Nutritional Foods Association, the American Herbal Products Association, and the Herb Research Foundation. 18 CHERYL M. WHEELER, a marketing manager at the Company since 1993, assists Mr. Duncan with 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 professional stuntwoman and martial arts expert. SCOTT W. LUSK, has been with the finance department of 4Health since September of 1995. Prior to joining 4Health, Mr. Lusk held the position of Controller at Greenbar Corporation from 1991 until 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., served as Vice President of Operations and as a director of Surgical Technologies, Inc. from its inception in 1991 through 1996. Upon the merger of Surgical Technologies, Inc. and 4Health, Mr. Schutjer became the Manager of Surgical Technologies, a division of 4Health, Inc. and was elected to 4Health's board of directors. Mr. Schutjer received his bachelor of science degree in business finance from the University of Utah. STEVEN B. BECKMAN, has been a director of the Company since 1997. From 1993 through 1996, Mr. Beckman served as Vice President Sales and Marketing at 4health, Inc. as well as being responsible for accounting and operations functions from 1993 to 1995. Upon leaving 4Health, Inc. in 1996, Mr. Beckman founded Achieve Communications, Inc. in Boulder, Colorado. He currently serves as the President of Achieve Communications, Inc. He received a bachelor of arts degree from the University of California at Santa Barbara. The Board of Directors of 4Health during 1997 was comprised of R. Lindsey Duncan, Cheryl Wheeler, Todd B. Crosland (resigned effective June 12, 1997), Rockwell D. Schutjer and Steven B. Beckman. The Board of Directors met 2 times during 1997 for regular Board of Directors meetings. All directors attended 100% of the aggregate of (i) the total number of meetings of the Board of Directors held while they were members and (ii) the total number of meetings held by all Committees of the Board of Directors on which they served as members except Mr. Crosland, who missed one Board meeting. In addition, on several occasions, the Board of Directors gave their unanimous written consent on issues involving normal corporate business. The Board of Directors has three standing committees, the Audit Committee, the Compensation Committee, and the Long-Term Stock Incentive Plan Administration Committee ("LTSIP Administration Committee"). During 1997, the Audit Committee and the LTSIP Administration Committee were composed of Messrs. Crosland and Beckman. The Audit Committee did not meet during 1997, the functions of such committee being performed by the Board of Directors as a whole. The LTSIP Administration Committee met throughout 1997 as needed to grant stock options. The LTSIP Administration Committee is responsible for overseeing 4Health's Long-Term Stock Incentive Plan (the "LTSIP") including, subject to the express terms of the LTSIP, making awards, interpreting the LTSIP, amending and rescinding rules and other duties related to the proper implementation of the LTSIP. During 1997, the 19 Compensation Committee was composed of Messrs. Duncan, Crosland, and Beckman. The Compensation Committee met once in 1997. The primary responsibility of the Compensation Committee is to establish and review the compensation policies of 4Health, including those for executives. During 1997, 4Health did not have a nominating committee, the functions of such a committee being performed by the Board of Directors as a whole. The LTSIP provides that upon assuming office, each non-employee director shall be granted a non-qualified option to acquire 5,000 shares of Common Stock at an exercise price equal to 100% of the fair market value on the date of grant. One-half of the grant shall become exercisable upon completion of one year of service as a director and the remaining balance upon completion of two years of service as a director. All options have a five year expiration term. On April 1, 1997, Mr. Beckman received 5,000 options under this policy exercisable at a price of $5.00 per share. Directors do not receive compensation for attending meetings of the Board of Directors. Directors are reimbursed for their reasonable travel and lodging expenses incurred attending meetings. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Pursuant to Section 16(a) of the Securities Exchange Act of 1934, executive officers, directors and 10% shareholders of 4Health are required to file reports on Form 3, 4 and 5 of their beneficial holdings and transactions in the 4Health Common Stock. During 1997, all such reports were filed in a timely manner. ITEM 11. EXECUTIVE COMPENSATION The following table shows, for the year ending December 31, 1997, the cash compensation paid by the Company, as well as certain other compensation paid or accrued for the year, to R. Lindsey Duncan, 4Health's President and Chief Executive Officer. No other executive received total cash compensation exceeding $100,000 during 1997. Summary Compensation -------------------- Long-Term Compensation -------------------------------- Annual Compensation Awards Payouts --------------------------------------------------------- All Restricted Securities Other Stock Underlying LTIP Compen- Name and Position Year Salary Bonus Other Award Options Payouts sation - -------------------------------------------------------------------------------------------------- R. Lindsey Duncan, 1997 $150,000 $ 0 $ 0 $ 0 401,252 $ 0 $ 0 President and Chief 1996 150,000 0 0 0 331,034 0 0 Executive Officer 1995 150,000 0 0 0 105,329 0 0
20 OPTION EXERCISES AND HOLDINGS The following table presents information with respect to the Chief Executive Officer concerning the exercise of options during 1997 and unexercised options held as of December 31, 1997. No options were granted to the Chief Executive Officer during 1997. Aggregated Option Exercises and Year end Option Values ------------------------------------------------------ Number of Unexercised Value of Unexercised In- Options at the-Money Options at December 31, 1997 December 31, 1997 --------------------------------------------------------- Shares Value Name Exercised(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable - ---------------------------------------------------------------------------------------------------------- R. Lindsey Duncan 0 $0 401,252 35,111 $444,723(1) $0.00(1)
(1) Based on the closing market price of $5.125 per share for 4Health's Common Stock as of December 31, 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION R. Lindsey Duncan, the President and Chief Executive Officer of 4Health, served on the Compensation Committee of the Board of Directors during 1997. REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors has responsibility for making recommendations regarding compensation policy for 4Health, including executives. The Compensation Committee's overall goal is to provide a strong link among shareholder value, company performance, and executive compensation. An additional goal is to promote long-term growth and development for 4Health by attracting and retaining qualified and talented executives. The following report shall not be deemed incorporated by reference into any filing under the Securities Exchange Act of 1933 or the Securities Exchange Act of 1934. 4Health uses various compensation surveys, including industry and regional specific surveys, to develop its compensation strategy and plans. The Compensation Committee also refers to such surveys for executive compensation, including that of the Chief Executive Officer. There is no set policy for adjusting base salary or bonuses subsequent to initial employment. Such adjustments in the past have occurred due to changes in job skills, performance, and competitive salary information. 4Health's current stock option plan includes executives, managers and key employees. Stock options are granted periodically by the LTSIP Administration Committee of the Board of Directors. The Long-Term Stock Incentive Plan allows the grant of options, both incentive and non-qualified. Historically, the LTSIP Administration Committee has granted non-qualified options. For executives, the options are usually granted with one third vesting after each year of service with 4Health. Pricing of the options generally begins at the fair market price on the date of grant for the options vested after one year and increases $1.00 per share for each additional year of service. 21 The compensation of Mr. Duncan, Chief Executive Officer of 4Health, for 1997 is shown in the Summary Compensation table. The Compensation Committee believes that his comp-ensation adequately reflects his performance as 4Health's President and Chief Executive Officer. The Compensation Committee has reviewed 4Health's compensation plans with regard to the deduction limitations under the Omnibus Budget Reconciliation Act of 1993 (the "Act") and the final regulations interpreting the Act which have recently been adopted by the Internal Revenue Service and the Department of the Treasury. Based on this review, the Committee has determined that 4Health's LTSIP, as previously approved by shareholders, meets the requirements for deductibility under the Act. The Committee believes that no tax deduction will be lost as a result of Section 162(m) on compensation paid to Company executives in 1997. R. Lindsey Duncan, Todd B. Crosland, Steven B. Beckman STOCK PERFORMANCE The graph below presents a comparison of the cumulative shareholder return of the Company's Common Stock over the period July 17, 1996 to December 31, 1997 with the cumulative total return over the same period for The Nasdaq Stock Market - U.S. Companies Total Return Index and a peer group represented by the Nasdaq Pharmaceutical Stocks Total return Index (SIC code 283). Both indexes were prepared for Nasdaq by the Center for Research in Security Prices. The graph below compares the cumulative total return of 4Health's Common Stock over the July 17, 1996 to December 31, 1997 period assuming a $100 investment on July 17, 1996 and assuming reinvestment of all dividends. (4Health's Common stock commenced trading on the Nasdaq National Market tier of The Nasdaq Stock Market under the stock symbol HHHH on July 17, 1996. Prior to that date, 4Health was known as Surgical Technologies, Inc. with stock trading under the symbol SGTI. The prior market performance history of Surgical has not been included herein because it does not reflect the results of the merger or the changed nature of 4Health's business since the merger. The graph is based on daily total return figures from July 17, 1996 and month-end figures from July 30, 1996 through December 31, 1997.) [GRAPH] ------------------------------------------------------------------------- Quarter End Values - -------------------------------------------------------------------------------------------------------- 7/17/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 - -------------------------------------------------------------------------------------------------------- 4Health $100.00 $ 78.95 $ 57.90 $ 58.55 $ 61.84 $ 50.66 $ 53.95 - -------------------------------------------------------------------------------------------------------- Nasdaq US Index 100.00 113.16 118.73 112.29 132.88 155.35 145.69 - -------------------------------------------------------------------------------------------------------- Nasdaq Pharmaceutical Index 100.00 113.64 110.25 104.70 113.03 126.80 113.92 - --------------------------------------------------------------------------------------------------------
22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table includes information as of December 31, 1997 concerning the beneficial ownership of the holdings of the Company's Common Stock by (i) all persons who are known by the Company to hold five percent or more of the outstanding shares of 4Health Common Stock, (ii) each of the directors of the Company, (iii) each executive officer of the Company, and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, all shares are owned directly, and the persons named in the table have sole voting and investing power with respect to shares shown as beneficially owned by them. SHARES BENEFICIALLY NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT - ------------------------------------ ------------ ------- Principal Shareholders - ---------------------- R. Lindsey Duncan 5,899,153 (4) 49.25 % 5485 Conestoga Court Boulder, CO 80301 Directors and Executive Officers - -------------------------------- R. Lindsey Duncan (1)(2) -------- See Above -------- Cheryl Wheeler (1)(3) 332,353 (4) 2.77 % Rockwell D. Schutjer (1) 75,250 (4) * Steven B. Beckman (1) 7,523 (4) * Scott W. Lusk (3) 5,864 (4) * All Officers and directors as a group (5 People) 6,320,143 (4) 52.76 %
- ------------------------ * Less than 1% (1) Serves as a director of 4Health. (2) Serves as an executive officer of 4Health and appears in the Summary Compensation table. (3) Serves as an executive officer of 4Health, but does not appear in the Summary Compensation table. (4) Includes the following number of shares which could be purchased under stock options exercisable within 60 days from the date hereof; Mr. Duncan, 401,252 shares; Ms. Wheeler, 51,914 shares; Mr. Schutjer, 9,000 shares; Mr. Beckman, 7,523 shares; Mr. Lusk, 4,512 shares; and all officers and directors as a group, 474,201 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As a director and in accordance with the LTSIP, on April 1, 1997, Mr. Beckman received 5,000 options under the LTSIP exercisable at a price of $5.00 per share (the fair market value.) One-half of these options becomes exercisable upon completion of one year of service as a director and the remaining balance upon completion of two years of service as a director. 23 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 28 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 25 of this Form 10-K. (b) Form 8-K dated October 14, 1997 consisting of the Registrant's press release regarding its signing of a letter of intent to merge. 24 EXHIBIT INDEX SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------------------------------------------- Item 2. Plan of Acquisition, Reorganization, Liquidation, or Succession - ----------------------------------------------------------------------------------------------------------------- 2.01 2 Agreement and Plan of Merger dated April 10, 1996, by and between Incorporated by 4health, Inc., and Surgical Technologies, Inc. as amended June 4, 1996 Reference (6) 2.02 2 Asset Purchase Agreement dated November 30, 1995, by and between Incorporated by Microtek Medical, Inc., and Surgical Technologies, Inc. Reference (5) 2.03 2 Acquisition Agreement dated effective January 1, 1996, by and between Incorporated by Rex Industries Acquisition Corporation and Rex Industries, Inc. Reference (5) 2.04 2 Amended and Restated Agreement and Plan of Merger dated December 24, Incorporated by 1997, signed January 7, 1998, by and between 4Health, Inc. and Irwin Reference (1) Naturals as amended April 2, 1998. 2.05 2 Amended and Restated Agreement and Plan of Merger dated December 24, This 1997, signed January 7, 1998, amended April 2, 1998, by and between Filing 4Health, Inc. and Irwin Naturals as amended May 22, 1998. Item 3. Articles of Incorporation and Bylaws - ----------------------------------------------------------------------------------------------------------------- 3.01 3 Articles of Incorporation of Surgical Subsidiary, Inc., a Incorporated by Utah Corporation now known as Surgical Technologies, Inc. Reference (8) 3.02 3 Articles of Merger and related Plan of Merger Incorporated by Reference (8) 3.03 3 Bylaws Incorporated by Reference (8) 3.04 3 Articles of Merger and related Plan of Merger Incorporated by Reference (6) 3.05 3 Form of Articles of Merger and related Plan of Merger Incorporated by Reference (1) Item 4. Instruments Defining the Rights of Security Holders - ----------------------------------------------------------------------------------------------------------------- 4.01 4 Form of Warrant Agreement between 4Health, Inc. and Zions Incorporated by First National Bank with related form of Warrant Reference (6) 4.02 4 Form of Sale Restriction Agreement respecting shareholders of Incorporated by both Surgical Technologies, Inc., and 4Health, Inc. Reference (6) 4.03 4 Form of Consent, Approval, and Irrevocable Proxy respecting Incorporated by certain Surgical stockholders with related schedule Reference (6) 4.04 4 Form of Consent, Approval, and Irrevocable Proxy respecting Incorporated by certain 4Health stockholders with related schedule Reference (6) 4.05 4 Specimen Common Stock Certificate Incorporated by Reference (6) 25 SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------------------------------------------- 4.06 4 Specimen Warrant Certificate Incorporated by Reference (6) 4.07 4 Warrant certificates between 4Health and Allen & Company Incorporated Incorporated by dated April 15, 1997 Reference (10) Item 5. Other Items - ----------------------------------------------------------------------------------------------------------------- 5.01 5 Summary of Revolving Line of Credit Agreement between 4Health and Incorporated by Norwest Business Credit, Inc. Reference (2) Item 10. Material Contracts - ----------------------------------------------------------------------------------------------------------------- 10.01 10 Form of Directors' Options Incorporated by Reference (5)* 10.02 10 Stock Option and Stock Award Plan Incorporated by Reference (5)* 10.03 10 1991 Directors' Stock Option Plan Incorporated by Reference (5)* 10.04 10 Directors' Stock Option Plan Incorporated by Reference (7)* 10.05 10 Technology Purchase Agreement between Ellis E. Williams, Professional Incorporated by Medical, Inc., and Surgical Technologies, Inc., dated February 4, 1993 Reference (8) 10.06 10 Patent Cross-License Agreement between Utah Medical Products, Inc., Incorporated by and Professional Medical, Inc., dated February 9, 1993 Reference (9) 10.07 10 Form of Promissory Note in the amount of $1,000,000 payable to Incorporated by First Interstate Bank, dated August 16, 1994 Reference (9) 10.08 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Incorporated by Security Agreement, and Fixture Filing, dated April 8, 1994, in the Reference (8) principal amount of $1,000,000 due Standard Insurance Company 10.09 10 Stock Purchase Agreement dated May 6, 1994, between Surgical Incorporated by Technologies, Inc., and Benitex, A.G. Reference (8) 10.10 10 Real Estate Contract dated February 2, 1994, between Surgical Incorporated by Technologies, Inc. and Rex Crosland related to the facilities at Reference (8) 2801 South Decker Lake Lane, Salt Lake City, Utah 10.11 10 Asset Purchase Agreement between Milwaukee Acquisition Company, Incorporated by Insulation Distributors, Inc., and Surgical Technologies, Inc., Reference (8) effective September 30, 1993 10.12 10 All-Inclusive Promissory Note and related All-Inclusive Trust Incorporated by Deed, relating to sale of building and property, dated March 31, Reference (9) 1995, in the principal amount of $981,375.32 26 SEC Exhibit Reference Number Number Title of Document Location - ----------------------------------------------------------------------------------------------------------------- 10.13 10 1996 Long-Term Stock Incentive Plan Incorporated by Reference (6) 10.14 10 Form of $2.00 option granted to Surgical directors, officers, Incorporated by and employees with related schedule Reference (6)* 10.15 10 Form of Option granted to Todd B. Crosland Incorporated by Reference (6)* 10.16 10 Form of Option granted to Rockwell D. Schutjer Incorporated by Reference (6)* 10.17 10 Form of Proprietary Information, Inventions, and Non- Incorporated by Competition Agreement between 4Health and R. Lindsey Duncan Reference (6) 10.18 10 Form of Employment Agreement between the Surviving Corporation Incorporated by and Rockwell D. Schutjer Reference (6)* 10.19 10 Deed of Trust Note and related Deed of Trust, Assignment of Rents, Incorporated by Security Agreement, and Fixture Filing, dated February 20, 1997, in Reference (4) the principal amount of $1,350,000 due Standard Insurance Company 10.20 10 Form of Non-Negotiable Promissory Note Incorporated by Reference (1) Item 20. Other Documents or Statements to Security Holders - ----------------------------------------------------------------------------------------------------------------- 20.01 20 Notice of change of transfer and warrant agent. Incorporated by Reference (3) Item 27. Financial Data Schedule - ----------------------------------------------------------------------------------------------------------------- 27.01 27 Financial Data Schedule This Filing
- ---------------- (1) Incorporated by reference from 4Health's report on Form 10-K for the year ended December 31, 1997. (2) Incorporated by reference from 4Health's report on Form 10-Q for the quarter ended September 30, 1997. (3) Incorporated by reference from 4Health's report on Form 10-Q for the quarter ended March 31, 1997. (4) Incorporated by reference from 4Health's report on Form 10-K for the year ended December 31, 1996. (5) Incorporated by reference from Surgical's registration statement on Form S-1 filed with the Commission, SEC file number 33-31863. (6) Incorporated by reference from Surgical's registration statement on Form S-4 filed with the Commission, SEC file number 33-03243. (7) Incorporated by reference from Surgical's report on Form 10-K for the year ended March 31, 1992. (8) Incorporated by reference from Surgical's report on Form 10-K for the year ended March 31, 1994. (9) Incorporated by reference from Surgical's report on Form 10-Q for the quarter ended December 31, 1995. (10) Incorporated by reference from Schedule 13D filed with the Commission by Allen & Company Incorporated on April 18, 1997. * Represents a management contract, compensatory plan, or arrangement required to be filed as an exhibit. 27 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
28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To 4Health, Inc.: We have audited the accompanying balance sheets of 4Health, Inc. (a Utah corporation) as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997 (as restated - see Note 2). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 4Health, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Arthur Andersen LLP Denver, Colorado, February 20, 1998. F-1 4Health, Inc. Balance Sheets As of December 31, 1997 and 1996 1997 1996 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 109,787 $ 1,086,168 Accounts receivable, net of allowance for doubtful accounts of $13,998 and $23,296, respectively 1,609,692 1,105,207 Inventories 1,329,223 2,534,881 Deferred tax asset 225,506 313,872 Other assets 109,893 171,138 Notes receivable, net of allowance of $300,000 34,817 265,819 ----------- ----------- Total Current Assets 3,418,918 5,477,085 PROPERTY AND EQUIPMENT, NET 2,295,707 2,559,629 OTHER ASSETS, NET 570,152 4,071,435 NOTES RECEIVABLE 78,063 116,308 ----------- ----------- Total Assets $ 6,362,840 $12,224,457 ----------- ----------- ----------- ----------- CURRENT LIABILITIES Accounts payable $ 698,310 $ 484,079 Accrued liabilities 360,454 878,025 Taxes payable 60,587 113,833 Notes Payable, current portion 29,454 20,555 Line of credit 740,797 - Capital leases - 3,733 ----------- ----------- Total Current Liabilities 1,889,602 1,500,225 DEFERRED TAX LIABILITY 42,376 113,072 NOTES PAYABLE 1,297,629 1,275,716 ----------- ----------- Total Liabilities 3,229,607 2,889,013 COMMITMENTS AND CONTINGENCIES (Notes 9 and 10) STOCKHOLDERS' EQUITY Common stock, $0.01 par value, 30,000,000 authorized, 12,068,798 and 11,460,374 issued, respectively, 90,890 shares held in treasury 120,687 114,603 Additional paid-in capital - common stock 11,407,668 11,261,852 Additional paid-in capital - common stock warrants 275,000 - Treasury stock, 90,890 shares (50,000) (50,000) Retained deficit (8,620,122) (1,991,011) ----------- ----------- Total Stockholders' Equity 3,133,233 9,335,444 ----------- ----------- Total Liabilities and Stockholders' Equity $ 6,362,840 $12,224,457 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these balance sheets. F-2 4Health, Inc. Statements of Operations For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ----------- ----------- ----------- Net sales $12,431,670 $17,351,829 $10,434,022 Cost of goods sold 6,122,315 6,924,473 3,802,877 ----------- ----------- ----------- Gross profit 6,309,355 10,427,356 6,631,145 Operating expenses: Sales and marketing 6,197,524 9,585,232 3,873,466 Research and development 418,190 414,998 149,366 General and administrative 3,031,447 3,080,588 1,476,986 Loss on write-off of intangible assets 3,202,431 - - ----------- ----------- ----------- 12,849,592 13,080,818 5,499,818 ----------- ----------- ----------- (Loss) income from operations (6,540,237) (2,653,462) 1,131,327 ----------- ----------- ----------- Other income (expense): Interest income 51,727 146,592 27,542 Interest expense (140,601) (108,486) (90,467) ----------- ----------- ----------- (88,874) 38,106 (62,925) ----------- ----------- ----------- Net (loss) income before income tax (provision) benefit (6,629,111) (2,615,356) 1,068,402 Income tax (provision) benefit - 65,215 (359,723) ----------- ----------- ----------- NET (LOSS) INCOME $(6,629,111) $(2,550,141) $ 708,679 ----------- ----------- ----------- ----------- ----------- ----------- Net (loss) income per common share - basic and diluted $ (.57) $ (.26) $ .08 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding - basic 11,615,004 9,896,822 8,707,214 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding - diluted 11,615,004 9,896,822 8,833,047 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements. F-3 4Health, Inc. Statements of Stockholders' Equity For the years ended December 31, 1997, 1996 and 1995 Additional Paid-In Preferred Stock Common Stock Capital ---------------------------------------------------------------------- Common Stock Equivalent Shares Amount Shares Amount Amount ---------------------------------------------------------------------- BALANCES, December 31, 1994 - $ - 8,703,442 $ 87,034 $ 954,271 Issuance of Series A Convertible Preferred Stock for cash, net of offering costs of $87,229 consisting of cash and common stock 376,167 15,000 11,285 113 1,427,658 Net income - - - - - ---------------------------------------------------------------------- BALANCES, December 31, 1995 376,167 $ 15,000 8,714,727 $ 87,147 $2,381,929 Conversion of a $50,000 shareholder note receivable for Treasury Stock - - - - - Conversion of Series A Convertible Preferred Stock (376,167) (15,000) 376,167 3,762 11,238 Common stock issued in merger with Surgical Technologies Inc. - - 2,271,108 22,711 8,773,955 Issuance of common stock to employees, directors and officers for options exercised - - 98,372 983 94,730 Net loss - - - - - ---------------------------------------------------------------------- BALANCES, December 31, 1996 - $ - 11,460,374 $114,603 $11,261,852 ---------------------------------------------------------------------- ----------------------------------------------------------------------
Treasury Stock ------------------------------ Total Retained Stock- Earnings holders' Shares Amount (Deficit) Equity ------------------------------------------------------------ BALANCES, December 31, 1994 - - $ (149,549) $ 891,756 Issuance of Series A Convertible Preferred Stock for cash, net of offering costs of $87,229 consisting of cash and common stock - - - 1,442,771 Net income - - 708,679 708,679 ------------------------------------------------------------ BALANCES, December 31, 1995 - - $ 559,130 $ 3,043,206 Conversion of a $50,000 shareholder note receivable for Treasury Stock 90,890 (50,000) - (50,000) Conversion of Series A Convertible Preferred Stock - - - - Common stock issued in merger with Surgical Technologies Inc. - - - 8,796,666 Issuance of common stock to employees, directors and officers for options exercised - - - 95,713 Net loss - - (2,550,141) (2,550,141) ------------------------------------------------------------ BALANCES, December 31, 1996 90,890 $(50,000) $(1,991,011) $ 9,335,444 ------------------------------------------------------------ ------------------------------------------------------------
The accompanying notes are an integral part of these statements. F-4 4Health, Inc. Statements of Stockholders' Equity For the years ended December 31, 1997, 1996 and 1995 (Continued) Additional Paid-In Preferred Stock Common Stock Capital ---------------------------------------------------------------------- Common Stock Equivalent Shares Amount Shares Amount Amount ---------------------------------------------------------------------- BALANCES, December 31, 1996 - $ - 11,460,374 $114,603 $11,261,852 Issuance of common stock to employees (current and former) for options exercised - - 108,424 1,084 150,816 Issuance of warrants as compensation for investment banking services - - - - - Issuance of common stock to Old 4Health shareholders pursuant to a realignment of equity interests (Note 1) - - 500,000 5,000 (5,000) Net loss - - - - - ---------------------------------------------------------------------- BALANCES, December 31, 1997 - $ - 12,068,798 $120,687 $11,407,668 ---------------------------------------------------------------------- ----------------------------------------------------------------------
Additional Treasury Stock Paid-In ---------------------------- Capital Total Common Retained Stock- Stock Earnings holders' Shares Amount Warrants (Deficit) Equity ---------------------------------------------------------------------- BALANCES, December 31, 1996 90,890 $(50,000) $ - $(1,991,011) $ 9,335,444 Issuance of common stock to employees (current and former) for options exercised - - - - 151,900 Issuance of warrants as compensation for investment banking services - - 275,000 - 275,000 Issuance of common stock to Old 4Health shareholders pursuant to a realignment of equity interests (Note 1) - - - - - Net loss - - - (6,629,111) (6,629,111) ---------------------------------------------------------------------- BALANCES, December 31, 1997 90,890 $(50,000) $275,000 $(8,620,122) $ 3,133,233 ---------------------------------------------------------------------- ----------------------------------------------------------------------
The accompanying notes are an integral part of these statements. F-5 4Health, Inc. Statements of Cash Flows For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995 ----------- ----------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(6,629,111) $(2,550,141) $ 708,679 Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation and amortization 523,055 334,971 122,401 Bad debt expense 15,788 - - Loss on disposal of assets 99,148 7,444 33,927 Issuance of warrants for compensation expense 275,000 - - Loss on write-off of intangible assets 3,202,431 - - (Increase) decrease in: Accounts receivable (520,274) (54,168) (723,462) Inventory 1,205,658 (1,166,483) (584,420) Other assets 84,132 (147,580) (52,118) Deferred tax assets 88,366 (231,862) (31,005) Increase (decrease) in: Accounts payable 214,231 (125,252) 311,852 Accrued interest payable - - 4,984 Accrued liabilities (517,571) 558,913 84,920 Taxes payable (53,246) 63,868 (24,495) Deferred tax liability (70,696) 22,507 32,458 ----------- ----------- ---------- Net cash used in operating activities (2,083,089) (3,287,783) (116,279) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of marketable securities - 524,002 - Acquisition of Surgical Technologies, Inc. - 3,639,257 - Purchase of fixed assets (84,111) (532,754) (689,030) Proceeds from asset dispositions 600 - 11,205 Proceeds from note receivable 269,247 262,062 - ----------- ----------- ---------- Net cash provided by (used in) investing activities 185,736 3,892,567 (677,825) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Preferred Stock - - 1,500,000 Preferred Stock issuance costs - - (57,229) Proceeds from common stock 151,900 95,713 - Surgical Technologies, Inc. acquisition costs - (457,551) - Borrowings on short-term debt 2,577,490 - - Borrowings on long-term debt 1,350,000 - - Repayments on short-term borrowings (1,836,693) - - Repayments on long-term borrowings (1,319,188) (71,198) - Repayments on capital leases (2,537) (5,515) (3,413) ----------- ----------- ---------- Net cash provided by (used in) financing activities 920,972 (438,551) 1,439,358 ----------- ----------- ---------- NET (DECREASE) INCREASE IN CASH (976,381) 166,233 645,254 CASH AND CASH EQUIVALENTS, at beginning of period 1,086,168 919,935 274,681 ----------- ----------- ---------- CASH AND CASH EQUIVALENTS, at end of period $ 109,787 $ 1,086,168 $ 919,935 ----------- ----------- ---------- ----------- ----------- ----------
The accompanying notes are an integral part of these statements. F-6 4Health, Inc. Statements of Cash Flows For the years ended December 31, 1997, 1996 and 1995 (Continued) 1997 1996 1995 --------- ---------- --------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes $ 40,871 $ 800 $ 443,769 Cash paid during the year for interest 128,190 98,527 83,735 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. The accompanying notes are an integral part of these statements. F-7 4Health, Inc. Notes to Financial Statements December 31, 1997 and 1996 (1) ORGANIZATION AND BUSINESS ACTIVITY ORGANIZATION 4health, Inc. was incorporated in California and commenced operations on February 17, 1993. 4health, Inc. acquired Nature's Secret, a vitamin and health food supplement company, on February 17, 1993, by issuing 4,000,000 shares of common stock to R. Lindsey Duncan, 4health's president, founder and majority stockholder. On July 15, 1996, 4health, Inc. ("Old 4Health"), a California corporation, merged with Surgical Technologies, Inc., ("Surgical") a Utah corporation. The merger was recorded as a reverse purchase. The merger included a two for four reverse split of Surgical's common stock. Pursuant to the Merger Agreement, Surgical continues as the surviving corporate entity, with its name changed to "4Health, Inc." (the "Company" or "4Health"). The Merger Agreement between Surgical and Old 4Health provided for the merger of Old 4Health with and into Surgical, pursuant to which: (a) the shares of Old 4Health common stock and the shares of Old 4Health Series A preferred stock were exchanged for approximately 9,000,000 shares of Surgical common stock, (b) each four shares of Surgical common stock issued and outstanding were converted into two shares of Surgical common stock (or 2,271,108 shares) and one warrant to purchase a share of the Company's common stock at $11.00 per share (or 1,135,554 total shares), (c) the board of directors of the Company was reconstituted to include five designees of Old 4Health and two designees of Surgical, and (d) the articles of incorporation of Surgical were amended to (i) change its name to 4Health, Inc., (ii) increase the authorization of common stock to 30,000,000 shares, (iii) add a "fair price" provision in the event of certain corporate transactions, and (iv) restrict the use of written consents of stockholders in lieu of meetings. The warrants may be redeemed by the Company at $0.01 per warrant, provided that the trading price of the underlying common stock exceeds $13.75 per share for 30 consecutive days. As part of the merger, all outstanding options to purchase shares of Old 4Health common stock were converted, pursuant to the Old 4Health conversion ratio (1.50467:1), into options to purchase shares of the Company at such converted exercise prices, such that the cash received by the Company upon exercise will be unchanged. Outstanding options to purchase an aggregate of 651,000 shares of Surgical common stock at a weighted average exercise price of $2.23 per share were converted into options to purchase an aggregate of 325,000 shares of the Company's common stock, at a weighted average exercise price of $4.45 per share. In addition, outstanding options to purchase an aggregate of 599,999 F-8 shares of Old 4Health common stock at a weighted average exercise price of $6.70 per share were converted into options to purchase an aggregate 902,800 shares of the Company's common stock at a weighted average exercise price of $4.45 per share. The number of shares of the Company's common stock issuable to the holders of Old 4Health common stock and Old 4Health Series A preferred stock was subject to adjustment in the event that the Company did not realize at least $2,000,000 in earnings, before interest and income taxes, from the ID Technology acquired from Surgical during the twelve month period following the merger. On September 26, 1997, pursuant to this adjustment clause, 500,000 additional shares of common stock were issued to the Old 4Health shareholders to realign the equity interests because of the failure of the acquired assets to produce the required level of earnings. PRO FORMA CONDENSED COMBINED OPERATIONS As a result of the sale of Surgical's specialty metals fabrication business segment and its disposable surgical pack and drape manufacturing product lines, both of which occurred prior to the merger, the continuing operations of Surgical subsequent to the merger were not material compared to the continuing operations of 4Health. Accordingly, the unaudited pro forma condensed statements of operations would reflect only the historical operations of 4Health. 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-, and 4Health-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 United States, and 4Health products are marketed through the mass market. The products are formulated to appeal to the general public and address overall health considerations. (2) RESTATEMENT The Company's balance sheets as of December 31, 1997 and 1996 and the related statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997 have been restated. The restatement is a result of the Securities and Exchange Commission's review of the Company's proxy materials related to the prospective merger with Irwin Naturals (See Note 10). The restatement affects the accounting treatment of the purchase price recorded for the Surgical acquisition effective July 15, 1996. In connection therewith, the Company increased the intangible asset values recorded for the Surgical acquisition based on the average stock price of Surgical for the two days before and after the announcement of the Surgical acquisition by $3,042,000. The remaining intangible assets of $3,202,000 were subsequently written off in 1997 because the continuing Surgical operations did not generate sufficient revenue to justify continuing such valuation. The restatement also included an adjustment to write-down inventory by $758,000 in connection with an exchange for barter credits in February 1997. These write downs were considered corrections of errors under APB No. 20 and the affected financial reporting periods were restated. F-9 The restatement was a non-cash charge against earnings and does not reflect an adverse change in the Company's cash flow previously reported. The accounts affected by the restatement are as follows: -------------------------------------------------------- As of December 31, -------------------------------------------------------- Previously As Previously As Reported Restated Reported Restated 1997 1997 1996 1996 ----------- ----------- ----------- ----------- Other assets, net $ 1,317,350 $ 680,045 $ 1,307,669 $ 4,242,573 Deferred tax liability 5,638 42,376 152,112 113,072 Additional paid-in capital - common stock 7,904,884 11,407,668 8,226,844 11,261,852 Retained deficit (4,442,387) (8,620,122) (1,929,947) (1,991,011) -------------------------------------------------------- As of December 31, -------------------------------------------------------- Previously As Previously As Reported Restated Reported Restated 1997 1997 1996 1996 ----------- ----------- ----------- ----------- Net sales $13,189,979 $12,431,670 N/A N/A General and administrative expenses 2,951,294 3,031,447 $2,980,484 $ 3,080,588 Loss on write-off of intangible assets - 3,202,431 N/A N/A Income tax benefit 75,778 - 26,175 65,215
The restatement did not affect the beginning balance in retained earnings for the year ended December 31, 1996 and decreased beginning of the year retained earnings by $61,000 for the year ended December 31, 1997. The effect on net income and related per share amounts for each of the years is as follows: -------------------------------------------------------- As of December 31, -------------------------------------------------------- Previously As Previously As Reported Restated Reported Restated 1997 1997 1996 1996 ----------- ----------- ----------- ----------- Net loss before income tax benefit $(2,588,218) $(6,629,111) $(2,515,252) $(2,615,356) Net loss (2,512,440) (6,629,111) (2,489,077) (2,550,141) Net loss per common share - basic and diluted $ (.22) $ (.57) $ (.25) $ (.26)
(3) 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 F-10 maintains the majority of its cash balance with two financial institutions, in the form of demand deposits and money market accounts. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral. The Company maintains reserves for estimated credit losses. Its accounts receivable balances are primarily domestic. The Company has one principal customer which accounted for approximately 6% of its total revenue for the year ended December 31, 1997, 30% of its total revenue for the year ended December 31, 1996 and 13% of its total revenue for the year ended December 31, 1995. OTHER ASSETS Included in other assets at December 31, 1996 was unamortized goodwill resulting from the merger (See Note 1) of approximately $3,227,000 and the ID Technology acquired from Surgical of approximately $727,000. The unamortized ID Technology is used in angioplasty procedures. These intangible assets are being amortized using the straight-line method over a period of eight years. In 1997, the purchase price for Surgical was adjusted downward because of the failure of the former Surgical assets to produce a specific level of earnings in the first year (See Note 1). The goodwill arising from the merger was reduced to $0 and the value of the ID Technology was reduced to $480,000 at December 31, 1997. The Company believes the carrying value of the asset is fully recoverable. On February 25, 1997, 4Health entered into a barter credit agreement with Active Media Services, Inc. Under the terms of the agreement, the Company exchanged with Active Media Services, Inc. certain inventory with a cost of $758,308 for which the Company received $2,300,000 in barter credits. These barter credits can be used in lieu of cash to purchase goods and services available through Active Media Services, Inc. 4Health intends to use these barter credits to reduce future advertising, printing, travel and other normal operating expenditures. This transaction was recorded as a reduction of inventory. INVENTORIES Inventories consist primarily of vitamins and health food supplements and are valued at the lower of first-in, first-out cost or net realizable value. As of December 31, 1997 and 1996, all of the Company's inventory consisted of purchased finished goods. 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 F-11 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: 1997 1996 ---------- ---------- Land $ 270,000 $ 270,000 Buildings and improvements 1,606,527 1,567,444 Machinery and equipment 174,779 201,036 Furniture, fixtures and equipment 760,364 868,757 ---------- ---------- 2,811,670 2,907,237 Less-accumulated depreciation (515,963) (347,608) ---------- ---------- $2,295,707 $2,559,629 ---------- ---------- ---------- ----------
Upon sale or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination of income or loss. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from future undiscounted cash flows. Impairment losses are recorded for the difference between the carrying value and fair value of the long-lived asset. STOCK BASED COMPENSATION PLANS In October of 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes financial accounting and reporting standards for stock-based compensation. The Statement defines a fair value-based method of accounting for an employee stock option or similar equity instrument. However, it also allows an entity to continue to measure compensation costs for those plans using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in Opinion No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in the Statement had been applied. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. The Company adopted SFAS No. 123 during 1996. The Company has elected to make pro forma disclosures as allowed by SFAS No. 123 (See Note 7). REVENUE RECOGNITION The Company recognizes revenue from product sales at the time of shipment. Sales returns and allowances are estimated at each reporting date and a reserve is established. F-12 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash, short-term trade receivables and payables and short-term and long-term debt. The carrying values of cash and short-term trade receivables, payables and short-term debt approximate fair value. The fair value of long-term notes payable is estimated based on current rates available for debt with similar credit risk, yield and maturity and at December 31, 1997 and 1996, approximates the carrying value. EARNINGS PER SHARE Effective December 15, 1997, the Company has adopted the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share." SFAS No. 128 requires entities to present both Basic Earnings Per Share ("EPS") and Diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. All earnings per share amounts for 1996 and 1995 have been restated to reflect the adoption of SFAS No. 128. Years ended December 31, (in thousands, except per share amounts) --------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------------------------- Per Per Per Loss Shares Share Loss Shares Share Income Shares Share ---- ------ ----- ---- ------ ----- ------ ------ ----- Net (loss) income $(6,629) 11,615 $(2,550) 9,897 $709 8,707 Basic EPS $(.57) $(.26) $.08 ----- ----- ---- ----- ----- ---- Effect of diluted securities: Convertible preferred stock 119 Stock options outstanding 7 --------------------------------------------------------------------------------------- Net (loss) income $(6,629) 11,615 $(2,550) 9,897 $709 8,833 ------- ------ ------- ----- ---- ----- ------- ------ ------- ----- ---- ----- Diluted EPS $(.57) $(.26) $.08 ----- ----- ---- ----- ----- ----
Assumed conversions were not included in the calculation for diluted EPS in 1997 and 1996 as they would have been anti-dilutive. Recently Issued Accounting Standards In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenue, gains and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with F-13 the same prominence as other financial statements. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The impact of the adoption of SFAS No. 130 on the Company's financial position and results of operations is not expected to be material. In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and service, geographic areas and major customers. This statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application comparative information for earlier years is to be restated. SFAS No. 131 may require certain disclosures to be made by the Company, if applicable. INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities. ESTIMATES MADE BY MANAGEMENT The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior year balances to conform with the current year presentation. (4) NOTES PAYABLE During 1997, the Company refinanced the corporate headquarters building loan for $1,350,000 for a five-year term. Payments of principal and interest of $11,503 are due monthly with the remaining balance due at the end of year five. Interest is calculated at the rate of 8.25% per year. Also during September 1997, the Company entered into a $1,500,000 three year revolving credit agreement with Norwest Business Credit, Inc. used for financing growth in inventory and receivables and other working capital needs. The agreement allows the Company to borrow up to $1,500,000 if F-14 eligible accounts receivable and inventory are sufficient to warrant such borrowings and contains certain covenants customary for this type of agreement. Borrowing on the line is subject to certain limitations and is secured by accounts receivable, inventory and various other assets. All of the Company's receipts are applied to the credit facility on a daily basis. The loan bears interest at Minnesota's Base Rate plus 2.75% and is subject to a minimum interest charge which is calculated on a quarterly basis. At year end, the maximum amount available to borrow was $.93 million, of which, $.19 million was still available. The maturities of the note payable and the revolving credit agreement are as follows: 1998 $ 770,251 1999 31,978 2000 34,718 2001 37,694 2002 1,193,239 ---------- Total $2,067,880 ---------- ----------
(5) NOTES RECEIVABLE As of December 31, 1997 and 1996 notes receivable consisted of the following: 1997 1996 -------- --------- Note receivable from a third party for certain assets, bearing interest 8%, with interest and principal due on January 31, 1997. Subsequent to the year ended December 31, 1996, the note receivable was extended to September 1, 1997 and has been paid. $ - $ 250,000 Note receivable from a third party for the purchase of certain assets, bearing interest 10% through February 16, 1999, secured by purchased assets 112,880 132,127 Less current portion (34,817) (265,819) -------- --------- Long-term notes receivable $ 78,063 116,308 -------- --------- -------- ---------
(6) RELATED-PARTY TRANSACTIONS LOAN PAYABLE The majority shareholder loaned the Company $200,000 during 1994 for the down payment required on the purchase of the corporate headquarters building. The loan was unsecured and bore interest at 7.0% and was due by March 31, 1997. This loan was paid off in 1996. Interest expense for fiscal 1996 totaled $2,492. F-15 NOTE RECEIVABLE In 1996, the Company received treasury stock as payment for a $50,000 shareholder note receivable (See Note 7). (7) 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 6). 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 Preferred Stock outstanding were converted into an aggregate of approximately 9,000,000 shares of common stock, split at a rate of 1.50467 to 1 for common stock and at 25.07782 to 1 for the Preferred Stock. Further, 2,271,108 shares of common stock were issued to holders of Surgical common stock. Shares of 4Health common stock, Preferred Stock and treasury stock have been retroactively restated to reflect the equivalent number of shares received in the merger, as presented in the Statements of Stockholders' Equity. In 1996 and 1997, common stock was issued as a result of options exercised by employees, an officer and a director of the Company as well as prior Surgical employees. The exercise prices ranged from $3.99 to $4.15 per share in 1997 and from $3.32 to $4.15 per share in 1996. Also during 1997, 500,000 shares of common stock were issued to Old 4Health shareholders pursuant to a clause in the merger agreement related to ID Technology post-merger earnings (See Note 1). WARRANTS In 1997, the Company entered into a three-year contract with Allen & Company to provide investment banking services. In consideration for these services the Company issued to Allen & Company warrants to purchase 1,000,000 shares of the Company's common stock at an exercise price of $6.00 per share and additional warrants to purchase 250,000 shares of the Company's common stock, at an exercise price of $4.00 per share, both exercisable up to the fifth anniversary of the date of issuance. The Company recorded professional service expense of $275,000 in connection with the issuance of these warrants. F-16 In 1996, as part of the merger transaction, warrants were issued to holders of Surgical common stock at the rate of one warrant per four shares of Surgical common stock held. Each warrant entitles the holder to acquire one share of the Company's common stock at an exercise price of $11.00 per share, for a period of 18 months. Compensation expense of $223,243, as calculated for SFAS No. 123, related to the warrants, is included in the pro forma information presented below. STOCK OPTION PLAN In 1996, upon consummation of the merger, the 1995 Stock Option Plan was terminated. The Long-Term Stock Incentive Plan ("LTSIP") as previously sponsored by Surgical was adopted. The LTSIP allows issuance of incentive stock options and non-qualified stock options and is administered by the Long-Term Stock Incentive Plan Administration Committee of the Board of Directors. The LTSIP can authorize an aggregate of 3,250,000 options exercisable into shares of new common stock. The option price of incentive stock options shall not be less than the fair market value of the Company's common stock on the date of the grant. All outstanding Old 4Health options were canceled/reissued pursuant to the merger. Options reissued under the LTSIP were issued giving effect to the rate at which common stock was split, as noted above, times the number of options previously held. A summary of stock option activity for the years ended December 31, 1995, 1996 and 1997 is as follows, including retroactive treatment of the stock split: 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 Granted 1,211,814 $4.37 Exercised (172,622) $3.91 Canceled (448,444) $4.93 --------- ----- Balance, December 31, 1996 866,103 $4.35 Granted 192,500 $5.92 Exercised (186,396) $4.01 Canceled (129,564) $6.00 --------- ----- Balance, December 31, 1997 742,643 $4.57 --------- ----- --------- ----- Options exercisable at December 31, 1995 - - December 31, 1996 498,478 $4.01 December 31, 1997 585,516 $4.24 Weighted average fair value of options granted during 1995 - $2.29 1996 - $0.56 1997 - $1.62
F-17 The following table summarizes information about the options outstanding at December 31, 1997: Options Outstanding Options Exercisable ------------------------------------------------- ------------------------- Weighted Number Average Weighted Number Weighted Outstanding Remaining Average Exercisable Average Range of Exercise at December Contractual Exercise at December Exercise Prices 31, 1997 Life Price 31, 1997 Price - ----------------- ----------- ----------- -------- ----------- -------- $3.32 - $4.98 543,516 2.94 years $ 4.07 543,516 $ 4.07 $5.50 - $7.69 186,127 3.80 years 5.74 32,000 5.79 $8.44 - $8.75 13,000 1.76 years 8.58 10,000 8.63 ------- ------- Total 742,643 3.14 years $ 4.57 585,516 $ 4.24 ------- ------- ------- -------
As noted in Note 3, the Company has elected to account for its stock-based compensation plans for employees and directors under APB 25. The Company recorded no compensation expense during 1997, 1996 or 1995 related to APB 25. Accordingly, for purposes of the pro forma disclosures presented below, the Company has computed the fair values of all options granted during 1997, 1996 and 1995 using the Black-Scholes pricing model and the following weighted average assumptions: 1997 1996 1995 --------- --------- --------- Risk-free interest rate 5.97% 5.60% 6.27% Expected dividend yield 0.0% 0.0% 0.0% Expected lives outstanding 2.2 years 1.5 years 2.7 years Expected volatility 60.68% 58.44% 58.44%
To estimate lives of options for this valuation, it was assumed options will be exercised one year after becoming fully vested. Cumulative compensation costs recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture. The expected volatility was based on an approximation of similar companies' volatility. Actual volatility of the Company's common stock varies. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of options granted. The total fair value of options granted was computed to be approximately $311,857, $1,164,173 and $427,837 for the years ended December 31, 1997, 1996 and 1995, respectively. These amounts are amortized ratably over the vesting periods of the options or recognized at the date of grant if no vesting period is required. Pro forma stock-based compensation, net of the effect of forfeitures, was $281,178, $1,037,949 and $265,069 for 1997, 1996 and 1995, respectively. F-18 If the Company had accounted for its stock-based compensation plans in accordance with SFAS No. 123, the Company's net (loss) income and pro forma net (loss) income per common share would have been reported as follows: 1997 1996 1995 ----------- ----------- -------- Net (loss) income: As reported $(6,629,111) $(2,550,141) $708,679 ----------- ----------- -------- ----------- ----------- -------- Pro forma $(6,910,289) $(3,588,090) $443,610 ----------- ----------- -------- ----------- ----------- -------- EPS: Basic and diluted as reported (Note 3) $ (.57) $ (.26) $ .08 ----------- ----------- -------- ----------- ----------- -------- Basic and diluted pro forma $ (.59) $ (.36) $ .05 ----------- ----------- -------- ----------- ----------- --------
Weighted average shares used to calculate pro forma net income (loss) per share were determined as described in Note 3, 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. (8) 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: 1997 1996 ----------- ----------- DEFERRED TAX ASSETS: Allowance for bad debt $ 5,459 $ 9,085 Sales reserve 19,708 156,000 Inventory tax adjustment 26,274 - Inventory reserve 71,444 50,505 Warrants 107,250 - Accrued liabilities 164,139 36,733 Net operating loss carryforward 5,642,125 2,433,050 ----------- ----------- Total deferred tax assets 6,036,399 2,685,373 DEFERRED TAX LIABILITIES: Inventory tax adjustment (49,986) - Tax over book depreciation/amortization (161,158) (113,072) ----------- ----------- Net deferred tax asset (liability), before valuation reserve 5,825,255 2,572,301 Valuation reserve (5,642,125) (2,371,501) ----------- ----------- Net deferred tax asset $ 183,130 $ 200,800 ----------- ----------- ----------- ----------- Current portion 225,506 313,872 Long-term portion (42,376) (113,072) ----------- ----------- $ 183,130 $ 200,800 ----------- ----------- ----------- -----------
F-19 The Company provided a valuation allowance to offset the majority of its 1996 and all of its 1997 net operating loss carryforwards primarily due to its history of operating losses. The components of the income tax (benefit) provision are as follows: Years Ended December 31, ------------------------------------ 1997 1996 1995 -------- --------- -------- Current: Federal $(16,970) $ 143,340 $319,568 State (700) 800 38,702 Deferred: Federal 17,670 (209,355) 1,453 -------- --------- -------- Total $ - $ (65,215) $359,723 -------- --------- -------- -------- --------- --------
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: 1997 1996 1995 ----- ----- ---- Statutory federal income tax rate (34.0%) (34.0%) 34.0% State income taxes (5.0) (5.0) 3.6 Utilization of net operating loss - - (5.5) Establishment of valuation allowances 40.0 32.9 - Short-year tax provision - 5.7 - Other (1.0) (2.1) 1.6 ----- ----- ---- Effective income tax rate (.0%) (2.5%) 33.7% ----- ----- ---- ----- ----- ----
(9) COMMITMENTS AND CONTINGENCIES The Company entered into certain leases which have various expiration dates. Rental expense was $134,763, $132,980 and $13,612 for the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum rental payments applicable to these noncancelable operating leases are as follows for the years ending December 31,: 1998 $126,826 1999 133,560 2000 126,592 2001 96,440 -------- $483,418 -------- --------
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. F-20 (10) SUBSEQUENT EVENT On January 7, 1998 4Health, Inc. entered into a merger agreement with Irwin Naturals, a privately held California corporation also engaged in the nutritional supplement business. The merger transaction is conditioned upon both companies satisfying certain conditions as specified in the agreement including the approval of the method of accounting for the transaction, the receipt of shareholder approval of the merger, and the satisfaction of other customary conditions. (11) SELECTED FINANCIAL DATA (UNAUDITED) The following tables set forth certain unaudited quarterly financial information: Quarters Ended ------------------------------------------------------- 1997 ------------------------------------------------------- December 31 September 30 June 30 March 31 ----------- ------------ ----------- ----------- Income statement data: Net sales $ 2,893,448 $3,076,185 $ 3,090,234 $ 3,371,803 Gross profit 1,620,188 1,774,857 1,591,994 1,322,317 (Loss) from operations (3,796,684) (392,584) (1,011,090) (1,407,801) Other (expense) income (36,685) 11,459 (18,042) 22,317 ----------- ---------- ----------- ----------- (Loss)income before tax (3,833,369) (381,125) (1,029,132) (1,385,484) Income tax (provision) benefit (88,408) (52,970) - (b) 141,378(a) ----------- ---------- ----------- ----------- Net (loss) income $(3,921,777) $ (434,095) $(1,029,132) $(1,244,106) ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Net (loss) income per common share - basic and diluted $ (.33) $ (.04) $ (.09) $ (.11) ----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
Quarters Ended ------------------------------------------------------- 1996 ------------------------------------------------------- December 31 September 30 June 30 March 31 ----------- ------------ ----------- ----------- Income statement data: Net sales $ 2,559,896 $3,311,507 $ 8,007,026 $ 3,473,400 Gross profit 1,415,521 2,027,067 4,768,824 2,215,944 (Loss) income from operations (1,863,097) (852,847) 26,671 34,253 Other income (expense) 11,437 52,480 (13,823) (10,429) ----------- ---------- ----------- ----------- (Loss)income before tax (1,851,660) (800,367) 12,848 23,824 Income tax (provision) benefit (26,561) 17,137 86,801(c) (12,162) ----------- ---------- ----------- ----------- Net (loss) income $(1,878,221) $ (783,230) $ 99,649 $ 11,662 ----------- ---------- ----------- ----------- ----------- ---------- ----------- ----------- Net (loss) income per common share - basic and diluted $ (.16) $ (.07) $ .01 $ .00 ----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
(a) The tax benefit in the first quarter of 1997 was recorded in anticipation of the Company having net income for the year. The Company recorded a benefit in the first quarter which the Company believed would be offset by a provision booked in subsequent profitable quarters. F-21 (b) There is neither a tax provision or benefit in the second quarter of 1997 as the Company anticipated having net income for the year. Based on the tax benefit recorded in the first quarter of 1997 and anticipated subsequent profitable quarters, the Company believed no tax benefit or provision was necessary in order to effectively adjust the year-end income tax provision. (c) The tax benefit recorded in the quarter ended June 30, 1996 reflects a tax refund from 1995. This refund was the result of additional book/tax timing differences filed on the Company's tax returns but not taken into account when the 1995 income tax provision was recorded. F-22 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: June 17, 1998 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 the June 17, 1998 Board, President and Chief Executive Officer (Principal Executive Officer) /s/ Scott W. Lusk - --------------------------- Scott W. Lusk Director of Finance June 17, 1998 /s/ Cheryl M. Wheeler - --------------------------- Cheryl M. Wheeler Director and Secretary June 17, 1998 /s/ Steven B. Beckman - --------------------------- Steven B. Beckman Director June 17, 1998 /s/ Rockwell D. Schutjer - --------------------------- Rockwell D. Schutjer Director June 17, 1998 EX-2.05 2 EXHIBIT 2.05 AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER among 4HEALTH, INC. IRWIN NATURALS and KLEE IRWIN May 22, 1998 TABLE OF CONTENTS ARTICLE I MERGER SECTION 1.01. The Merger. . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 1.02. Closing; Closing Date; Effective Time . . . . . . . . . . 2 SECTION 1.03. Effect of the Merger. . . . . . . . . . . . . . . . . . . 2 SECTION 1.04. Articles of Incorporation; Bylaws . . . . . . . . . . . . 3 SECTION 1.05. Directors and Officers. . . . . . . . . . . . . . . . . . 3 ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 2.01. Merger Consideration; Conversion and Cancellation of Securities . . . . . . . . . . . . . . . . . . . . . . 3 SECTION 2.02. Exchange and Surrender of Certificates. . . . . . . . . . 5 ARTICLE III REPRESENTATIONS AND WARRANTIES OF IN AND IRWIN SECTION 3.01. Organization and Qualification; Subsidiaries. . . . . . . 6 SECTION 3.02. Articles of Incorporation and Bylaws. . . . . . . . . . . 7 SECTION 3.03. Capitalization. . . . . . . . . . . . . . . . . . . . . . 7 SECTION 3.04. Authority . . . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 3.05. No Conflict; Required Filings and Consents. . . . . . . . 8 SECTION 3.06. Permits; Compliance . . . . . . . . . . . . . . . . . . . 9 SECTION 3.07. Financial Statements; Financial Results.. . . . . . . . . 9 SECTION 3.08. Absence of Certain Changes or Events. . . . . . . . . . . 10 SECTION 3.09. Absence of Litigation . . . . . . . . . . . . . . . . . . 10 SECTION 3.10. Employee Benefit Plans; Labor Matters.. . . . . . . . . . 11 SECTION 3.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 12 SECTION 3.12. Tax and Accounting Matters. . . . . . . . . . . . . . . . 16 SECTION 3.13. Certain Business Practices. . . . . . . . . . . . . . . . 17 SECTION 3.14. Environmental Matters . . . . . . . . . . . . . . . . . . 17 SECTION 3.15. Vote Required . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 3.16. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.17. Insurance . . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.18. Properties. . . . . . . . . . . . . . . . . . . . . . . . 20 SECTION 3.19. Certain Contracts and Restrictions. . . . . . . . . . . . 21 SECTION 3.20. Futures Trading and Fixed Price Exposure. . . . . . . . . 21 SECTION 3.21. Information Supplied. . . . . . . . . . . . . . . . . . . 21 SECTION 3.22. Securities Laws Representations . . . . . . . . . . . . . 21 SECTION 3.23. Intellectual Property . . . . . . . . . . . . . . . . . . 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF 4HEALTH SECTION 4.01. Organization and Qualifications; Subsidiaries . . . . . . 23 SECTION 4.02. Articles of Incorporation and Bylaws. . . . . . . . . . . 24 SECTION 4.03. Capitalization. . . . . . . . . . . . . . . . . . . . . . 24 SECTION 4.04. Authority . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 4.05. No Conflict: Required Filings and Consents. . . . . . . . 25 SECTION 4.06. Permits; Compliance . . . . . . . . . . . . . . . . . . . 26 SECTION 4.07. Financial Statements. . . . . . . . . . . . . . . . . . . 26 SECTION 4.08. Absence of Certain Changes or Events. . . . . . . . . . . 27 SECTION 4.09. Absence of Litigation . . . . . . . . . . . . . . . . . . 28 SECTION 4.10. Employee Benefit Plans; Labor Matters . . . . . . . . . . 28 SECTION 4.11. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 4.12. Tax Matters . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 4.13. NSM Listing . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.14. Certain Business Practices. . . . . . . . . . . . . . . . 33 SECTION 4.15. Environmental Matters . . . . . . . . . . . . . . . . . . 33 SECTION 4.16. Brokers . . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.17. Insurance . . . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.18. Properties. . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 4.19. Certain Contracts and Restrictions. . . . . . . . . . . . 35 SECTION 4.20. Easements . . . . . . . . . . . . . . . . . . . . . . . . 35 SECTION 4.21. Futures Trading and Fixed Price Exposure. . . . . . . . . 36 SECTION 4.22. Information Supplied. . . . . . . . . . . . . . . . . . . 36 SECTION 4.23. Intellectual Property . . . . . . . . . . . . . . . . . . 36 SECTION 4.24. Pooling of Interests. . . . . . . . . . . . . . . . . . . 36 SECTION 4.25. Exempt Transaction. . . . . . . . . . . . . . . . . . . . 36 SECTION 4.26. No Violation of Securities Laws . . . . . . . . . . . . . 37 SECTION 4.27. No Investigation. . . . . . . . . . . . . . . . . . . . . 37 SECTION 4.28. No Convictions. . . . . . . . . . . . . . . . . . . . . . 37 SECTION 4.29. No Restraint. . . . . . . . . . . . . . . . . . . . . . . 37 ii ARTICLE V COVENANTS SECTION 5.01. Affirmative Covenants of IN . . . . . . . . . . . . . . . 37 SECTION 5.02. Negative Covenants of IN. . . . . . . . . . . . . . . . . 38 SECTION 5.03. Affirmative Covenants and Consent of Irwin. . . . . . . . 41 SECTION 5.04. Affirmative and Negative Covenants of 4Health.. . . . . . 42 SECTION 5.05. Access and Information. . . . . . . . . . . . . . . . . . 45 ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01. Stockholder Approvals.. . . . . . . . . . . . . . . . . . 46 SECTION 6.02. Registration Statement; Information.. . . . . . . . . . . 47 SECTION 6.03. Appropriate Action; Consents; Filings; Indemnification.. . . . . . . . . . . . . . . . . . . . . 50 SECTION 6.04. Tax and Accounting Treatment. . . . . . . . . . . . . . . 53 SECTION 6.05. Public Announcements. . . . . . . . . . . . . . . . . . . 53 SECTION 6.06. NSM Listing . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 6.07. Stock Resale Agreement. . . . . . . . . . . . . . . . . . 53 SECTION 6.08. No Interference . . . . . . . . . . . . . . . . . . . . . 53 SECTION 6.09. Form D Filing . . . . . . . . . . . . . . . . . . . . . . 53 ARTICLE VII CLOSING CONDITIONS SECTION 7.01. Conditions to Obligations of Each Party Under This Agreement . . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 7.02. Additional Conditions to Obligations of 4Health . . . . . 54 SECTION 7.03. Additional Conditions to Obligations of IN. . . . . . . . 56 iii ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. Termination . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 8.02. Effect of Termination . . . . . . . . . . . . . . . . . . 59 SECTION 8.03. Amendment . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 8.04. Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 8.05. Fees, Expenses and Other Payments . . . . . . . . . . . . 59 ARTICLE IX GENERAL PROVISIONS SECTION 9.01. Effectiveness of Representations, Warranties and Agreements. . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 9.02. Notices . . . . . . . . . . . . . . . . . . . . . . . . . 61 SECTION 9.03. Certain Definitions . . . . . . . . . . . . . . . . . . . 61 SECTION 9.04. Headings. . . . . . . . . . . . . . . . . . . . . . . . . 62 SECTION 9.05. Severability. . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 9.06. Entire Agreement. . . . . . . . . . . . . . . . . . . . . 63 SECTION 9.07. Assignment. . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 9.08. Parties in Interest . . . . . . . . . . . . . . . . . . . 63 SECTION 9.09. Failure or Indulgence Not Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . 63 SECTION 9.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 9.11 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 63 iv SCHEDULES Schedule 1.04 Changes to 4Health Articles and Bylaws Schedule 1.05 Directors and Officers of Surviving Corporation IN DISCLOSURE SCHEDULE Schedule 3.01 Subsidiaries Schedule 3.03(a) Reservation of IN Common Stock Schedule 3.03(b)(iii) Investments Schedule 3.03(b)(iv) Revenue Sharing Agreements Schedule 3.03(c) Outstanding Stock Awards Schedule 3.05 Conflicts Schedule 3.06 Notifications from Governmental Entities Schedule 3.07 Contingent Liabilities Schedule 3.08 Certain Changes Schedule 3.09 Litigation Schedule 3.10(d) Severance Agreements Schedule 3.11(a) Tax Exceptions Schedule 3.11(b) Tax Proceedings Schedule 3.11(c) Tax Elections and Consents, etc. Schedule 3.14 Environmental Matters Schedule 3.16 Brokers Schedule 3.17 Insurance Schedule 3.18 Properties Schedule 3.19 Material Contracts Schedule 3.23 Intellectual Property 4HEALTH DISCLOSURE SCHEDULE Schedule 4.01 Subsidiaries Schedule 4.03(a) Reservation of 4Health Common Stock Schedule 4.03(b)(i) Options, Warrants and Rights Schedule 4.03(b)(ii) Repurchase and Redemption Obligations, etc. Schedule 4.03(b)(iii) Investments Schedule 4.03(b)(iv) Revenue Sharing Agreements Schedule 4.03(b)(v) Voting Trusts, Proxies Schedule 4.03(c) Outstanding Stock Awards Schedule 4.05 Conflicts Schedule 4.06 Notifications from Governmental Entities Schedule 4.08 Certain Changes Schedule 4.09 Litigation v Schedule 4.10(a) Employee Benefit Plans Schedule 4.10(b) Employee Benefit Liabilities Schedule 4.10(c) Labor Matters Schedule 4.10(d) Employment Agreement Schedule 4.10(e) Medical Benefits Schedule 4.10(f) Multiemployer Plans Schedule 4.10(g) Changes to Benefit Plans Schedule 4.11 Taxes Schedule 4.15 Environmental Matters Schedule 4.16 Brokers Schedule 4.17 Insurance Schedule 4.19 Material Contracts Schedule 4.23 Intellectual Property COVENANTS Schedule 5.02(a) Employee Matters Schedule 5.02(b) Distributions Schedule 5.02(f) Asset Dispositions Schedule 5.02(k) Obligations Schedule 5.02(p) Affiliate Transactions Schedule 5.02(q) Commitments Schedule 5.03(b)(v) Asset Dispositions Schedule 5.03(b)(xiv) Affiliate Transactions Schedule 5.04(b)(i) Increase in Benefits Schedule 5.04(b)(vi) Asset Sales Schedule 5.04(b)(xi) Obligations Schedule 5.04(b)(xvi) Affiliate Transactions Schedule 5.04(b)(xvii) Commitments Schedule 6.02(a) Plan of Distribution EXHIBITS Exhibit A Articles of Merger Exhibit B Stock Legend Exhibit C Form of Sale Restriction Agreements Exhibit D Form of Note Exhibit E Form of Indemnity Agreement Exhibit F Duncan Employment Agreement Exhibit G Irwin Employment Agreement vi AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, effective as of May 22, 1998 (this "Agreement"), amending and restating the Agreement and Plan of Merger dated as of April 2, 1998, by and among 4Health, Inc., a Utah corporation ("4Health"), Irwin Naturals, a California corporation ("IN") and Mr. Klee Irwin, an individual resident in California and the Chief Executive Officer and a principal shareholder of IN ("Irwin"), originally entered into as of December 24, 1997. RECITALS IN, upon the terms and subject to the conditions of this Agreement and in accordance with the Revised Business Corporation Act of the State of Utah ("Utah Law"), will merge with and into 4Health (the "Merger"), and pursuant thereto, the shares of common stock, no par value per share of IN ("IN Common Stock"), issued and outstanding immediately prior to the Effective Time (as defined herein) of the Merger, not owned directly or indirectly by IN or 4Health or their respective subsidiaries, will be converted at the Effective Time into the right to receive an aggregate of 15,750,000 shares of common stock, par value $.01 per share, of 4Health ("4Health Common Stock"), subject to the right of holders of such shares of IN Common Stock (each a "Dissenting IN Stockholder") to seek an appraisal of the fair value thereof as provided in Section 1300 of the General Corporation Law of the State of California ("California Law"). The Board of Directors of IN has determined that the Merger is consistent with and in furtherance of the long-term business strategy of IN and is fair to, and in the best interests of, IN and its stockholders and has approved and adopted the Merger, this Agreement, and the other transactions contemplated hereby, and has recommended approval of this Agreement by the stockholders of IN. The Board of Directors of 4Health has determined that the Merger is consistent with and in furtherance of the long-term business strategy of 4Health and is fair to, and in the best interests of, 4Health and its stockholders and has approved and adopted this Agreement and 1 the transactions contemplated hereby, and has recommended approval of this Agreement by its stockholders. For federal income tax purposes, it is intended that the Merger qualify as a tax-free reorganization under the provisions of Section 368(a) of the United States Internal Revenue Code of 1986 as amended (the "Code"). It is intended that the Merger qualify for the "pooling of interests" method of accounting as provided in Accounting Principles Board Opinion No. 16 of the American Institute of Certified Public Accountants and the interpretations issued thereunder as presently in effect. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and confirmed, the parties hereto agree as follows: ARTICLE I THE MERGER SECTION 1.01. THE MERGER. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with Utah Law, at the Effective Time, IN shall be merged with and into 4Health (each a "Constituent Corporation"). As a result of the Merger, the separate corporate existence of IN shall cease and 4Health shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). Certain terms used in this Agreement are defined in Section 9.03 hereof. SECTION 1.02. CLOSING; CLOSING DATE; EFFECTIVE TIME. Unless this Agreement shall have been terminated pursuant to Section 8.01, and subject to the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, the consummation of the Merger and the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of IN at 10549 West Jefferson Boulevard, Culver City, CA 90232 as soon as practicable (but in any event within two business days) after the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, or at such other date, time and place as 4Health and IN may agree. The date on which the Closing takes place is referred to herein as the "Closing Date". As promptly as practicable on the Closing Date, the parties hereto shall cause the Merger to be consummated by executing and filing Articles of Merger, in substantially the form of Exhibit A attached hereto, with the Division of Corporations and Commercial Code of the State of Utah (the date and time of such filing, or such later date or time agreed upon by 4Health and IN and set forth therein, being the "Effective Time"). For all tax purposes, the Closing shall be effective at the end of the day on the Closing Date. 2 SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, to the full extent provided under Utah Law, the Surviving Corporation shall possess all the rights, privileges, powers and franchises of a public as well as of a private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations; and any and all rights, privileges, powers and franchises of each of the Constituent Corporations, and all property, real, personal and mixed, and all debts due to either of the Constituent Corporations on whatever account, as well as stock subscriptions and all other things in action belonging to each of the Constituent Corporations, shall be vested in the Surviving Corporation; and all property, rights, privileges, powers and franchises, and all and every other interest shall be thereafter as effectually the property of the Surviving Corporation as they were of the Constituent Corporations, and the title to any real estate vested by deed or otherwise, in either of the Constituent Corporations, shall not revert or be in any way impaired; but all rights of creditors and all liens upon any property of either of the Constituent Corporations shall be preserved unimpaired, and all debts, liabilities and duties of the Constituent Corporations shall thenceforth attach to the Surviving Corporation and may be enforced against it to the same extent as if said debts, liabilities and duties had been incurred or contracted by it. SECTION 1.04. ARTICLES OF INCORPORATION; BYLAWS. At the Effective Time, the articles of incorporation of 4Health, as amended by the Articles of Merger attached hereto as Exhibit A to make the amendments set forth on Schedule 1.04 attached hereto, shall be the articles of incorporation of the Surviving Corporation and thereafter shall continue to be its articles of incorporation until amended as provided therein and pursuant to Utah Law. The bylaws of 4Health, as amended by the Articles of Merger to make the changes set forth in Schedule 1.04 attached hereto, shall be the bylaws of the Surviving Corporation and thereafter shall continue to be its bylaws until amended as provided therein and in the articles of incorporation and pursuant to Utah Law. SECTION 1.06. DIRECTORS AND OFFICERS. Immediately after the Effective Time, the directors of the Surviving Corporation shall be the four individuals identified in Schedule 1.05, classified as set forth opposite their names and a fifth individual who shall be classified as a Class III director with a one year term of office and who will be designated by IN and 4Health no later than the date on which definitive Proxy Materials (as such term is hereinafter defined) are first filed with the Commission (as hereinafter defined) for its review. The officers of the Surviving Corporation shall be the individuals identified in Schedule 1.05, each of the directors and officers to hold office in accordance with the articles of incorporation and bylaws of the Surviving Corporation, in each case until his successor is duly elected or appointed and qualified. 3 ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES SECTION 2.01. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF SECURITIES. At the Effective Time, by virtue of the Merger and without any action on the part of 4Health, IN, or their respective stockholders: (a) Subject to the other provisions of this Article II, each share of IN Common Stock issued and outstanding immediately prior to the Effective Time (excluding any IN Common Stock described in Section 2.01(c) of this Agreement and shares held by any Dissenting IN Stockholder shall be converted into the right to receive 241.37931 shares of 4Health Common Stock (the "Exchange Ratio"). Notwithstanding the foregoing, if between the date of this Agreement and the Effective Time the outstanding shares of IN Common Stock or 4Health Common Stock shall have been changed into a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, conversion, recapitalization, split, combination or exchange of shares, the Exchange Ratio shall be correspondingly adjusted to reflect such stock dividend, subdivision, reclassification, conversion, recapitalization, split, combination or exchange of shares. (b) Notwithstanding any provision of this Agreement to the contrary, each share of IN Common Stock and held in the treasury of IN, and each share of IN Common Stock, owned by 4Health or any direct or indirect wholly owned subsidiary of 4Health immediately prior to the Effective Time shall be canceled and extinguished without any conversion thereof and no payment shall be made with respect thereto. (c) Subject to the provisions of Section 2.01(e), all shares of IN Common Stock, shall cease to be outstanding and shall automatically be canceled and retired, and each certificate previously evidencing IN Common Stock, immediately prior to the Effective Time (other than IN Common Stock, described in Section 2.01(b) of this Agreement) (the "Converted Shares" or "Converted Share Certificates," as the case may be) shall thereafter represent the right to receive, subject to Section 2.02(d) of this Agreement, that number of shares of 4Health Common Stock determined pursuant to Section 2.01(a) hereof (the "Merger Consideration"). The holders of Converted Share Certificates shall cease to have any rights with respect to such Converted Shares except as otherwise provided herein or by law. Such Converted Share Certificates shall be exchanged for certificates evidencing whole shares of 4Health Common Stock upon the surrender of such Converted Share Certificates in accordance with the provisions of Section 2.02 of this Agreement, without interest. (d) All shares of 4Health Common Stock issued to holders of IN Common Stock, in the Merger shall be issued in a transaction intended to qualify for the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities 4 Act") and Regulation D promulgated thereunder ("Regulation D") and shall be deemed "restricted securities" as defined in Rule 144 promulgated under the Securities Act. (e) Notwithstanding anything in this Agreement to the contrary, any issued and outstanding shares of capital stock of IN held by a Dissenting IN Stockholder, who has not voted in favor of nor consented to the Merger and who complies with all the provisions of California Law concerning the right of holders of such stock to dissent from the Merger and require appraisal of their shares, shall not be converted as described in Section 2.01(a) but shall become, at the Effective Time, by virtue of the Merger and without any further action, the right to receive such consideration as may be determined to be due to such Dissenting IN Stockholder pursuant to California Law; PROVIDED, HOWEVER, that shares of IN Common Stock outstanding immediately prior to the Effective Time and held by a Dissenting IN Stockholder, who shall, after the Effective Time, withdraw his demand for appraisal or lose his right of appraisal, in either case pursuant to California Law shall be deemed to be converted as of the Effective Time, into the right to receive 4Health Common Stock. SECTION 2.02. EXCHANGE AND SURRENDER OF CERTIFICATES. (a) Immediately after the Effective Time, 4Health shall deliver to each registered holder of a Converted Share Certificate against delivery by such holder of all of his Converted Share Certificates representing issued and outstanding shares of IN Common Stock a certificate representing that number of whole shares of 4Health Common Stock which such holder has the right to receive in exchange for the Converted Share Certificates surrendered pursuant to the provisions of this Article II (after taking into account all Converted Shares then held by such holder), and the Converted Share Certificates so surrendered shall forthwith be canceled. The certificate representing the 4Health Common Stock shall bear a restrictive legend in the form set forth in Exhibit B. Until surrendered as contemplated by this Section 2.02, each Converted Share Certificate shall be deemed at any time after the Effective Time to represent only the 4Health Common Stock into which the Converted Shares represented by such Converted Share Certificate have been converted as provided in this Article II. (b) After the Effective Time, there shall be no further registration of transfers of IN Common Stock. If, after the Effective Time, certificates representing shares of IN Common Stock are presented to the Surviving Corporation, they shall be canceled and exchanged for the Merger Consideration provided for in this Agreement in accordance with the procedures set forth herein. (c) Any portion of the Merger Consideration that remains unclaimed by the holders of shares of IN Common Stock, one year after the Effective Time shall be returned to the Surviving Corporation, upon demand, and any such holder who has not exchanged its shares of IN Common Stock in accordance with this Section 2.02 prior to that time shall thereafter look only to the Surviving Corporation for payment of the Merger Consideration in respect of its 5 shares of IN Common Stock. Notwithstanding the foregoing, the Surviving Corporation shall not be liable to any holder of Converted Shares for any amount paid to a public official pursuant to applicable abandoned property, escheat or similar laws. (d) No dividends, interest or other distributions with respect to shares of 4Health Common Stock shall be paid to the holder of any unsurrendered Converted Share Certificates unless and until such Converted Share Certificates are surrendered as provided in this Section 2.02. Upon such surrender, 4Health shall pay, without interest, all dividends and other distributions payable in respect of such shares of 4Health Common Stock on a date subsequent to, and in respect of a record date after, the Effective Time. (e) No fractional shares or certificates or scrip evidencing fractional shares of 4Health Common Stock shall be issued in the Merger or upon the surrender for exchange of Converted Share Certificates, and the Exchange Ratio shall be appropriately adjusted if necessary so that only whole shares of 4Health Common Stock are issued in the Merger to holders of Converted Share Certificates. ARTICLE III REPRESENTATIONS AND WARRANTIES OF IN AND IRWIN IN and Irwin, jointly and severally hereby represent and warrant to 4Health that: SECTION 3.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of IN and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the ownership or leasing of its properties makes such qualification necessary, other than where the failure to be so duly qualified and in good standing would not have an IN Material Adverse Effect. The term "IN Material Adverse Effect" as used in this Agreement shall mean any change or effect that, individually or when taken together with all other such changes or effects, would be reasonably likely to be materially adverse to the assets, liabilities, financial condition, results of operations or current or future business of IN and its subsidiaries, taken as a whole. Schedule 3.01 of the disclosure schedule to be delivered to 4Health by IN and attached hereto and made a part hereof (the "IN Disclosure Schedule") as provided in Section 7.02(i) hereof, sets forth, as of the date hereof, a true and complete list of all IN's directly or indirectly owned subsidiaries, together with (A) the jurisdiction of incorporation or organization of each subsidiary and the percentage of each subsidiary's outstanding capital stock or other equity interests owned by IN or another subsidiary of IN, and (B) an indication of whether each such subsidiary is a "Significant Subsidiary" as defined in Section 9.03(g) of this Agreement. Except as set forth in Schedule 3.01 to the IN Disclosure Schedule, neither IN nor 6 any of its subsidiaries nor Irwin owns an equity interest in any other partnership or joint venture arrangement or other business entity that is material to the assets, liabilities, financial condition, results of operations or current or future business of IN and its subsidiaries, taken as a whole. IN is the registered and beneficial owner of all of the issued and outstanding shares of voting capital stock of Applied Nutrition Inc. and Irwin Naturals International, Inc. SECTION 3.02. ARTICLES OF INCORPORATION AND BYLAWS to 4Health complete and correct copies of the articles of incorporation and the bylaws or the equivalent organizational documents as presently in effect of IN and each of its subsidiaries. Neither IN nor any of its subsidiaries is in violation of any of the provisions of its articles or any material provision of its bylaws (or equivalent organizational documents). SECTION 3.03. CAPITALIZATION. (a) The authorized capital stock of IN consists of One Hundred Thousand (100,000) shares of IN Common Stock, of which Sixty Five Thousand Two Hundred Fifty (65,250) shares are issued and outstanding, and Thirty Four Thousand Seven Hundred Fifty (34,750) shares are held in treasury by IN. No shares of capital stock of IN are reserved for any purpose. Each of the outstanding shares of capital stock of, or other equity interests in, each of IN and its subsidiaries is duly authorized, validly issued, and, in the case of shares of capital stock, fully paid and nonassessable, and has not been issued in violation of (nor are any of the authorized shares of capital stock of, or other equity interests in, such entities subject to) any preemptive or similar rights created by statute, the charter or bylaws (or the equivalent organizational documents) of IN or any of its subsidiaries, or any agreement to which IN or any of its subsidiaries is a party or bound, and such outstanding shares or other equity interests owned by IN or a subsidiary of IN are owned free and clear of all security interests, liens, claims, pledges, agreements, limitations on IN's or such subsidiaries' voting rights, charges or other encumbrances of any nature whatsoever. (b) There are no options, warrants or other rights (including registration rights), agreements, arrangements or commitments of any character to which IN or any of its subsidiaries or Irwin is a party relating to the issued or unissued capital stock of IN or any of its subsidiaries or obligating IN or any of its subsidiaries or Irwin to grant, issue or sell any shares of the capital stock of IN or any of its subsidiaries, by sale, lease, license or otherwise. There are no obligations, contingent or otherwise, of IN or any of its subsidiaries or Irwin to (i) repurchase, redeem or otherwise acquire any shares of IN Common Stock or other capital stock of IN, or the capital stock or other equity interests of any subsidiary of IN; or (ii) provide material funds to, or make any material investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of, any subsidiary of IN or any other person. Except as described in Schedule 3.03(b)(iii) to the IN Disclosure Schedule, neither IN nor any of its subsidiaries or Irwin (x) directly or indirectly owns, (y) has agreed to purchase or otherwise acquire or (z) holds any interest convertible into or exchangeable or 7 exercisable for, 5% or more of the capital stock of any corporation, partnership, joint venture or other business association or entity (other than the subsidiaries of IN set forth in Schedule 3.01 to the IN Disclosure Schedule). Except as set forth in Schedule 3.03(b)(iv) to the IN Disclosure Schedule, there are no agreements, arrangements or commitments of any character (contingent or otherwise) pursuant to which any person is or may be entitled to receive any payment based on the revenues or earnings, or calculated in accordance therewith, of IN or any of its subsidiaries. Except as contemplated hereby, there are no voting trusts, proxies or other agreements or understandings to which IN or any of its subsidiaries or Irwin is or will be a party or by which IN or any of its subsidiaries or Irwin is or will be bound with respect to the voting of any shares of capital stock of IN or any of its subsidiaries. SECTION 3.04. AUTHORITY. IN and Irwin each have all requisite corporate power and authority and legal capacity, respectively, to execute and deliver this Agreement, to perform its and his obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by IN and the consummation by IN of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no other corporate proceedings on the part of IN are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by IN and Irwin, and, assuming the due authorization, execution and delivery thereof by 4Health, constitutes the legal, valid and binding obligation of IN and Irwin enforceable against IN and Irwin in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect, affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. SECTION 3.05. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by IN and Irwin does not, and the consummation of the transactions contemplated hereby in accordance with its terms will not (i) conflict with or violate the articles of incorporation or bylaws, or the equivalent organizational documents, in each case as amended or restated, of IN or any of its subsidiaries, (ii) conflict with or violate any federal, state, foreign or local law, statute, ordinance, rule, regulation, order, judgment or decree (collectively, "Laws") applicable to IN or any of its subsidiaries or Irwin or by or to which any of their respective properties is bound or subject or (iii) except as described in Schedule 3.05 to the IN Disclosure Schedule, result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or require payment under, or result in the creation of a lien or encumbrance on any of the properties or assets of IN or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which IN or any of its subsidiaries or Irwin is a party or by or to which IN or any of its subsidiaries or Irwin or any of their respective properties is bound or subject, except for 8 any such conflicts or violations described in clause (ii) or breaches, defaults, events, rights of termination, amendment, acceleration or cancellation, payment obligations or liens or encumbrances described in clause (iii) that would not have an IN Material Adverse Effect. (b) The execution and delivery of this Agreement by IN and Irwin does not, and consummation of the transactions contemplated hereby will not, require IN or Irwin to obtain any consent, license, permit, approval, waiver, authorization or order of, or to make any filing with or notification to, any governmental or regulatory authority, domestic or foreign (collectively, "Governmental Entities"), except (i) for filing appropriate merger documents as required by California and Utah Laws; and (ii) where the failure to obtain such consents, licenses, permits, approvals, waivers, authorizations or orders, or to make such filings or notifications, would not, either individually or in the aggregate, materially interfere with IN's performance of its obligations under this Agreement and would not have an IN Material Adverse Effect. SECTION 3.06. PERMITS; COMPLIANCE. Each of IN and its subsidiaries and, to IN's and Irwin's knowledge, each third party operator of any of IN's properties, is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "IN Permits"), and there is no action, proceeding or investigation pending or, to the knowledge of IN or Irwin, threatened regarding suspension or cancellation of any of the IN Permits, except where the failure to possess, or the suspension or cancellation of, such IN Permits would not have an IN Material Adverse Effect. Neither IN nor any of its subsidiaries is in conflict with, or in default or violation of (a) any Law applicable to IN or any of its subsidiaries or by or to which any of their respective properties is bound or subject, including, without limitation, the provisions of the Dietary Supplemental Health Education Act of 1994, all consumer product safety Laws, all product labeling Laws and all truth in advertising Laws, or (b) any of the IN Permits, except for any such conflicts, defaults or violations that would not have a IN Material Adverse Effect. During the period commencing on September 30, 1997 and ending on the date hereof, neither IN nor any of its subsidiaries has received from any Governmental Entity any written notification with respect to possible conflicts, defaults or violations of Laws, except as set forth in Schedule 3.06 of the IN Disclosure Schedule and except for written notices relating to possible conflicts, defaults or violations that would not have an IN Material Adverse Effect. SECTION 3.07. FINANCIAL STATEMENTS; FINANCIAL RESULTS. (a) IN's audited consolidated financial statements (including the related notes thereto) for the fiscal years ended December 31, 1995 and December 31, 1996 and the nine months ended September 30, 1997 (the "IN Financial Statements") to be furnished to 4Health pursuant to Section 5.01(d) will (i) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved ("GAAP") (except (A) to the extent required by changes in generally accepted accounting principles and (B) as may be indicated in the notes thereto) and (ii) fairly present the financial position of IN as of the respective dates thereof and the result of operations 9 and cash flows for the periods indicated (including reasonable estimates of normal and recurring year-end adjustments), except that (x) any interim financial statements were or will be subject to normal and recurring year-end adjustments and (y) any pro forma financial information contained in such financial statements will not necessarily be indicative of the financial position of IN as of the respective dates thereof and the results of operations and cash flows for the periods indicated. Except as set forth in Schedule 3.07 of the IN Disclosure Schedule, IN has no liabilities or obligations that will be of any nature (whether known or unknown and whether accrued or contingent) except for liabilities or obligations reflected or reserved against in the audited balance sheet dated as of September 30, 1997 including the notes thereto (the "IN Balance Sheet") to be furnished to 4Health pursuant to Section 5.01(d) and current liabilities incurred in the ordinary course of business consistent with past practice since the date of the IN Balance Sheet. (b) IN's gross revenues, calculated in accordance with GAAP, earned during the twenty-one (21) month period ended September 30, 1997 exceeded $22,000,000 in the aggregate. (c) The sum of (i) IN's earnings before income taxes, depreciation and amortization charges, calculated in accordance with GAAP, plus (ii) any amounts paid by IN to its officers as salary, in each case during the twenty-one (21) month period ended September 30, 1997, exceeded $4,500,000. SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as contemplated by this Agreement or as set forth in Schedule 3.08 to the IN Disclosure Schedule, since September 30, 1997 IN and its subsidiaries have conducted their respective businesses only in the ordinary course and in a manner consistent with past practice and there has not been: (i) any material damage, destruction or loss (whether or not covered by insurance) with respect to any material assets of IN or any of its subsidiaries; (ii) any material change by IN or any of its subsidiaries in their accounting methods, principles or practices; (iii) any declaration, setting aside or payment of any dividends or distributions in respect of shares of IN Common Stock or the shares of stock of, or other equity interests in, any subsidiary of IN, or any redemption, purchase or other acquisition by IN or any of its subsidiaries of any of IN's securities or any of the securities of any subsidiary of IN; (iv) any increase in the benefits under, or the establishment or amendment of, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including, without limitation, the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan, or any increase in the compensation payable or to become payable to directors, officers or employees of IN or its subsidiaries; (v) any revaluation by IN or any of its subsidiaries of any of their assets, including the writing down of the value of inventory or the writing down or off of notes or accounts receivable, other than in the ordinary course of business and consistent with past practices; (vi) any entry by IN or any of its subsidiaries into any commitment or transaction material to IN and its subsidiaries, taken as a whole (other than this Agreement and 10 the transactions contemplated hereby); (vii) any material increase in indebtedness for borrowed money; or (viii) an IN Material Adverse Effect. SECTION 3.09. ABSENCE OF LITIGATION. Except as set forth in Schedule 3.09 to the IN Disclosure Schedule, there is no claim, action, suit, litigation, proceeding, arbitration or, to the knowledge of IN or Irwin, investigation of any kind, at law or in equity (including actions or proceedings seeking injunctive relief), pending or, to the knowledge of IN or Irwin, threatened against IN or any of its subsidiaries or any properties or rights of IN or any of its subsidiaries (except for claims, actions, suits, litigation, proceedings, arbitrations or investigations which would not have an IN Material Adverse Effect), and neither IN nor any of its subsidiaries is subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of IN or Irwin, continuing investigation by, any Governmental Entity, or any judgment, order, writ, injunction, decree or award of any Government Entity or arbitrator, including, without limitation, cease-and-desist or other orders, except for matters that would not have an IN Material Adverse Effect. SECTION 3.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS. (a) Neither IN nor any member of any ERISA Group has maintained or contributed to any employee benefit plan (as such term is defined in ERISA Section 3(3)) during the past five years and neither IN nor any member of its ERISA Group has any liability under Sections 4063, 4069, 4212(c) or 4204 of ERISA with respect to any such employee benefit plan, and IN does not maintain and has not contributed to any other retirement, pension, stock option, stock appreciation rights, profit sharing, incentive compensation, deferred compensation, savings, thrift, vacation pay, severance pay, insurance, health, welfare or other employee compensation or benefit plan, agreement, practice, or arrangement, whether written or unwritten, whether or not legally binding (collectively, the "IN Benefit Plans"). For purposes of this Agreement, "ERISA Group" means a controlled or affiliated group within the meaning of Code Section 414(b), (c), (m), or (o) of which IN is or may be a member. (b) No event has occurred and, to the knowledge or IN or Irwin, there exists no condition or set of circumstances, in connection with which IN or any member of its ERISA Group could be subject to any liability under the terms of any IN Benefit Plans, ERISA, the Code or any other applicable Law which would have an IN Material Adverse Effect. (c) Neither IN nor any member of its ERISA Group, including, without limitation, any of its subsidiaries, is or has ever been a party to any collective bargaining or other labor union contracts. No collective bargaining agreement is being negotiated by IN or any of its subsidiaries. There is no pending or threatened labor dispute, strike or work stoppage against IN or any of its subsidiaries which may interfere with the respective business activities of IN or any of its subsidiaries. None of IN, any of its subsidiaries or any of their respective representatives or employees has committed any unfair labor practices in connection with the operation of the respective businesses of IN or its subsidiaries, and there is no pending or threatened charge or 11 complaint against IN or any of its subsidiaries by the National Labor Relations Board or any comparable state agency. IN and its subsidiaries are in compliance with all applicable wage and hours Laws, age, race, religious and gender anti-discrimination Laws, employee health and safety Laws and all immigration Laws as regards their respective employees and, there is no pending or, to IN's and Irwin's knowledge, threatened claim, investigations or proceeding involving any alleged violation of any such Law. (d) Neither IN nor any of its subsidiaries is a party to or is bound by any severance agreements, programs or policies. Schedule 3.10(d) to the IN Disclosure Schedule sets forth, and IN has made available to 4Health true and correct copies of, (i) all employment agreements with officers or IN or its subsidiaries; (ii) all agreements with consultants of IN or its subsidiaries obligating IN or any subsidiary to make annual cash payments in an amount exceeding $25,000; (iii) all non-competition agreements with IN or a subsidiary executed by officers of IN; and (iv) all plans, programs, agreements and other arrangements of IN or its subsidiaries with or relating to its directors. (e) Neither IN nor any member of its ERISA Group provides retiree medical or retiree life insurance benefits to any person and (y) neither IN nor any of its subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions of Sections 601 through 608 of ERISA and Section 4980B of the Code and each such IN Benefit Plan or arrangement may be amended or terminated by IN or its subsidiaries at any time without liability. (f) Neither IN nor any member of its ERISA Group including, without limitation, any of its subsidiaries, contributes to or has an obligation to contribute to, and has not within six years prior to the date of this Agreement contributed to or had an obligation to contribute to or has any secondary liability under ERISA Section 4204 to, a multiemployer plan within the meaning of Section 3(37) of ERISA. SECTION 3.11. TAXES. Except when a failure of any representation made in this Section 3.11 to be true and correct would not result in a liability to IN in excess of (i) $10,000 in the case of a representation known to IN or Irwin to be untrue or incorrect or (ii) $25,000 in the case of a representation not known to IN or Irwin to be untrue or incorrect: (a) Except as set forth in Schedule 3.11(a) of the IN Disclosure Schedule: (1) Except to the extent that the applicable statute of limitations has expired, all Returns required to be filed by or on behalf of IN have been duly filed on a timely basis with the appropriate Governmental Entities and such Returns (including all attached statements and schedules) are true, correct and complete. Except to the extent that the applicable statute of limitations with respect thereto has expired, all Taxes (as defined in (f) below) have been paid in full on a timely basis, and no other Taxes are payable by IN with respect thereto for items or 12 periods covered by such Returns (whether or not shown on or reportable on such Returns) or with respect to any period prior to the Effective Time; (2) IN has complied in all respects with all applicable Laws relating to the payment and withholding of Taxes (including any estimated Taxes and withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar provisions under foreign laws) and has, within the time and in the manner prescribed by Law, withheld from employee wages and paid over all amounts withheld under applicable Laws; (3) IN has disclosed on its income tax returns all positions taken therein that could give rise to a substantial understatement penalty within the meaning of Code Section 6662; (4) There are no liens on any of the assets of IN with respect to Taxes, other than liens for Taxes not yet due and payable for Taxes that are being contested in good faith through appropriate proceedings and for which appropriate reserves have been established; (5) IN does not have any liability under Treasury Regulation Section 1.1502-6 or any analogous state, local or foreign law by reason of having been a member of any consolidated, combined or unitary group, other than in the current affiliated group of which IN is the common parent corporation; (6) Except to the extent that the applicable statute of limitations has expired, IN has made available to 4Health complete copies of: (i) all federal, state and local, as well as any other taxing authority, income tax, sales and use tax, employment tax and franchise tax returns of IN for all periods since the formation of IN (or any predecessor in interest) and all such tax returns of Irwin with respect to the business of IN for periods prior to the formation of IN, and (ii) all tax audit reports, work papers statements of deficiencies, closing or other agreements received by Irwin (with respect to the business of IN) or IN or on its behalf or relating to Taxes; and (7) IN does not do business in or derive income from any state, local, territorial or foreign taxing jurisdiction so as to be subject to Return filing requirements of such jurisdiction, other than those for which Returns have been furnished to 4Health. (b) Except as disclosed in Schedule 3.11(b) of the IN Disclosure Schedule: (1) There is no audit of any Returns of IN or Irwin (with respect to the business of IN by a governmental or taxing authority in process, pending or, to the knowledge of IN or Irwin, threatened (formally or informally) and no Governmental Entity of any jurisdiction in which IN does not file a Return has claimed that IN is or may be subject to tax in that jurisdiction; 13 (2) Except to the extent that the applicable statute of limitations has expired and except as to matters that have been resolved, no deficiencies exist or have been asserted (either formally or informally) or are expected to be asserted with respect to Taxes of Irwin (with respect to the business of IN) or IN, and no notice (either formally or informally) has been received by Irwin or IN that he or it has not filed a Return or paid Taxes required to be filed or paid by it; (3) IN is not a party to any pending action or proceeding for assessment or collection of Taxes, nor has such action or proceeding been asserted or threatened (either formally or informally) against it or any of its assets, except to the extent that the applicable statute of limitations has expired and except as to matters that have been resolved; (4) No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of IN; (5) No action has been taken that would have the effect of deferring any liability for Taxes for IN from any period prior to the Effective Time to any period after the Effective Time; (6) There are no requests for rulings, subpoenas or requests for information pending with respect to the Taxes of IN; (7) No power of attorney has been granted by IN, with respect to any matter relating to Taxes; (8) IN is not and has never been included in an affiliated group of corporations, within the meaning of Section 1504 of the Code; (9) IN is not (nor has it ever been) a party to any tax allocation or sharing agreement between affiliated corporations; and (10) The amount of liability for unpaid Taxes of IN for all periods ending on or before the Effective Time will not, in the aggregate, materially exceed the amount of the liability accruals for Taxes reflected on the IN Balance Sheet. (c) Except as disclosed on Schedule 3.11(c) of the IN Disclosure Schedule: (1) IN is not required to treat any of its assets as owned by another person for federal income tax purposes or as tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Code; (2) IN has not issued or assumed any corporate acquisition indebtedness that is subject to Sections 279(a) and (b) of the Code; 14 (3) IN has not entered into any compensatory agreements with respect to the performance of services under which payment would result in a nondeductible expense pursuant Section 280G of the Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code; (4) No election has been made under Section 338 of the Code with respect to IN and no action has been taken that would result in any income tax liability to IN as a result of a deemed election within the meaning of Section 338 of the Code; (5) No consent under Section 341(f) of the Code has been filed with respect to IN; (6) IN has not agreed, nor is it required to make, any adjustment under Code Section 481(a) by reason of a change in accounting method or otherwise; (7) IN has not disposed of any property that is presently being accounted for under the installment method; (8) IN is not a party to any interest rate swap or currency swap; (9) IN has not participated in any international boycott as defined in Code Section 999; (10) IN is not subject to any joint venture, partnership or other arrangement or contract that is treated as a partnership for federal income tax purposes; (11) IN has not made any of the foregoing elections and is not required to apply any of the foregoing rules under any comparable state, local or foreign income tax provisions; and (12) IN does not have and has never had a permanent establishment in any foreign country, as defined in any applicable tax treaty or convention between the United States and such foreign country. (d) The books and records of IN, including the Returns of IN made available to 4Health, contain accurate and complete information with respect to: (1) All material tax elections in effect with respect to IN; (2) The current tax basis of the assets of IN; (3) The current and accumulated earnings and profits of IN, if any; 15 (4) The net operating losses of IN by taxable year, if any; (5) The net capital losses of IN by taxable year, if any; (6) The tax credit carry overs of IN, if any; and (7) The overall foreign losses of IN under Section 904(f) of the Code that are subject to recapture, if any. (e) The Returns provided by IN to 4Health contain accurate and complete information with respect to any net operating losses and net operating loss carry forwards, if any, and other tax attributes of IN, and the extent to which they are subject to any limitation under Code Sections 381, 382, 383, or 384, or any other provision of the Code or the federal consolidated return regulations (or any predecessor provision of any Code Section or the regulations) and, apart from any such limitations and apart from any limitation that would be imposed as a result of the Merger, there is nothing that would prevent IN from utilizing these net operating losses, net operating loss carry forwards or other tax attributes, if any, as so limited if it has sufficient income. (f) (1) For purposes of this Agreement the term "Taxes" shall mean all taxes, however, denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profit taxes, payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business license taxes, occupation taxes, real and personal property taxes, stamp taxes, environmental taxes, transfer taxes, workers' compensation, Pension Benefit Guaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, required to be paid, withheld or collected. (2) For the purposes of this Agreement, the term "Returns" shall mean all reports, estimates, declarations of estimated tax, information statements and returns relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties. (3) All references to "IN" in this Section 3.11 shall include all subsidiaries of IN and where appropriate in this Section 3.11, the singular shall include the plural. 16 SECTION 3.12. TAX AND ACCOUNTING MATTERS. (a) Neither IN nor, to the knowledge of IN or Irwin, any of its affiliates has taken or agreed to take any action that would prevent the Merger from constituting a tax-free reorganization qualifying under the provisions of Section 368(a) of the Code. (b) IN has no plan or intention to acquire the 4Health Common Stock issued in the Merger. (c) Subject to Section 8.05(a), IN and the holders of IN Common Stock will each pay their respective expenses, if any, incurred in connection with the Merger. (d) There is no intercorporate indebtedness existing between IN and 4Health that was issued, acquired or will be settled at a discount. (e) IN is not an investment company as defined in section 368(a)(2)(F)(iii) and (iv) of the Code. (f) Except as contemplated by this Agreement, IN will take no action prior to the Effective Time to cease operations or, except in the ordinary course of business, dispose of any of its assets of any of its subsidiaries or current lines of business. (g) Neither IN nor any of its subsidiaries or affiliates has taken in the last two years or will take any action prior to the Effective Time which will adversely affect or invalidate the ability of 4Health to account for the Merger using the pooling of interests method of accounting as provided in Accounting Principles Board Opinion No. 16 of the American Institute of Certified Public Accountants and the interpretations issued thereunder as presently in effect ("APB 16"). SECTION 3.13. CERTAIN BUSINESS PRACTICES. To the best of its knowledge, none of IN, any of its subsidiaries or any directors, officers, agents or employees of IN or any of its subsidiaries has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful payment. SECTION 3.14. ENVIRONMENTAL MATTERS. (a) Except for matters disclosed in Schedule 3.14 to the IN Disclosure Schedule and except for matters that would not have or are reasonably not likely to have an IN Material Adverse Effect, to the best knowledge of IN or Irwin: 17 (i) The properties, operations and activities of IN and its subsidiaries are in compliance with all applicable Environmental Laws and there are no circumstances which could reasonably be expected to prevent or interfere with their continued compliance with applicable Environmental Laws. (ii) IN and its subsidiaries and the properties and operations of IN and its subsidiaries are not subject to any existing, pending, or, to IN's knowledge, threatened civil, criminal or administrative action, suit, claim, notice of violation, investigation, notice of potential liability, request for information, inquiry, demand or proceeding under applicable Environmental Laws. (iii) IN and its subsidiaries have not agreed, whether by contract or by consent agreement with Governmental Entities or private persons, to undertake investigation, clean up, or remedial activities. (iv) All notices, permits, licenses, or similar authorizations required to be obtained or filed by IN or any of its subsidiaries under any Environmental Laws in connection with any aspect of the business of IN or any of its subsidiaries, including without limitation those relating to the treatment, storage, disposal or discharge of Hazardous Materials, have been duly obtained or filed and will remain valid and in effect after the Merger, and IN and its subsidiaries are in compliance with the terms and conditions of all such notices, permits, licenses and similar authorizations. (v) IN and its subsidiaries have not received any notice of noncompliance with respect to any financial responsibility requirements applicable to their operations and imposed by any Governmental Entity under any Environmental Laws. (vi) There are no physical or environmental conditions existing on any leased property of IN or its subsidiaries or resulting from IN's or such subsidiaries' operations or activities, past or present, at any location, including without limitation, releases and disposal of Hazardous Materials, that would give rise to any on-site or off-site investigation, reporting, or remedial obligations or other Environmental Liability. (vii) To the extent required by applicable Environmental Laws, all Hazardous Materials generated by IN and its subsidiaries have been transported only by persons authorized under applicable Environmental Laws to transport such materials, and disposed of only at treatment, storage and disposal facilities authorized under applicable Environmental Laws to treat, store or dispose of such Hazardous Materials. (viii) There has been no exposure of any person or property to Hazardous Materials or any release of Hazardous Materials into the environment by IN or its present or prior subsidiaries or in connection with their present or prior properties or operations that could reasonably be expected to give rise to any Environmental Liability. 18 (ix) No release or clean up of Hazardous Materials has occurred at IN and its subsidiaries' leased properties which could reasonably be expected to result in the assertion or creation of any lien on the properties by any governmental body or agency or other Governmental Entity with respect thereto, nor has any such lien been asserted or made by any governmental body, agency or entity with respect thereto. (x) The operations of each third party operator of any of IN or its subsidiaries' properties are in compliance with the terms of this Section 3.14. (b) IN and its subsidiaries have made available to 4Health all internal and external environmental audits, studies, documents and correspondence on environmental matters in the possession of IN or its subsidiaries relating to any of the present or prior properties or operations of IN and its subsidiaries. (c) For purposes of this Agreement, the following terms shall be defined as follows: (i) "Environmental Laws" shall mean any and all laws, statutes, ordinances, rules, regulations or orders of any Governmental Entity pertaining to pollution, health, safety, or the environment, including, without limitation, the Clean Air Act, the Comprehensive Environmental, Response, Compensation, and Liability Act ("CERCLA"), the Clean Water Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Solid Waste Disposal Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the Hazardous Materials Transportation Act, the Oil Pollution Act, all as amended, any state laws implementing the foregoing federal laws, any state laws pertaining to, health, safety and waste management including, without limitation, the handling of asbestos, medical waste or disposable products, hydrocarbon products, PCBs or other Hazardous Materials or processing or disposing of wastes or the use, maintenance and closure of pits and impoundments, all other federal, state or local environmental conservation or protection and health and safety laws, and any common law creating liability for environmental conditions. Environmental Laws shall include, without limitation, all restrictions, conditions, standards, limitations, prohibitions, requirements, guidelines, obligations, schedules and timetables contained in Environmental Laws or contained in any regulation, plan, code, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. (ii) "Hazardous Materials" shall mean any materials that are regulated by or form the basis of liability under Environmental Laws, and include, without limitation, asbestos, wastes, including, without limitation, medical wastes or disposable products, hazardous substances, pollutants or contaminants, hazardous or solid wastes, hazardous constituents, hazardous materials, toxic substances, petroleum, including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). 19 (iii) "Environmental Liability" shall mean liabilities, fines, penalties, obligations, consequential damages, responsibilities, response costs, natural resource damages, corrective action costs, reclamation costs, and costs and expenses, known or unknown, absolute or contingent, past, present or future, resulting from any requirement, claim or demand under Environmental Laws or contract. SECTION 3.15. VOTE REQUIRED. The only vote or written consent of the holders of any class or series of IN capital stock necessary to approve the Merger and adopt this Agreement is the affirmative vote or written consents from the holders of at least a majority of the outstanding shares of IN Common Stock. SECTION 3.16. BROKERS. Except as set forth in Schedule 3.16 to the IN Disclosure Schedule and the Notes payable to the order of Messrs. Charles Paz, Roy Dahlen and Ken Bodger, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of IN. IN has made or will make available prior to Closing to 4Health a complete and correct copy of all agreements referenced in Schedule 3.16 to the IN Disclosure Schedule pursuant to which such firm or individual will be entitled to any payment relating to the transactions contemplated by this Agreement. SECTION 3.17. INSURANCE. Schedule 3.17 to the IN Disclosure Schedule will set forth a true and complete listing of all material policies currently in force, and all other policies under which a claim could be made as of the date hereof (I.E., all occurrence-based policies), for fire, products and environmental or pollution control liability, general liability, vehicle, workers' compensation, directors and officers' liability, title and other insurance owned or held by or covering IN or any of its property, assets, or activities, past or present. As of the date hereof, all of such policies are in full force and effect, and IN has not received any outstanding notice of cancellation or termination with respect to any policy of fire, products or environmental or pollution control liability, general liability, vehicle, workers' compensation, directors' and officers' liability, title and other insurance owned or held by or covering IN or any of its property, assets, or activities, past or present. To the knowledge of IN or Irwin, neither the Merger nor any of the transactions contemplated hereby shall cause the termination or may form the basis for terminating any such insurance policies or insurance coverages presently maintained by IN. SECTION 3.18 PROPERTIES. Except as set forth in Schedule 3.18 to the IN Disclosure Schedule, except for liens arising in the ordinary course of business after the date hereof and assets disposed of in the ordinary course of business after the date of the IN Balance Sheet, IN and its subsidiaries have good and marketable title free and clear of all liens, the existence of which would have an IN Material Adverse Effect, to all their material assets, whether tangible or intangible, personal or mixed, reflected in the IN Balance Sheet as being owned by IN and its subsidiaries as of the date thereof or purported to be owned on the date hereof. All buildings, and all fixtures, equipment and other property and assets which are material to its business on a 20 consolidated basis held under leases by any of IN or its subsidiaries, are held under valid instruments enforceable by IN or its subsidiaries in accordance with their respective terms. Substantially all of IN's and its subsidiaries' equipment in regular use has been well maintained and is in good and serviceable condition, reasonable wear and tear excepted. Neither IN nor any of its subsidiaries own any real property and all of IN's and its subsidiaries' interests in real property are subject to valid and binding leases, all of which are in full force and effect, are not in breach by IN or its subsidiaries or, to IN's or Irwin's knowledge, by the lessor thereunder. SECTION 3.19. CERTAIN CONTRACTS AND RESTRICTIONS. Other than agreements, contracts or commitments listed elsewhere in the IN Disclosure Schedule, Schedule 3.19 to the IN Disclosure Schedule lists, as of the date hereof, each agreement, contract or commitment (including any amendments thereto) to which IN or any of its subsidiaries is a party or by which IN or any of its subsidiaries is bound (i) involving consideration during the next twelve months in excess of $10,000 or (ii) which is otherwise material to the assets, liabilities, financial condition, results of operations or current or future business of IN and its subsidiaries, taken as a whole. As of the date of this Agreement and except as indicated on the IN Disclosure Schedule, (i) IN has fully complied with all material terms and conditions of all agreements, contracts and commitments listed in the IN Disclosure Schedule and all such agreements, contracts and commitments are in full force and effect, (ii) IN and Irwin have no knowledge of any defaults thereunder or any cancellations or modifications thereof, and (iii) such agreements, contracts and commitments are not subject to any memorandum or other written document or understanding permitting cancellation. SECTION 3.20. FUTURES TRADING AND FIXED PRICE EXPOSURE. Neither IN nor any of its subsidiaries is presently engaged in any futures or options trading or is a party to any price, interest rate or currency swaps, hedges, futures or other derivative instruments. SECTION 3.21. INFORMATION SUPPLIED. Without limiting any of the representations and warranties contained herein, the representations and warranties of IN contained in this Agreement and the information set forth in the IN Disclosure Schedule is complete and accurate and does not contain any untrue statement of material fact, or omit a material fact necessary in order to make the statements contained therein, in light of the circumstances under which such statements are or were made, not misleading. SECTION 3.22. SECURITIES LAWS REPRESENTATIONS. Without limiting any of the representations and warranties of 4Health contained herein, Irwin hereby acknowledges and agrees with 4Health that he is familiar with 4Health's assets, business, financial condition, results of operations, and prospects. He is aware of the risks attendant to an investment in the 4Health Common Stock. He has relied solely upon the independent investigations made by him and his representatives and 4Health's representations and warranties set forth herein in making a decision to approve the Merger and to acquire the 4Health Common Stock nad has a full understanding and appreciation of the risks inherent in such a speculative investment. In connection with such 21 investigation, he and his advisors, if any, have had the opportunity to ask, to the extent he considered necessary, questions of, and have received answers from, officers of 4Health concerning the affairs of 4Health and have had access to reports filed by 4Health with the Commission (as hereinafter defined), all documents, records, books and additional information which he has deemed necessary to make an informed investment decision to acquire the 4Health Common Stock. He recognizes that the offer and sale by 4Health to him of the 4Health Common Stock has not been registered under the Securities Act or any other domestic or foreign securities laws (the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and any such other applicable domestic and foreign securities laws are hereinafter collectively referred to herein as the "Securities Laws") and, except as set forth in 6.02 hereof, will not be registered under any such Securities Laws, in reliance upon exemptions from the registration requirements thereof. He is acquiring the 4Health Common Stock solely for his own account for investment and not with a view to, or for offer or resale in connection with, a distribution thereof in violation of any Securities Laws. He understands that the effect of such representations and warranties is that such Stock must be held indefinitely unless the sale or transfer thereof is subsequently registered under applicable Securities Laws or an exemption from such registration is available at the time of the proposed sale or transfer thereof. Except as provided in Section 6.02 hereof, 4Health is under no obligation to file a registration statement under the Securities Act covering the sale or transfer of the 4Health Common Stock or otherwise to register such Stock for sale under applicable Securities Laws. Irwin represents and warrants that he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of approving the Merger and investing in the 4Health Common Stock; he is an "accredited investor" as defined in Rule 501 of Regulation D; and that the statements contained in this Section 3.23 are true, correct and complete in all material respects and do not omit any material fact necessary to make such statements not misleading. Irwin shall make no sale or other disposition of his 4Health Common Stock unless (a) 4Health shall have received an opinion of counsel satisfactory in form and substance to it that the sale or other disposition may be made without registration under the then applicable provisions of the Securities Laws and the rules and regulations promulgated thereunder, or (b) such Stock is included in a currently effective registration statement under the Securities Act. Neither Irwin, his wife nor any holder of a Converted Share has been convicted of any felony or misdemeanor in connection with the purchase and sale of any security or involving the making of any false filing with the Securities and Exchange Commission ("Commission"). Neither Irwin, his wife nor any holder of a Converted Share nor IN or any subsidiary of IN, nor any officer, director and/or shareholder of IN or any subsidiary of IN, is subject to any order, judgment or decree of any court of competent jurisdiction, temporarily or preliminarily restraining or enjoining, or subject to any order, judgment or decree of any court of competent jurisdiction, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase and sale of any security or involving the making of any false filing with the Commission. Irwin agrees to secure and furnish to 4Health prior to the Effective Time investment representation letters from his wife and any other holder of Converted Shares, if any, addressed to 4Health containing the same representations and warranties made by Irwin in this Section 3.23. 22 SECTION 3.23. INTELLECTUAL PROPERTY. Schedule 3.23 lists all the registered patents, trademarks, service marks, copyrights, trade names and applications for any of the foregoing owned by IN or any to its knowledge, its subsidiaries as of the date of this Agreement (the "Registered Intellectual Property"). To its knowledge, IN has good and marketable title to the Registered Intellectual Property and has good and marketable title to, or valid licenses or rights to use, all patents, copyrights, trademarks, trade names, brand names, proprietary and other technical information, technology and software (collectively, "Intellectual Property") which are used in the operation of its business as presently conducted, free from any liens and free from any requirement of any past, present or future royalty payments, license fees, charges or other payments or conditions or restrictions, whatsoever, except as set forth on Schedule 3.23. Immediately after the Effective Time, the Surviving Corporation will own or will have the right to use all Intellectual Property free from liens and on the same terms and conditions as in effect prior to the Effective Time. Except as set forth in Schedule 3.23, there are no claims or proceedings pending or, to IN's or to Irwin's knowledge, threatened, against IN asserting that IN or any of its subsidiaries is infringing or engaging in the unauthorized use of any Intellectual Property of any other person or entity. Schedule 3.23 sets forth all agreements and arrangements (i) pursuant to which IN or any of its subsidiaries has licensed Intellectual Property to, or the use of Intellectual Property in other areas permitted (through non-assertion, settlement or similar agreements or otherwise) by, any other person and (ii) pursuant to which IN or any of its subsidiaries has had Intellectual Property licensed to it, or has otherwise been permitted to use Intellectual Property (through non-assertion, settlement or similar agreements or otherwise). All of the agreements or arrangements to the extent set forth on Schedule 3.23 (w) are in full force and effect in accordance with their terms and neither IN nor Irwin is aware that any default exists thereunder by IN or any of its subsidiaries or by any other party thereto; (x) are free and clear of liens; and (y) do not contain any change of control or other terms or conditions that will become applicable or inapplicable as a result of the consummation of the Merger and the transactions contemplated by this Agreement. IN has delivered to 4Health true and complete copies of all agreements and arrangements set forth on Schedule 3.23. There are no royalties, license fees, charges or other amounts payable by, or on behalf of IN or any of its subsidiaries in respect of any Intellectual Property other than as set forth on Schedule 3.23. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF 4HEALTH 4Health hereby represents and warrants to IN and Irwin that: SECTION 4.01. ORGANIZATION AND QUALIFICATIONS; SUBSIDIARIES. 4Health is a corporation duly organized, validly existing and in good standing under the laws of the State of Utah and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted and is duly qualified and in good standing to do business in each jurisdiction in which the nature of the business conducted by it or the ownership or 23 leasing of its properties makes such qualification necessary, other than where the failure to be so duly qualified and in good standing would not have a 4Health Material Adverse Effect. The term "4Health Material Adverse Effect" as used in this Agreement shall mean any change or effect that, individually or when taken together with all such other changes or effects, would be reasonably likely to be materially adverse to the assets, liabilities, financial condition, results of operations or current or future business of 4Health and its subsidiaries, taken as a whole. Except as set forth in Schedule 4.01 to the disclosure schedule to be delivered to IN by 4Health and which is attached hereto and is made a part hereof (the "4Health Disclosure Schedule") as provided in Section 7.03(g), 4Health does not own an equity interest in any other corporation, partnership or joint venture arrangement or other business entity that is material to the assets, liabilities, financial condition, results of operations or current or future business of 4Health and its subsidiaries, taken as a whole. SECTION 4.02. ARTICLES OF INCORPORATION AND BYLAWS. 4Health has heretofore furnished to IN a complete and correct copy of the articles of incorporation and bylaws or the equivalent organizational documents as presently in effect of 4Health. 4Health is not in violation of any of the provisions of its articles or any material provision of its bylaws. SECTION 4.03. CAPITALIZATION. (a) Except as set forth in Schedule 4.03(a) or as contemplated by this Agreement, the authorized capital stock of 4Health consists of 30,000,000 shares of 4Health Common Stock as of the date hereof, of which 11,911,658 shares are issued and outstanding, 50,000 shares are held in treasury by 4Health and up to 2,139,323 shares are reserved for future issuance pursuant to stock options and warrants; and (ii) 5,000,000 shares of series preferred stock, par value $1.00 per share, none of which are issued and outstanding. Except as described in this Section 4.03 or Schedule 4.03(a) of the 4Health Disclosure Schedule, no shares of capital stock of 4Health are reserved for any purpose. Each of the outstanding shares of capital stock of, or other equity interests in 4Health is duly authorized, validly issued, and, in the case of shares of capital stock, fully paid and nonassessable, and has not been issued in violation of (nor are any of the authorized shares of capital stock of, or other equity interests in, such entities subject to) any preemptive or similar rights created by statue, the charter or bylaws (or the equivalent organizational documents) of 4Health, or any agreement to which 4Health is a party or bound, and such outstanding shares or other equity interests owned by 4Health are owned free and clear of all security interests, liens, claims, pledges, agreements, limitations on 4Health's voting rights, charges or other encumbrances of any nature whatsoever. (b) Except as set forth in Schedule 4.03(b)(i) to the 4Health Disclosure Schedule, there are no options, warrants or other rights (including registration rights), agreements, arrangements or commitments of any character to which 4Health is a party relating to the issued or unissued capital stock of 4Health or obligating 4Health to grant, issue or sell any shares of the capital stock of 4Health, by sale, leases, license or otherwise. Except as set forth in Schedule 4.03(b)(ii) to the 4Health Disclosure Schedule, there are no obligations, contingent or 24 otherwise, of 4Health to (i) repurchase, redeem or otherwise acquire any shares of 4Health Common Stock or other capital stock of 4Health; or (ii) provide material funds to, or make any material investment in (in the form of a loan, capital contribution or otherwise), or provide any guarantee with respect to the obligations of any other person. Except as described in Schedule 4.03(b)(iii) to the 4Health Disclosure Schedule, 4Health (x) does not directly or indirectly own, (y) has not agreed to purchase or otherwise acquire or (z) does not holds any interest convertible into or exchangeable or exercisable for, 5% or more of the capital stock of any corporation, partnership, joint venture or other business association or entity. Except as set forth in Schedule 4.03(b)(iv) to the 4Health Disclosure Schedule, there are no agreements, arrangements or commitments of any character (contingent or otherwise) pursuant to which any person is or may be entitled to receive any payment based on the revenues or earnings or calculated in accordance therewith, of 4Health. Except as set forth in Schedule 4.03(b)(v), there are no voting trusts, proxies or other agreements or understanding to which 4Health is a party or by which 4Health is bound with respect to the voting of any shares of capital stock of 4Health. (c) 4Health has made available to IN complete and correct copies of (i) its Long Term Stock Incentive Plan (The "4Health Option Plan") and the forms of options issued pursuant to the 4Health Option Plan, including all amendments thereto and (ii) all options and warrants that are not in the form specified under clause (i) above. Schedule 4.03(c) to the 4Health Disclosure Schedule sets forth a complete and correct list of all outstanding warrants and options, restricted stock or any other stock awards and shares of stock reserved for issuance under such stock options, the form thereof provided under clause (i) above. Schedule 4.03(c) to the 4Health Disclosure Schedule sets forth a complete and correct list of all outstanding warrants and options, restricted stock or any other stock awards (the "4Health Stock Awards") granted under the 4Health Option Plan or otherwise, setting forth as of the date hereof (i) the number of type of 4Health Stock Awards, (ii) the exercise price of each outstanding stock option or warrants, and (iii) the number of stock options and warrants presently exercisable. SECTION 4.04 AUTHORITY. 4Health has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by 4Health and the consummation by 4Health of the transactions contemplated hereby have been duly authorized by all necessary corporate action and, except for securing the approval of 4Health's stockholders, no other corporate proceedings on the part of 4Health are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by 4Health and, assuming the due authorization, execution and delivery thereof by IN and Irwin, constitutes the legal, valid and binding obligation of 4Health enforceable against 4Health in accordance with its terms, except that (i) such enforcement may be subject to applicable bankruptcy, insolvency or other similar laws, now or hereafter in effect. affecting creditors' rights generally, and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 25 SECTION 4.05. NO CONFLICT: REQUIRED FILINGS AND CONSENTS. (a) Except as set forth in Schedule 4.05 to the 4Health Disclosure Schedule, the execution and delivery of this Agreement by 4Health does not, and the consummation of the transaction contemplated hereby will not (i) conflict with or violate the articles of incorporation or bylaws, or the equivalent organizational documents, in each case as amended or restated, of 4Health, (ii) conflict with or violate any Laws applicable to 4Health or by which any of its properties is bound or subject, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of 4Health pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which 4Health is a party or by or to which 4Health or any of its properties is bound or subject, except for any such conflicts or violations described in clause (ii) or breaches, defaults, events, rights of termination, amendment, acceleration or cancellation, payments obligations or liens or encumbrances described in clause (iii) that would not have a 4Health Material Adverse Effect. (b) The execution and delivery of this Agreement by 4Health does not, and consummation of the Merger will not, require 4Health to obtain any consent, license, permit, approval, waiver, authorization or order of, or to make any filing with or notification to, any Governmental Entity, except (i) for filing appropriate merger documents as required by California and Utah Laws; (ii) for filing Proxy Materials (as defined herein) and Form D with the Commission; (iii) if required by the National Association of Securities Dealers, Inc. ("NASD"), a listing application listing the shares of 4Health's Common Stock on the NASDAQ National Stock Market ("NSM"); and (iv) where the failure to obtain such consents, licenses, permits, approvals, waivers, authorizations or orders, or to make such filings or notifications, would not, either individually or in the aggregate, materially interfere with 4Health's performance of its obligations under this Agreement and would not have a 4Health Material Adverse Effect. SECTION 4.06. PERMITS; COMPLIANCE. 4Health and, to 4Health's knowledge, each third party operator of any of 4Health's properties, is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents. certificates, approvals and orders necessary to won, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "4Health Permits"), and there is no action, proceeding or investigation pending or, to the knowledge of 4Health, threatened regarding suspension or cancellation of any of the 4Health Permits, except where the failure to possess, or the suspension or cancellation of, such 4Health Permits would not have a 4Health Material Adverse Effect. Except as set forth in Schedule 4.06 to the 4Health Disclosure Schedule, 4Health has not received from any Governmental Entity any written notification with respect to possible conflicts, defaults or violations of Laws, except for written notices relating to possible conflicts, defaults or violations that would not have a 4Health Material Adverse Effect. 26 SECTION 4.07. FINANCIAL STATEMENTS. (a) Since March 31, 1991, 4Health and its subsidiaries have filed (i) all forms, reports, statements and other documents required to be filed with (A) the Commission including, without limitation, (1) all Registration Statements filed under the Securities Act, (2) all Annual Reports on Form 10-K, (3) all Quarterly Reports on Form 10-Q, (4) all proxy statements relating to meetings of stockholders (whether annual or special), (5) all Current Reports on Form 8-K and (6) all other reports, schedules, registration statements or other documents (collectively referred to as the "4Health Commission Reports") and (B) any applicable state securities authorities and (ii) all forms, reports, statements and other documents required to be filed with any other applicable federal or state regulatory authorities, except where the failure to file any such forms, reports, statements or other documents would not have a 4Health Material Adverse Effect (all such forms, reports, statements and other documents in clauses (i) and (ii) of this Section 3.07(a) being referred to herein, collectively, as the "4Health Reports"). The 4Health Reports, including all 4Health Reports filed after the date of this Agreement and prior to the Effective Time, (x) were or will be prepared in accordance with the requirements of applicable Law (including, with respect to 4Health Commission Reports, the Securities Act and the Exchange Act, as the case may be, and the rules and regulations of the Commission thereunder applicable to such 4Health Commission Reports) and (y) did not at the time they were filed, or will not at the time they are filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in 4Health Commission Reports filed prior to the Effective Time, (i) have been or will be prepared in accordance with the published rules and regulations of the Commission and generally accepted accounting principles applied on a consistent basis throughout the periods involved (except (a) to the extent required by changes in generally accepted accounting principles; (b) with respect to 4Health Commission Reports filed prior to the date of this Agreement, as may be indicated in the notes thereto; and (c) with respect to interim financial statements as may be permitted by Article 10 of Regulation S-X) and (ii) fairly present or will fairly present the consolidated financial position of 4Health and its subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated (including reasonable estimates of normal and recurring year-end adjustments), except that (x) any unaudited interim financial statements were or will be subject to normal and recurring year-end adjustments and (y) any pro forma financial statements contained in such consolidated financial statements are not necessarily indicative of the consolidated financial position of 4Health and its subsidiaries as of the respective dates thereof and the consolidated results of operations and cash flows for the periods indicated. SECTION 4.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the 4Health Commission Reports, or in the 4Health Disclosure Schedule or as contemplated by this 27 Agreement or as set forth in Schedule 4.08 to the 4Health Disclosure Schedule, since September 30, 1997, 4Health has conducted its business in the ordinary course of business consistent with past practice. Since September 30, 1997, there has not been (i) any event, change, or effect (including the occurrence of any liabilities of any nature, whether or not accrued, contingent or otherwise) having or, which would be reasonably likely to have, individually or in the aggregate, a 4Health Material Adverse Effect; (ii) any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the equity interests of 4Health or any redemption, purchase or other acquisition by 4Health or any of 4Health's subsidiaries of any of 4Health's securities or any of the securities of any subsidiary of 4Health; (iii) any revaluation by 4Health of its assets, including the writing down of the value of inventory or the writing down or off of notes or accounts receivable, other than in the ordinary course of business and consistent with past practices; (iv) any change by 4Health in accounting principles or methods, except insofar as may be required by a change in generally accepted accounting principles;(v) a fundamental change in the nature of 4Health's business; or (vi) a 4Health Material Adverse Effect. SECTION 4.09. ABSENCE OF LITIGATION. Except as set forth in Schedule 4.09 to the 4Health Disclosure Schedule, there is no claim, suit, litigation, proceeding, arbitration or, to the knowledge of 4Health, investigation of any kind, at law or in equity (including actions or proceedings seeking injunctive relief) pending or, to the knowledge of 4Health, threatened, against 4Health or any of its properties or rights (except for claims, actions, suits, litigation, proceedings, arbitrations or investigations which would not have a 4Health Material Adverse Effect), and 4Health is not subject to any continuing order of, consent decree, settlement agreement or other similar written agreement with, or, to the knowledge of 4Health, continuing investigation by, any Governmental Entity, or any judgment, order, writ, injunction, decree or award of any Government Entity or arbitrator, including, without limitation, cease-and-desist or other orders, except for matters that would not have a 4Health Material Adverse Effect. SECTION 4.10. EMPLOYEE BENEFIT PLANS; LABOR MATTERS. (a) Schedule 4.10(a) to the 4Health Disclosure Schedule sets forth each employee benefit plan (as such term is defined in ERISA Section 3(3)) maintained or contributed to during the past five years by 4Health or any member of its ERISA Group or with respect to which 4Health or any member of its ERISA Group could incur liability under Sections 4063, 4069, 4212(c) or 4204 of ERISA, and any other retirement, pension, stock option, stock appreciation rights, profit sharing, incentive compensation, deferred compensation, savings, thrift, vacation pay, severance pay, insurance, health, welfare or other employee compensation or benefit plan, agreement, practice, or arrangement, whether written or unwritten, whether or not legally binding (collectively, the "4Health Benefit Plans"). For purposes of this Agreement, "ERISA Group" means a controlled or affiliated group within the meaning of Code Section 414(b), (c), (m), or (o) of which 4Health is a member. 4Health has made available to IN correct and complete copies of all 4Health Benefit Plans (including a detailed written description of any 4Health Benefit Plan that is unwritten, including a description of eligibility criteria, participation, 28 vesting, benefits, funding arrangements and assets and any other provisions relating to 4Health) and, with respect to each 4Health Benefit Plan, a copy of each of the following, to the extent each is applicable to each 4Health Benefit Plan: (i) the most recent favorable determination letter, (ii) materials submitted to the Internal Revenue Service in support of a pending determination letter request, (iii) the most recent letter issued by the Internal Revenue Service recognizing tax exemption, (iv) each insurance contract, trust agreement, or other funding vehicle, (v) the three most recently filed Forms 5500 plus all schedules and attachments, (vi) the three most recent actuarial valuations, and (vii) each summary plan description or other general explanation or communication distributed or otherwise provided to employees with respect to each 4Health Benefit Plan that describes the terms of the 4Health Benefit Plan. (b) With respect to the 4Health Benefit Plans, no event has occurred and, to the knowledge of 4Health, there exists no condition or set of circumstances, in connection with which 4Health or any member of its ERISA Group could be subject to any liability under the terms of such 4Health Benefit Plans, ERISA, the Code or any other applicable Law which would have an 4Health Material Adverse Effect. Except as otherwise set forth on Schedule 4.10(b) to the 4Health Disclosure Schedule: (i) As to any 4Health Benefit Plan intended to be qualified under Section 401 of the Code, such 4Health Benefit Plan satisfies the requirements of such Section and there has been no termination or partial termination of such 4Health Benefit Plan within the meaning of Section 411(d)(3) of the Code and 4Health has administered all such Plans in accordance with all applicable Laws; (ii) There are no actions, suits or claims pending (other than routine claims for benefits) or, to the knowledge of 4Health, threatened against, or with respect to, any of the 4Health Benefit Plans or their assets, any plan sponsor, or any fiduciary (as such term is defined in Section 3(21) of ERISA), and 4Health has no knowledge of any facts that could give rise to any actions, suits or claims; (iii) All contributions required to be made to the 4Health Benefit Plans pursuant to their terms and provisions have been made timely; (iv) As to any 4Health Benefit Plan subject to Title IV of ERISA, there has been no event or condition which presents the material risk of plan termination, no accumulated funding deficiency, whether or not waived, within the meaning of Section 302 of ERISA or Section 412 of the Code has been incurred, no reportable event within the meaning of Section 4043 of ERISA has occurred, no notice of intent to terminate the 4Health Benefit Plan has been given under Section 4041 of ERISA, no proceeding has been instituted under Section 4042 of ERISA to terminate the 4Health Benefit Plan, and no liability to the Pension Benefit Guaranty Corporation or to the Plan has been incurred; 29 (v) Neither 4Health nor any party in interest (as such term is defined in ERISA Section 3(14)) nor any disqualified person has engaged in any prohibited transaction within the meaning of ERISA Section 406 or Code Section 4975 that would subject 4Health to any liability; and (vi) The consummation of the transactions contemplated by this Agreement will not give rise to any acceleration of vesting of payments or options, the acceleration of the time of making any payments, or the making of any payments, which in the aggregate would result in an "excess parachute payment" within the meaning of Section 280G of the Code and the imposition of the excise under Section 4999 of the Code. (c) Except as set forth in Schedule 4.10(c) to the 4Health Disclosure Schedule, neither 4Health nor any member of its ERISA Group, including, without limitation, any of its subsidiaries, is or has ever been a party to any collective bargaining or other labor union contracts. No collective bargaining agreement is being negotiated by 4Health or any of its subsidiaries. There is no pending or threatened labor dispute, strike or work stoppage against 4Health or any of its subsidiaries which may interfere with the respective business activities of 4Health or any of its subsidiaries. None of 4Health, any of its subsidiaries or any of their respective representatives or employees has committed any unfair labor practices in connection with the operation of the respective businesses of 4Health or its subsidiaries, and there is no pending or threatened charge or complaint against 4Health or any of its subsidiaries by the National Labor Relations Board or any comparable state agency. 4Health and its subsidiaries are in compliance with all applicable wage and hours Laws, age, race, religious and gender anti-discrimination Laws, employee health and safety Laws and all immigration Laws as regards their respective employees and, there is no pending or, to 4Health's knowledge, threatened claim, investigations or proceeding involving any alleged violation of any such Law. (d) Except as disclosed in Schedule 4.10(d) to the 4Health Disclosure Schedule and as contemplated by this Agreement, neither 4Health nor any of its subsidiaries is a party to or is bound by any severance agreements, programs or policies. Schedule 4.10(d) to the 4Health Disclosure Schedule sets forth, and 4Health has made available to IN true and correct copies of, (i) all employment agreements with officers or 4Health or its subsidiaries; (ii) all agreements with consultants of 4Health or its subsidiaries obligating 4Health or any subsidiary to make annual cash payments in an amount exceeding $25,000; (iii) all non-competition agreements with 4Health or a subsidiary executed by officers of 4Health; and (iv) all plans, programs, agreements and other arrangements of 4Health or its subsidiaries with or relating to its directors. (e) Except as provided in Schedule 4.10(e) to the 4Health Disclosure Schedule, (x) no 4Health Benefit Plan provides retiree medical or retiree life insurance benefits to any person and (y) neither 4Health nor any of its subsidiaries is contractually or otherwise obligated (whether or not in writing) to provide any person with life insurance or medical benefits upon retirement or termination of employment, other than as required by the provisions 30 of Sections 601 through 608 of ERISA and Section 4980B of the Code and each such 4Health Benefit Plan or arrangement may be amended or terminated by 4Health or its subsidiaries at any time without liability. (f) Except as set forth in Schedule 4.10(f) to the 4Health Disclosure Schedule, neither 4Health nor any member of its ERISA Group including, without limitation, any of its subsidiaries, contributes to or has an obligation to contribute to, and has not within six years prior to the date of this Agreement contributed to or had an obligation to contribute to or has any secondary liability under ERISA Section 4204 to, a multiemployer plan within the meaning of Section 3(37) of ERISA. (g) Except as contemplated by this Agreement or as set forth in Schedule 4.10(g), 4Health has not amended, or taken any actions with respect to, any of the 4Health Benefit Plans or any of the plans, programs, agreements, policies or other arrangements described in Section 4.10(d) of this Agreement since September 30, 1997. (h) With respect to each 4Health Benefit Plan that is a "group health plan" within the meaning of Section 5000(b) of the Code, each such 4Health Benefit Plan complies and has complied with the requirements of Part 6 of Title I of ERISA and Sections 4980B and 5000 of the Code, except where the failure to so comply would not have a 4Health Material Adverse Effect. SECTION 4.11 TAXES. Except as set forth in Schedule 4.11 of the 4Health Disclosure Schedule and except as such failure of any representation or warranty made in this Section 4.11 to be true and correct which would not have a 4Health Material Adverse Effect: (a) Except to the extent that the applicable statute of limitations has expired, all Returns required to be filed by or on behalf of 4Health have been duly filed on a timely basis with the appropriate Governmental Entities and such Returns are true, correct and complete. Except to the extent that the applicable statute of limitations with respect thereto has expired, all Taxes have been duly paid in full or a provision has been made in accordance with generally accepted accounting principles for the payment of all Taxes for all periods covered by such Returns or with respect to any period prior to the Effective Time. 4Health has disclosed on its income tax returns all positions taken therein which could give rise to a substantial understatement penalty within the meaning of Code Section 6662. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of 4Health. (b) 4Health has complied in all respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes (including any estimated Taxes and the withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar provisions under any foreign laws) and have, within the time and the manner prescribed by law, withheld from employee wages and paid over all amounts withheld under applicable laws. 31 (c) There is no audit of any of the Returns of 4Health by a Governmental Entity in process or threatened and there is no material dispute or claim concerning any liabilities for Taxes of 4Health either raised or reasonably expected to be raised by any taxing authority. There are no liens on any assets of 4Health with respect to Taxes, other than liens set forth in Schedule 4.11 of the 4Health Disclosure Schedule for Taxes that are being contested in good faith through appropriate proceedings and for which appropriate reserves have been established. (d) 4Health has made available to IN complete copies of (i) all federal income tax returns of 4Health for all periods open under the statute of limitations for assessments and (ii) examination reports, and statements of deficiencies assessed against 4Health. (e) No consent under Section 341(f) of the Code has been filed with respect to 4Health. (f) 4Health has not entered into any compensatory agreements with respect to the performance of services under which payment would result in a nondeductible expense pursuant to Section 280G of the Code. (g) 4Health has not agreed, nor is it required to make, prior to the Effective Time, any adjustment under Code Section 481(a) by reason of a change in accounting method or otherwise. (h) 4Health has not issued or assumed any corporate acquisition indebtedness that is subject to Sections 279(a) and (b) of the Code. (i) The amount of liability for unpaid Taxes of 4Health for all periods ending on or before the Effective Time will not, in the aggregate, materially exceed the amount of the liability accruals for Taxes reflected on the balance sheet of 4Health filed in Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 (the "4Health Balance Sheet"). (j) The tax returns provided by 4Health to IN contain accurate and complete information with respect to the net operating losses, net operating loss carryforwards and other tax attributes of 4Health, and the extent to which they are subject to any limitation under Code Sections 381, 382, 383 or 384, or any other provision of the Code or the federal consolidated return regulations (or any predecessor provision of any Code section or the regulations) and, apart from any such limitations and apart from any limitation that would be imposed as a result of the Merger, there is nothing that would prevent 4Health from utilizing these net operating losses, net operating loss carryforwards or other tax attributes as so limited if sufficient income were realized. 32 (k) 4Health is not required to treat any of its assets as owned by another person for federal income tax purposes or as tax-exempt bond property or as tax-exempt use property within the meaning of Section 168 of the Code. SECTION 4.12. TAX MATTERS. Neither 4Health, nor, to the knowledge of 4Health, any of 4Health's affiliates has taken or agreed to take any action that would prevent the Merger from constituting a tax-free reorganization qualifying under the provisions of Section 368(a) of the Code. SECTION 4.13. NSM LISTING. The 4Health Common Stock is traded in the NSM, and, 4Health has not received any current notice from the NSM or the NASD that it intends to delist the 4Health Common Stock from the NSM. SECTION 4.14. CERTAIN BUSINESS PRACTICES. To the best of 4Health's knowledge, none of 4Health, or any directors, offices, agents or employees of 4Health has (i) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any other unlawful payment. SECTION 4.15. ENVIRONMENTAL MATTERS (a) Except as disclosed in Schedule 4.15 to the 4Health Disclosure Schedule and except for matters that would not have or are reasonably not likely to have a 4Health Material Adverse Effect, to the best knowledge of 4Health: (i) the properties, operations and activities of 4Health are in compliance with all applicable Environmental Laws and there are no circumstances which could reasonably be expected to prevent or interfere with their continued compliance with applicable Environmental Laws; (ii) 4Health and the properties and operations of 4Health are not subject to any existing, pending, or, to 4Health's knowledge, threatened civil, criminal or administrative action, suit, claim, notice of violation, investigation, notice of potential liability, request for information, inquiry, demand or proceeding under applicable Environmental Laws; (iii) 4Health has not agreed, whether by contract or by consent agreement with governmental authorities or private persons, to undertaken investigation, clean up, or remedial activities; (iv) All notices, permits, licenses, or similar authorizations required to be obtained or filed by 4Health under any Environmental Law in connection with any aspect of the business of 4Health, including without limitation those relating to the treatment, storage, disposal or discharge of Hazardous Materials, have been duly obtained or filed and will remain 33 valid and in effect after the Merger, and 4Health is in compliance with the terms and conditions of all such notices, permits, licenses and similar authorizations; (v) 4Health has not received any notice of noncompliance with respect to any financial responsibility requirements applicable to its operations and imposed by any Governmental Entity under any Environmental Laws. (vi) There are no physical or environmental conditions existing on any property of 4Health or resulting from 4Health's operations or activities, past or present, at any location, including without limitation, releases and disposal of Hazardous Materials, that would give rise to any on-site or off-site investigation, reporting, or remedial obligations or other Environmental Liability; (vii) To the extent required by applicable Environmental Laws, all Hazardous Materials generated by 4Health have been transported only by persons authorized under applicable Environmental Laws to transport such materials, and disposed of only at treatment, storage and disposal facilities authorized under applicable Environmental Laws to treat, store or dispose of such Hazardous Materials; (viii) There has been no exposure of any person or property to Hazardous Materials or any lease of Hazardous Materials into the environment by 4Health or in connection with their present or prior properties or operations that could reasonably be expected to give rise to any Environmental Liability; (ix) No release or clean up of Hazardous Materials has occurred at 4Health's properties which could reasonably be expected to in the assertion or creation of any lien on the properties by any governmental body or agency with respect thereto, nor has any such lien been asserted or made by any governmental body or agency with respect thereto; and (x) The operations of each third party operator of any of 4Health's properties are in compliance with the terms of this Section 4.15. (b) 4Health has made available to IN all material internal and external environmental audits, studies, documents and correspondence on environmental matters in the possession of 4Health relating to any of the present or prior properties or operations of 4Health. SECTION 4.16. BROKERS. Except as set forth in Schedule 4.16 of the 4Health Disclosure Schedule and the Notes payable to the order of Messrs. Charles Paz, Roy Dahlen and Ken Bodger, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of 4Health. Prior to the date of this Agreement, 4Health has made available to IN a complete and correct copy of all agreements referenced in Schedule 4.16 34 pursuant to which any such firm will be entitled to any payment related to the transactions contemplated by this Agreement. SECTION 4.17. INSURANCE. Schedule 4.17 to the 4Health Disclosure Schedule will set forth a true and complete listing of all material policies currently in force, and all other policies under which a claim could be made as of the date hereof (I.E., all occurrence-based policies), for fire, products and environmental or pollution control liability, general liability, vehicle, workers' compensation, directors and officers' liability, title and other insurance owned or held by or covering 4Health or any of its property, assets, or activities, past or present. As of the date hereof, all of such policies are in full force and effect, and 4Health has not received any outstanding notice of cancellation or termination with respect to any policy of fire, products or environmental or pollution control liability, general liability, vehicle, workers' compensation, directors' and officers' liability, title and other insurance owned or held by or covering 4Health or any of its property, assets, or activities, past or present. To the knowledge of 4Health, neither the Merger nor any of the transactions contemplated hereby shall cause the termination or may form the basis for terminating any such insurance policies or insurance coverages presently maintained by 4Health. SECTION 4.18. PROPERTIES. Except for liens arising in the ordinary course of business after the date hereof and properties and assets disposed of in the ordinary course of business after the date of the 4Health Balance Sheet, 4Health has good and marketable title free and clear of all liens, the existence of which would have a 4Health Material Adverse Effect, to all their material properties and assets, whether tangible or intangible, real, personal or mixed, reflected in the 4Health Balance Sheet as being owned by 4Health as of the date thereof or purported to be owned on the date hereof. All buildings, and all fixtures, equipment and other property and assets which are material to its business on a consolidated basis, held under leases by 4Health are held under valid instruments enforceable by 4Health in accordance with their respective terms. Substantially all of 4Health's equipment in regular use has been well maintained and is in good and serviceable condition, reasonable wear an tear excepted. SECTION 4.19. CERTAIN CONTRACTS AND RESTRICTIONS. Other than agreements, contracts or commitments listed elsewhere in the 4Health Disclosure Schedule, Schedule 4.19 to the 4Health Disclosure Schedule lists, as of the date hereof, each agreement, contract or commitment (including any amendments thereto) to which 4Health is a party or by which 4Health is bound (i) involving consideration during the next twelve months in excess of $10,000 or (ii) which is otherwise material to the assets, liabilities, financial condition, results of operations or current or future business of 4Health, taken as a whole. As of the date of this Agreement and except as indicated on the 4Health Disclosure Schedule, (i) 4Health has fully complied with all material terms and conditions of all agreements, contracts and commitments that will be listed in the 4Health Disclosure Schedule and all such agreements, contracts and commitments are in full force and effect, (ii) 4Health has no knowledge of any defaults thereunder or any cancellations or 35 modifications thereof, and (iii) such agreements, contracts and commitments are not subject to any memorandum or other written document or understanding permitting cancellation. SECTION 4.20. EASEMENTS. The business of 4Health has been operated in a manner that does not violate the material terms of any easements, rights of way, permits, servitude, licenses and similar rights relating to real property used by 4Health in its business (collectively, "4Health Easements") except for violations that have not resulted and will not result in a 4Health Material Adverse Effect. All material 4Health Easements are valid and enforceable and grant the rights purported to be granted thereby and all rights necessary thereunder for the current operation of such business. SECTION 4.21. FUTURES TRADING AND FIXED PRICE EXPOSURE. 4Health is not presently engaged in any futures or options trading nor is it a party to any price, interest rate or currency swaps, hedges, futures or other derivative instruments. SECTION 4.22. INFORMATION SUPPLIED. Without limiting any of the representations and warranties contained herein, no representation or warranty of 4Health and no statement by 4Health or other information contained in or documents referred to in the 4Health Disclosure Schedule, as of the date of such representation, warranty, statement or document, contains or contained any untrue statement of material fact, or, at the date thereof, omits or omitted to state a material fact necessary in order to make the statements contained therein, in light of the circumstances under which such statements are or were made, not misleading. SECTION 4.23. INTELLECTUAL PROPERTY. Schedule 4.23 lists all the registered patents, trademarks, service marks, copyrights, trade names and applications for any of the foregoing owned by 4Health as of the date of this Agreement (the "4Health Registered Intellectual Property"). To its knowledge, 4Health has good and marketable title to the 4Health Registered Intellectual Property and has good and marketable title to, or valid licenses or rights to use, all patents, copyrights, trademarks, trade names, brand names, proprietary and other technical information, technology and software (collectively, "4Health Intellectual Property") which are used in the operation of its business as presently conducted, free from any liens and free from any requirement of any past, present or future royalty payments, license fees, charges or other payments or conditions or restrictions, whatsoever, except as set forth on Schedule 4.23. Except as set forth in Schedule 4.23, there are no claims or proceedings pending or, to the 4Health's knowledge, threatened, against 4Health asserting that 4Health is infringing or engaging in the unauthorized use of any 4Health Intellectual Property of any other person or entity. 4Health has delivered to 4Health true and complete copies of all agreements and arrangements set forth on Schedule 4.23. There are no royalties, license fees, charges or other amounts payable by, or on behalf of IN in respect of any 4Health Intellectual Property other than as set forth on Schedule 4.23. SECTION 4.24. POOLING OF INTERESTS. Neither 4Health, nor any of its officers, directors and/or shareholders has taken in the last two years or will take prior to the Effective Time any 36 action which would interfere with the ability of 4Health to account for the Merger under the "pooling of interests" method of accounting. SECTION 4.25. EXEMPT TRANSACTION. Assuming the accuracy and completeness of IN's and Irwin's representations and warranties hereunder, and assuming further that IN and IN stockholders have not taken and will not take any action that would render unavailable the exemption from registration under the Securities Act provided by Rule 506 of Regulation D and Section 4(2) thereof and applicable state securities laws, the shares of 4Health Common Stock issued as a result of the Merger will be offered and sold pursuant to the registration exemption provided by Rule 506 of Regulation D and Section 4(2) of the Securities Act as a transaction not involving a public offering and the requirements of the applicable state securities laws of the State of California and respective rules and regulations thereunder. SECTION 4.26 NO VIOLATION OF SECURITIES LAWS. No injunction, stop order, cease and desist order or other judgment, writ, or decree denying, revoking or suspending the registration of shares of 4Health Common Stock or prohibiting or restricting the offer or sale of shares of 4Health Common Stock has been issued and except as disclosed in Schedule 4.09 to the 4Health Disclosure Schedule, to the knowledge of 4Health, there are no private or governmental suits, actions, investigations or other proceedings pending or threatened, seeking such a judgment, order, writ or decree or alleging any violation of Federal or state securities laws. SECTION 4.27. NO INVESTIGATION. No formal or informal investigation or examination by the Commission or by the securities administrator of any state is pending, or to the knowledge of 4Health, threatened against 4Health, or any director, officer or shareholder of 4Health, or any of its subsidiaries. SECTION 4.28. NO CONVICTIONS. Neither 4Health nor any officer, director or shareholder of 4Health or any of its subsidiaries, has been convicted of any felony or misdemeanor in connection with the purchase and sale of any security or involving the making of any false filing with the Commission. SECTION 4.29. NO RESTRAINT. Neither 4Health nor any subsidiary of 4Health, nor any officer, director and/or shareholder of 4Health or any subsidiary of 4Health, is subject to any order, judgment or decree of any court of competent jurisdiction, temporarily or preliminarily restraining or enjoining, or subject to any order, judgment or decree of any court of competent jurisdiction, permanently restraining or enjoining, such person from engaging in or continuing any conduct or practice in connection with the purchase and sale of any security or involving the making of any false filing with the Commission. 37 ARTICLE V COVENANTS SECTION 5.01. AFFIRMATIVE COVENANTS OF IN. IN hereby covenants and agrees that, at or prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by 4Health, IN will and will cause its subsidiaries to: (a) continue to operate its business in all material respect in the usual and ordinary course, consistent with prior practice and to use all reasonable efforts to preserve substantially intact its business organization, maintain its material rights and franchises, retain the services of its respective officers and employees and maintain its relationships with its material customers and suppliers; (b) maintain and keep its material properties and assets in as good repair and conditions as at present, ordinary wear and tear excepted, and maintain supplies and inventories of products in quantities consistent with its customary business practice; (c) use all reasonable efforts to keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained; (d) furnish to 4Health copies of the IN Financial Statements and IN Balance Sheet, certified by IN's independent auditors, and the IN Disclosure Schedule no later than 10 days prior to the Closing Date; and (e) take all such steps as are commercially reasonable in order to consummate the Merger and all other transactions contemplated hereby, including, without limitation, securing all requisite consents thereto. SECTION 5.02. NEGATIVE COVENANTS OF IN. Except as expressly contemplated by this Agreement or otherwise consented to in writing by 4Health, from the date of this Agreement until the Effective Time, IN will not do, and will not permit any of its subsidiaries to do, any of the foregoing: (a) (i) except as set forth on in Schedule 5.02(a) to the IN Disclosure Schedule, increase the compensation payable to or to become payable to any director or executive officer; (ii) grant any severance or termination pay to, or enter into or amend any employment or severance agreement with, any director, officer or employee; (iii) establish, adopt or enter into any employee benefit plan or arrangement; or (iv) except as may be required by applicable law, adopt, amend, or take any other actions with respect to, any IN Benefit Plans or any of the plans, programs, agreements, policies or other arrangements described in Section 3.10(d) of this Agreement; 38 (b) except as set forth on Schedule 5.02(b) to the IN Disclosure Schedule, declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock, except for dividends by a direct or indirect wholly owned subsidiary of IN to IN or another wholly owned subsidiary of IN; (c) except as contemplated by this Agreement, (i) redeem, purchase or otherwise acquire any shares of its or any of its subsidiaries' capital stock or any securities or obligations convertible into or exchangeable for any shares of its or its subsidiaries' capital stock (other than any such acquisitions directly from any wholly owned subsidiary of IN in exchange for capital contributions or loans to such subsidiary), or any options, warrants or conversion or other rights to acquire any shares of its or its subsidiaries' capital stock or any such securities or obligations (except in connection with the exercise of outstanding stock options in accordance with their terms); (ii) effect any reorganization or recapitalization; or (iii) split, combine or reclassify any of its or its subsidiaries' capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its or its subsidiaries' capital stock; (d) except as contemplated by this Agreement, (i) issue, deliver, award, grant or sell, or authorize or propose the issuance, delivery, award, grant or sale (including the grant of any security interests, liens, claims, pledges, limitations in voting rights, charges or other encumbrances) of, any shares of any class of its or its subsidiaries' capital stock (including shares held in treasury), any securities convertible into or exercisable or exchangeable for any such shares, or any rights, warrants or options to acquire any such shares (except as permitted pursuant to Sections 2.01(a) and 2.01(b) of this Agreement or for the issuance of shares upon the exercise of outstanding stock options or the vesting of restricted stock in accordance with the terms of outstanding IN Stock Awards); (ii) amend or otherwise modify the terms of any such rights, warrants or options the effect of which shall be to make such terms more favorable to the holders thereof; or (iii) take any action to accelerate the exercisability of stock options; (e) acquire or agree to acquire, by merging or consolidating with, by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice); (f) except as disclosed in Schedule 5.02(f) to the IN Disclosure Schedule, sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of its material assets or any material assets of any of its subsidiaries, except for the sale of inventory or other dispositions in the ordinary course; 39 (g) initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction (as defined below), or enter into discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of the officers, directors or employees of IN or any of its subsidiaries or any investment banker, financial advisor, attorney, accountant or other representative retained by IN or any of IN's subsidiaries to take any such action, and IN shall promptly notify 4Health of all relevant terms of any such inquiries and proposals received by IN or any of its subsidiaries or by any such officer, director, investment banker, financial advisor, attorney, accountant or other representative relating to any of such matters and if such inquiry or proposal is in writing, IN shall promptly deliver or cause to be delivered to 4Health a copy of such inquiry or proposal. For purposes of this Agreement, "Competing Transaction" shall mean any of the following (other than the transactions contemplated by this Agreement) involving a party hereto or any of its subsidiaries: (i) any merger, consolidation, share exchange, business combination or similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 20% or more of the assets of a party hereto and its subsidiaries, taken as a whole, (iii) any tender offer or exchange offer for 20% or more of the outstanding shares of capital stock of a party hereto or the filing of a registration statement under the Securities Act in connection therewith; (iv) any person (other than stockholders as of the date of this Agreement) having acquired beneficial ownership of, or any group (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) having been formed which beneficially owns or has the right to acquire beneficial ownership of, 20% or more of the outstanding shares of capital stock of a party hereto; or (v) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (h) release any third party from its obligations, or grant any consent, under any existing standstill provision relating to a Competing Transaction or otherwise under any confidentiality or other agreement, or fail to enforce any such agreement in all material respects; (i) adopt or propose to adopt any amendments to its articles of incorporation or bylaws, which would alter the terms of its capital stock or would have an adverse impact on the consummation of the transactions contemplated by this Agreement; (j) (A) change any of its methods of accounting in effect at September 30, 1997, or (B) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, audit or controversy relating to Taxes (except where the amount of such settlements or controversies, individually or in the aggregate, does not exceed $10,000), or change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns for the taxable year ended December 31, 1996, except in each case, as may be required by Law or generally accepted accounting principles; 40 (k) except as set forth in Schedule 5.02(k) of the IN Disclosure Schedule, incur any obligations for borrowed money or purchase money indebtedness or guarantee, whether or not evidenced by a note, bond, debenture or similar instrument, except in the ordinary course of business consistent with past practice and in no event in excess of $10,000 in the aggregate; (l) enter into any material arrangement, agreement or contract with any third party which provides for an exclusive arrangement with that third party or is substantially more restrictive on IN or substantially less advantageous to IN than arrangements, agreements or contracts existing on the date hereof; (m) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization of IN or any of its subsidiaries; (n) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, disc harge or satisfaction of any such claims, liabilities or obligations, (x) reflected on, or reserved against in, or contemplated by, the IN Balance Sheet (including the notes thereto) of IN and its subsidiaries, (y) incurred in the ordinary course of business consistent with past practice or (z) which are legally required to be paid, discharged or satisfied; (o) knowingly take, or agree to commit to take, any action that would make any representation or warranty of IN contained herein inaccurate in any respect at, or as of any time prior to, the Effective Time; (p) other than between or among wholly-owned subsidiaries of IN which remain wholly-owned or between IN and its wholly-owned subsidiaries which remain wholly-owned or except to the extent described in Schedule 5.02(p) of the IN Disclosure Schedule, neither IN nor any of its subsidiaries will engage in any transaction with, or enter into any agreement, arrangement, or understanding with, directly or indirectly, any of IN's affiliates, including, without limitation, any transactions, agreements, arrangements or understanding with any affiliate or other person covered under Item 404 of Regulation S-K promulgated under the Securities Act, other than pursuant to such agreement, arrangements or understandings existing on the date of this Agreement (which are set forth on Section 5.02(p) of the IN Disclosure Schedule) or as disclosed in writing to 4Health on the date hereof or which are contemplated under this Agreement; provided, that IN provides 4Health with all information concerning any such agreement, arrangement or understanding that 4Health may reasonably request; (q) except as may be set forth in Schedule 5.02(q) to the IN Disclosure Schedule, agree to or approve any commitment, including any authorization for expenditure or agreement to acquire property, obligating IN for an amount in excess of $10,000; 41 (r) engage in any futures or options trading or be a party to any price or currency swaps, hedges, futures or derivative instruments; or (s) agree in writing or otherwise to do any of the foregoing. SECTION 5.03 AFFIRMATIVE COVENANTS AND CONSENT OF IRWIN. In lieu of a meeting of stockholders, the Merger, this Agreement and the transactions contemplated hereby shall be approved upon written consent, without a meeting, in accordance with the provisions of California Law, and the execution and delivery of this Agreement by Irwin shall constitute his written consent to the Merger, this Agreement and the consummation of the transactions contemplated hereby for all purposes required by the applicable provisions of California Law in order to approve and effectuate the Merger. Irwin hereby irrevocably waives any and all rights to assert any dissenters' rights granted under the provisions of any Law with respect to the Merger, this Agreement or the transactions contemplated hereby. IN hereby agrees to secure similar proxies and written consents from all other IN stockholders, if any, and deliver them to 4Health prior to the Effective Time in sufficient time to meet all applicable procedural requirements of California Law regarding stockholder approval of mergers or other business combinations. SECTION 5.04. AFFIRMATIVE AND NEGATIVE COVENANTS OF 4HEALTH. (a) 4Health hereby covenants and agrees that, at or prior to the Effective Time, unless otherwise expressly contemplated by this Agreement or consented to in writing by IN, 4Health will: (i) continue to operate its business in all material respects in the usual and ordinary course, consistent with past practice; (ii) use all reasonable efforts to preserve substantially intact its business organization, maintain its material rights and franchises, retain the services of its respective officers and 4Health employees and maintain its relationships with its material c ustomers and suppliers; (iii) maintain and keep its material properties and assets in as good repair and condition as at present, ordinary wear and tear excepted, and maintain supplies and inventories in quantities consistent with its customary business practice; (iv) use all reasonable efforts to keep in full force and effect insurance and bonds comparable in amount and scope of coverage to that currently maintained; (v) secure the affirmative votes at a duly convened shareholders meeting, from shareholders of 4Health owning in excess of fifty percent (50%) of the issued and 42 outstanding shares of 4Health Common Stock approving the Merger, this Agreement and the transactions contemplated hereby; and (vi) take all such steps as are commercially reasonable in order to consummate the Merger and all other transactions contemplated hereby, including, without limitation, securing all requisite consents thereto. (b) Except as expressly contemplated by this Agreement or otherwise consented to in writing by 4Health, from the date of this Agreement until the Effective Time, 4Health will not do any of the foregoing: (i) except as set forth on in Schedule 5.04(b)(i) to the 4Health Disclosure Schedule, increase the compensation payable to or to become payable to any director or executive officer; 5.(vii) grant any severance or termination pay to, or enter into or amend any employment or severance agreement with, any director, officer or employee; 5.(viii) establish, adopt or enter into any employee benefit plan or arrangement; or 5.(ix) except as may be required by applicable law, adopt, amend, or take any other actions with respect to, any 4Health Benefit Plans or any of the plans, programs, agreements, policies or other arrangements described in Section 4.10(d) of this Agreement; (ii) declare or pay any dividend on, or make any other distribution in respect of, outstanding shares of capital stock; (iii) except as contemplated by this Agreement or as described in Schedule 4.03(b)(ii) to the 4Health Disclosure Schedule, (i) redeem, purchase or otherwise acquire any shares of its capital stock or any securities or obligations convertible into or exchangeable for any shares of its capital stock, or any options, warrants or conversion or other rights to acquire any shares of its or any such securities or obligations (except in connection with the exercise of outstanding stock options in accordance with their terms); (ii) effect any reorganization or recapitalization; or (iii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for, shares of its capital stock; (iv) except as described in Schedule 4.03(b)(i) to the 4Health Disclosure Schedule or as contemplated by this Agreement, (i) issue, deliver, award, grant or sell, or authorize or propose the issuance, delivery, award, grant or sale (including the grant of any security interests, liens, claims, pledges, limitations in voting rights, charges or other encumbrances) of, any shares of any class of its capital stock (including shares held in treasury), any securities convertible into or exercisable or exchangeable for any such shares, or any rights, warrants or options to acquire any such shares (except as permitted pursuant to Sections 2.01(a) and 2.01(b) of this Agreement or for the issuance of shares upon the exercise of outstanding stock options or the vesting of restricted stock in accordance with the terms of outstanding 4Health Stock Awards); (ii) amend or otherwise modify the terms of any such rights, warrants or options 43 the effect of which shall be to make such terms more favorable to the holders thereof; or (iii) take any action to accelerate the exercisability of stock options; (v) acquire or agree to acquire, by merging or consolidating with, by purchasing any equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person (other than pursuant to this Agreement or for the purchase of assets from suppliers or vendors in the ordinary course of business and consistent with past practice); (vi) except as discussed in Schedule 5.04(b)(vi) to the 4Health Disclosure Schedule, sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or otherwise dispose of, any of its material assets, except for the sale of inventory or other dispositions in the ordinary course; (vii) initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal relating to, or that may reasonably be expected to lead to, any Competing Transaction, or enter into discussions or negotiate with any person or entity in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of the officers, directors or employees of 4Health or any investment banker, financial advisor, attorney, accountant or other representative retained by 4Health to take any such action, and 4Health shall promptly notify IN of all relevant terms of any such inquiries and proposals received by 4Health or any of its subsidiaries or by any such officer, director, investment banker, financial advisor, attorney, accountant or other representative relating to any of such matters and if such inquiry or proposal is in writing, 4Health shall promptly deliver or cause to be delivered to IN a copy of such inquiry or proposal; (viii) release any third party from its obligations, or grant any consent, under any existing standstill provision relating to a Competing Transaction or otherwise under any confidentiality or other agreement, or fail to enforce any such agreement in all material respects; (ix) adopt or propose to adopt any amendments to its articles of incorporation or bylaws, which would alter the terms of its capital stock or would have an adverse impact on the consummation of the transactions contemplated by this Agreement; (x) (A) change any of its methods of accounting in effect at September 30, 1997, or (B) make or rescind any express or deemed election relating to Taxes, settle or compromise any claim, action, suit, litigation, audit or controversy relating to Taxes (except where the amount of such settlements or controversies, individually or in the aggregate, does not exceed $10,000), or change any of its methods of reporting income or deductions for federal income tax purposes from those employed in the preparation of the federal income tax returns for 44 the taxable year ended December 31, 1996, except in each case, as may be required by Law or generally accepted accounting principles; (xi) except as set forth in Schedule 5.04(b)(xi) of the 4Health Disclosure Schedule, incur any obligations for borrowed money or purchase money indebtedness or guarantee, whether or not evidenced by a note, bond, debenture or similar instrument, except in the ordinary course of business consistent with past practice and in no event in excess of $10,000 in the aggregate; (xii) enter into any material arrangement, agreement or contract with any third party which provides for an exclusive arrangement with that third party or is substantially more restrictive on 4Health or substantially less advantageous to 4Health than arrangements, agreements or contracts existing on the date hereof; (xiii) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other material reorganization of 4Health; (xiv) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction of any such claims, liabilities or obligations, (x) reflected on, or reserved against in, or contemplated by, the 4Health Balance Sheet (including the notes thereto) (y) incurred in the ordinary course of business consistent with past practice or (z) which are legally required to be paid, discharged or satisfied; (xv) knowingly take, or agree to commit to take, any action that would make any representation or warranty of 4Health contained herein inaccurate in any respect at, or as of any time prior to, the Effective Time; (xvi) except to the extent described in Schedule 5.04(b)(xvi) of the 4Health Disclosure Schedule, 4Health will not engage in any transaction with, or enter into any agreement, arrangement, or understanding with, directly or indirectly, any of 4Health's affiliates, including, without limitation, any transactions, agreements, arrangements or understanding with any affiliate or other person covered under Item 404 of Regulation S-K promulgated under the Securities Act, other than pursuant to such agreement, arrangements or understandings existing on the date of this Agreement (which are set forth on Schedule 5.03(b)(xvi) of the 4Health Disclosure Schedule) or as disclosed in writing to IN on the date hereof or which are contemplated under this Agreement; provided, that 4Health provides IN with all information concerning any such agreement, arrangement or understanding that IN may reasonably request; (xvii) except as may be set forth in Schedule 5.04 (b)(xvii) to the 4Health Disclosure Schedule, agree to or approve any commitment, including any authorization 45 fee, expenditure or agreement to acquire property, obligating 4Health for an amount in excess of $10,000; (xviii) engage in any futures or options trading or be a party to any price or currency swaps, hedges, futures or derivative instruments; or (xix) agree in writing or otherwise to do any of the foregoing. SECTION 5.05. ACCESS AND INFORMATION. (a) IN shall, and shall cause its subsidiaries to, (i) afford 4Health and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives (collectively, the "4Health Representatives") reasonable access at reasonable times, upon reasonable prior notice, to the officers, employees, agents, properties, offices and other facilities of IN and its subsidiaries and to the books and records thereof and (ii) furnish promptly to 4Health and the 4Health Representatives such information concerning the business, pro perties, contracts, records and personnel of IN and its subsidiaries (including, without limitation, financial, operating and other data and information) as may be reasonably requested, from time to time, by 4Health or such Representatives. (b) 4Health shall (i) afford to IN and its officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives (collectively, the "IN Representatives") reasonable access at reasonable times, upon reasonable prior notice, to the officers, employees, accountants, agents, properties, offices and other facilities of 4Health and to its books and records and (ii) furnish promptly to IN and IN Representatives such information concerning the business, properties, contracts, records and personnel of 4Health (including, without limitation, financial, operating and other data and information) as may be reasonably requested, from time to time, by IN or such Representatives. (c) Notwithstanding the foregoing provisions of this Section 5.05, neither party shall be required to grant access or furnish information to the other party to the extent that such access to or the furnishing of such information is prohibited by Law. No investigation by the parties hereto made heretofore or hereafter shall affect the representations and warranties of the parties which are herein contained and each such representation and warranty shall survive such investigation. (d) The information received pursuant to Section 5.05(a) and (b) shall be deemed to be "Proprietary Information" for purposes of those certain Letter Agreements dated October 16, 1997 and December 5, 1997, between IN and 4Health (collectively, the "Letter Agreements"), the provisions of which shall survive the execution, delivery and termination of this Agreement. 46 ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01. STOCKHOLDER APPROVALS. (a) IN and 4Health each shall, promptly after the date hereof, take all actions necessary in accordance with California and Utah Laws, respectively, and their respective articles of incorporation and bylaws to convene a special meeting of stockholders or, in IN's case, to solicit written consents of stockholders, to act on this Agreement. IN and 4Health shall solicit from stockholders of IN and 4Health, respectively, proxies or, in IN's case written consents, in favor of the approval and adoption of this Agreement and to secure the vote of stockholders required by California and Utah Laws and their respective articles of incorporation and bylaws to approve and adopt this Agreement, the Merger and the consummation of the transactions contemplated hereby. (b) 4Health shall, promptly after the date hereof, prepare a proxy statement and proxy (the "Proxy Materials") and file them with the Commission and comply with the requirements of Regulation 14A under the Exchange Act. IN will cooperate with 4Health in connection with the preparation of the Proxy Materials and will furnish 4Health for insertion in the Proxy Materials all such information regarding IN and its subsidiaries and their respective businesses and financial condition as is required to be contained in the Proxy Materials under the provisions of Regulation 14A and the rules promulgated thereunder. Promptly upon clearance of the Proxy Materials by the Staff of the Commission, 4Health shall mail or cause to be mailed to 4Health's stockholders, the Proxy Materials, including a notice of special meeting of stockholders, and take all actions necessary in accordance with Utah Law and its articles of incorporation and bylaws to convene a special meeting of 4Health's stockholders to act on this Agreement and the transactions contemplated hereby. SECTION 6.02. REGISTRATION STATEMENT; INFORMATION. (a) As promptly as practicable after the receipt of a written demand from Irwin (provided he continues to hold beneficially at least 10% of the issued and outstanding shares of Common Stock and such shares are not freely transferable under Rule 144 without any discount in price due to the volume or other limitations imposed by such Rule), 4Health shall prepare and file with the Commission a registration statement on Form S-1, S-2 or S-3 (the "Registration Statement") registering the shares of 4Health Common Stock issued in connection with the Merger. 4Health shall use its best efforts to cause such Registration Statement to be declared effective by the Commission as promptly as practicable and shall furnish each holder of 4Health Common Stock whose shares are being registered (a "Selling Stockholder") with a reasonable number of copies of the prospectus included in such Registration Statement for use in connection with any sales of its Stock as soon as practicable after such Registration Statement is declared effective by the Commission. 4Health agrees to bear all of the costs associated with the 47 preparation and filing of such Registration Statement, including all filing fees, legal, accounting and printing costs but shall not be required to pay the legal or accounting costs or underwriting fees and expenses, if any, incurred by any Selling Stockholder. If such Registration Statement is on Form S-1 or S-2, 4Health shall prepare and file with the Commission all Post-Effective Amendments necessary to keep such Registration Statement current for the period ending on the earlier of (i) the sale of all the shares of 4Health Common Stock included in such Registration Statement or (ii) the second anniversary of the Effective Time. The inclusion of any such shares of 4Health Common Stock in such Registration Statement shall be contingent upon the receipt from the Selling Stockholder all such information required to be disclosed in a registration statement under the Securities Act by selling stockholders pursuant to applicable rules and regulations promulgated by the Commission. In the event that such shares of 4Health Common Stock are to be included in an underwritten offering by 4Health, the amount of shares that may be included in such offering shall be subject to a pro rata reduction if, in the opinion of the managing underwriter, such reduction is advisable in order to permit an orderly distribution, but not below 25% of the total number of shares comprising such underwritten offering. Irwin shall be entitled to make no more than three such demands for registration, provided that all of the shares sought to be registered under the first such demand were not sold as provided in such Registration Statement within the time provided therefor. At Irwin's election any Prospectus to be included in any such Registration Statement shall contain the disclosure set forth in Schedule 6.02(a) attached hereto. (b) 4Health hereby represents and warrants to IN and Irwin that the information contained in the Registration Statement, the Proxy Materials (other than information to be furnished by IN or the Selling Stockholders) shall not, at the time the Registration Statement is declared effective by the Commission and the Proxy Materials are mailed to 4Health stockholders contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. All documents that 4Health is responsible for filing with the Commission in connection with the transactions contemplated herein shall comply as to form in all material respects with the applicable requirements of the Securities Act and the rules and regulations thereunder and the Exchange Act and the rules and regulations thereunder. (c) IN and Irwin jointly and severally represent and warrant to 4Health that the information to be supplied by IN and Irwin for inclusion in the definitive Proxy Materials, at the time the Proxy Materials are mailed to 4Health stockholders and by Irwin for inclusion in the Registration Statement, shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) 4Health agrees to indemnify and hold harmless, to the full extent permitted by law, IN, its officers, directors, stockholders (including, without limitation, Irwin), employees, agents, attorneys, investment advisers and underwriters, and each Person who controls IN within 48 the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, IN, together with the partners, officers, directors, stockholders, employees and agents of such controlling Person (collectively, the "Indemnified Persons"), from and against all losses, claims, damages, liabilities and expenses (including without limitation any legal or other fees and expenses incurred by an Indemnified Person in connection with defending or investigating any action or claim in respect thereof) (collectively, the "Damages") to which an Indemnified Person may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Damages (or proceedings in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of material fact contained in any Registration Statement (or any amendment thereto) including, without limitation, any Prospectus or Supplement thereto contained therein, pursuant to which any 4Health Common Stock issued in the Merger was registered under the Securities Act, or in any Proxy Materials furnished to 4Health stockholders in connection herewith and any supplements or amendments thereto, including all documents incorporated therein by reference, or caused by any omission or alleged omission to state therein a material fact necessary to make the statements therein in light of the circumstances under which they were made not misleading, except insofar as such Damages arise out of or are based upon any such untrue statement or omission based upon information furnished in writing to 4Health by the Indemnified Person expressly for use therein; PROVIDED, HOWEVER, that 4Health shall not be liable to the Indemnified Person under this Section 6.02(d) to the extent that any such Damages were caused by the fact that the Indemnified Person sold 4Health Common Stock to a person as to whom it shall be established that there was not sent or given, at or prior to the written confirmation of such sale, a copy of the Prospectus as then amended or supplemented if, and only if, 4Health has previously furnished copies of such amended or supplemented Prospectus to such Indemnified Person. (e) IN and Irwin, jointly and severally, agree to indemnify and hold harmless 4Health, its directors, officers, stockholders, agents, attorneys and investment advisers and each person, if any, who controls 4Health within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from 4Health to the Indemnified Persons, but only with reference to information relating to the Indemnified Persons furnished to 4Health in writing by any Indemnified Person expressly for use in any Registration Statement, Prospectus or Proxy Materials (or any amendment or supplement thereto); PROVIDED, HOWEVER, that the Indemnified Persons shall not be obligated to provide such indemnity to the extent that such Damages result from the failure of 4Health to promptly amend or take action to correct or supplement any such Registration Statement, Prospectus, or Proxy Materials on the basis of corrected or supplemental information provided in writing by the Indemnified Person to 4Health expressly for such purpose. (f) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (d) or (e) above, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the " indemnifying party") in writing and the 49 indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceedings and shall pay the fees and disbursements of such counsel relating to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, or (ii) the indemnifying party fails promptly to assume the defense of such proceeding or fails to employ counsel reasonably satisfactory to such indemnified party or parties, or (iii) (A) the named parties to any such proceeding (including any impleaded parties) include both such indemnified party or parties and any indemnifying party or an affiliate of such indemnified party or parties or of any indemnifying party, (B) there may be one or more defenses available to such indemnified party or parties or such affiliate of such indemnified party or parties that are different from or additional to those available to any indemnifying party or such affiliate of any indemnifying party and (C) such indemnified party or parties shall have been advised by such counsel that there may exist a conflict of interest between or among such indemnified party or parties or such Affiliate of such indemnified party or parties and any indemnifying party or such affiliate of any indemnifying party, in which case, if such indemnified party or parties notifies the indemnifying party or parties in writing that it elects to employ separate counsel of its choice at the expense of the indemnifying parties, the indemnifying parties shall not have the right to assume the defense thereof and such counsel shall be at the expense of the indemnifying parties, it being understood, however, that unless there exists a conflict among indemnified parties, the indemnifying parties shall not, in connection with any one such proceeding or separate but substantially similar or related proceedings in the same jurisdiction, arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (together with appropriate local counsel) at any time for such indemnified party or parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but, if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party or parties from and against any loss or liability by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which such indemnified party is a party, and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. SECTION 6.03 APPROPRIATE ACTION; CONSENTS; FILINGS; INDEMNIFICATION. (a) IN and 4Health shall each use, and IN shall cause each of its subsidiaries to use, all reasonable efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (ii) obtain from any Governmental Entities any consents, licenses, permits, waivers, approvals, authorizations or 50 orders requir ed to be obtained or made by 4Health or IN or any of its subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, the Merger, (iii) make all necessary filings, and thereafter make any other required submissions, with respect to this Agreement and the Merger required under (A) the Securities Act and the Exchange Act and the rules and regulations thereunder, and any other applicable federal or state securities laws, and (B) any other applicable Law; provided that 4Health and IN shall cooperate with each other in connection with the making of all such filings, including providing copies of all such documents to the nonfiling party and its advisors prior to such filings and, if requested, shall accept all reasonable additions, deletions or changes suggested in connection therewith. IN and 4Health shall furnish all information required for any application or other filing to be made pursuant to the rules and regulations of any applicable Law (including, without limitation, all information required to be included in the Registration Statement and the Proxy Materials) in connection with the transactions contemplated by this Agreement. (b) 4Health and IN agree to cooperate with respect to, and shall cause each of their respective subsidiaries to cooperate with respect to, and agree to use all reasonable efforts vigorously to contest and resist, any action, including legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) (an "Order") of any Governmental Entity that is in effect and that restricts, prevents or prohibits the consummation of the Merger or any other transactions contemplated by this Agreement, including, without limit ation, by vigorously pursuing all available avenues of administrative and judicial appeal and all available legislative action. Each of 4Health and IN also agree to take any and all actions, including, without limitation, the disposition of assets or the withdrawal from doing business in particular jurisdictions, required by regulatory authorities as a condition to the granting of any approvals required in order to permit the consummation of the Merger or as may be required to avoid, lift, vacate or reverse any legislative or judicial action which would otherwise cause any condition to Closing not to be satisfied; provided, however, that in no event shall 4Health be required to take any action that would or could reasonably be expected to have a 4Health Material Adverse Effect, and IN shall not be required to take any action which would or could reasonably be expected to have an IN Material Adverse Effect. (c) (i) Each of IN and 4Health shall give (or IN shall cause its subsidiaries to give) any notices to third parties, and use, and cause their respective subsidiaries to use, all reasonable efforts to obtain any third party consents (A) necessary, proper or advisable to consummate the transactions contemplated by this Agreement, (B) otherwise required under any contracts, licenses, leases or other agreements in connection with the consummation of the transactions contemplated hereby or (C) required to prevent an IN Material Adverse Effect from occurring prior to the Effective Time or a 4Health Material Adverse Effect from occurring after the Effective Time. 51 (ii) In the event that any party shall fail to obtain any third party consent described in subsection (c)(i) above, such party shall use all reasonable efforts, and shall take any such actions reasonably requested by the other party, to limit the adverse effect upon 4Health and IN and its subsidiaries, and their respective businesses resulting or which could reasonably be expected to result after the Effective Time, from the failure to obtain such consent. (d) Each of 4Health and IN shall promptly notify the other of (w) any material change in its current or future business, assets, liabilities, financial condition or results of operations, (x) any complaints, investigations or hearings (or communications indicating that the same may be contemplated) of any Governmental Entities with respect to its business or the transactions contemplated hereby, (y) the institution or the threat of material litigation involving it or any of its subsidiaries or (z) any event or condition that might reasonably be expected to cause any of its representations, warranties, covenants or agreements set forth herein not to be true and correct at the Effective Time. As used in the preceding sentence, "material litigation" means any case, arbitration or adversary proceeding or other matter which would have been required to be disclosed on the IN Disclosure Schedule pursuant to Section 3.09 or the 4Health Disclosure Schedule pursuant to Section 4.09, as the case may be, if in existence on the date hereof, or in respect of which the legal fees and other costs (i) to IN (or its subsidiaries) might reasonably be expected to exceed $10,000 over the life of the matter or (ii) to 4Health (or its subsidiaries) might reasonably be expected to exceed $10,000 over the life of the matter. (e) (i) In the event of any threatened, pending or completed claim, action, suit, investigation or any legal, administrative or other proceeding ("proceeding") by any governmental entity or other person which questions the validity or legality of the transactions contemplated by this Agreement or seeks to enjoin, restrain or prohibit such transactions, or seeks damages in connection therewith, whether before or after the Effective Time of the Merger, 4Health and IN agree, to the fullest extent permissible by law, to vigorously defend and respond thereto. (ii) 4Health as the Surviving Corporation agrees (1) not to change for seven (7) years from the Effective Time, the provisions of its articles of incorporation and bylaws or applicable indemnification agreements in effect on the Effective Time in each case relating to indemnification of each existing officer and director (and their respective successors) of 4Health and the Surviving Corporation (together, with any successor by operation of law, referred to in this Section as, individually, an "Indemnified Party" and collectively, "Indemnified Parties") in a manner which adversely affects the rights of such Indemnified Party to indemnification thereunder, and (ii) to perform its obligations thereunder, or exercise any discretionary authority thereunder, to the fullest extent permissible by law to provide such Indemnified Party with all rights to indemnification available thereunder. Notwithstanding the foregoing, nothing in this Agreement shall constitute a waiver of, or otherwise operate to adversely affect, the existing rights of the Indemnified Parties under the articles or bylaws of 4Health or IN in effect on the date hereof and the indemnification agreements relating to the indemnification of any Indemnified Party. 52 (iii) 4Health agrees that, for seven (7) years after the Effective Time, 4Health shall maintain officers' and directors' liability insurance policies indemnifying and holding harmless the Indemnified Parties with respect to any actions or omissions occurring prior to the Effective Time, providing at least $10,000,000 insurance coverage on terms no less advantageous to the Indemnified Parties than 4Health's existing policy; provided that in the event any claim is asserted or made within such seven year period, coverage under such insurance shall be continued in respect thereof until final disposition of such claim. (iv) In the event the foregoing indemnities or insurance policies referred to in clauses (ii) and (iii) above become unavailable or unenforceable for any reason, 4Health agrees to indemnify and hold harmless the Indemnified Parties to the same extent as if such indemnities and insurance were available and in full force and effect. (v) The provisions of this Section 6.03(e) shall survive the consummation of the transactions contemplated hereby. SECTION 6.04. TAX AND ACCOUNTING TREATMENT. Each party hereto shall use all reasonable efforts to cause the Merger to qualify, and shall not take, and shall use all reasonable efforts to prevent any affiliate of such party from taking, any actions that could prevent the Merger from qualifying, as a reorganization under the provisions of section 368(a) of the Code or from qualifying for the "pooling of interests" method of accounting as provided in APB 16. SECTION 6.05. PUBLIC ANNOUNCEMENTS. Neither party shall issue any press release or otherwise make any public statements with respect to the Merger without the approval of the other. SECTION 6.06. NSM LISTING. Each party hereto shall use all reasonable efforts to cause the shares of 4Health Common Stock to be issued in the Merger to be approved for listing (subject to official notice of issuance) on the NSM or other national sec urities exchange prior to the Effective Time. SECTION 6.07. STOCK RESALE AGREEMENT. IN agrees to deliver, on or prior to the Effective Time, the agreement, in substantially the form of Exhibit C attached hereto, of Margarethe Irwin not to effect any sales of the 4Health Common Stock except in compliance with Rule 144 and upon her shares becoming registered under the Securities Act not in excess of the volume limitations specified in Rule 145(d) promulgated under the Securities Act. Thereafter, affiliates of the IN will continue to be subject to the requirements of Rule 145 and Rule 144 as provided therein. 53 SECTION 6.08. NO INTERFERENCE. Pending the Closing, neither party shall take any action which would unreasonably be expected to interfere with the business or operations of the other. SECTION 6.09. FORM D FILING. At or immediately after the Closing, 4Health shall file with the Commission an appropriately completed, dated and executed Form D reflecting the issuance of the Merger Consideration. ARTICLE VII CLOSING CONDITIONS SECTION 7.01. CONDITIONS TO OBLIGATIONS OF EACH PARTY UNDER THIS AGREEMENT. The respective obligations of each party to effect the Merger and the other transactions contemplated hereby shall be subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in writing by the parties hereto, in whole or in part, to the extent permitted by applicable Law: (a) NO ORDER. No Governmental Entity or federal or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which has the effect of making the Merger illegal or otherwise prohibiting consummation of the Merger. (b) SECURITIES LAWS. The Proxy Materials shall have been cleared by the Staff of the Commission for mailing to 4Health stockholders. (c) STOCKHOLDER APPROVAL. The Merger, this Agreement and the consummation of the transactions contemplated hereby shall have been approved and adopted upon written consent or by the requisite vote of the stockholders of IN and 4Health, respectively. (d) GOVERNMENTAL APPROVALS. All approvals, waivers and/or consents required to be issued by any Governmental Entity or otherwise respecting the Merger, this Agreement and the consummations of the transactions contemplated hereby shall have been timely obtained. (e) PROMISSORY NOTES. 4Health shall have executed and delivered three substantially identical promissory notes each in the principal amount of $210,000 and each substantially in the form of Exhibit D hereto payable to the respective or der of Messrs. Charles Paz, Roy Dahlen and Ken Bodger. 54 (f) INDEMNITY AGREEMENTS. The officers and directors of 4Health who shall be in office immediately after the Closing shall each receive an Indemnity Agreement executed and delivered by 4Health and dated the Closing Date, each in substantially the form of Exhibit E. SECTION 7.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF 4HEALTH. The obligations of 4Health to effect the Merger and the other transactions contemplated hereby are also subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in writing by 4Health, in whole or in part, to the extent permitted by applicable law: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of IN and Irwin contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date). 4Health shall have received a certificate of the President and the Chief Financial Officer of IN and Irwin, dated the Closing Date, to such effect. (b) AGREEMENTS AND COVENANTS. IN and Irwin shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, including, without limitation, the receipt of the approval and adoption by the requisite vote of the IN stockholders of the Merger, this Agreement and the consummation of the transactions contemplated thereby. 4Health shall have received a certificate of the President and the Chief Financial Officer of IN and Irwin, dated the Closing Date, to such effect. (c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no change, occurrence or circumstance in the current or future business, assets, liabilities, financial condition or results of operations of IN or any of its subsidiaries having or reasonably likely to have, individually or in the aggregate, an IN Material Adverse Effect. 4Health shall have received a certificate of the President and the Chief Financial Officer of IN, dated the Closing Date, to such effect. (d) ABSENCE OF REGULATORY CONDITIONS. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any Governmental Entity in connection with the grant of a regulatory approval necessary, in the reasonable business judgment of 4Health, to the continuing operation of the current or future business of IN, which imposes any condition or restriction upon 4Health or the business or operations of IN which, in the reasonable business judgment of 4Health, would be materially burdensome in the context of the transactions contemplated by this Agreement. (e) IN COUNSEL'S OPINION. 4Health shall have received from Gay L. Harwin, Esq., counsel to IN, a favorable opinion dated the Closing Date in form and substance reasonably satisfactory to 4Health and its counsel. 55 (f) WITHHOLDING. IN must not have determined to withhold any amount from the Merger Consideration pursuant to the tax withholding provisions of section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of any other provision of law. (g) COMFORT LETTER. 4Health shall have received a letter from Arthur Anderson LLP, dated as of a date within five days of the Closing Date and in a form reasonably satisfactory to 4Health, stating that they are independent public accountants, within the meaning of the Securities Act and the rules and regulations thereunder and that on the basis of a reading of the financial statements prepared by IN and inquiries of officers of IN responsible for financial and accounting matters and such other procedures and inquiries as may be specified in such letter, nothing has come to their attention which gives them reason to believe that (i) the financial statements furnished to 4Health in connection herewith were not prepared in accordance with generally accepted accounting principles and practices applied on a consistent basis, (ii) during the period from September 30, 1997 to a specified date not more than five days prior to the Closing Date, there was any change in the capital stock or increase in the indebtedness for borrowed money of IN, and (iii) the Merger should not qualify for the "pooling of interests" method of accounting as provided in APB 16. (h) DISSENTERS' RIGHTS. No dissenters' rights have been asserted by any IN stockholders. (i) IN FINANCIAL STATEMENTS AND BALANCE SHEET. IN shall have furnished 4Health with the IN Financial Statements and IN Balance Sheet, each certified by IN's independent auditors, and the IN Disclosure Schedule at least 10 days prior to the Closing Date which shall be reasonably satisfactory in form and substance to 4Health. (j) EMPLOYMENT AGREEMENT. 4Health shall have executed and delivered to R. Lindsey Duncan at the Closing an Employment Agreement, dated the Closing Date, in substantially the form of Exhibit F. (k) NSM LISTING. The shares of Common Stock issued in the Merger shall have been listed for trading on the NSM. SECTION 7.03. ADDITIONAL CONDITIONS TO OBLIGATIONS OF IN. The obligations of IN to effect the Merger and the other transactions contemplated hereby are also subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in writing by IN, in whole or in part, to the extent permitted by applicable law: (a) REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of 4Health contained in this Agreement shall be true and correct as of the Closing Date as though made on and as of the Closing Date (except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties 56 shall be true and correct as of such earlier date). IN shall have received a certificate of the President and the Chief Financial Officer of 4Health, dated the Closing Date, to such effect. (b) AGREEMENTS AND COVENANTS. 4Health shall have performed or complied with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date. IN shall have received a certificate of the President and the Chief Financial Officer of 4Health, dated the Closing Date, to such effect. (c) MATERIAL ADVERSE CHANGE. Since the date of this Agreement, there shall have been no change, occurrence or circumstance in the current or future business, assets, liabilities, financial condition or results of operations of 4Health or any of its subsidiaries having or reasonably likely to have, individually or in the aggregate, a 4Health Material Adverse Effect. IN shall have received a certificate of the President and the Chief Financial Officer of 4Health, dated the Closing Date, to such effect. (d) ABSENCE OF REGULATORY CONDITIONS. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, by any Governmental Entity in connection with the grant of a regulatory approval necessary, in the reasonable business judgment of IN, to the continuing operation of the current or future business of 4Health, which imposes any condition or restriction upon IN or the business or operations of 4Health which, in the reasonable business judgment of IN, would be materially burdensome in the context of the transactions contemplated by this Agreement. (e) SSB&B OPINION. IN shall have received from Messrs. Satterlee Stephens Burke & Burke LLP, counsel to 4Health, a favorable opinion dated the Closing Date, in form and substance reasonably satisfactory to IN and its counsel. In rendering their opinion, Messrs. Satterlee Stephens Burke & Burke LLP shall be entitled to rely on the o pinion of Utah counsel as to matters involving Utah Law. (f) COMFORT LETTER. IN shall have received a letter from Arthur Anderson LLP, dated as of a date within five days of the Closing Date and in a form reasonably satisfactory to IN. stating that they are independent public accountants, within the meaning of the Securities Act and the rules and regulations thereunder, and that on the basis of a reading of the unaudited interim financial statements prepared by 4Health and inquiries of officers of 4Health responsible for financial and accounting matters and such other procedures and inquiries as may be specified in such letter, nothing has come to their attention which gives them reason to believe that (i) the unaudited financial statements included in 4Health's Quarterly Report on Form 10-Q for the third quarter ended September 30, 1997 were not prepared in accordance with the related requirements under the Securities Act or Exchange Act and generally accepted accounting principles and practices applied on a basis substantially consistent with those followed in the preparation of the audited financial statements included in 4Health's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 and (ii) except as may have been disclosed in the 4Health Disclosure Schedule, during the period from September 30, 1997 to a specified date not more 57 than five days prior to the Closing Date, there was any change in the capital stock or incr ease in the indebtedness for borrowed money of 4Health. (g) 4HEALTH DISCLOSURE SCHEDULE. 4Health shall have furnished IN with the 4Health Disclosure Schedule which shall be reasonably satisfactory in form and substance to IN. (h) EMPLOYMENT AGREEMENT. 4Health shall have executed and delivered to Klee Irwin at the Closing an Employment Agreement, dated the Closing Date, in substantially the form of Exhibit G. (i) NSM LISTING. The shares of Common Stock issued in the Merger shall have been listed for trading on the NSM. (j) RESIGNATIONS. 4Health shall have received the resignations of Cheryl Wheeler, Steven B. Beckman and Rockwell Schutjer as directors of 4Health, effective on or prior to the Effective Time. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of this Agreement and the Merger by the stockholders of IN and 4Health: (a) by mutual consent of 4Health and IN; (b) by 4Health, upon a material breach of any representation, warranty, covenant or agreement on the part of IN set forth in this Agreement, or if any representation or warranty of IN shall have become untrue, in either case such that the conditions set forth in Section 7.02(a) or Section 7.02(b) of this Agreement, as the case may be, would be incapable of being satisfied by February 15, 1998 (or as otherwise extended as described in Section 8.01(e)); provided, that in any case, a willful breach shall be deemed to cause such condition as to be incapable of being satisfied for purposes of this Section 8.01(b); (c) by IN, upon a material breach of any representation, warranty, covenant or agreement on the part of 4Health set forth in this Agreement, or if any representation or warranty of 4Health shall have become untrue, in either case such that the conditions set forth in Section 7.03, (a) or Section 7.03(b) of this Agreement, as the case may be, would be incapable of being satisfied by February 15, 1998 (or as otherwise extended as described in Section 8.01(e)); provided, that in any case, a willful breach shall be deemed to cause such conditions to be incapable of being satisfied for purposes of Section 8.01(c); 58 (d) by either 4Health or IN, if there shall be any Order which is final and nonappealable preventing the consummation of the Merger, except if the party relying on such Order to terminate this Agreement has not complied with its obligations under Section 6.03(b) of this Agreement; or (e) by either 4Health or IN, if the Merger shall not have been consummated before February 15, 1998; provided, however, that this Agreement may be extended by written notice of either 4Health or IN to a date not later than March 6, 1998, if the Merger shall not have been consummated as a direct result of IN or 4Health having failed by February 15, 1998 to receive all required regulatory approvals or consents with respect to the Merger; (f) by 4Health or IN, if this Agreement and the Merger shall fail to be approved and adopted by the requisite numbers of stockholders of IN and 4Health in accordance with California and Utah Laws and the requirements of the NSM or NASD. The right of any party hereto to terminate this Agreement pursuant to this Section 8.01 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any party hereto, any person contr olling any such party or any of their respective officers, directors, repre sentatives or agents, whether prior to or after the execution of this Agreement. SECTION 8.02. EFFECT OF TERMINATION. Except as provided in Section 8.05 or Section 9.01 of this Agreement, in the event of the termination of this Agreement pursuant to Section 8.01, this Agreement shall forthwith become void, there shall be no liability on the part of 4Health or IN to the other and all rights and obligations of any party hereto shall cease, except that nothing herein shall relieve any party of any liability for (i) any material breach of such party's covenants or agreements contained in this Agreement, or (ii) any willful breach of such party's representations or warranties contained in this Agreement. SECTION 8.03. AMENDMENT. This Agreement may be amended by the parties hereto at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of IN and 4Health, (i) no amendment, which under paplicable Law may not be made without the approval of the stockholders of IN or 4Health, may be made without such approval, and (ii) no amendment, which under the applicable rules of the NSM or NASD, may not be made without the approval of the stockholders of IN or 4Health, may be made without such approval. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 8.04. WAIVER. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other party hereto, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document delivered pursuant hereto and (c) waive compliance by the other party with any of the agreements or conditions contained herein. Any such extension or 59 waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. SECTION 8.05. FEES, EXPENSES AND OTHER PAYMENTS. (a) Except as provided in Section 8.05(c) of this Agreement, in the event the Merger is not consummated all Expenses (as defined in paragraph (b) of this Section 8.05) incurred by the parties hereto shall be borne solely and entirely by the party that has incurred such Expenses; PROVIDED, HOWEVER, in the event the Merger is consummated, all Expenses incurred in connection with the Merger and the trans actions contemplated thereby will be paid by 4Health. (b) "Expenses" as used in this Agreement shall include all out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment ba nkers, experts and consultants to a party hereto and its affiliates) incurred by a party or on its behalf in connection with or related to the authorization, preparation, negotiation, execution and performance of this Agreement, the solicitation of stockholder approvals and all other matters related to the consummation of the transactions contemplated hereby. (c) IN agrees that if this Agreement is terminated pursuant to: (i) Section 8.01(b) and such termination is the result of a willful breach of any representation, warranty, covenant or agreement of IN contained herein; or (ii) Section 8.01(f) and such termination is the result of the failure of IN to secure the requisite stockholder consent to the Merger and this Agreement; then IN shall pay to 4Health as liquidated damages an amount equal to $200,000, which amount is inclusive of all of 4Health's Expenses. (d) 4Health agrees that if this Agreement is terminated pursuant to Section 8.01(c) and s uch termination is the result of a willful breach of any representation, warranty, covenant or agreement of 4Health contained herein; then 4Health shall pay to IN as liquidated damages an amount equal to $200,000, which amount is inclusive of all of IN's Expenses. (e) Any payment required to be made pursuant to Section 8.05(c) or Section 8.05(d) of this Agreement shall be made as promptly as practicable but not later than three business days after termination of this Agreement, and shall be made by wire transfer of immediately available funds to an account designated by IN or 4Health, as the case may be. 60 ARTICLE IX GENERAL PROVISIONS SECTION 9.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. (a) Except as set forth in Section 9.01(b) of this Agreement, the representations, warranties and agreements of each party hereto shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any other party hereto, any person controlling any such party or any of their officers, directors, representatives or agents, whether prior to or after the execution of this Agreement. (b) The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Article VIII, except that the agreements set forth in Articles I and II and V and Sections 3.23, 6.02, 6.04 and 6.07 shall survive the Effective Time and those set forth in Sections 5.05(d), 8.02 and 8.05 and Article IX hereof shall survive termination. SECTION 9.02. NOTICES. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given upon receipt, if delivered personally or by air courier, or mailed by registered or certified mail (postage prepaid, return receipt requested), to the parties at the following addresses (or at such other address for a party as shall be specified by like changes of address) or sent by facsimile transmission to the telecopier number specified below (to be followed promptly by personal or air courier delivery or mailing as hereinafter provided): (a) If to 4Health, to: 5485 Conestoga Court Boulder, Colorado 80301 Attn: R. Lindsey Duncan, President Facsimile Number: (303) 546-6416 with copy to: Satterlee Stephens Burke & Burke LLP 230 Park Avenue, Suite 1130 New York, NY 10169 Attn: Peter A. Basilevsky, Esq. Facsimile Number: (212) 818-9606 61 (b) If to IN or Irwin, to: 10549 W. Jefferson Blvd. Culver City, CA 90232 Attn: Mr. Klee Irwin Facsimile Number: (310) 202-9454 with copy to: Law Offices of Gay L. Harwin 10940 Wilshire Boulevard, Suite 1600 Los Angeles, CA 90024 Attn: Gay L. Harwin, Esq. Facsimile Number: (310) 443-4121 SECTION 9.03. CERTAIN DEFINITIONS. For the purposes of this Agreement, the term: (a) "affiliate" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; (b) a person shall be deemed a "beneficial owner" of or to have "beneficial ownership" of IN Common Stock or 4Health Common Stock, as the case may be, in accordance with the interpretation of the term "beneficial ownership" as defined in Rule 13d-3 under the Exchange Act, as in effect on the date hereof; provided that a person shall be deemed to be the beneficial owner of, and to have beneficial ownership of, IN Common Stock or 4Health Common Stock, as the case may be, that such person or any affiliate of such person has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise. (c) "business day" means any day other than a day on which banks in the State of Colorado and/or the State of California are authorized or obligated to be closed; (d) "control" (including the terms "controlled," "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of stock or as trustee or executor, by contract or credit arrangement or otherwise; (e) "knowledge" or "known" shall mean, with respect to any matter in question, if an executive officer of IN or 4Health, as the case may be, has actual knowledge of such matter; 62 (f) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d) of the Exchange Act); (g) "Significant Subsidiary" means any subsidiary of person that would constitute a Significant Subsidiary of such party within the meaning of Rule 1-02 of Regulation S-X of the SEC; and (h) "subsidiary" or "subsidiaries" of IN, 4Health, or any other person, means any corporation, partnership, joint venture or other legal entity of which IN, 4Health or any such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, currently or in the past, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other gove rning body of such corporation or other legal entity. SECTION 9.04. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section references herein are, unless the context otherwise requires, references to sections of this Agreement. SECTION 9.05. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the extent possible. SECTION 9.06. ENTIRE AGREEMENT. Except as provided in that certain Agreement respecting a dietary supplement product entitled "PhenSafe", this Agreement (together with the Exhibits, the IN Disclosure Schedule and the 4Health Disclosure Schedule) constitutes the entire agreement of the parties, and supersedes all prior agreements and undertakings, including that certain Letter of Intent dated October 13, 1997, both written and oral, among the parties or between any of the m, with respect to the subject matter hereof. SECTION 9.07. ASSIGNMENT. This Agreement shall not be assigned by operation of law or otherwise. SECTION 9.08. PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied (other than as contemplated by Section 6.07 or Section 6.09), is intended to or shall confer upon 63 any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 9.09. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 9.10. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Utah, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. SECTION 9.11. COUNTERPARTS. This Agreement may be executed in multiple counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. 4HEALTH, INC. By:/s/R. Lindsey Duncan -------------------- Name R. Lindsey Duncan Title: President By:/s/Klee Irwin ------------- Name: Klee Irwin Title: President /s/Klee Irwin ------------- Klee Irwin 64 EX-27 3 EXHIBIT 27 - FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 110 0 1,160 14 1,329 3,419 2,296 247 6,363 1,890 1,298 0 0 121 3,013 6,363 12,432 6,309 6,122 18,972 0 0 141 (6,629) 0 (6,629) 0 0 0 (6,629) (.57) (.57)
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