Back to GetFilings.com
1
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, 2000
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 Identification No.)
incorporation or organization)
3500 W. 80TH STREET, SUITE 130, BLOOMINGTON, MINNESOTA, 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (952) 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 21, 2001, 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 approximately $5,603,000.
As of March 21, 2001, 12,165,250 shares of the registrant's common stock,
$.01 par value, were outstanding.
1
2
ITEM 1. BUSINESS
OVERVIEW
Health Fitness Corporation, and its wholly-owned subsidiaries (collectively, the
"Company"), provides fitness and wellness management services and products to
major corporations, hospitals, communities and universities primarily located in
the United States and Canada. Additionally, the Company provides health related
programming, and on-site physical therapy services. The Company's executive
offices are located at 3500 W. 80th Street, Suite 130, Bloomington, Minnesota
55431 and its telephone number is (952) 831-6830.
Effective on January 1, 2001, the Company sold its International Fitness Club
Network (IFCN) line of business, which organized and maintained a network of
commercial fitness and health clubs and marketed memberships in such clubs to
employees and insurance companies. The IFCN line of business accounted for
approximately $656,000 in revenues and $ 612,000 in direct costs during 2000.
The assets and liabilities of the IFCN line of business remained on the
Company's consolidated balance sheet at December 31, 2000.
FITNESS AND WELLNESS SERVICES AND PRODUCTS
Fitness Center Management. The Company currently is under contract to manage 140
corporate and 12 hospital, community or university based 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, and fitness
benefits in particular, are considered high priorities as potential employees
evaluate job prospects with a given employer. Hospitals invest in fitness
centers to create a new revenue source that is not subject to insurance or
government reimbursements and to address community health initiatives. The
Company's sales staff markets to corporations, hospitals, communities and
universities 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 a fee, for design services provided to a client 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.
On-Site Physical Therapy. The Company provides "on-site" preventive and
rehabilitative physical therapy services at 13 corporate fitness centers in
California, Georgia and Kentucky.
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 line of business; and
4) sold The Preferred Companies (PTPA) managed care network line of business.
The physical therapy clinics business segment, and the ProSource fitness
equipment business segment were classified as discontinued operations. Revenues
and direct expenses of $1,411,000 and $1,305,000, from the divested lines of
business were included in ongoing operations in the Company's December 31, 1999
financial statements. While certain assets and liabilities related to the
discontinued operations
2
3
remained on the balance sheet at December 31, 2000, no new revenues or expenses
are being generated from any of these sold or closed business segments.
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
lines of business and assisted with the design and execution of the Company's
re-engineering effort. Currently, while the Company no longer retains Manchester
for the full scope of services mentioned previously, the Company has retained
Manchester to assist with certain aspects of the Company's business strategies.
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 line of business. 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, 2000, the Company had 473 full-time and 1,004 part-time
employees engaged in the Company's operations. The Company's part-time employees
are primarily engaged in the staffing of the fitness centers that the Company
operates for its clients. The Company currently does not have a collective
bargaining relationship with its employees and management believes its
relationship with employees is good.
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
3
4
The Company maintains general premises liability insurance of $6,000,000 per
occurrence and $6,000,000 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, 2001 and July, 2002. The Company's monthly base rental expense for this
office space is approximately $10,581, plus taxes, insurance and other related
operating costs. The Company believes that its facilities are adequate for its
foreseeable needs. The Company's discontinued operations includes a lease that
expires in October, 2002 with a monthly base rent of approximately $4,005.
ITEM 3. LEGAL PROCEEDINGS
In April 2000, HealthSouth Corporation filed a lawsuit against the Company and
two former employees in U.S. District Court in Minnesota arising out of
HealthSouth's purchase of several rehabilitation and physical therapy clinics
from the Company in May 1999. HealthSouth claims that the two former employees
improperly diverted business away from the purchased clinics. HealthSouth seeks
damages in excess of $1,000,000 as a refund of a portion of the purchase price
paid by it for the clinics. The Company believes that HealthSouth's claims are
without merit and intends to vigorously defend the claims and to assert any
counterclaims that may be appropriate.
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, 2000.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In April 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.
4
5
Calendar Year 2000: Low High
--- ----
Fourth quarter $.28 $.52
Third quarter .36 .52
Second quarter .39 1.25
First quarter .56 1.78
Calendar Year 1999: Low High
--- ----
Fourth quarter $.28 $.75
Third quarter .31 .56
Second quarter .31 .59
First quarter .31 .69
At March 21, 2001, the published high and low sale prices for the Company's
common stock were $0.6562 and $0.5469 per share respectively. At March 21, 2001,
there were issued and outstanding 12,165,250 shares of common stock of the
Company held by 413 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 of dividends, if any, is
subject to the discretion of the Board of Directors, and 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.
Effective December 13, 2000, the Company issued 10,000 shares of common stock,
valued at $2969, without registration under the Securities Act to an employee
in connection with resolving claims under an Employment Agreement. The Company
claimed an exemption from registration under the Securities Act of 1933 by
virtue of Section 4(2) thereof. The certificate representing the shares bears a
restrictive securities legend.
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 each of the
five years in the period ended December 31, 2000, has been derived from the
Company's Audited Consolidated Financial Statements. Data for 1996 and 1997 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,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
REVENUE $ 26,191,000 $ 26,195,000 $ 25,643,000 $ 21,480,000 $ 16,500,000
INCOME (LOSS) FROM CONTINUING OPERATIONS 930,000 (1,402,000) (941,000) (943,000) 146,000
INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Basic 0.08 (0.12) (0.08) (0.12) 0.02
Diluted 0.07 (0.12) (0.08) (0.12) 0.02
BALANCE SHEET DATA (AT DECEMBER 31):
TOTAL ASSETS 10,399,000 11,324,000 18,635,000 23,732,000 18,179,000
LONG-TERM DEBT 25,000 424,000 862,000 5,785,000 657,000
SHAREHOLDERS' EQUITY 4,195,000 3,198,000 5,844,000 10,148,000 9,892,000
5
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Health Fitness Corporation provides fitness and wellness management services and
products to corporations, hospitals, communities, and universities primarily
located in the United States and Canada. Fitness center based services include
the development, marketing, and management of corporate, hospital, and
community-based fitness centers, health related programming, and on-site
physical therapy. While consumers of the services are typically corporate
employees and hospital customers, revenues are generated almost exclusively
through business to business, contractual relationships. Effective January 1,
2001, the Company sold its IFCN line of business, which maintained and sold
memberships in a network of independently owned and operated commercial fitness
and health clubs.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
REVENUE
For 2000, total revenues from continuing operations of $26,191,000 remained
constant with revenues of $26,195,000 for 1999. Revenues decreased due to the
sale of the Isernhagen and PTPA product lines in the third quarter of 1999 but
were offset by increases in the corporate, hospital and community fitness center
lines of business.
GROSS PROFIT
For 2000, gross profit increased $342,000 to $6,386,000 or 24.4% from $6,044,000
or 23.1% for 1999. Increases in gross profit in the corporate fitness center,
IFCN and consulting lines of business were partially offset by the decrease in
gross profit due to the sale of the PTPA and Isernhagen lines of business in
1999. The increase in gross margin at the corporate fitness center line of
business was due to the elimination of lower margin management contracts. The
increase in gross margin at IFCN and the consulting lines of business was
entirely due to reductions in the cost of revenue in 2000 as compared to 1999.
OPERATING EXPENSES AND OPERATING INCOME (LOSS)
Operating expenses decreased $1,278,000 to $4,738,000 for 2000, and were 18.1%
of sales as compared to $6,016,000 or 23.0% of sales in 1999. Operating income
for 2000 increased $1,621,000 to $1,649,000 as compared to $28,000 in 1999.
Salaries and benefits decreased $214,000 to $1,840,000 due to staffing
reductions. Selling, general and administrative costs decreased by $696,000 to
$2,518,000, or 9.6% of sales as compared to $3,214,000 or 12.3% of sales in
1999. The decrease was primarily due to the achievement of targeted expense
reductions, the reduction of bad debt expenses, the elimination of amortization
relating to the PTPA and Isernhagen lines of business which were sold in 1999,
and software replacement expenses recorded in 1999. Re-engineering expenses
decreased $368,000 to $380,000 from $748,000 for the same period in 1999. The
decrease is due to the lack of noncompete expenses that were recorded in 1999
and a decrease in re-engineering related contract services, partially offset by
merger related due diligence expenses associated with the terminated Healthtrax
merger in 2000.
INTEREST EXPENSE
Interest expense for 2000, which includes amortization of financing costs, was
$682,000 or 2.6% as compared to $1,090,000 or 4.1% in 1999. The decrease is due
to lower average borrowings, lower interest rates and fees, and lower financing
costs to be amortized in 2000 as compared to 1999.
6
7
OTHER INCOME (EXPENSE)
Other income (expense) decreased $266,000 to income of $12,000 from an expense
of $254,000 in 1999, primarily due to a $356,000 loss associated with the
divestiture of the PTPA and Isernhagen lines of business in 1999.
INCOME TAXES
Income taxes were calculated based on management's estimate of the Company's
effective tax rate. Income tax expense represents minimum state income taxes as
well as federal taxes due because of alternative minimum tax calculations.
Current income tax expense in 2000 has been offset by utilization of net
operating losses. Income tax benefits in 1999 have been offset by a valuation
allowance.
INCOME (LOSS) FROM CONTINUING OPERATIONS
As a result of the above, the Company's income from continuing operations
increased $2,332,000 to $930,000 in 2000 compared to a loss of $1,402,000 in
1999.
DISCONTINUED OPERATIONS
There were no operating losses associated with discontinued operations recorded
in 2000.
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 revenues of $25,643,000 for 1998. The increase was
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 centers and IFCN
lines of business were entirely offset by gross profit declines in consulting,
PTPA and Isernhagen lines of business. Improved margins in the corporate and
hospital fitness centers 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 $6,368,000 or 24.8% of sales for 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 payments
of approximately $142,000 was incurred for eliminated positions during 1999.
Further, the Company incurred $748,000 in re-engineering costs related to the
Company's turn around process. 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 for 1999, which includes financing costs, was $1,090,000 as
compared to $667,000 for 1998. The increase was 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.
7
8
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 for 1999 included a loss of $356,000
associated with the divestiture of the PTPA and Isernhagen lines of business.
INCOME TAXES
Income taxes were calculated based on management's estimate of the Company's
effective tax rate and represent primarily state income taxes. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit decreased to ($2,392,000) in 2000 from
($3,836,000) in 1999, largely due to improved accounts receivable collections,
as well as the reduction of accounts payable and other obligations.
Until July 2000, the Company had a revolving credit facility with Abelco Finance
L.L.C. and other affiliates of Cerberus Partners, L.P. (the "Lender"). The
Company's ability to draw down on the facility was tied to the borrowing base
formula which was based upon the Company's EBITDA (defined as earnings before
interest, taxes, depreciation and amortization), revenues, or collections,
whichever is less. The credit facility was secured by all of the Company's
assets, including its accounts receivable, inventory, equipment, and general
intangibles and was guaranteed in part by the Company's founder and former Chief
Executive Officer. The advances under the credit facility accrued interest at a
rate equal to 7.0% in excess of Chase Manhattan's prime rate, with a minimum
rate of 15.5%. The Company was 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 (2.5%) was added to the principal balance of the
facility, and accrued interest until paid. The credit facility was due September
2000. The credit facility was subject to various affirmative and negative
covenants customary in transactions of this type, including a requirement to
maintain certain financial ratios and limitations on the Company's ability to
incur additional indebtedness, to make acquisitions outside of certain
established parameters, or to make dividend distributions.
In July 2000, the Company entered into a credit agreement with Coast Business
Credit for a $5.0 million working capital facility. Interest on the loan is at
the prime rate plus 3.0%, with future reductions based on the achievement of
certain net worth levels after March 31, 2001. Available credit under the credit
facility is based upon certain profitability and cash collection multiples.
Additionally, the Company is subject to certain financial covenants that measure
net worth, interest coverage and debt capacity. The initial proceeds of the loan
were used to pay off existing loans with Abelco and with the holders of certain
8
9
subordinated debentures. The facility expires in July 2003. The Company is in
compliance with all of the financial covenants in effect on December 31, 2000.
Sources of capital to meet future obligations are anticipated to provided by
cash generated through operations and the Company's new revolving credit
facility. The Company does not believe that inflation has had a significant
impact on the results of its operations.
OUTLOOK
The year ended December 31, 2000 was highly productive for the Company in
improving financial condition and restoring profitability. These improvements
were gained through refinancing of the Company's revolving credit facility and
aggressive cost cutting measures, including the downsizing of corporate staff
and general overhead reductions.
Management believes that the Company's sale of the IFCN line of business
effective on January 1, 2001, will enable the Company to focus more effectively
on it's core business and that the foregoing expense reductions have better
positioned the Company to further develop its corporate, hospital, and community
based fitness center management. Management believes that major corporations
will continue to make significant investments into employee fitness and
wellness. 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.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Such "forward-looking" information is included
in this Form 10-K, including the MD&A section, as well as in the Company's
Annual Report to be filed with the Securities and Exchange Commission, and in
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).
Forward-looking statements include all statements based on future expectations
and specifically include statements relating to improving margins, focus on core
businesses following the sale of the IFCN line of business, growth of the market
for corporate, hospital, and community based 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, leverage
and debt service (including sensitivity to fluctuations in interest rates)
continued expansion of corporate, hospital, and community fitness center
opportunities, and availability of sufficient working capital.
The following risks and uncertainties also should be noted:
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
its 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
prevent the Company's senior secured lender from taking material adverse action
against the Company and its collateral.
9
10
POTENTIAL DEPRESSIVE EFFECT ON PRICE OF COMMON STOCK ARISING FROM EXERCISE AND
SALE OF EXISTING CONVERTIBLE SECURITIES:
At December 31, 2000, the Company had outstanding stock options and stock
purchase warrants (not including the shares issuable under any contingent
grants, earn-out agreements or any future acquisition) to purchase an aggregate
2,586,402 shares of common stock. The exercise 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 of such outstanding stock options and stock purchase warrants 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.
10
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company as of December 31, 2000 and
1999, and the related Consolidated Statements of Operations, Stockholders'
Equity, and Cash Flows for each of the three years in the period ended December
31, 2000, and the notes thereto have been audited by Grant Thornton LLP,
independent certified public accountants.
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... F-1
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS................................ F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY...................... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS................................ F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... F-6
11
12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Health Fitness
Corporation and subsidiaries as of December 31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. 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 of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Fitness
Corporation and subsidiaries as of December 31, 2000 and 1999 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
We have also audited Schedule II of Health Fitness Corporation and subsidiaries
for each of the three years in the period ended December 31, 2000. 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 23, 2001
F-1
13
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- ---------------------------
2000 1999
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 472,930 $ 139,852
Trade and other accounts receivable, less allowance
for doubtful accounts of $262,600 and $187,900 at
December 31, 2000 and 1999 3,266,277 3,406,552
Trade and other notes receivable -- 308,841
Prepaid expenses and other 47,789 10,939
----------- -----------
Total current assets 3,786,996 3,866,184
PROPERTY AND EQUIPMENT, net 257,947 554,885
OTHER ASSETS
Goodwill, less accumulated amortization of $2,183,400
and $1,777,600 at December 31, 2000 and 1999 5,783,550 6,163,998
Intangible assets, less accumulated amortization of $551,900
and $359,100 at December 31, 2000 and 1999 493,947 317,714
Trade and other notes receivable 73,380 340,731
Other 3,448 80,043
----------- -----------
$10,399,268 $11,323,555
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 2,685,802 $ 2,862,128
Current maturities of long-term obligations 101,850 341,133
Subordinated notes payable -- 115,000
Trade accounts payable 357,117 672,322
Accrued salaries, wages, and payroll taxes 927,193 924,135
Accrued earn-out -- 186,425
Other accrued liabilities 736,049 407,997
Deferred revenue 1,264,674 1,381,752
Net liabilities of discontinued operations 106,734 810,987
----------- -----------
Total current liabilities 6,179,419 7,701,879
LONG-TERM OBLIGATIONS, less current maturities 24,954 423,548
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $0.01 par value; 25,000,000 shares authorized;
12,165,250 and 12,112,015 shares issued and
outstanding at December 31, 2000 and 1999 121,653 121,120
Additional paid-in capital 16,921,503 16,855,438
Accumulated deficit (12,848,261) (13,778,430)
----------- -----------
4,194,895 3,198,128
$10,399,268 $11,323,555
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
14
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------
2000 1999 1998
------------- -------------- ---------------
REVENUE $ 26,190,671 $ 26,195,110 $ 25,642,995
COST OF REVENUE 19,804,356 20,151,180 19,608,792
------------- ------------- -------------
GROSS PROFIT 6,386,315 6,043,930 6,034,203
OPERATING EXPENSES
Salaries 1,840,436 2,053,509 1,985,495
Selling, general, and administrative 2,517,634 3,214,160 4,382,991
Re-engineering 380,103 748,473 --
------------- ------------- ------------
Total operating expenses 4,738,173 6,016,142 6,368,486
------------- ------------- ------------
OPERATING INCOME (LOSS) 1,648,142 27,788 (334,283)
OTHER INCOME (EXPENSE)
Interest expense (681,847) (1,089,904) (666,935)
Other, net 12,321 (253,568) 109,904
------------- ------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 978,616 (1,315,684) (891,314)
INCOME TAXES 48,447 86,220 50,000
------------- ------------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 930,169 (1,401,904) (941,314)
DISCONTINUED OPERATIONS
Loss from operations of Physical Therapy Clinic segment and
Equipment segment -- -- (1,893,921)
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)
------------- ------------- ------------
NET INCOME (LOSS) $ 930,169 $ (2,826,904) $ (8,109,147)
============= ============= ============
NET INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS
Basic $ 0.08 $ (0.12) $ (0.08)
Diluted 0.07 (0.12) (0.08)
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS
Basic $ -- $ (0.12) $ (0.64)
Diluted -- (0.12) (0.64)
NET INCOME (LOSS) PER SHARE:
Basic $ 0.08 $ (0.24) $ (0.72)
Diluted 0.07 (0.24) (0.72)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 12,133,085 11,982,610 11,319,295
Diluted 12,451,095 11,982,610 11,319,295
The accompanying notes are an integral part of the financial statements.
F-3
15
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ------------------------------------------------
COMMON STOCK ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
----------- ---------- ------------ ------------
BALANCE AT JANUARY 1, 1998 8,136,828 $ 81,368 $12,976,680 $ (2,842,379)
Issuance of common stock in
connection with acquisitions 230,000 2,300 405,200 --
Issuance of common stock in
connection with credit facility 312,497 3,125 340,622 --
Stock options exercised 32,000 320 39,680 --
Warrants exercised 80,000 800 99,200 --
Issuance of common stock in
connection with private placement 3,000,000 30,000 2,755,074 --
Issuance of common stock through
Employee Stock Purchase Plan 93,088 931 108,670 --
Advances on notes receivable -- -- -- --
Payments received on notes receivable -- -- -- --
Net loss -- -- -- (8,109,147)
---------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1998 11,884,413 118,844 16,725,126 (10,951,526)
Issuance of common stock
through earnout provisions 128,465 1,285 77,576 --
Issuance of common stock through
Employee Stock Purchase Plan 99,137 991 52,736 --
Advances on notes receivable -- -- -- --
Payments received on notes receivable -- -- -- --
Net loss -- -- -- (2,826,904)
---------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 1999 12,112,015 121,120 16,855,438 (13,778,430)
Issuance of common stock in
connection with contract services
and incentive compensation 9,500 95 6,780 --
Issuance of common stock through
Employee Stock Purchase Plan 41,672 417 12,054 --
Issuance of common stock through
earnout provisions 2,063 21 8,231 --
Issuance of warrants in connection
with professional services rendered -- -- 39,000 --
Net income -- -- -- 930,169
---------- -------- ----------- ------------
BALANCE AT DECEMBER 31, 2000 12,165,250 $121,653 $16,921,503 $(12,848,261)
========== ======== =========== ============
STOCKHOLDER
NOTE AND TOTAL
INTEREST STOCKHOLDERS'
RECEIVABLE EQUITY
------------ --------------
BALANCE AT JANUARY 1, 1998 $ (67,229) $ 10,148,440
Issuance of common stock in
connection with acquisitions -- 407,500
Issuance of common stock in
connection with credit facility -- 343,747
Stock options exercised -- 40,000
Warrants exercised -- 100,000
Issuance of common stock in
connection with private placement -- 2,785,074
Issuance of common stock through
Employee Stock Purchase Plan -- 109,601
Advances on notes receivable (3,533) (3,533)
Payments received on notes receivable 22,400 22,400
Net loss -- (8,109,147)
----------- ------------
BALANCE AT DECEMBER 31, 1998 (48,362) 5,844,082
Issuance of common stock
through earnout provisions -- 78,861
Issuance of common stock through
Employee Stock Purchase Plan -- 53,727
Advances on notes receivable (4,753) (4,753)
Payments received on notes receivable 53,115 53,115
Net loss -- (2,826,904)
----------- ------------
BALANCE AT DECEMBER 31, 1999 -- 3,198,128
Issuance of common stock in
connection with contract services
and incentive compensation -- 6,875
Issuance of common stock through
Employee Stock Purchase Plan -- 12,471
Issuance of common stock through
earnout provisions -- 8,252
Issuance of warrants in connection
with professional services rendered -- 39,000
Net income -- 930,169
----------- ------------
BALANCE AT DECEMBER 31, 2000 $ -- $ 4,194,895
=========== ============
See notes to consolidated financial statements.
F-4
16
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ---------------------------------------------
2000 1999 1998
------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss ) $ 930,169 $ (2,826,904) $ (8,109,147)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Common stock and warrants issued for services and compensation 45,875 -- --
Depreciation and amortization 826,543 980,652 930,572
Amortization of financing costs 58,166 585,260 836,082
Loss on disposal of assets 1,420 356,195 --
Write-down of assets 25,000 255,000 332,060
Discontinued operations (613,892) 931,460 5,510,944
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable 140,275 335,523 630,327
Inventories -- (816) (3,003)
Prepaid expenses and other (36,850) 21,343 472,374
Other assets 76,591 46,658 301,276
Trade accounts payable (315,669) (320,034) (934,667)
Accrued liabilities and other 301,574 (228,113) (1,372,939)
Deferred revenue (117,078) 238,557 (261,266)
----------- ------------ ------------
Net cash provided by (used in) operating activities 1,322,124 374,781 (1,667,387)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (48,217) (6,397) (94,413)
Net proceeds from sale of property 2,700 1,316,613 --
Payments for acquisitions, net of liabilities assumed and cash acquired -- -- (196,263)
Payments in connection with earn-out provisions (203,538) (286,049) (644,933)
Advances made for notes receivable -- -- (1,170,398)
Net change in notes receivable 168,026 363,590 418,675
Payment for non-compete agreement (90,000) -- --
Discontinued operations -- 2,751,967 (658,941)
----------- ------------ ------------
Net cash provided by (used in) investing activities (171,029) 4,139,724 (2,346,273)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and notes payable 30,326,170 34,134,335 40,626,690
Repayments of line of credit and notes payable (30,502,496) (38,211,900) (33,686,998)
Proceeds from (repayments) issuance of subordinated debt (115,000) 115,000 --
Proceeds from long term debt -- -- 1,456,384
Repayment of long term debt (229,711) (417,018) (6,602,662)
Payment of financing costs (248,996) -- (1,394,020)
Proceeds from the issuance of common stock 12,471 53,727 3,378,422
Discontinued operations (60,455) (126,757) 164,936
Other -- 48,362 18,867
------------ ------------ ------------
Net cash provided by (used in) financing activities (818,017) (4,404,251) 3,961,619
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 333,078 110,254 (52,041)
CASH AT BEGINNING OF YEAR 139,852 29,598 81,639
------------ ------------ ------------
CASH AT END OF YEAR $ 472,930 $ 139,852 $ 29,598
============ ============ ============
See notes to consolidated financial statements.
F-5
17
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ---------------------------------------------
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and its wholly owned
subsidiaries (the "Company") provides fitness and wellness
management services and products to major corporations,
hospitals, communities and universities primarily located in the
United States and Canada. Fitness and wellness management
services include the development, marketing and management of
corporate, hospital, and community based fitness centers, injury
prevention, work-injury management consulting, and on-site
physical therapy.
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 - 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 8.76% to
9%. The Company grants credit to customers in the ordinary course
of business, but generally does not require collateral or any
other security to support amounts due. Management performs
ongoing credit evaluations of customers. The Company maintains
allowances for potential credit losses which, when realized, have
been within management's expectations. Concentrations of credit
risk with respect to trade receivables are limited due to the
large number of customers and their geographic dispersion.
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 on contracting third-party payor contracts.
Accounts receivable relating to deferred revenue were $1,074,598
and $1,060,745 at December 31, 2000 and 1999.
Revenue Recognition - Revenue, except from contracting
third-party payor contracts, is recognized at the time the
service is provided. Revenue from contracting third-party payor
contracts is recognized over the contract period.
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 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 are amortized on a straight-line basis
over 15 or 20 years. 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.
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.
F-6
18
Intangible Assets -- The Company's intangible assets include
noncompete agreements, deferred financing costs, trade names and
contracts related to businesses acquired. Noncompete agreements
consist of agreements with certain individuals which cover
periods of two to seven years and prohibit the individuals from
directly or indirectly competing with the Company and are
amortized over the term of the noncompete agreement. Deferred
financing costs are amortized on a straight line method over the
term of the credit agreement. Contracts consist of agreements to
provide rehabilitative services on behalf of other health care
providers for terms of two to three years. The values assigned by
the Company to trade names and contracts are based on independent
appraisals and are amortized on a straight-line basis over 15
years for trademarks and 2 or 3 years for contracts.
Income (Loss) Per Common Share -- Basic income (loss) per share
is computed by dividing income (loss) by the weighted average
number of common shares outstanding. Diluted income (loss) per
share is computed by dividing income (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.
Common stock options and warrants to purchase 2,103,902 shares of
common stock with a weighted average exercise price of $2.54 were
excluded from the 2000 diluted computation because they are
anti-dilutive.
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, 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.
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.
Fair Values of Financial Instruments -- Due to their short-term
nature, the carrying value of our current financial assets and
liabilities approximates their fair values. The fair value of our
borrowings, if recalculated based on current interest rates,
would not significantly differ from the recorded amounts.
Use of Estimates -- Preparing consolidated financial statements
in conformity with accounting principles generally accepted in
the United States of America 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.
2. SALE OF ASSETS
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. The Company received $1,550,000 and recorded a loss on
sale of $356,195.
F-7
19
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 $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
------ ------
Revenues $ 2,465,700 $ 5,727,600
Interest expense 560,200 1,227,100
Net loss (2,243,500) (3,118,575)
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 totaling $95,000. The loss on
disposition was $536,000.
Information relating to the equipment division for the years
ending December 31 is as follows:
1999 1998
------ ------
Revenues $1,769,300 $7,293,100
Interest expense 100,000 198,400
Net income (loss) (896,900) (780,000)
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
clinics 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.
F-8
20
The components of net liabilities of discontinued operations
included in the Company's consolidated balance sheets as of
December 31 are as follows:
2000 1999
------ ------
ASSETS
Accounts receivable $ 135,000 $ 217,554
Property and equipment, net 50,000 50,000
--------- ----------
185,000 267,554
LIABILITIES
Accounts payable (1,295) (307,512)
Accrued expenses (290,439) (771,029)
--------- ----------
(291,734) (1,078,541)
--------- ----------
$(106,734) $(810,987)
========= ==========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
Useful Life 2000 1999
----------- ------ ------
Leasehold improvements Term of lease $ 88,057 $ 88,057
Office equipment 3-7 years 837,139 822,479
Software 3 years 172,137 163,581
Health care equipment 1-5 years 379,835 392,025
--------- ----------
1,477,168 1,466,142
Less accumulated depreciation and amortization 1,219,221 911,257
--------- ----------
$ 257,947 $ 554,885
========= ==========
5. FINANCING
Note Payable -- On July 14, 2000, the Company entered into a
credit agreement (the credit agreement) that provides for maximum
borrowings of the lessor of $5.0 million or an amount as defined
in the agreement based upon levels of eligible collections or
EBITDA (Defined as earnings before interest, taxes, depreciation
and amortization. Interest on outstanding borrowings is computed
at the prime rate plus 3.0% with a minimum rate of 9.0%
(effective rate of 12.5% at December 31, 2000). The Company is
required to pay minimum monthly interest equal to the effective
interest rate times $2.5 million.
The Company is also required to pay a monthly servicing fee of
$2,000 and loan fees of $150,000, of which $50,000 was paid on
July 21, 2000, the remaining $50,000 installments become due on
July 14, 2001 and 2002, respectively. At December 31, 2000, the
Company had approximately $1.2 million available under the credit
agreement. The credit agreement expires on July 14, 2003.
Borrowings under the credit agreement are collateralized by
substantially all of the Company's assets. The credit agreement
contains various restrictive covenants relating to tangible net
worth, the debt service coverage ratio and the quarterly measure
of debt to EBITDA.
F-9
21
At December 31, 1999, the Company maintained a credit agreement
that provided for maximum borrowings of $3.8 million as defined.
Interest on outstanding borrowings was 15.5% at December 31,
1999. At July 21, 2000, the Company terminated the agreement.
Subordinated Notes Payable -- During 1999, the Company had
outstanding $115,000 of secured convertible subordinated
debentures to three accredited investors. The debentures
calculated interest at the rate of 16% per year. For each $4.00
principal amount of debentures purchased, the purchaser received
a warrant to purchase one share of Company's common stock at
$1.00 per share, exercisable for a period of four years. The
debentures were paid in their entirety in 2000.
Long-Term Obligations -- Long-term obligations consists of the
following at December 31:
2000 1999
------ ------
Present value of capital lease obligations, interest from 12.77%
to 21.30% due through March 2002,
collateralized by various property and equipment $126,804 $238,203
Notes payable paid in full or assigned during 2000 -- 526,478
-------- --------
126,804 764,681
Less current maturities 101,850 341,133
-------- --------
$ 24,954 $423,548
======== ========
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 leases 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 $213,000, $245,000 and
$208,000 for the years ended December 31, 2000, 1999 and 1998.
Minimum rent payments due under operating leases are
approximately as follows:
Years ending December 31:
2001 $150,000
2002 84,000
2003 5,700
Independent Contractor -- An independent contractor, who was an
executive officer of the Company and 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 these
services provided totaled $98,729 and $328,172 for the years
ended December 31, 1999 and 1998.
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
F-10
22
the age of 18 and have completed one month 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 approximately $103,000, $105,000 and
$141,000 for the years ended December 31, 2000, 1999 and 1998.
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.
In April 2000, HealthSouth Corporation filed a lawsuit against
the Company and two former employees in U.S. District Court in
Minnesota arising out of HealthSouth's purchase of several
rehabilitation and physical therapy clinics from the Company in
May 1999. HealthSouth claims that the two former employees
improperly diverted business away from the purchased clinics.
HealthSouth seeks damages in excess of $1,000,000 as a refund of
a portion of the purchase price paid by it for the clinics. The
Company believes that HealthSouth's claims are without merit and
intends to vigorously defend the claims and to assert any
counterclaims that may be appropriate.
7. EQUITY TRANSACTIONS
Issuance of Common Stock -- During 2000, the Company issued 9,500
shares of common stock in connection with contract services and
incentive compensation to employees.
During 1999, the Company issued 120,000 shares of common stock in
connection with a 1997 acquisition in accordance with the
purchase agreement. The stock was issued at the same time the
operation was sold as discussed in Note 2.
During 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. The Company also
issued warrants to purchase 300,000 shares of common stock to the
selling agents. The selling agents' warrants are exercisable
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.
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.
F-11
23
A summary of the stock option activity is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding at January 1, 1998 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
Granted 315,000 0.30
Forfeited (330,000) 2.46
---------- -----
Outstanding at December 31, 2000 968,905 $2.15
========== =====
Options exercisable at December 31:
2000 553,904 $2.99
1999 723,177 3.02
1998 835,897 2.85
The following table summarizes information about stock options at
December 31, 2000:
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
--------------- ------------- ---------------- ------------------ ------------ -----------
$0.30 - $0.44 320,000 5.63 $ 0.30 4,999 $ 0.42
0.50 - 0.53 16,500 2.27 0.51 16,500 0.51
2.25 - 3.00 527,405 4.38 2.89 427,405 2.87
3.62 - 4.00 105,000 2.47 3.98 105,000 3.98
------- -------
968,905 4.55 $ 2.15 553,904 $ 2.99
======= =======
Had the fair value method been used for valuing options granted
in 2000, 1999 and 1998, the Company's net income (loss) and net
income (loss) per share would have changed to the pro forma
amounts indicated below:
2000 1999 1998
------ ------ ------
Net income (loss) $758,350 $(3,015,828) $(8,931,567)
Net income (loss) Per Share:
Basic $0.06 $(0.25) $(0.79)
Diluted $0.05 $(0.25) $(0.79)
F-12
24
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:
2000 1999 1998
------ ------ ------
Dividend yield None None None
Expected volatility 78.6% 72.1% 55.0%
Expected life of option 5 years 1 to 5 years 4 or 10 years
Risk-free interest rate 6.18% 6.31% 5.73%
Fair value of options on grant date $0.21 $0.21 $0.44
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 up to
350,000 shares of the Company's common stock at 90% of the fair
market value, as defined. During 2000, 1999 and 1998, the Company
issued 41,672, 99,137 and 93,088 shares, respectively, under the
Stock Purchase Plan. Fair value disclosures have not been made
for shares under the Employee Stock Purchase Plan as such values
are immaterial.
Warrants -- The Company has outstanding warrants to directors, selling agents,
and consultants in consideration for services performed and in connection with
the issuance of debt.
During 2000, the Company issued warrants to purchase 150,000 shares of common
stock in connection with professional services rendered to the Company during
the year.
A summary of the stock warrants activity is as follows:
Exercise
Number of Price
Shares Per Share
--------- -------------
Outstanding at January 1, 1998 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
Granted 198,316 0.30 - 3.00
Forfeited (397,133) 2.50 - 4.00
---------
Outstanding at December 31, 2000 1,617,497 0.30 - 4.00
=========
Warrants exercisable at year-end:
2000 1,617,497 0.30 - 4.00
1999 1,816,314 1.00 - 4.00
1998 2,094,964 1.65 - 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.
F-13
25
8. INCOME TAXES
A reconciliation between taxes computed at the expected federal income
tax rate and the effective tax rate for the years ended December 31 is
as follows:
2000 1999 1998
------ ------ ------
Tax benefit computed at statutory rates $ 316,300 $(932,000) $(320,000)
State tax benefit, net of federal effect 32,000 56,900 (10,000)
Nondeductible goodwill amortization 159,300 200,000 190,000
Other (11,653) 95,320 20,000
Change in valuation allowance (447,500) 666,000 170,000
--------- --------- ---------
$ 48,447 $ 86,220 $ 50,000
========= ========= =========
At December 31, 2000, the Company had approximately $9,574,000 of
federal and state operating loss carryforwards. The carryforwards
expire from 2004 to 2019.
The components of deferred tax assets (liabilities) at December 31
consist of the following:
2000 1999 1998
------ ------ ------
Current:
Accounts and notes receivable $ 153,100 $ 150,000 $ 690,000
Accrued employee benefits 85,000 80,000 160,000
Tax accounting change adjustment (119,700) (120,000) (120,000)
Reserve for discontinued operations -- 300,000 1,310,000
----------- ----------- -----------
Net current asset 118,400 410,000 2,040,000
Noncurrent:
Tax accounting change adjustment -- (120,000) (240,000)
Difference between tax and book depreciation
and amortization 58,400 (115,000) (150,000)
Tax loss carryforwards 3,505,300 3,981,000 1,840,000
Other 56,400 30,000 30,000
----------- ---------- -----------
Net non-current asset 3,620,100 3,776,000 1,480,000
----------- ---------- -----------
3,738,500 4,186,000 3,520,000
Less valuation allowance (3,738,500) (4,186,000) (3,520,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
F-14
26
9. SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information and noncash investing and financing
activities for the years ended December 31, is as follows:
2000 1999 1998
------ ------ ------
Cash paid for interest $664,584 $1,155,989 $1,205,192
Issuance of common stock in connection with
acquisitions -- 78,861 407,500
Debt assumed by company through acquisitions -- -- 165,159
Assignment of note payable and note receivable
to a third party 408,166 -- --
10. SUBSEQUENT EVENT
On January 1, 2001, the Company sold its subsidiary, International
Fitness Club Network (IFCN). The subsidiary was 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 Company received $425,000 and recorded a gain
on sale of $234,645.
F-15
27
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended
------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- --------------- ----------------- ----------------
2000
Revenue $ 6,738,891 $ 6,284,961 $ 6,495,863 $ 6,670,956
Gross profit 1,794,814 1,535,648 1,504,588 1,551,265
Net income 427,561 202,787 77,868 221,953
Net income per share
Basic $ 0.04 $ 0.02 $ 0.01 $ 0.01
Diluted 0.03 0.02 0.01 0.01
Weighted average common shares outstanding
Basic 12,121,756 12,139,906 12,272,792 12,274,857
Diluted 12,523,255 12,541,911 12,273,301 12,419,531
1999
Revenue $ 6,947,658 $ 6,350,508 $ 6,467,158 $ 6,429,786
Gross profit 1,765,563 1,337,126 1,484,687 1,456,554
Income (loss) from continuing operations 273,059 (586,869) (941,060) (147,034)
Loss from discontinued operations (1,425,000) -- -- --
Net loss (1,151,941) (586,869) (941,060) (147,034)
Net income (loss) per share from continuing operations
Basic $ 0.02 $ (0.05) $ (0.08) $ (0.01)
Diluted 0.02 (0.05) (0.08) (0.01)
Net loss per share from discontinuing operations
Basic $ (0.12) $ -- $ -- $ --
Diluted (0.12) -- -- --
Net income (loss) per share
Basic $ (0.10) $ (0.05) $ (0.08) $ (0.01)
Diluted (0.10) (0.05) (0.08) (0.01)
Weighted average common shares outstanding
Basic 11,884,413 11,949,383 11,982,132 12,112,015
Diluted 11,884,413 11,949,383 11,982,132 12,112,015
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
F-16
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Position
Jerry V. Noyce 56 President, Chief Executive Officer and
Director
Wesley W. Winnekins 39 Chief Financial Officer and Treasurer
James A. Narum 44 Corporate Vice President of Operations-
Corporate Health and Fitness Division
Jeanne C. Crawford 43 Vice President-Human Resources and Secretary
Jerry V. Noyce has been President and Chief Executive Officer of the
Company since November 2000 and a director since January 2001. From October 1973
to March 1997 he was Chief Executive Officer and Executive Vice President of
Northwest Racquet, Swim & Health Clubs. From March 1997 to November 1999 Mr.
Noyce served as Regional Chief Executive Officer of CSI/Wellbridge Company, the
successor to Northwest Racquet, where he was responsible for all operations at
the Northwest Clubs and the Flagship Athletic Club. Mr. Noyce continues to
provide consulting services to CSI/Wellbridge.
Wesley W. Winnekins has been Chief Financial Officer and Treasurer of
the Company since February 2001. Prior to joining the Company, Mr. Winnekins
served as CFO (from January 2000 to February 2001) of University.com, Inc., a
privately held provider of on line learning solutions for corporations. From
June 1995 to April 1999 he served as CFO and vice president of operations for
Reality Interactive, a publicly held developer of CD-ROMs and online training
for the corporate market. From June 1993 to May 1995 he served as controller and
director of operations for The Marsh, a Minneapolis-based health club, and was
controller of the Greenwood Athletic Club in Denver from October 1987 to January
1989.
James A. Narum has been the Company's Corporate Vice President of
Operations - Corporate Health and Fitness Division since November 2000. Prior to
November 2000, Mr. Narum was responsible for national operations in the
Company's Corporate Health and Fitness Division since 1995. From 1983 to 1995,
Mr. Narum was responsible for regional operations, sales, consulting, and client
account management for Fitness Systems Inc., a provider of fitness center
management services the Company acquired in 1995. Mr. Narum also currently
represents HFC by serving on the Board of Directors for the Health Enhancement
Research Organization (HERO).
Jeanne C. Crawford has been the Company's Vice President of Human
Resources since July 1998 and Secretary of the Company since February 2001. From
July 1996 through July 1998, Ms. Crawford served as a Human Resource consultant
to the Company. From October 1991 through September 1993, Ms. Crawford served as
Vice President of Human Resources for RehabClinics, Inc. a publicly held
outpatient rehabilitation company. From May 1989 through October 1991, Ms.
Crawford served as Director of Human Resources for Greater Atlantic Health
Service, an HMO and physicians medical group. From 1979 through 1989, Ms.
Crawford served in various human resources management positions in both the
retail and publishing industries.
The information required by Item 10 relating to directors and
compliance with Section 16 of the Exchange Act is incorporated herein by
reference to the sections entitled "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" which appear in the Company's
definitive proxy statement for its 2001 Annual Meeting.
29
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference to the section entitled "Executive Compensation" which appears in the
Company's definitive proxy statement for its 2001 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by
reference to the section entitled "Principal Shareholders and Management
Shareholdings" which appears in the Company's definitive proxy statement for its
2001 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the section entitled "Certain Transactions" which appears in the
Company's definitive proxy statement for its 2001 Annual Meeting.
30
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
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, 2000 $187,900 $98,000 -- $(23,300)(b) $262,600
Year ended December 31, 1999 1,101,200 429,700 45,500(a) (1,388,500)(b) 187,900
Year ended December 31, 1998 82,200 1,071,000 -- (52,000)(b) 1,101,200
(a) Recovery of accounts receivable previously written off as uncollectible
(b) Accounts receivable written off as uncollectible
31
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, 2000 and 1999
and for each of the two years in the period ended December 31,
2000 and 1999
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules The following consolidated
financial statement schedule is included in Item 14(d):
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, 2000.
32
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 28, 2001 HEALTH FITNESS CORPORATION
By /s/ Jerry Noyce.
-------------------------------------
Jerry Noyce
Chief Executive Officer
(Principal Executive Officer)
33
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears above or below constitutes and appoints Jerry Noyce and Wesley
Winnekins, 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/ Jerry Noyce Chief Executive Officer and Director
- -------------------------
Jerry Noyce (principal executive officer) March 28, 2001
/s/ Wesley Winnekins Chief Financial Officer
- -------------------------
Wesley Winnekins (principal financial and accounting officer) March 28, 2001
/s/ Mark Sheffert
- -------------------------
Mark Sheffert Director March 28, 2001
/s/ James A. Bernards
- -------------------------
James A. Bernards Director March 28, 2001
34
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
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 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
*10.6 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
10.7 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
10.8 Loan and Security Agreement dated July 14, 2000, by and among
the Company and Coast Business Credit incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000
*10.9 Employment agreement dated November 30, 2000 between Company and
Jerry V. Noyce.
*10.10 Employment agreement dated April 21, 1995 between the Company
and James A. Narum, as amended October 19, 1999 and November 2,
2000.
*10.11 Employment agreement dated February 9, 2001 between Company and
Wesley W. Winnekins.
35
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 Amendment dated March 1, 2001 to Standard Office Lease Agreement
(Net) dated as of June 13, 1995 covering a portion of the
Company's headquarters.
21.1 Subsidiaries
23.1 Consent of Grant Thornton LLP
24.1 Power of Attorney (included on Signature Page)
- ---------------------------
*Indicates management contract or compensatory plan or arrangement.