Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number: 0-25064
HEALTH FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3500 W. 80th Street, Suite 130, Bloomington, Minnesota, 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 831-6830
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
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 the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 17, 2000, the aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the last
quoted price at which such stock was sold on such date as reported by the OTC
Bulletin Board, was $7,947,010.
As of March 17, 2000, 12,110,652 shares of the registrant's common
stock, $.01 par value, were outstanding.
ITEM 1. BUSINESS
Health Fitness Corporation and its wholly-owned subsidiaries (collectively, the
"Company") offers wellness services and products to major corporations,
hospitals and insurance companies, including:
o The marketing and management of corporate and hospital-based fitness
centers;
o The maintenance and organization of a network of independent commercial
fitness and health clubs and the marketing of memberships in such
network of clubs to employers and insurance companies through its
International Fitness Club Network (IFCN) division;
o The management of on-site physical therapy clinics within certain
corporate customer owned facilities.
In 1999 the Company 1) sold or closed all units of its physical therapy clinic
business segment; 2) sold its ProSource fitness equipment business segment; 3)
sold its Isernhagen rehabilitative products and services division; and 4) sold
The Preferred Companies (PTPA) managed care network division. The physical
therapy clinics business segment, and the ProSource fitness equipment business
segment have been classified as discontinued operations. Revenues and direct
expenses generated from the divested divisions from ongoing operations of
$1,411,000 and $1,305,000, respectively, are included in ongoing operations in
the Company's December 31, 1999 financial statements. While certain assets and
liabilities related to the discontinued operations remained on the balance sheet
at December 31, 1999, no new revenues or expenses are being generated from any
of these sold or closed business segments or divisions.
The Company's executive offices are located at 3500 W. 80th Street, Suite 130,
Bloomington, Minnesota 55431 and its telephone number is (612) 831-6830.
Wellness Services and Products
Fitness Center Management. The Company currently is under contract to manage
approximately 126 corporate and 12 hospital fitness centers located nationwide.
Major corporations and hospitals invest in fitness centers and in wellness for
several reasons. First, there is a body of research that indicates that
healthier employees are more productive, both in increased output and in reduced
stress and sick leave. Additionally, wellness benefits, fitness benefits in
particular, are considered high priorities as potential employees evaluate job
prospects with a given employer. Hospitals are investing in fitness centers for
the additional reason of creating a new revenue source that is not subjected to
insurance or government reimbursements. The Company's fitness center sales staff
markets to corporations and hospitals primarily through direct mail, telephone
follow-ups and on-site presentations to secure additional consulting and
management contracts for the Company.
The Company provides a full range of development, management and marketing
services for corporate and hospital-owned fitness centers. The Company generally
manages all aspects of fitness center development, including fitness center
design and equipment selection and acquisition. All start-up costs, including
costs related to leasing and improving the site and acquiring the equipment, are
generally borne by the client. The Company also provides consulting services,
for which it receives consulting fees, for design and consulting work with
clients prior to the decision to establish a fitness center. Once a fitness
center is established, the Company generally manages all aspects of fitness
center operation, other than leasing of real estate and equipment, and provides
staffing services and exercise programs and instruction.
IFCN Network. The Company's IFCN is in the business of organizing and
maintaining a network of independent commercial fitness and health clubs and
marketing memberships in such network of clubs to employers and insurance
companies.
On-Site Physical Therapy. The Company provides "on-site" physical therapy
services at 12 corporate fitness centers in California, Georgia and Kentucky.
On April 8, 1999, the Company retained The Manchester Companies, Inc., a
Minneapolis-based multi-disciplinary professional services firm ("Manchester)
which provides investment banking, finance, turnaround and management advisory
services to small and middle market companies. Manchester has provided senior
management services, assisted with the sale of various business segments and
divisions and assisted with the design and execution of the Company's
re-engineering effort. In the fourth quarter, the Company announced that it
further engaged Manchester to explore strategic options, which could include a
merger or sale. The Company and Manchester continue to explore options, although
no option has been chosen at this time.
Competition
Within the business-to-business fitness center management industry, there are
relatively few national competitors. However, virtually all markets are home to
regional providers that manage anywhere from one or two sites to several sites
across state lines. With its national presence and over 20 years of history,
management believes that the Company is well positioned to compete in this
industry.
Proprietary Rights
During 1999, the Company sold most of its proprietary rights related to its
Isernhagen division. The Company does not believe they have any significant
remaining proprietary rights.
Government Regulation
Although the Company is subject to substantially less governmental regulation
since it has sold its physical therapy clinics, it is possible that government
regulation will have an impact on the Company's operations. Management of the
Company believes that there currently is no significant government regulation
which materially limits the Company's ability to provide management and
consulting services to its corporate and hospital-based clients.
Employees
At December 31, 1999, the Company had 499 full-time and 1,781 part-time
employees engaged in the Company's continuing operations. The Company's
part-time employees are primarily engaged in the staffing of the fitness centers
that the Company operates for its clients.
Indemnification Obligations
A majority of the Company's management contracts with its fitness center clients
include a provision that obligates the Company to indemnify and hold harmless
its fitness center clients and their employees, officers and directors from any
and all claims, actions and/or suits (including attorneys' fees) arising
directly or indirectly from any act or omission of the Company or its employees,
officers or directors in connection with the operation of the Company's
business. A majority of these management contracts also include a provision that
obligates the clients to indemnify and hold the Company harmless against all
liabilities arising out of the acts or omissions of the clients, their employees
and agents. The Company can make no assurance that any such claims by its
fitness center clients, or their employees, officers or directors, will not be
made in the course of operating the Company's business.
Insurance
The Company maintains general premises liability insurance of $1,000,000 per
occurrence and $3,100,000 in the aggregate per location for each of its fitness
centers and its executive offices. While the Company believes its insurance
policies to be sufficient in amount and coverage for its current operations,
there can be no assurance that coverage will continue to be available in
adequate amounts or at a reasonable cost, and there can be no assurance that the
insurance proceeds, if any, will cover the full extent of loss resulting from
any claims.
ITEM 2. PROPERTIES
The Company leases approximately 10,000 square feet of commercial office space
at 3500 W. 80th Street, Bloomington, Minnesota 55431, under leases expiring July
31, 2001. The Company's monthly base rental expense for this office space is
approximately $10,581, plus taxes, insurance and other related operating costs.
Other locations involved in the Company's continuing operations are leased in
Rhode Island and California on a month to month basis or for a term of one year
with an aggregate monthly base rent of approximately $3,665. The Company
believes that its facilities are adequate for its foreseeable needs. The
Company's discontinued operations includes a lease that expires in July, 2002
with a monthly base rent of approximately $4,005.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in various claims and
lawsuits incident to the operation of its business, including claims arising
from accidents or from the negligent provision of physical therapy services or
arising from the discontinuance of certain operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In April of 1999, the Company was de-listed from the Nasdaq SmallCap Market
(TM). Since that time, trading in the Company's common stock has been conducted
in the over-the-counter markets (often referred to as "pink sheets") or on the
OTC Bulletin Board.
The following table sets forth, for the periods indicated, the range of low and
high sale prices for the Company's common stock.
Calendar Year 1999: Low High
--- ----
Fourth quarter $.28 $.75
Third quarter .31 .56
Second quarter .31 .59
First quarter .31 .69
Calendar Year 1998: Low High
--- ----
Fourth quarter $.25 $1.00
Third quarter .38 1.25
Second quarter 1.00 2.00
First quarter 1.25 2.44
At March 17, 2000, the published high and low sale prices for the Company's
common stock were $0.6562 and $0.6562 per share respectively. At March 17, 2000,
there were issued and outstanding 12,110,652 shares of common stock of the
Company held by 455 shareholders of record. Record ownership includes ownership
by nominees who may hold for multiple owners.
The Company has never declared or paid any cash dividends on its common stock
and does not intend to pay cash dividends on its common stock in the foreseeable
future. The Company presently expects to retain any earnings to finance the
development and expansion of its business. The payment by the Company of
dividends, if any, on its common stock in the future is subject to the
discretion of the Board of Directors, will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors. The
Company's current credit facility prohibits the payment of dividends.
During the quarter ended December 31, 1999, the Company did not sell or issue
any equity securities without registration under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected historical financial data with respect to the
Company and its subsidiaries. The data given below as of and for the five years
ended December 31, 1999 has been derived from the Company's Audited Consolidated
Financial Statements. Data for 1995, 1996, 1997, and 1998 has been restated to
reflect discontinued operations as presented in 1998. Such data should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere herein and with the Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Years Ended December 31,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 26,195,000 $ 25,643,000 $ 21,480,000 $ 16,500,000 $ 12,635,000
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,402,000) (941,000) (943,000) 146,000 (254,000)
INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Basic (0.12) (0.08) (0.12) 0.02 (0.05)
Diluted (0.11) (0.08) (0.12) 0.02 (0.05)
BALANCE SHEET DATA (AT DECEMBER 31):
TOTAL ASSETS 11,324,000 18,635,000 23,732,000 18,179,000 14,284,000
LONG-TERM DEBT 503,000 862,000 5,785,000 657,000 598,000
SHAREHOLDERS' EQUITY 3,198,000 5,844,000 10,148,000 9,892,000 7,399,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
Results of Operations
Years Ended December 31,
1999 % 1998 % 1997 %
------------ --------- ------------ ----- ------------ -----
REVENUE $ 26,195,000 100.0% $ 25,643,000 100.0% $ 21,480,000 100.0%
COST OF REVENUE 20,151,000 76.9% 19,609,000 76.5% 16,580,000 77.2%
------------ --------- ------------ ----- ------------ -----
GROSS PROFIT 6,044,000 23.1% 6,034,000 23.5% 4,900,000 22.8%
OPERATING EXPENSES:
Salaries 2,054,000 7.8% 1,985,000 7.7% 1,799,000 8.4%
Selling, general, and administrative 3,214,000 12.3% 4,383,000 17.1% 3,789,000 17.6%
Re-engineering 748,000 2.9% -- -- -- --
------------ --------- ------------ ----- ------------ -----
Total operating expenses 6,016,000 23.0% 6,368,000 24.8% 5,588,000 26.0%
------------ --------- ------------ ----- ------------ -----
OPERATING INCOME (LOSS) 28,000 0.1% (334,000) -1.3% (688,000) -3.2%
INTEREST EXPENSE (1,090,000) -4.1% (667,000) -2.6% (277,000) -1.3%
OTHER INCOME (EXPENSE) (254,000) -1.0% 110,000 0.4% 67,000 0.3%
------------ --------- ------------ ----- ------------ -----
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (1,316,000) -5.0% (891,000) -3.5% (898,000) -4.2%
INCOME TAXES 86,000 0.3% 50,000 0.2% 45,000 0.2%
------------ --------- ------------ ----- ------------ -----
LOSS FROM CONTINUING OPERATIONS $ (1,402,000) -5.3% $ (941,000) -3.7% $ (943,000) -4.4%
------------ --------- ------------ ----- ------------ -----
BUSINESS DESCRIPTION
Health Fitness Corporation provides wellness services and products to major
corporations and health care organizations. Fitness center based services
include the development and management of corporate and hospital-based fitness
centers, health related programming, and on-site physical therapy. Wellness
services are provided to dispersed employee populations of major corporations
and insurance companies through the International Fitness Club Network. While
consumers of the services are typically corporate employees and hospital
customers, revenues are generated almost exclusively through business to
business, contractual relationships.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
Revenue
For 1999, total revenues from continuing operations increased $552,000 or 2.2%
to $26,195,000 as compared to 1998. The increase is primarily due to growth in
fitness center management contracts and IFCN sales. The increase was partially
offset by revenue declines from the sale of the PTPA and Isernhagen product
lines and lower emphasis on consulting sales.
Gross Profit
For 1999, gross profit remained relatively constant at $6,044,000 or 23.1%.
Increases in gross profit in the corporate and hospital fitness and IFCN
divisions were entirely offset by gross profit declines in consulting, PTPA and
Isernhagen divisions. Improved margins in the corporate and hospital fitness
center division were largely due to the elimination of lower margin fitness
management contracts.
Operating Expenses and Operating Income (Loss)
Operating expenses decreased $352,000 to $6,016,000 for 1999, and are 23.0% of
sales as compared to 24.8% of sales in 1998. Operating income for 1999 was
$28,000 as compared to a loss of $334,000 in 1998. The decrease in operating
expenses was largely due to successful expense reductions in 1999, and lower bad
debt write-offs which generated an operating profit . While wage and salary
expenses were roughly constant between 1999 and 1998, severance of approximately
$142,000 was paid for eliminated positions during 1999. Further, the Company
incurred $748,000 in re-engineering costs related to effecting the Company's
turn around. These costs were primarily consulting and noncompete expenses. The
operating income for 1999 without these re-engineering costs was $776,000 as
compared to a loss of $334,000 in 1998
Interest Expense
Interest expense, which includes financing costs, for ongoing operations in 1999
was $1,090,000 as compared to $667,000 in 1998. The increase is largely due to
the allocation of interest expense to discontinued operations in 1998, based on
the ratio of net operating assets of the discontinued operations to consolidated
net assets. While the interest rate on the Company's notes payable to its lender
remained constant at 16%, total notes payable balances declined to $2,862,000 at
December 31, 1999 from $6,940,000 at December 31, 1998.
Other Income (Expense)
Other expenses were $254,000 in 1999 as compared to other income of $110,000 in
1998. The major component of other expense included a loss of $356,000
associated with the divestiture of PTPA and Isernhagen.
Income Taxes
Income taxes were calculated based on management's estimate of the Company's
effective tax rate and represent primarily state income taxes. Deferred income
tax benefits due to losses in 1999 and 1998 have been offset by a valuation
allowance.
Loss from Continuing Operations
As a result of the above, the Company's significant reduction in operating
losses was more than offset by increased interest and divestiture expenses,
resulting in an overall increase in the Company's loss from continuing
operations in 1999 to $1,402,000 as compared to a loss of $941,000 in 1998.
Discontinued Operations
Operating losses from discontinued operations during the phase out period,
including projected shutdown costs and the expected net realizable loss from the
sale of the business segments of $5,274,000, were recorded as discontinued
operations during the year ended December 31, 1998. In 1999 the Company accrued
an additional loss of $1,425,000 due to actual operating losses during the phase
out period exceeding earlier estimates and changes in the estimated sales price
of the business segments.
Years Ended December 31, 1998 and 1997
Revenue
For 1998, total revenues increased $4,163,000, or 19%, from 1997. The increase
was primarily due to the growth in new fitness center management contracts. The
Company added a net 20 corporate and hospital fitness center sites during 1998.
Gross Profit
Gross profit as a percentage of revenue for 1998 increased .7 percentage points
when compared to the same period in the prior year. Gross profit dollars for
1998 increased $1,134,000, or 23%, from 1997. The increase in gross profit
dollars was primarily due to the increase in fitness center contracts. The
increase in gross profit percentage was primarily due to more profitable
hospital fitness center contracts being added during 1998.
Operating Expenses
Operating expenses for 1998 increased $780,000, or 14% from the prior year.
Operating expenses, as a percentage of revenue, for 1998 decreased 1.2
percentage points from 1997. The dollar increase was due to two non-cash
adjustments that occurred in September and December required to recognize bad
debt expense ($900,000) and reflect the net realizable value of certain assets
($415,000). Other operating expenses decreased $535,000, or 10%. The Company had
an operating loss of $334,000 for the year ended December 31, 1998, a decrease
in operating loss of $354,000 over the prior year. The decrease was due to the
sales and gross margin improvements in 1998 over 1997. The Company generated
just under $1 million in operating income before the one-time adjustments
mentioned above.
Interest Expense
Interest expense, which includes financing costs, in 1998 increased $390,000
from the prior year due to higher average borrowings and a higher effective
interest rate in 1998 versus 1997.
Income Taxes
Income taxes were calculated based on management's estimate of the Company's
effective tax rate and represent primarily state income taxes in 1998. Deferred
income tax benefit for the years ended December 31, 1998 and 1997 has been
offset by a valuation allowance.
Loss From Continuing Operations
The Company had a loss from continuing operations of $941,000 in 1998, a $2,000
decrease from the prior year. The Company generated approximately $375,000 in
income from continuing operations before the adjustments mentioned above in the
Operating Expenses section.
Discontinued Operations.
In August 1998, the Company formally adopted a plan to dispose of its
freestanding physical therapy clinics business segment (the PT clinics). The
disposal of the PT clinics was accounted for as a discontinued operation. In
June 1999, the Company completed the sale of the PT clinics for $3,750,000.
Losses from operation of the clinics through the measurement date was
$1,461,000. Estimated losses during the phase-out period of $2,561,000 and
estimated loss on sale, including shut down costs, of $2,091,000 was recorded as
of December 31, 1998
In November 1998, the Company formally adopted a plan to dispose of its fitness
equipment business segment (the equipment division). The disposal of the
equipment division was accounted for as a discontinued operation. In July 1999,
the Company completed the sale of the equipment division for $175,000. Loss from
operation of the equipment division through the measurement date was $433,000.
Estimated losses during the phase out period of $622,000 were recorded as of
December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit decreased to ($3,756,000) in 1999 from
($7,467,000) in the prior year largely due to reductions in notes payable from
the proceeds of the sale of the PT clinics and equipment division and the sale
of the PTPA and Isernhagen divisions from ongoing operations. While accounts
receivable from ongoing operations declined during the year (to $3,407,000 from
$3,976,000), the reduction was largely due to improved collections. Deferred
revenue declined by $244,000 to $1,382,000 largely due to deferred revenues
associated with the PTPA and Isernhagen divisions.
The Company has a revolving credit facility with Ableco Finance L.L.C. and other
affiliates of Cerberus Partners, L.P. (the "Lender"). The credit agreement for
this facility was amended several times during 1999. At December 31, 1999,
maximum borrowing allowed under the facility was approximately $3,800,000. All
financial covenants were waived through March 16, 2000. Advances under the
credit facility accrue interest at a rate equal to 7.0% in excess of Chase
Manhattan's prime rate, with a minimum of 15.5%. The maturity date for this
credit facility is September 16, 2000. The loan is guaranteed in part by the
Company's founder and former Chief Executive Officer.
On May 15, and June 30, 1999, the Company completed the sale of the majority of
its PT clinics for a total of $3,750,000. In conjunction with the sale of the PT
clinics, the Company used the net proceeds of $2,250,000 to reduce its
outstanding revolving credit facility balance.
On July 2, 1999, the Company completed the sale of the equipment division for a
sales price of $175,000 for the inventory and fixed assets. The proceeds from
the sale were cash of $80,000 and two notes receivable totaling $95,000.
The Company completed the sale of assets of the Isernhagen and PTPA divisions
effective August 31, 1999 for a sales price of $1,550,000. The sale generated
cash proceeds of $1,298,000 of which $1,050,000 was used to reduce its
outstanding revolving credit facility balance.
On February 26, and March 10, 1999, the Company issued $115,000 of Secured
Convertible Subordinated Debentures ("Debentures") to three accredited
investors. The Debentures bear interest at the rate of 16% per annum. The
Debentures are secured by a lien on the Company's assets, however both the
payment of the Debentures and the security interest securing the Debentures are
subordinate to the Company's borrowings from Ableco Finance LLC. Principal and
accrued interest on the Debentures is convertible into Company common stock at a
price of $.30 per share. For each $4.00 principal amount of Debentures
purchased, the purchaser received a Warrant to purchase one share of Company
common stock at $1.00 per share, exercisable for a period of four years. The
Debentures were originally due October 1, 1999, however all parties have agreed
to extend the conversion period and maturity of the Debentures to coincide with
the maturity of the revolving credit facility.
Sources of capital to meet future obligations in 2000 are anticipated to be cash
provided by operations and the Company's revolving credit facility. The Company
expects to negotiate its revolving credit facility prior to its due date of
September 16, 2000.
Outlook
The year ended December 31, 1999 was highly productive for the Company in
refocusing on its core operations of fitness center management for major
corporations and hospital fitness centers. Perhaps most importantly, the sale of
the independent physical therapy business segment, the fitness equipment
business segment, The Preferred Companies and Isernhagen substantially improved
the Company's financial condition. Additional improvements were achieved through
cost cutting measures including the downsizing of corporate staff and general
overhead reductions. Management has targeted improved margins as one of its top
priorities for 2000 and has highlighted several new opportunities for achieving
this goal through further expense reductions and improved operational processes.
Management believes that the foregoing divestitures and expense reductions have
better positioned the Company to further develop its market in corporate and
hospital fitness centers. Management believes that the trend in increasing
investment by major corporations into employee fitness and wellness will
continue, and as one of the largest providers of corporate fitness services, the
Company is poised to take advantage of this trend. Further, as hospitals and
other health care organizations look for opportunities to diversify their
revenue streams outside of insurance and government reimbursements, management
believes that investment in fitness centers, and therefore the Company's
hospital fitness center management services, will remain an attractive option to
those hospitals. Lastly, the Company intends to explore ways to expand its
wellness service and product offerings to its existing client base, including
information services, personal training, and wellness programming. The
aforementioned paragraphs contain forward-looking statements and management can
make no assurances that the opportunities presented will provide material
financial benefits to the Company.
In the fourth quarter, the Company announced that it hired The Manchester
Companies, Inc. a Minneapolis based investment bank, to explore strategic
options, which could include a merger or sale. The Company and The Manchester
Companies, Inc. continue to explore options, although no option has been chosen
at this time.
Year 2000 Compliance
Health Fitness Corporation undertook several initiatives to eliminate the impact
of Year 2000 date conversion problems with its computer hardware and systems.
The date conversion had no adverse impact on the Company.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-K
including the MD&A section, and other materials filed or to be filed by the
Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company) contain statements that are forward-looking, such as statements
relating to improving margins, growth of the market for corporate and hospital
fitness centers, and the intention to expand the Company's products and
services. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, continued availability of
Manchester's services, leverage and debt service (including sensitivity to
fluctuations in interest rates), continued expansion of corporate and hospital
fitness center opportunities, and availability of sufficient working capital.
The following risks and uncertainties also should be noted:
Balanced Budget Act of 1997:
It is believed that the Federal Balanced Budget Act of 1997 has had and will
continue to have an adverse effect on the financial condition and operating
results of hospitals throughout the country. Although management believes the
market for hospital fitness centers is growing, it is possible that the adverse
effects of this Act could cause cancellations or non-renewals of the Company's
hospital-based fitness center management contracts, and/or limit opportunities
for new contracts in such area. Such adverse effects on hospitals could have a
material adverse effect on the Company and its financial position, results of
operations and cash flows.
Restrictions and affirmative and negative covenants imposed by senior credit
facility:
Certain of the affirmative and negative covenants imposed upon the Company by
its senior secured lending facility restrict the Company's ability to incur
additional senior and subordinated debt. Furthermore, upon certain events of
default, such senior secured lender is entitled to demand immediate repayment of
their outstanding loans. In such circumstances, the Company may not be able to
access other sources of capital, on a timely basis, or on terms and conditions
favorable to the Company, or at all, with sufficient speed or sufficient size to
avoid the Company's senior secured lender from taking material adverse action
against the Company and its collateral.
Potential depressive effect on price of common stock arising from exercise and
sale of existing convertible securities:
At December 31, 1999, the Company had outstanding stock options and warrants
(not including the shares issuable under any contingent grants, earn-out
agreements or any future acquisition) to purchase an aggregate 2,800,219 shares
of common stock. The exercise and sale of such outstanding stock options and
stock purchase warrants and sale of stock acquired thereby may have a material
adverse effect on the price of the Company's common stock. In addition, the
exercise and sale of such Company's common stock could occur at a time when the
Company would otherwise be able to obtain additional equity capital on terms and
conditions more favorable to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future, investing
in derivative financial instruments, derivative commodity instruments or other
such financial instruments. Transactions with international customers are
entered into in U.S. dollars, precluding the need for foreign currency hedges.
As a result, the exposure to market risk is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company as of December 31, 1999 and 1998,
and related Consolidated Statements of Operations, Shareholders' Equity, and
Cash Flows for the years then ended, and the notes thereto have been audited by
Grant Thornton LLP, independent certified public accountants. The Consolidated
Statements of Operations, Shareholders' Equity, and Cash Flows of the Company
for the year ended December 31, 1997, and notes thereto have been audited by
Deloitte & Touche LLP, independent auditors.
HEALTH FITNESS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -
GRANT THORNTON LLP................................................... F-2
INDEPENDENT AUDITORS' REPORT - DELOITTE & TOUCHE LLP...................F-3
CONSOLIDATED BALANCE SHEETS..............................................F-4
CONSOLIDATED STATEMENTS OF OPERATIONS....................................F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY..........................F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS....................................F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...............................F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Health Fitness Corporation
We have audited the accompanying consolidated balance sheets of Health Fitness
Corporation and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 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 consolidated financial position of Health Fitness
Corporation and subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
We have also audited Schedule II of Health Fitness Corporation and subsidiaries
for each of the two years in the period ended December 31, 1999. In our
opinion, this Schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/Grant Thornton LLP
Minneapolis, Minnesota
February 29, 2000 (except for note 5, as to which the date is March 16, 2000)
F-2
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Health Fitness Corporation (the Company)
for the year ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Health Fitness
Corporation for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
April 8, 1998
(April 12, 1999 as to Note 3)
F-3
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
------------------------------
ASSETS
CURRENT ASSETS
Cash $ 139,852 $ 29,598
Trade accounts and notes receivable, less allowance for doubtful
accounts of $187,912 and $1,101,210 at December 31, 1999 and 1998 3,406,552 3,975,974
Notes receivable, current portion 308,841 396,213
Inventories - 26,459
Prepaid expenses and other 10,939 33,395
------------------------------
Total current assets 3,866,184 4,461,639
PROPERTY AND EQUIPMENT, net 554,885 1,049,626
OTHER ASSETS-LONG TERM
Goodwill, less accumulated amortization of $1,777,580 and $1,580,098
at December 31, 1999 and 1998 6,163,998 7,568,810
Noncompete agreements, less accumulated amortization of $288,413 and
$374,478 at December 31, 1999 and 1998 238,437 592,373
Copyrights, less accumulated amortization of $85,608 at December 31,
1998 - 584,391
Trade names, less accumulated amortization of $7,389 and $20,613 at
December 31, 1999 and 1998 62,611 189,387
Contracts, less accumulated amortization of $63,334 and $23,334 at
December 31, 1999 and 1998 16,666 56,666
Notes receivable 340,731 922,966
Deferred financing costs, less accumulated amortization of $836,082
at December 31, 1998 - 585,260
Other 80,043 65,983
Net assets of discontinued operations - 2,558,112
------------------------------
$ 11,323,555 $ 18,635,213
==============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,862,128 $ 6,939,692
Current maturities of long-term obligations 420,755 478,618
Subordinated notes payable 115,000 -
Trade accounts payable 672,322 992,356
Accrued salaries, wages, and payroll taxes 924,135 1,017,171
Accrued earn-out 186,425 309,962
Other accrued liabilities 407,997 565,658
Deferred revenue 1,381,752 1,625,659
Net liabilities of discontinued operations 652,053 -
------------------------------
Total current liabilities 7,622,567 11,929,116
LONG-TERM OBLIGATIONS, less current maturities 502,860 862,015
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000 shares authorized, none
issued or outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized;
12,112,015 and 11,884,413 shares issued and outstanding at
December 31, 1999 and 1998 121,120 118,844
Additional paid-in capital 16,855,438 16,725,126
Accumulated deficit (13,778,430) (10,951,526)
------------------------------
3,198,128 5,892,444
Stockholder note and interest receivable - (48,362)
------------------------------
3,198,128 5,844,082
------------------------------
$ 11,323,555 $ 18,635,213
==============================
The accompanying notes are an integral part of the financial statements.
F-4
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-----------------------------------------
REVENUE $26,195,110 $25,642,995 $21,480,454
COST OF REVENUE 20,151,180 19,608,792 16,580,601
-----------------------------------------
GROSS PROFIT 6,043,930 6,034,203 4,899,853
OPERATING EXPENSES
Salaries 2,053,509 1,985,495 1,798,728
Selling, general, and administrative 3,214,160 4,382,991 3,789,051
Re-engineering 748,473 - -
-----------------------------------------
Total operating expenses 6,016,142 6,368,486 5,587,779
-----------------------------------------
OPERATING INCOME (LOSS) 27,788 (334,283) (687,926)
OTHER INCOME (EXPENSE)
Interest expense (1,089,904) (666,935) (277,286)
Other, net (253,568) 109,904 67,258
-----------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (1,315,684) (891,314) (897,954)
INCOME TAXES 86,220 50,000 45,000
-----------------------------------------
LOSS FROM CONTINUING OPERATIONS (1,401,904) (941,314) (942,954)
-----------------------------------------
DISCONTINUED OPERATIONS
Loss from operations of Physical Therapy Clinic segment and
Equipment segment - (1,893,921) (103,736)
Loss on disposal of Physical Therapy Clinic segment and Equipment
segment (1,425,000) (5,273,912) -
-----------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (1,425,000) (7,167,833) (103,736)
-----------------------------------------
NET LOSS $(2,826,904) $(8,109,147) $(1,046,690)
=========================================
NET LOSS PER SHARE FROM CONTINUING OPERATIONS
Basic $ (0.12) $ (0.08) $ (0.12)
Diluted (0.11) (0.08) (0.12)
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS
Basic $ (0.12) $ (0.64) $ (0.01)
Diluted (0.12) (0.64) (0.01)
NET LOSS PER SHARE:
Basic $ (0.24) $ (0.72) $ (0.13)
Diluted (0.23) (0.72) (0.13)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 11,982,610 11,319,295 7,884,088
Diluted 12,350,341 11,319,295 7,884,088
The accompanying notes are an integral part of the financial statements.
F-5
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
Stockholder
Additional Note and Total
Common Stock Paid-in Accumulated Interest Stockholders'
Shares Amount Capital Deficit Receivable Equity
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1997 7,193,293 $ 71,933 $11,693,417 $(1,795,689) $(77,573) $9,892,088
Issuance of common stock in
connection with 1995 acquisition 292,829 2,928 (2,928) - - -
Issuance of common stock in
connection with 1997 acquisitions 153,911 1,539 414,086 - - 415,625
Issuance of common stock
purchase warrants - - 92,431 - - 92,431
Issuance of note payable with
conversion option - - 44,118 - - 44,118
Conversion of convertible notes and
interest 130,358 1,304 313,452 - - 314,756
Warrants exercised 86,800 868 129,882 - - 130,750
Stock options exercised 223,000 2,230 158,520 - - 160,750
Issuance of common stock
for services 35,500 355 83,239 - - 83,594
Issuance of common stock through
Employee Stock Purchase Plan 21,137 211 50,463 - - 50,674
Advances on notes receivable - - - - (9,656) (9,656)
Payments received on notes receivable - - - - 20,000 20,000
Net loss - - - (1,046,690) - (1,046,690)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 8,136,828 81,368 12,976,680 (2,842,379) (67,229) 10,148,440
Issuance of common stock in
connection with acquisitions 230,000 2,300 405,200 - - 407,500
Issuance of common stock
in connection with credit
facility 312,497 3,125 340,622 - - 343,747
Stock options exercised 32,000 320 39,680 - - 40,000
Warrants exercised 80,000 800 99,200 - - 100,000
Issuance of common stock in connection
with private placement 3,000,000 30,000 2,755,074 - - 2,785,074
Issuance of common stock through
Employee Stock Purchase Plan 93,088 931 108,670 - - 109,601
Advances on notes receivable - - - - (3,533) (3,533)
Payments received on notes receivable - - - - 22,400 22,400
Net loss - - - (8,109,147) - (8,109,147)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 11,884,413 118,844 16,725,126 (10,951,526) (48,362) 5,844,082
Issuance of common stock in
connection with a 1997
acquisition and earnout 128,465 1,285 77,576 - - 78,861
Issuance of common stock through
Employee Stock Purchase Plan 99,137 991 52,736 - - 53,727
Advances on notes receivable - - - - (4,753) (4,753)
Payments received on notes receivable - - - - 53,115 53,115
Net loss - - - (2,826,904) - (2,826,904)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 12,112,015 $121,120 $16,855,438 $(13,778,430) $ - $ 3,198,128
=============================================================================
The accompanying notes are an integral part of the financial statements.
F-6
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,826,904) $(8,109,147) $(1,046,690)
Adjustment to reconcile net loss to net cash provided
by (used in) operating activities:
Common stock issued for services - - 134,268
Depreciation and amortization 1,565,912 1,766,654 893,801
Loss on disposal of assets 356,195 - -
Write down of asset 255,000 332,060 -
Discontinued operations 931,460 5,510,944 (81,294)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable 335,523 630,327 (1,538,397)
Inventories (816) (3,003) (23,456)
Prepaid expenses and other 21,343 472,374 (155,755)
Other assets 46,658 301,276 (254,853)
Trade accounts payable (320,034) (934,667) 112,764
Accrued liabilities and other (228,113) (1,372,939) 854,363
Deferred revenue 238,557 (261,266) 267,274
------------ ------------ ------------
Net cash provided by (used in) operating activities 374,781 (1,667,387) (837,975)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,397) (94,413) (496,190)
Net proceeds from sale of property 1,316,613 - -
Payments for acquisitions, net of liabilities assumed and cash
acquired - (196,263) (100,000)
Payments in connection with earn-out provisions (286,049) (644,933) (485,115)
Advances made for notes receivable - (1,170,398) -
Net change in notes receivable 363,590 418,675 220,008
Discontinued operations 2,751,967 (658,941) (1,957,615)
------------ ------------ ------------
Net cash provided by (used in) investing activities 4,139,724 (2,346,273) (2,818,912)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and notes payable 34,134,335 40,626,690 3,435,500
Repayments of line of credit and notes payable (38,211,900) (33,686,998) (2,197,500)
Proceeds from issuance of subordinated debt 115,000 - -
Proceeds from long term debt - 1,456,384 2,712,128
Repayment of long term debt (417,018) (6,602,662) (440,803)
Payment of financing costs - (1,394,020) -
Proceeds from the issuance of common stock 53,727 3,378,422 291,500
Discontinued operations (126,757) 164,936 -
Proceeds from the issuance of warrants to purchase common stock - - 22,000
Other 48,362 18,867 (84,299)
------------ ------------ ------------
Net cash provided by (used in) financing activities (4,404,251) 3,961,619 3,738,526
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 110,254 (52,041) 81,639
CASH AT BEGINNING OF YEAR 29,598 81,639 -
------------ ------------ ------------
CASH AT END OF YEAR $ 139,852 $ 29,598 $ 81,639
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-7
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation provides wellness services and
products to major corporations and health care organizations. Fitness
center based services include the development and management of
corporate and hospital-based fitness centers, health related
programming, and on-site physical therapy. Wellness services are
provided to dispersed employee populations of major corporations and
insurance companies through the International Fitness Club Network.
While consumers of the services are typically corporate employees and
hospital customers, revenues are generated almost exclusively through
business to business, contractual relationships.
Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
Trade Accounts and Notes Receivable - The Company grants credit to
customers in the ordinary course of business. Trade accounts and notes
receivable represent amounts due from companies and individuals for
services and products. The notes receivable are typically due in 60
monthly installments and have interest rates from 6.2% to 14.7%.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers and their geographic
dispersion.
Fair Values of Financial Instruments - Due to their short-term nature,
the carrying value of the Company's current financial assets and
liabilities approximates their fair values. The fair value of the
Company's borrowings, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
Deferred Revenue - Deferred revenue represents billings in advance for
the management of corporate and hospital-based fitness centers and
amounts received in excess of revenues recognized to date. Accounts
receivable relating to deferred revenue was $1,060,745 and $1,205,601
at December 31, 1999 and 1998.
Revenue Recognition - Revenue is recognized at the time the service is
provided.
Property and Equipment - Property and equipment is stated at cost.
Depreciation and amortization are computed using both straight-line and
accelerated methods over the useful lives of the assets or the terms of
the capital leases.
Goodwill - Goodwill represents the excess of the purchase price and
related costs over the fair value of the net assets of businesses
acquired and is amortized on a straight-line basis over 15 or 20 years.
Subsequent payments of earn-out provisions associated with acquisitions
are accounted for as adjustments to goodwill and amortized on a
straight-line basis over the remaining life of the goodwill. The
carrying value of goodwill and other intangible assets is assessed
periodically or when factors indicating impairment are present.
Projected undiscounted cash flows are used in assessing these assets.
Noncompete Agreements - The Company has entered into noncompete and
separation agreements with certain individuals, which cover periods of
five to seven years and prohibit the individuals from directly or
indirectly competing with the Company. The payments associated with
these agreements are amortized over the term of the noncompete
agreement.
Other Intangible Assets - The Company's other intangible assets consist
of copyrights, trade names, and contracts related to businesses
acquired. The values assigned by the Company to copyrights, trade names
and contracts are based on independent appraisals and are amortized on
a straight-line basis over 15 years for copyrights and trademarks and 2
or 3 years for contracts.
Net Loss Per Common Share - Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding and 24,068 contingently issuable shares in 1997. Diluted
net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding, contingently issuable
shares and common share equivalents relating to stock options, stock
warrants, and convertible subordinated debt when dilutive. Diluted net
loss per share in 1998 and 1997 is the same as basic net loss per share
due to the losses in those years.
Common stock options and warrants to purchase 2,800,219 shares of
common stock with a weighted average exercise price of $2.73 and
assumed conversion of convertible subordinated notes into 383,333
shares of common stock were excluded from the 1999 diluted computation
because they are anti-dilutive.
Contingently issuable shares of common stock with a value of $500,000,
and common stock options and warrants to purchase 3,712,541 shares of
common stock with a weighted average exercise price of $2.84, were
excluded from the 1998 diluted computation because they are
anti-dilutive.
Contingently issuable shares of common stock with a value of $500,000,
and common stock options and warrants to purchase 2,685,211 shares of
common stock with a weighted average exercise price of $3.19, and
assumed conversion of convertible subordinated notes into 159,522
shares of common stock were excluded from the 1997 diluted computation
because they are anti-dilutive.
Stock-Based Compensation - The Company utilizes the intrinsic value
method of accounting for its stock based employee compensation plans.
Pro-forma information related to the fair value based method of
accounting is contained in note 7.
Use of Estimates - Preparing consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated 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 the
1998 balances to conform to the presentation used in 1999.
2. BUSINESS COMBINATIONS AND DISPOSITIONS
1999 Dispositions - On September 23, 1999, the Company sold the assets
of Preferred Therapy Providers of America, a preferred provider network
of physical therapy clinics and Health Fitness Rehab, Inc. a provider
of services designed to manage and prevent work related injuries. Both
subsidiaries offered product lines utilized in the Company's fitness
centers. The Company received $1,550,000 and recorded a loss on sale of
$356,195.
1998 Acquisitions - On June 4, 1998, the Company completed the
acquisition of all the issued and outstanding stock of David W.
Pickering, Inc. (DWP), a Rhode Island corporation doing business as
International Fitness Club Network (IFCN). IFCN is in the business of
organizing and maintaining a network of commercial fitness and health
clubs and marketing memberships in such clubs to employers and
insurance companies (the IFCN Business). The purchase agreement
contained a noncompete provision that covers a period of five years and
prohibits the former owner from directly or indirectly competing with
the Company. In conjunction with this acquisition, the Company issued
30,000 shares of common stock valued at $45,000, and paid cash
consideration of $210,000 and an automobile valued at approximately
$30,000.
The purchase agreement requires the Company to make annual payments of
up to 45% of DWP's net income from operations, as defined, for each of
the five fiscal years ending May 31, 1999 through 2003. The annual
payment, if any, is due in a combination of 50% in cash and 50% in the
Company's common stock. The number of shares issued in connection with
the annual payment is calculated by dividing the portion of the annual
payment payable in common stock by $3.00. There was no annual payment
due for the fiscal year ending May 31, 1999.
The Company also entered into a five-year, management agreement with
International Fitness and Wellness Corporation (IFWC) to manage the
IFCN Business on behalf of the Company. ICN is owned and operated by
the former shareholder of DWP. The management agreement requires the
Company to compensate IFCW at the rate of $125,000 per year payable
monthly. As additional compensation, the Company will grant IFCW
nonqualified stock options to purchase up to 15,000 shares of the
Company's common stock at an exercise price equal to the fair market
value of the Company's common stock on the last day of each DWP
earn-out year provided DWP's earn-out ratio is at least 20%. No stock
options were issued for the year ending May 31, 1999.
On February 27, 1998, the Company completed the acquisition of all the
issued and outstanding stock of Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. In
connection with the acquisition of Midlands, the Company issued 200,000
shares of common stock valued at $362,500 and cash consideration of
$585,000. Midlands was sold as part of the physical therapy clinic
business segment described in Note 3.
In connection with the 1998 acquisitions; assets purchased and
liabilities assumed, common stock issued, and cash consideration paid
were as follows:
IFCN Midlands
------- --------
Assets acquired:
Accounts receivable $135,899 $ -
Other current assets 10,070 21,750
Property 14,178 196,789
Noncompete agreements 140,000 490,000
Trade names 70,000 80,000
Contracts 80,000 120,000
Excess of purchase price
over net assets acquired 89,550 335,402
------- --------
539,697 1,243,941
Liabilities assumed:
Accounts payable 53,550 120,985
Accrued expenses 92,011 106,968
Deferred revenue 42,465 -
Debt 96,671 68,488
------- -------
284,697 296,441
Common stock issued 45,000 362,500
------- --------
Cash consideration paid $210,000 $ 585,000
======= ========
The 1998 acquisitions were accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired
are being amortized over 15 years using the straight-line method. The
consolidated statements of operations include the results of operations
for IFCN since its acquisition. The Midlands results of operations for
the period of February 1998, the date of acquisition, through May 1999,
the date it was sold, has been included in discontinued operations.
Unaudited pro forma revenue for the year ending December 31, 1998,
which reflects the combined continuing operations of the Company with
the 1998 IFCN acquisition as if the transaction had occurred at the
beginning of 1998, is $25,761,600. The impact of this acquisition was
not significant on net loss and net loss per share. The unaudited pro
forma revenues may not necessarily reflect the actual operations of the
Company had the acquisition occurred as of the date presented. The
unaudited pro forma revenue is not necessary indicative of future
revenues for the combined companies. Midlands pro forma revenues have
not been included due to the sale of Midlands in 1999 and the
reclassification of all Midland operating results to discontinued
operations in the consolidated statements of operations.
3. DISCONTINUED OPERATIONS
In August 1998, the Company formally adopted a plan to dispose of its
freestanding physical therapy clinics business segment (the PT
clinics). The disposal of the PT clinics was accounted for as a
discontinued operation. In June 1999, the Company completed the sale of
the PT clinics for cash of $3,750,000. The loss on disposition was
$1,017,700.
Information relating to the PT clinics for the years ending December 31
is as follows:
1999 1998 1997
------ ------ ------
Revenues $2,465,700 $ 5,727,600 $5,380,300
Interest expense 560,200 1,227,100 312,500
Net loss (2,243,500) (3,118,575) (362,900)
A tax benefit has been recorded and has been offset by a valuation
allowance for each year. Interest expense has been allocated based on
the ratio of net operating assets of the PT clinics to consolidated net
assets.
Net losses of $1,657,212 incurred in 1998 subsequent to the measurement
date, estimated 1999 net losses of $903,523 and estimated shutdown
costs and loss on disposal of $2,090,922 were included in the loss on
disposal of discontinued operations for the year ending December 31,
1998. In the first quarter of 1999 the Company increased the loss
$941,000 due to actual losses from operations and the loss on sale
exceeding estimates.
In November 1998, the Company formally adopted a plan to dispose of its
fitness equipment business segment (the equipment division). The
disposal of the equipment division was accounted for as a discontinued
operation. In July 1999, the Company completed the sale of the
equipment division for cash of $80,000 and two notes receivable
totalling $90,000. The loss on disposition was $536,000.
Information relating to the equipment division for the years ending
December 31 is as follows:
1999 1998 1997
------ ------ ------
Revenues $1,769,300 $7,293,100 $6,809,900
Interest expense 100,000 198,400 60,500
Net income (loss) (896,900) (780,000) 259,164
A tax benefit has been recorded and has been offset by a valuation
allowance for each year. Interest expense has been allocated based on
the ratio of net operating assets of the equipment division to
consolidated net assets.
Net losses of $347,442 incurred in 1998 subsequent to the measurement
date, estimated 1999 net losses of $342,390 and estimated shutdown
costs and gain on disposal of $67,577 were included in the loss on
disposal of discontinued operations for the year ending December 31,
1998. In the first quarter of 1999 the Company increased the loss
$484,000 due to actual losses from operations and the loss on sale
exceeding estimates.
The Company has restated the 1997 financial statements to present the
operating results of the PT clinics and the equipment division as
discontinued operations. The components of net assets (liabilities) of
discontinued operations included in the Company's consolidated balance
sheets as of December 31 are as follows:
1999 1998
--------- -----------
ASSETS
Accounts receivable $ 217,554 $ 2,345,111
Inventories - 527,585
Prepaid expenses and other - 192,754
Property and equipment, net 50,000 2,100,422
Intangible assets, net - 2,641,108
--------- -----------
267,554 7,806,980
LIABILITIES
Accounts payable (307,512) (1,346,687)
Accrued expenses (156,247) (467,982)
Long-term obligations - (164,936)
Accrued expenses and losses related to
discontinued operations (455,848) (3,269,263)
--------- -----------
(919,607) (5,248,868)
--------- -----------
$ (652,053) $ 2,558,112
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
Useful Life 1999 1998
----------- ------ ------
Leasehold improvements Term of lease $ 88,057 $ 54,979
Office equipment 3-7 years 822,479 947,730
Software 3 years 163,581 382,925
Preventive health care equipment 1-5 years 392,025 293,438
---------- ----------
1,466,142 1,679,072
Less accumulated depreciation and amortization 911,257 629,446
---------- ----------
$ 554,885 $1,049,626
========== ==========
5. FINANCING
Note Payable - The Company entered into a credit agreement and
subsequent amendments (the Credit Agreement) that provides for maximum
borrowings of $3.8 million as defined. Interest on outstanding
borrowings is computed at the prime rate plus 7.0% with a minimum rate
of 15.5% (effective rate of 15.5% at December 31, 1999.) The Company is
required to pay monthly interest payments on outstanding borrowings at
the prime rate plus 4.5% with a minimum rate of 13.0%. The unpaid
interest is added to the outstanding borrowings as of the first of the
current month. The Company is also required to pay a monthly servicing
fee of $5,000. The Credit Agreement is due on September 16, 2000.
Borrowings under the Credit Agreement are collateralized by
substantially all of the Company's assets and partially guaranteed by
the Company's founder and former Chief Executive Officer. The Credit
Agreement contains various restrictive covenants relating to changes in
accumulated deficit, maintenance of fixed charge coverage ratio,
minimum working capital requirements, prohibits dividend payments, and
other matters. At December 31, 1999 the Company was in violation of
certain covenants for which the Company obtained a waiver through March
16, 2000 from the lender.
Subordinated Notes Payable - The Company issued $115,000 of secured
convertible subordinated debentures to three accredited investors. The
debentures maturity date coincides with the due date of the Credit
Agreement and bear interest at the rate of 16% per annum. The
debentures are secured by a lien on the Company's assets and are
subordinate to the Company's borrowings under the Credit Agreement.
Principal and accrued interest on the debentures is convertible into
Company common stock at a price of $.30 per share. For each $4.00
principal amount of debentures purchased, the purchaser received a
warrant to purchase one share of Company common stock at $1.00 per
share, exercisable for a period of four years.
Long-Term Obligations - Long-term obligations at December 31 consists
of the following:
1999 1998
------ ------
Notes payable, due in various monthly installments up
to $2,828 including interest at 8.76% due through
September 2002, collateralized by equipment $670,465 $ 907,126
Present value of capital lease obligations, interest
from 12.77% to 21.00% due through March 2002,
collateralized by various property and equipment 238,203 253,112
Other 14,947 180,395
-------- ----------
923,615 1,340,633
Less current maturities 420,755 478,618
-------- ----------
$502,860 $ 862,015
======== ==========
Maturities of long-term obligations are as follows:
Years ending December 31:
2000 $ 420,755
2001 403,190
2002 99,670
-------------
$ 923,615
6. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases office space and equipment under operating
leases. In addition to base rental payments, these leases require the
Company to pay its proportionate share of real estate taxes, special
assessments, and maintenance costs. These leases can be renewed for
additional one-year periods.
The Company also leased certain equipment under agreements which
substantially cover the estimated useful lives of the respective
assets. These agreements were capitalized at the present value of the
future minimum lease payments.
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $245,202, $208,488 and $192,469 for the years
ending December 31, 1999, 1998 and 1997.
Minimum rent payments due under operating leases are as follows:
Years ending December 31:
2000 $ 160,344
2001 101,865
2002 24,933
2003 5,057
Independent Contractor - An independent contractor, who was an
executive officer of the Company and is a member of the Company's Board
of Directors, assumed the functions of its Chief Financial Officer from
July 1997 to April 1999. Expenses relating to the services provided
totaled $98,729, $328,172 and $236,426 for the years ending December
31, 1999, 1998 and 1997.
Benefit Plan - The Company has a defined contribution plan which
conforms to IRS provisions for 401(k) plans. Employees are eligible to
participate in the plan providing they have attained the age of 21 and
have completed one year of service. Participants may contribute up to
15% of their earnings, and the Company may make certain matching
contributions. The Company made matching contributions of $136,000,
$166,000 and $106,000 for the years ending December 31, 1999, 1998 and
1997.
Legal Proceedings - The Company is involved in various claims and
lawsuits incident to the operation of its business. The Company
believes that the outcome of such claims will not have a material
adverse effect on its financial condition, results of operation, or
cash flows.
7. EQUITY TRANSACTIONS
Issuance of Common Stock - On September 23, 1999, the Company issued
120,000 shares of common stock in connection with the 1997 acquisition
of a Minnesota based provider services designed to manage and prevent
work related injuries. The 1997 purchase agreement included a provision
for the issuance of common stock in 1999. The stock was issued at the
same time the operation was sold as discussed in Note 2.
In February 1998, the Company obtained gross proceeds of $3,300,000 of
equity financing through a private placement of 3,000,000 units, with
each unit consisting of one share of common stock and a detachable
warrant to purchase one-fourth of a share of common stock at $2.25 per
share. The warrants are currently exercisable and expire four years
from the date of issuance.
In connection with the private placement, the Company also issued
warrants to purchase 300,000 shares of common stock to the selling
agents. The selling agents' warrants are exercisable from February 18,
1999 through February 18, 2003 at $1.65 per share and contain a net
value exercise provision allowing for the issuance of a lesser number
of shares than provided in the warrant without payment of the cash
exercise price.
During 1998, the Company received proceeds of $140,000 when holders of
stock options and warrants exercised their right to purchase a total of
112,000 shares of common stock at a price of $1.25 per share.
During 1997, the Company issued 130,358 shares of common stock to
holders of three convertible, subordinated promissory notes electing to
convert their notes with face values of $300,000 and accrued interest
of $14,756 into common stock.
During 1997, the Company also issued 35,500 shares of common stock in
return for services provided. The value of the common stock issued,
$83,594, was based on the market value of the Company's common stock.
On January 30, 1997, the Company issued 292,829 shares of common stock
in connection with the 1995 purchase of a California-based operator of
corporate fitness centers. The 1995 purchase agreement provided that if
the average closing sale price of the Company's common stock during the
fourth quarter of 1996 did not reach at least $6.00 per share, the
Company would issue sufficient additional shares so that the aggregate
value of the stock consideration received by the sellers equaled
$1,200,000 based on the same three month average price calculation.
Stock Options - The Company has 2,000,000 shares of stock reserved for
stock options under a 1995 Stock Option Plan. Generally, the options
outstanding (1) are granted at prices equal to the market value of the
stock on the date of grant, (2) vest immediately, ratably over a five
year vesting period, or one year prior to expiration, and, (3) expire
over a period of five or ten years from the date of grant. No
previously issued options have been repriced.
A summary of the stock option activity is as follows:
Weighted
Number of Average
Shares Exercise Price
------------ --------------
Outstanding at January 1, 1997 923,847 $ 2.38
Granted 837,000 3.06
Exercised (223,000) 0.72
------------ ----
Outstanding at December 31, 1997 1,537,847 3.00
Granted 229,330 3.13
Exercised (32,000) 1.25
Forfeited (117,600) 2.74
----------- ----
Outstanding at December 31, 1998 1,617,577 3.07
Granted 95,250 0.52
Forfeited (728,922) 3.08
----------- ----
Outstanding at December 31, 1999 983,905 $ 2.81
=========== ====
Options exercisable at December 31:
1997 653,012 $ 2.77
1998 835,897 $ 2.85
1999 723,177 $ 3.02
The following table summarizes information about stock options at
December 31, 1999:
Options Outstanding Options Exercisable
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding Years Price Exercisable Price
---------------- ---------- ----------------- -------- ---------- -------
$0.40 - $0.60 89,000 1.69 $0.52 12,749 $0.50
2.00 - 3.00 794,905 1.76 2.92 610,428 2.91
4.00 100,000 3.59 4.00 100,000 4.00
---------- ---- ------- ---------- -------
983,905 1.94 $2.81 723,177 $3.02
========== ==== ======= ========== =======
Had the fair value method been used for valuing options granted in
1999, 1998 and 1997, the Company's net loss and net loss per share
would have changed to the pro forma amounts indicated below:
1999 1998 1997
------ ------ ------
Net loss $(3,015,828) $ (8,931,567) $ (1,510,236)
Net loss per share:
Basic $(.25) $(.79) $(.19)
Diluted $(.24) $(.79) $(.19)
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option-pricing model with the following
assumptions and results for the grants:
1999 1998 1997
------ ------ ------
Dividend yield None None None
Expected volatility 72.1% 55.0% 55.62%
Expected life of option 1 to 5 years 4 or 10 years 5 or 10 years
Risk-free interest rate 6.31% 5.73% 6.56%
Fair value of options on grant date $.21 $0.44 $1.64
Employee Stock Purchase Plan - The Company's Board of Directors and
Stockholders adopted an Employee Stock Purchase Plan (the Stock
Purchase Plan) which allows employees to purchase shares of the
Company's common stock at 90% of the fair market value, as defined. The
aggregate number of shares that could be issued is 200,000 shares of
common stock. During 1999, 1998 and 1997, the Company issued 85,775,
93,088 and 21,137 shares, respectively, under the Stock Purchase Plan.
Fair value disclosures under FAS No. 123 have not been disclosed for
shares under the Employee Stock Purchase Plan as such values are
immaterial.
Warrants - The Company has issued warrants to directors, selling
agents, and consultants in consideration for services performed. The
Company has also issued warrants in connection with the issuance of
debt. The warrants issued in connection with the debt expire at various
dates through 2003.
A summary of the stock warrants activity is as follows:
Exercise
Number of Price
Shares Per Share
Outstanding at January 1, 1997 1,214,964 $ 1.25 - 4.00
Granted 20,800 3.00
Exercised (86,800) 1.50 - 2.19
Forfeited (1,600) 3.16
------------ ------------
Outstanding at December 31, 1997 1,147,364 1.25 - 4.00
Granted 1,050,000 1.65 - 2.25
Exercised (80,000) 1.25
Forfeited (22,400) 1.25 - 3.00
------------ -----------
Outstanding at December 31, 1998 2,094,964 1.65 - 4.00
Granted 28,750 1.00
Forfeited (307,400) 2.63 - 4.00
------------ -----------
Outstanding at December 31, 1999 1,816,314 $ 1.00 - 4.00
========= ===========
Warrants exercisable at year-end:
1997 1,147,364 $ 1.25 - 4.00
1998 2,094,964 $ 1.65 - 4.00
1999 1,816,314 $ 1.00 - 4.00
Stockholder Note and Interest Receivable - Note and interest receivable
are amounts due from a stockholder and officer of the Company at
December 31, 1998. The amounts were settled in 1999.
8. INCOME TAXES
A reconciliation between taxes computed at the expected federal income
tax rate of 34% and the effective tax rate for the years ending
December 31 is as follows:
1999 1998 1997
------ ------ ------
Tax benefit computed at statutory rates $(932,000) $(320,000) $(310,000)
State taxes, net of federal effect 56,900 (10,000) (15,000)
Nondeductible goodwill amortization 200,000 190,000 160,000
Other 95,320 20,000 5,000
Change in valuation allowance 666,000 170,000 205,000
-------- -------- --------
$ 86,220 $ 50,000 $ 45,000
======= ======= =======
At December 31, 1999, the Company had approximately $11,646,000 of
federal and state operating loss carryforwards. The carryforwards
expire from 2004 to 2019. Utilization of the losses in future years may
be limited based on changes in the corporation's ownership.
The components of deferred tax assets (liabilities) at December 31
consist of the following:
1999 1998 1997
--------- --------- ---------
Current:
Accounts and notes receivable $ 150,000 $ 690,000 $ 570,000
Accrued employee benefits 80,000 160,000 230,000
Tax accounting change adjustment (120,000) (120,000) (100,000)
Reserve for discontinued operations 300,000 1,310,000 --
--------- --------- ---------
410,000 2,040,000 700,000
Noncurrent:
Tax accounting change adjustment (120,000) (240,000) (380,000)
Difference between tax and book depreciation
and amortization (115,000) (150,000) (200,000)
Tax loss carryforwards 3,981,000 1,840,000 330,000
Other 30,000 30,000 30,000
--------- --------- ---------
3,776,000 1,480,000 (220,000)
--------- --------- ---------
Net deferred tax asset 4,186,000 3,520,000 480,000
Less valuation allowance (4,186,000) (3,520,000) (480,000)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information and noncash investing and financing
activities for the years ending December 31, is as follows:
1999 1998 1997
------ ------ ------
Cash paid for interest (net of capitalized
interest of $129,440 in 1997) $1,155,989 $ 1,205,192 $ 526,306
Issuance of common stock in connection with
acquisitions 78,861 407,500 415,625
Debt assumed by company through acquisitions - 165,159 315,492
Conversion of notes payable and accrued
interest to equity - - 314,756
Issuance of notes payable in connection with
acquisitions - - 250,000
Issuance of stock warrant in connection with
the design and implementation of management
information and control system agreement - - 70,431
Line of credit borrowings refinanced with long-
term debt - - 750,000
Notes payable refinanced with long-term debt - - 600,000
Issuance of common stock in connection with
a software license agreement - - 26,250
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously disclosed.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the directors and executive officers of the Registrant and
their positions and offices presently held are as follows:
Name Age Position with Company
- ---- --- ---------------------
Charles J. B. Mitchell, Jr. 56 Acting Chief Executive Officer
Thomas A. Knox 49 Acting Chief Operating Officer
Loren S. Brink 44 Director and President of Sales and Marketing
Sean A. Kearns 29 Vice President of Finance
James A. Bernards 53 Chairman of the Board of Directors
Charles E. Bidwell 55 Director and Former Chief Financial Officer
Susan H. DeNuccio 50 Director
William T. Simonet, M.D. 46 Director
Robert K. Spinner 57 Director
Charles J. B. Mitchell, Jr. was appointed Acting Chief Executive Officer in July
of 1999. Mr. Mitchell is an employee of The Manchester Companies Inc. and has
provided senior management services, assisted with the sale of various business
segments and divisions and assisted with the design and execution of the
Company's re-engineering effort.
Thomas A. Knox was appointed Acting Chief Operating Officer in July of 1999. Mr.
Knox is an employee of The Manchester Companies Inc. and has provided senior
management services, assisted with the sale of various business segments and
divisions and assisted with the design and execution of the Company's
re-engineering effort.
Loren S. Brink has been President of Sales and Marketing since July of 1999.
Prior to July 1999, Mr. Brink was Chief Executive Officer of the Company since
its inception in 1981, and was Chairman of the Board until December 1998. He
holds a Masters Degree in Cardiac Rehabilitation and Adult Fitness from the
University of Wisconsin. He has an extensive clinical background, has published
numerous articles regarding corporate fitness and speaks frequently at national
conferences.
Sean A. Kearns has been Vice President of Finance for the Company since August
of 1999. Prior to Health Fitness Corporation, Mr. Kearns worked in a turnaround
capacity as Assistant to the CEO for Automotive Systems International, Inc., a
Chicago based auto part manufacturer. From 1992 to 1997, Mr. Kearns worked in
the Middle Market Leveraged Buyout Division of the Chase Manhattan Bank. Mr.
Kearns holds a Masters of Business from The Amos Tuck School of Business at
Dartmouth College.
James A. Bernards, Chairman of the Board of Directors of the Company since April
1999. Mr. Bernards has been President of Brightstone Capital, Ltd., a venture
capital firm, since 1985 and President of Facilitation Incorporated, a strategic
planning firm he founded in July 1993. Prior to that time he was President of
Stirtz Bernards & Co., a CPA firm he founded and with which he has been a
partner for more than 18 years.
Charles E. Bidwell has been a Director of the Company since 1988 and has served
as a consultant to the Company in the position of Chief Financial Officer from
July 1997 through April 1999, and as Chairman of the Board from December 1998 to
April 1999. Mr. Bidwell is a venture capitalist and has served as a consultant
to various companies. From 1981 through April 1994, Mr. Bidwell was the Chief
Financial Officer of Red Owl Stores, Inc., a Minneapolis-based food retailer. He
has a 25-year history of starting and managing new businesses, as well as
significant corporate experience with Tonka, Inc. and Red Owl Stores, Inc. He
holds an MBA in Marketing and Finance from Carnegie-Mellon University in
Pittsburgh, Pennsylvania.
Susan H. DeNuccio, a Director of the Company since October 1998, has been
President of DeNuccio Group, a retail personnel and health care consulting firm,
since August 1998. She served as Vice President-Personnel for Target Stores, a
retail store chain, from August 1973 until her retirement in August 1998. She
also currently serves as a director of Health Partners, a Minneapolis-based
provider of health care.
William T. Simonet, M.D., a Director of the Company since March 1993, is an
independent practicing orthopedic surgeon. From 1985 until August 1994, Dr.
Simonet practiced with Orthopedic Consultants, P.A. Dr. Simonet received his
Medical degree in 1980 from the University of Minnesota medical school. He also
received a Master of Science degree in orthopedic surgery from the Mayo Graduate
School of Medicine in 1985.
Robert K. Spinner, a Director of the Company since May 1995, was President of
Abbott Northwestern Hospital in Minneapolis, Minnesota from 1988 to 1997 and a
member of the administrative staff at Abbott Northwestern from 1968 to 1997. In
1997, Allina Health Systems named Mr. Spinner President of Allina Hospitals. Mr.
Spinner graduated from St. John's University in Collegeville, Minnesota with a
Bachelor's degree in Economics and Accounting in 1964; he was awarded a Masters
degree in Hospital and Healthcare Administration from the University of
Minnesota in 1969. Mr. Spinner is a member of the Board of Directors of St.
John's University, the Newt C. Little Hospice and the Minnesota Hospital
Association.
There are no family relationships among any of the Company's directors or
executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding compensation paid
during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and the Company's most highly compensated executive officers
who received compensation in excess of $100,000 during fiscal 1999 (such
individuals referred to as the "named executive officers").
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
------------------------------------- --------------------------- -----------
Restricted LTIP All Other
Name and Position Fiscal Salary ($) Bonus ($) Other ($) Stock Awards Payouts Comp. ($)
Year ($) Options ($)
- ----------------------- --------- ------------- ---------- ------------ --------------- ----------- ----------- --------------
Charles Mitchell, 1999 (4) -- -- -- -- -- --
Acting Chief 1998 -- -- -- -- -- -- --
Executive Officer 1997 -- -- -- -- -- --
- ----------------------- --------- ------------- ---------- ------------ --------------- ----------- ----------- --------------
Thomas Knox, Acting 1999 (4) -- -- -- -- -- --
Chief Operating 1998 -- -- -- -- -- -- --
Officer 1997 -- -- -- -- -- --
- ----------------------- --------- ------------- ---------- ------------ --------------- ----------- ----------- --------------
Loren S. Brink, 1999 176,164 -- -- -- -- -- 214,662(5)
President of Sales & 1998 175,385 -- 20,705(2) -- -- -- 26,000(3)
Marketing 1997 160,000 -- 17,339(2) -- 100,000 -- 11,740(1)
- ----------------------- --------- ------------- ---------- ------------ --------------- ----------- ----------- --------------
* Does not exceed lesser of $50,000 or 10% of such individual's salary
and bonus.
(1) Amount reflects life insurance premiums not available to employees
generally.
(2) Amount reflects automobile allowance and entertainment expense
allowance.
(3) Amount reflects, $2,000 of life insurance not available to employees
generally and $24,000 for a partial guarantee of the Company's credit
facility
(4) The management services of Mr. Mitchell and Mr. Knox are provided
through the consulting agreement with The Manchester Companies, Inc.
These individuals do not receive direct compensation from the Company.
(5) Amount reflects $180,000 for a noncompete and $34,662 for forgiveness
of a note receivable.
Employment Agreements
Loren Brink. On June 30, 1999 (and amended October 7, 1999) the Company entered
into an 30 month Employment Agreement with Mr. Brink, (the "Agreement"), which
will automatically extend for additional one-year terms, unless either party
gives written notice of termination. Pursuant to the Agreement, Mr. Brink will
serve as the Company's President of Sales and Marketing at a base salary of
$190,000. Sales commissions will be paid based on the achievement of certain
sales goals, and options may be granted at the discretion of the Board of
Directors. Mr. Brink receives normal and customary employee benefits and fringe
benefits, including a monthly car allowance, and county club membership.
Option/SAR Grants During 1999 Fiscal Year
The following table sets forth information regarding stock options
granted to the named executive officers during the fiscal year ended December
31, 1999. The Company has not granted stock appreciation rights:
Potential Realizable Value
Number of % of Total At Assumed Annual Rates of
Securities Options/SARs Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options/SARs Employees in Base Price Expiration ----------------------------
Name Granted (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ------------------------ ----------------- ------------------ ------------- ------------- -------------- -------------
Loren S. Brink 0 N/A N/A N/A N/A N/A
- ------------------------ ----------------- ------------------ ------------- ------------- -------------- -------------
Charles Mitchell 0 N/A N/A N/A N/A N/A
- ------------------------ ----------------- ------------------ ------------- ------------- -------------- -------------
Thomas Knox 0 N/A N/A N/A N/A N/A
- ------------------------ ----------------- ------------------ ------------- ------------- -------------- -------------
Aggregated Option/SAR Exercises During 1999 Fiscal Year and Fiscal Year End
Option/SAR Values
The following table provides information related to the number of
options exercised during the last fiscal year and the number and value of
options held at fiscal year end by the named executive officers:
Number of Unexercised Value of Unexercised In
Securities Underlying the-Money Options at
Shares Acquired Value Options at 12/31/99 12/31/99
Name on Exercise (#) Realized exercisable/unexercisable exercisable/unexercisable
- ----------------------- ------------------ ------------ ----------------------------- ---------------------------
Loren S. Brink -- -- 175,000/25,000 $0
- ----------------------- ------------------ ------------ ----------------------------- ---------------------------
Charles Mitchell -- -- -- $0
- ----------------------- ------------------ ------------ ----------------------------- ---------------------------
Thomas Knox -- -- -- $0
- ----------------------- ------------------ ------------ ----------------------------- ---------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock
beneficially owned as of March 27, 2000, by persons known to the Company to be
beneficial owners of more than 5% of the Company's Common Stock, by each
executive officer of the Company named in the Summary Compensation table, by
each current director and nominee for director of the Company and by all
directors and current executive officers (including the named individuals) as a
group. Unless otherwise indicated, the shareholders listed in the table have
sole voting and investment powers with respect to the shares indicated.
Name and Address of Number of Shares Percent of
Beneficial Owner Beneficially Owned Class (1)
- ------------------------------------- ------------- ----------
Perkins Capital Management, Inc. 1,066,950 (2) 8.8%
730 East Lake Street
Wayzata, MN 55391
- ------------------------------------- ------------- ----------
Loren S. Brink 920,378 (3) 7.5%
3500 W. 80th Street
Minneapolis, MN 55431
- ------------------------------------- ------------- ----------
George E. Kline 882,276 (4) 7.1%
4750 IDS Center
Minneapolis, MN 55402
- ------------------------------------- ------------- ----------
Charles E. Bidwell 749,640 (5) 6.0%
- ------------------------------------- ------------- ----------
James A. Bernards 160,000 (6) 1.3%
- ------------------------------------- ------------- ----------
Robert K. Spinner 86,500 (7) *
- ------------------------------------- ------------- ----------
William T. Simonet, M.D. 83,250 (8) *
- ------------------------------------- ------------- ----------
Susan H. DeNuccio 63,750 (9) *
- ------------------------------------- ------------- ----------
Charles J. B. Mitchell, Jr. - *
- ------------------------------------- ------------- ----------
Thomas A. Knox - *
- ------------------------------------- ------------- ----------
All current directors and
executive officers 2,063,518 (10) 16.1%
as a group (9 persons)
- ------------------------------------- ------------- ----------
* Less than 1%
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person to acquire them as of March 27, 2000, or within sixty
days of such date are treated as outstanding only when determining the
percent owned by such individual and when determining the percent owned
by a group.
(2) In its most recent Schedule 13G filing with the Securities and Exchange
Commission on February 2, 2000, Perkins Capital Management, Inc.
represents it has sole voting power over 623,000 of such shares and
sole dispositive power over all such shares.
(3) Includes 200,000 shares which may be purchased upon exercise of options
which are exercisable as of March 27, 2000 or within 60 days of such
date.
(4) Includes (i) 100,000 shares held by Brightstone Capital, Ltd., an
investment firm controlled by Mr. Bernards and Mr. Kline; and (ii)
85,782 shares and a currently exercisable warrant to purchase 50,000
shares held by Brightside Fund, 318,182 shares and a currently
exercisable warrant to purchase 79,546 shares held by Brightstone Fund
VIII, a currently exercisable warrant to purchase 67,516 shares held by
Brightbridge Fund, and 31,250 shares held by Brightstone Fund V, all of
which are investment funds managed by Messrs. Bernards and Kline. Also
includes 50,000 shares which may be purchased upon exercise of options
which are exercisable as of March 27, 2000 or within 60 days of such
date. Pursuant to written agreement between Mr. Bernards and Mr. Kline,
Mr. Kline has sole voting and investment power over Company securities
held by any investment funds managed by them.
(5) Includes 334,167 shares which may be purchased upon exercise of options
and warrants or conversion of debentures that are exercisable or
convertible as of March 27, 2000 or within 60 days of such date.
(6) Includes 100,000 shares held by Brightstone Capital, Ltd., an
investment firm controlled by Mr. Bernards and Mr. Kline, 10,000 shares
held by an employee benefit plan over which Mr. Bernards has shared
voting and investment power, and 50,000 shares which may be purchased
upon exercise of options that are exercisable as of March 27, 2000 or
within 60 days of such date. Does not contain Company shares or
warrants held by any investment funds managed by Messrs. Bernards and
Kline. Pursuant to written agreement between Mr. Bernards and Mr.
Kline, Mr. Bernards has no voting or investment power over any Company
securities held by such investment funds.
(7) Includes 67,500 shares which may be purchased upon exercise of options
and warrants that are exercisable as of March 27, 2000 or within 60
days of such date.
(8) Includes 26,250 shares which may be purchased upon exercise of options
and warrants that are exercisable as of March 27, 2000 or within 60
days of such date.
(9) Such shares are not outstanding but may be purchased upon exercise of
options and warrants or conversion of debentures that are exercisable
or convertible as of March 27, 2000 or within 60 days of such date.
(10) Includes 741,667 shares which may be purchased upon exercise of options
and warrants or conversion of debentures that are exercisable or
convertible as of March 27, 2000 or within 60 days of such date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Consulting: On April 8, 1999, the Company retained The Manchester Companies,
Inc., a Minneapolis-based multi-disciplinary professional services firm
("Manchester) which provides investment banking, finance, turnaround and
management advisory services to small and middle market companies. Manchester
has provided senior management services, assisted with the sale of various
business segments and divisions and assisted with the design and execution of
the Company's re-engineering effort. In the fourth quarter, the Company
announced that it further engaged Manchester to explore strategic options, which
could include a merger or sale. The Company and Manchester continue to explore
options, although no option has been chosen at this time.
Consulting: Charles E. Bidwell has served as a consultant to the Company in the
area of capital raising, and has also served in various capacities, including
the Company's Chief Financial Officer, Secretary and Treasurer between at
various dates between 1991 and April, 1999. While he remains a director of the
Company, Mr. Bidwell currently holds no official or consulting positions.
Guarantee: Loren S. Brink has given a limited personal guarantee securing the
Company's Credit Facility.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
(1) Financial Statements. The following financial
statements are included in Part II, Item 8 of this
Annual Report on Form 10-K:
Report of Grant Thornton LLP on Consolidated
Financial Statements and Financial Statement Schedule
as of December 31, 1999 and 1998 and for each of the
two years ended December 31, 1999 and 1998
Report of Deloitte & Touche LLP on Consolidated
Financial Statements for the year ended December 31,
1997
Consolidated Balance Sheets as of December 31, 1999
and 1998
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules The following
consolidated financial statement schedule is included
in Item 14(d):
Report of Deloitte and Touche LLP on Financial
Statement Schedule for the year ended December 31,
1997
Schedule II-Valuation and Qualifying Accounts and
Reserves
All other financial statement schedules have been
omitted, because they are not applicable, are not
required, or the information is included in the
financial Statements or notes thereto
(3) Exhibits. The following exhibits are included in this
report: See "Exhibit Index to Form 10-K" immediately
following the signature page of this Form 10-K
(b) Reports on Form 8-K
The Company did not file any reports on from 8-K during the
three months ended December 31, 1999.
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Health Fitness Corporation (the Company) for the year ended
December 31, 1997 and have issued our report thereon dated April 8, 1998 (April
12, 1999 as to Note 3); such financial statements and report are included in
your 1999 Annual Report on Form 10-K. Our audit also included the financial
statement schedule of the Company, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Out responsibility
is to express an opinion based on our audit. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as whole, presents fairly, in all material respects, the
information set forth therein for the year ended December 31, 1997.
/s/Deloitte & Touche LLP
Minneapolis, Minnesota
April 8, 1998
Health Fitness Corporation and subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1999
Balance at Charged to Charged to Balance
Beginning Costs and Other accounts Deductions at End
Description of Period Expenses -Describe Describe of Period
- --------------------- ---------- ---------- -------------- ------------ ---------
Allowance for doubtful accounts
and returns:
Year ended December 31, 1999 $1,101,210 $ 429,735 $45,526(a) $(1,388,559)(b) $ 187,912
Year ended December 31, 1998 82,153 1,071,004 - (51,947)(b) 1,101,210
Year ended December 31, 1997 44,000 38,153 - - 82,153
(a) Recovery of accounts receivable previously written off as uncollectible
(b) Accounts receivable written off as uncollectible
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 2000 HEALTH FITNESS CORPORATION
By /s/ Charles J. B. Mitchell, Jr.
Charles J. B. Mitchell, Jr.
Acting Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Exchange Act, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears above or below constitutes and appoints Charles J. B. Mitchell, Jr. and
Sean Kearns, or either of them, his true and lawful attorneys-in-fact, and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Report, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to
be done by virtue hereof.
Signature Date
/s/ Charles J. B. Mitchell, Jr. Acting Chief Executive Officer
Charles J. B. Mitchell, Jr. (principal executive officer) March 27, 2000
/s/ Sean A. Kearns Vice-President of Finance
Sean A. Kearns (principal financial and
accounting officer) March 27, 2000
/s/ Loren S. Brink
Loren S. Brink Director March 27, 2000
/s/ Charles E. Bidwell
Charles E. Bidwell Director March 27, 2000
/s/ Susan H. DeNuccio
Susan H. DeNuccio Director March 27, 2000
/s/ William T. Simonet.
William T. Simonet, M.D. Director March 27, 2000
/s/ Robert K. Spinner
Robert K. Spinner Director March 27, 2000
/s/ James A. Bernards
James A. Bernards Director March 27, 2000
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-K
Exhibit No. Description
3.1 Articles of Incorporation, as amended, of the Company - incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997
3.2 Restated By-Laws of the Company - incorporated by reference to the
Company's Registration Statement on Form SB-2 No. 33-83784C
4.1 Specimen of Common Stock Certificate - incorporated by reference to the
Company's Registration Statement on Form SB-2 No. 33-83784C
4.2 Form of Secured Convertible Debenture - incorporated by reference to
the Company's Form 10-Q for the quarter ended March 31, 1999
4.3 Extension of Secured Convertible Subordinated Debentures dated as of
October 1, 1999 among the Company and Debenture holders - incorporated
by reference by the Company's Form 10-Q for the quarter ended September
30, 1999
10.1 Standard Office Lease Agreement (Net) dated as of June 13, 1995
covering a portion of the Company's headquarters - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996
10.2 Standard Office Lease Agreement (Net) dated as of September 3, 1997
covering a portion of the Company's headquarters - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997
*10.3 Company's 1995 Stock Option Plan - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995
*10.4 Amendment to Company's 1995 Stock Option Plan - incorporated by
reference to Part II, Item 4 of the Company's Form 10-QSB for the
quarter ended June 30, 1997
10.5 Loan and Security Agreement dated February 17, 1998 among the Company,
the Company's subsidiaries and Madeleine L.L.C. - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997
10.6 Amendment No. 3 to Loan and Security Agreement dated June 26, 1998
among the Company, the Company's subsidiaries and Madeleine L.L.C. -
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998
10.7 Amendment No. 4 to Loan and Security Agreement dated September 10, 1998
among the Company, the Company's subsidiaries and Madeleine L.L.C. -
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998
10.8 Amendment No. 5 to Loan and Security Agreement dated November 2, 1998
among the Company, the Company's subsidiaries and Madeleine L.L.C. -
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998
10.9 Amendment No. 6 to Loan and Security Agreement dated January 8, 1999
among the Company, the Company's subsidiaries and Madeleine L.L.C. -
incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998
10.10 Amendment No. 7 to Loan and Security Agreement dated February 26, 1999
among the Company, the Company's subsidiaries and Abelco Finance L.L.C.
as assignee of Madeleine L.L.C. - incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1998
10.11 Amendment No. 8 to Loan and Security Agreement dated March 12, 1999
among the Company, the Company's subsidiaries and Abelco Finance L.L.C.
as assignee of Madeleine L.L.C.
10.12 Agreement to Purchase Assets, dated as of May 14, 1999, among the
Registrant, certain of its subsidiaries and HealthSouth Corporation -
incorporated by reference to the Company's Current Report on Form 8-K
filed June 1, 1999
10.13 Amendment No. 9 to Loan and Security Agreement dated as of May 10, 1999
among the Company, the Company's subsidiaries and Abelco Finance L.L.C.
as assignee of Madeleine L.L.C. - incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999
10.14 Amendment No. 10 to Loan and Security Agreement dated as of May 24,
1999 among the Company, the Company's subsidiaries and Abelco Finance
L.L.C. as assignee of Madeleine L.L.C. - incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999
10.15 Letter Agreement dated as of June 1, 1999 among the Company, the
Company's subsidiaries and Abelco Finance L.L.C. as assignee of
Madeleine L.L.C. modifying Amendment No. 10 to Loan and Security
Agreement - incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999
10.16 Amendment No. 11 to Loan and Security Agreement dated June 30, 1999
among the Company, the Company's subsidiaries and Abelco Finance L.L.C.
as assignee of Madeleine L.L.C. - incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999
10.17 Amendment No. 12 to Loan and Security Agreement dated July 15, 1999
among the Company, the Company's subsidiaries and Abelco Finance L.L.C.
as assignee of Madeleine L.L.C. - incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999
*10.18 Employment Agreement dated June 30, 1999 between the Company and Loren
S. Brink - incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999
10.19 Retainer Agreement, dated April 7, 1999, between the Company and
Manchester Business Services--incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1999
10.20 Amendment No. 13 to Loan and Security Agreement dated as of September
22, 1999 among the Company, the Company's subsidiaries and Abelco
Finance L.L.C. as assignee of Madeleine L.L.C. - incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999
10.21 Consent and Amendment No. 14 to Loan and Security Agreement dated as of
October 16, 1999 among the Company, the Company's subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C. - incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999
10.22 Amendment No. 15 to Loan and Security Agreement dated as of December
20, 1999 among the Company, the Company's subsidiaries and Abelco
Finance L.L.C. as assignee of Madeleine L.L.C.
10.23 Amendment No. 16 to Loan and Security Agreement dated as of March 15,
2000 among the Company, the Company's subsidiaries and Abelco Finance
L.L.C. as assignee of Madeleine L.L.C.
21.1 Subsidiaries
23.1 Consent of Grant Thornton LLP
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on Signature Page)
27.1 Financial Data Schedule for year ended December 31, 1999 (in electronic
version only)
*Indicates management contract or compensatory plan or arrangement.