AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 2006
REGISTRATION NO. 333-131045
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No.1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEALTH FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 8090 41-1580506
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
3600 AMERICAN BLVD W., SUITE 560
BLOOMINGTON, MN 55431
(952) 831-6830
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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JERRY V. NOYCE
CHIEF EXECUTIVE OFFICER AND PRESIDENT
HEALTH FITNESS CORPORATION
3600 AMERICAN BLVD W., SUITE 560
BLOOMINGTON, MN 55431
(952) 831-6830
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copy To:
JOHN A. SATORIUS, ESQ.
JEFFREY C. ERB, ESQ.
FREDRIKSON & BYRON, P.A.
4000 PILLSBURY CENTER
200 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
(612) 492-7000
(612) 492-7077 (FAX)
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of this Registration Statement based upon market conditions
and other factors.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE SHARE PRICE PER PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE OFFERING PRICE(2) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------
Common stock, $0.01 par
value per share 6,630,000 $2.67(2) $17,702,100 $1,894.12(3)
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Common stock, $0.01 par
value per share 51,000 $2.41(4) $ 122,910 $ 13.15
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(1) In accordance with Rule 416(a), the registrant is also registering
hereunder an indeterminate number of shares that may be issued and resold
resulting from stock splits, stock dividends or similar transactions.
(2) Estimated pursuant to Rule 457(c) under the Securities Act, solely for the
purposes of calculating the registration fee, upon the basis of the average
high and low bid and ask prices of our common stock as quoted on the
Over-the-Counter Bulletin Board on January 12, 2006.
(3) Paid January 13, 2006.
(4) Estimated pursuant to Rule 457(c) under the Securities Act, solely for the
purposes of calculating the registration fee, upon the basis of the average
high and low bid and ask prices of our common as quoted on the
Over-the-Counter Bulletin Board on February 28, 2006.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THE COMMON STOCK COVERED BY THIS PROSPECTUS
UNTIL THE REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS RELATES IS DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THE COMMON STOCK, AND IT IS NOT SOLICITING AN OFFER TO BUY THE
COMMON STOCK, IN ANY JURISDICTION WHERE THE OFFER AND SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MARCH 7, 2006
PROSPECTUS
HEALTH FITNESS CORPORATION
6,681,000 SHARES OF COMMON STOCK
With this prospectus, the persons named in this prospectus or in prospectus
supplements (collectively, the "Selling Stockholders") may offer and sell up to
6,681,000 shares of our common stock in the manner described under "Plan of
Distribution." The shares of common stock covered by this prospectus include:
- 5,100,000 shares of common stock that are issuable upon conversion of
1,000 shares of Series B Convertible Preferred Stock ("Series B
Stock") we issued on November 14, 2005 in a private placement to a
limited number of accredited investors; and
- up to 1,530,000 shares of common stock, equal to 30% of the number of
shares of common stock issuable upon conversion of the Series B Stock,
we may be required to issue from time to time upon exercise, for cash,
of warrants we issued on November 14, 2005 to the original purchasers
of the Series B Stock.
- up to 51,000 shares of common stock we may be required to issue from
time to time upon exercise of warrants we issued on November 14, 2005
to the placement agents (or their affiliates) for the Series B Stock.
All 1,000 shares of Series B Stock, which are not covered by this
prospectus, will automatically be converted into an aggregate 5,100,000 shares
of our common stock upon the date the SEC first declares effective the
registration statement to which this prospectus relates.
We are required to maintain the effectiveness of the registration statement
to which this prospectus relates until the earlier of the date all shares of
common stock covered by this prospectus have been sold using this prospectus or
pursuant to Rule 144 (or other similar rule then in effect) under the Securities
Act of 1933, or such date as all shares of common stock covered by this
prospectus may be sold without volume restrictions pursuant to Rule 144(k).
Although we might receive cash proceeds from the exercise of the warrants
referenced above, we will not receive any proceeds from the sales, if any, of
the common stock covered by this prospectus. We will pay the expenses related to
the registration of the common stock covered by this prospectus. The Selling
Stockholders will pay commissions and selling expenses, if any, incurred by
them.
Our common stock is listed on the OTCBB under the symbol "HFIT." The low
and high sale prices for our common stock on February 28, 2006 on the OTCBB was
$2.36 and $2.45 per share, respectively.
INVESTING IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March __, 2006.
TABLE OF CONTENTS
Page
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ABOUT THIS PROSPECTUS.............................................. 1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS....................... 2
PROSPECTUS SUMMARY................................................. 4
THE OFFERING....................................................... 6
RISK FACTORS....................................................... 8
USE OF PROCEEDS.................................................... 12
PRICE RANGE OF COMMON STOCK........................................ 12
DIVIDEND POLICY.................................................... 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 13
PRINCIPAL SHAREHOLDERS............................................. 41
SELLING STOCKHOLDERS............................................... 44
PLAN OF DISTRIBUTION............................................... 47
DESCRIPTION OF CAPITAL STOCK....................................... 49
LEGAL MATTERS...................................................... 52
EXPERTS............................................................ 52
WHERE YOU CAN FIND MORE INFORMATION................................ 52
INDEX TO FINANCIAL STATEMENTS...................................... F-1
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of this prospectus or as of the earlier date stated
with respect to such information, as applicable, regardless of the time of
delivery of this prospectus or any sale of the common stock. This document may
be used only where it is legal to sell these securities.
Other than in the United States, we have not taken any action or otherwise
authorized any action that would permit this offering, or possession or
distribution of this prospectus, in any jurisdiction where action for those
purposes is required. You are required to inform yourselves about and to observe
any restrictions relating to this offering and the distribution of this
prospectus in the United States.
In this prospectus, unless otherwise stated or the context otherwise
requires, reference to "the Company," "Health Fitness," "HFC," "we," "us," "our"
and similar references refer to Health Fitness Corporation and its consolidated
subsidiaries.
i
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using the SEC's shelf registration rules. Under the shelf registration
rules, using this prospectus and, if required, one or more prospectus
supplements, the Selling Stockholders from time to time may sell the common
stock covered by this prospectus in the manner described in "Plan of
Distribution." The shares covered by this prospectus include 5,100,000 shares of
common stock issuable upon the automatic conversion of all shares of Series B
Stock on the date the SEC first declares effective the registration statement to
which this prospectus relates, 1,530,000 shares of common stock, equal to 30% of
the number of shares of common stock issuable upon conversion of the Series B
Stock, issuable upon the exercise, for cash, of outstanding warrants we issued
to the original purchasers of the Series B Stock and 51,000 shares of common
stock issuable upon the exercise, for cash, of warrants we issued to certain of
the placement agents (or their affiliates) for the Series B Stock.
A prospectus supplement may include additional risk factors or other
special considerations applicable to our business or common stock. Any
prospectus supplement may also add, update, or change information in this
prospectus. We recommend that you carefully read this entire prospectus,
together with any supplements before making a decision to invest in our common
stock.
1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains, and supplements to this prospectus might contain,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Essentially all statements, other than statements of historical
facts, included in this prospectus and in any prospectus supplements are
forward-looking statements. Forward-looking statements involve substantial risks
and uncertainties, and our actual results may be significantly different than
those expressed in our forward-looking statements. Our forward-looking
statements relate primarily to our growth strategies, assessments of trends in
our industry, our competitive strengths, adequacy of our financial resources,
future revenues, projected costs and prospects. The words "anticipates,"
"believes," "estimates," "expects," "intends," "may," "plans," "projects,"
"will," "would" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words.
You are cautioned not to place undue reliance upon our forward-looking
statements. Our actual results, and the outcome of other events identified in
forward-looking statements, could differ materially
2
from the expectations disclosed in our forward-looking statements. Although it
is not possible to foresee all of the risks we may face and the other factors
that may cause actual results to be materially different than those expressed in
our forward-looking statements, we have described in "Risk Factors" the risks
and factors we believe are most likely to cause our actual results or events to
differ materially from the forward-looking statements that we make. Other risks,
uncertainties and factors, both known and unknown, could cause our actual
results to differ materially from those described in our forward-looking
statements.
Our forward-looking statements do not reflect all potential effects of any
future acquisitions, mergers, dispositions, joint ventures or strategic
investments we may make, which are difficult to predict and assess. We do not
assume any obligation to update or revise any forward-looking statements, or to
update the reasons actual results could differ materially from those anticipated
in these forward-looking statements, even if new information becomes available
in the future.
3
PROSPECTUS SUMMARY
This summary does not contain all of the information you should consider
before buying shares of our common stock. You should read the entire prospectus
and any prospectus supplements carefully, especially the sections titled
"Caution Regarding Forward-looking Statements," "Risk Factors" and "Managements'
Discussion and Analysis of Financial Condition and Results of Operations,"
together with our financial statements and the related notes included elsewhere
in this prospectus and in prospectus supplements, before deciding to invest in
shares of our common stock.
OUR BUSINESS
As a leading provider of fitness center management and health management
programs to corporations, hospitals, communities and universities located in the
United States and Canada, we currently have agreements with approximately 150
customers to staff and manage more than 400 fitness and wellness centers,
including 224 corporate fitness centers, 55 corporate wellness programs, 13
corporate occupational health programs, 17 hospital, commercial and
university-based fitness centers and wellness programs, and 95 corporate sites
that do not have full-time staff. Approximately 70 of our customers are Fortune
1000 companies.
Major corporations, hospitals and universities invest in fitness centers
and health improvement programs for several reasons. We believe it is becoming
widely accepted that healthier employees are more productive, experience reduced
levels of stress and are absent from work less often due to illness.
Additionally, companies are struggling to deal with the escalating cost of
providing employee healthcare benefits, which have been and are expected to
continue increasing at double-digit rates. Many companies are beginning to
recognize that employees are their most important asset, and consider employee
health improvement initiatives a top priority.
In March 2005, we reorganized our operations to focus more clearly on the
two areas of our business: fitness management services and health management
services. Within each area, we provide three types of services: (i) staffing
services, which generally include on-site staff at our customer's site to manage
daily operations, (ii) program services, which generally include personal
training, weight loss programs, seminars, specialty fitness classes, massage
therapy, paper and web-based health risk assessments, biometric screenings to
assess blood profiles, data collection, management and reporting and educational
literature and programs, and (iii) consulting services, which typically include
fitness center floor plan designs, interior design plans, selection and sourcing
of fitness equipment, fitness program design and analysis of the effectiveness
of employee health improvement programs. As of September 30, 2005 and December
31, 2004, staffing services accounted for approximately 92.7% and 95.2%,
respectively, of total revenue, program services accounted for approximately
6.9% and 4.5%, respectively, of total revenue and consulting services accounted
for approximately 0.4% and 0.3%, respectively, of total revenue.
Key elements of our growth strategy include: (i) further developing fitness
and health management programs and services through internal expertise,
partnerships and potential mergers or acquisitions; (ii) expanding existing
fitness management relationships to include comprehensive health management
services; (iii) pursuing customer opportunities with mid-sized companies and
other smaller organizations, who are generally underserved and in need of
employee health management services because of rising healthcare costs; (iv)
continuing to pursue opportunities to offer on-site fitness management services
to large organizations; and (v) exploring international growth opportunities as
large companies begin to broaden their scope of participation in employee health
management programs.
4
RECENT DEVELOPMENTS
Private Placement of Securities; Redemption of Series A Convertible Preferred
Stock
On November 14, 2005, we issued an aggregate of 1,000 shares of Series B
Convertible Preferred Stock (the "Series B Stock") to a limited number of
accredited investors for an aggregate purchase price of $10.2 million. After
selling commissions and expenses, we received net proceeds of approximately $9.4
million. The Series B Stock automatically converts into 5,100,000 shares of
common stock effective on the date the SEC first declares effective the
registration statement to which this prospectus relates. We also issued the same
investors 5-year warrants (the "Warrants") to purchase 1,530,000 shares of
common stock, equal to 30% of the number of shares of common stock issuable upon
conversion of the Series B Stock, for $2.40 per share, subject to
weighted-average anti-dilution adjustments for certain issuances or deemed
issuances of equity securities for less than $2.40 per share which may reduce
the stated exercise price of $2.40 per share. We issued the placement agents (or
their affiliates) for the Series B Stock warrants to acquire 102,000 shares of
our common stock on substantially the same terms as the Warrants, except the
exercise price of such warrants is $2.00 per share. The shares of common stock
issuable upon the automatic conversion of the Series B Stock, upon the exercise
of the Warrants and upon exercise of placement agent warrants to purchase 51,000
shares of common stock represent all of the securities covered by this
prospectus.
We used approximately $5.1 million of the net proceeds from the issuance
of the Series B Stock to redeem, effective November 15, 2005: (i) all of the
outstanding shares of Series A Convertible Preferred Stock, which were
convertible into 2,222,210 shares of common stock, and (ii) warrants to purchase
1,275,463 shares of common stock if exercised for cash, or 916,458 shares of
common stock if exercised on a "cash-less" exercise basis, which warrants were
issued to original purchaser of the Series A Convertible Preferred Stock. We
used substantially all of the remainder of the net proceeds to acquire
HealthCalc.Net, Inc.
Acquisition of HealthCalc.Net, Inc.
On December 23, 2005, we acquired all of the capital stock of
HealthCalc.Net, Inc. ("HealthCalc"), a leading provider of web-based fitness,
health management and wellness programs to corporations, health care
organizations, physicians and athletic/fitness centers. We paid $4 million in
cash and issued 847,281 shares of our common stock to HealthCalc's shareholders
at the closing of the acquisition on December 23, 2005. We may become obligated
to pay or issue, as the case may be, an additional amount of up to $2 million in
cash, common stock, or a combination thereof, to HealthCalc's shareholders under
a 12-month, earn-out formula based upon HealthCalc achieving certain revenue
objectives for fiscal year 2006.
Founded in 1997, and headquartered in Dallas, Texas, HealthCalc's web-based
platform provides customers with a variety of tools and resources to identify
opportunities to impact health care costs through lifestyle improvement programs
for individuals. In addition to other services, the HealthCalc platform allows
individuals to take periodic online health assessments, track their daily
exercise, receive online health coaching, and provide access to the latest
health education and information in an internet-based environment.
HealthCalc has been one of our technology providers for approximately ten
years. Management believes that owning HealthCalc's proven technology platform
is an important element of our overall strategy of growing our health management
services. Prior to the acquisition, we used HealthCalc's web-based system in
many of our fitness centers to track member usage and perform health
assessments. The HFC version of the HealthCalc platform (Live for Life-e) become
a foundation of our health management services, and was used by over 500,000
individual registered users from our various institutional customers during
2005.
We have included our unaudited pro forma combined financial statements
giving effect to our acquisition of HealthCalc as of September 30, 2005 and for
the nine months ended September 30, 2005 and year ended December 31, 2004
elsewhere in this prospectus. You are encouraged to read our pro forma financial
statements carefully.
5
Potential for Director to Not Stand for Reelection
Mr. Cary Musech has served on our Board of Directors since December 2003.
Mr. Musech joined the Board of Directors in connection with an investment
agreement between us and Bayview Capital Partners LP (See "Related Party
Transactions" elsewhere in the prospectus for a more complete description of
this transaction). Bayview's investment was fully redeemed (except for an
insignificant number of warrants) and Bayview's investment agreement was
terminated effective as of November 15, 2005. Mr. Musech has indicated that he
will continue to serve as a director until our next annual meeting (typically
held in May of each year) but that, as a result of our redemption of
substantially all of Bayview Partner's investment, he likely will not seek
another term as a director at that time.
COMPANY INFORMATION
We are a Minnesota corporation with executive offices at 3600 American Blvd
W., Suite 560, Bloomington, Minnesota 55431. Our telephone number is (952)
831-6830. We were incorporated on March 31, 1987.
THE OFFERING
Common Stock Covered by this
Prospectus ...................... 6,681,000 shares, of which 5,100,000 will be
issued and outstanding upon the effective
date of the registration statement to which
this prospectus relates, and up to 1,581,000
shares that may be issued upon exercise, for
cash, of warrants held by Selling
Stockholders.
Common Stock Outstanding
Assuming the Sale of all
Common Stock Covered by this
Prospectus(1).................... 20,468,349.
Use of Proceeds.................. We will not receive any proceeds from the
sale of the common stock covered by this
prospectus. To the extent all of the
warrants to purchase the 1,581,000 shares of
common stock covered by this prospectus are
exercised for cash, we would receive
approximately $3.8 million in the aggregate
from such exercises. All of the warrants may
be exercised on a "cash-less" basis, in
which case we would not receive any cash
proceeds.
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(1) The number of shares of our common stock to be outstanding after this
offering is based on 13,787,349 shares outstanding as of December 31, 2005,
and excludes:
- 2,159,425 shares of common stock issuable as of December 31, 2005 upon
the exercise of outstanding stock options under our 2005 Stock Option
Plan at exercise prices between $0.30 and $3.00 per share;
- an aggregate of 1,158,600 shares of common stock reserved for future
issuance under our 2005 Stock Option Plan at the market value of our
common stock at the date of grant and an aggregate of 182,134 shares
of common stock reserved for future issuance under our employee stock
purchase plan; and
- 51,000 shares of common stock issuable as of the date of December 31,
2005 upon the exercise of warrants issued to certain of the placement
agents (or their affiliates) of the Series B Stock (the underlying
shares of which are not covered by this prospectus) at an exercise
price of $2.00 per share, and 62,431 shares of common stock issuable
as of December 31, 2005 upon the exercise of warrants at exercise
prices between $2.24 and $2.70 per share.
6
Risk Factors..................... An investment in our common stock is
speculative and involves risks. You should
read the "Risk Factors" section of this
prospectus for a discussion of certain
factors to consider carefully before
deciding to invest in shares of our common
stock.
Plan of Distribution............. The shares of common stock covered by this
prospectus may be sold by the Selling
Stockholders in the manner described under
"Plan of Distribution."
OTCBB Symbol..................... "HFIT."
SELECTED FINANCIAL DATA AND SUPPLEMENTARY FINANCIAL INFORMATION
You should read the following selected financial data and supplementary
financial information together with our complete financial statements and the
related notes, and our "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all of which is included herein. We
derived the following annual information from our audited consolidated financial
statements as of December 31, 2004, 2003, 2002, 2001 and 2000. We derived the
following quarterly financial information from our unaudited consolidated
financial statements for each quarter indicated. All unaudited consolidated
financial statements contain, in our opinion, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
information set forth herein. Historical results of operations may not be
indicative of results to be expected for any future period.
The below selected financial data and supplementary financial information
does not reflect our acquisition of HealtCalc.Net, Inc., our redemption of all
Series A Convertible Preferred Stock and certain warrants to purchase common
stock and our issuance of 1,000 shares of Series B Convertible Preferred Stock
and warrants to purchase common stock, all as described in more detail in the
"Recent Developments" section of this prospectus. We have included our unaudited
pro forma combined financial statements giving effect to our acquisition of
HealthCalc as of September 30, 2005 and for the nine months ended September 30,
2005 and year ended December 31, 2004 elsewhere in this prospectus. You are
encouraged to read our pro forma financial statements carefully.
Selected Financial Data
NINE MONTHS ENDED YEAR ENDED DECEMBER 31,
---------------------------- -------------------------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2004 2003 2002 2001 2000
------------- ------------- --------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenue $ 40,608 $ 38,950 $ 52,455 $ 31,479 $ 27,865 $ 25,910 $ 26,191
---------- ---------- -------- -------- -------- -------- --------
Net earnings (loss) applicable to
common shareholders $ 1,633 $ 1,273 $ 1,588 $ (27) $ 3,001 $ 1,806 $ 930
========== ========== ======== ======== ======== ======== ========
Net earnings per common share:
Basic $ 0.13 $ 0.10 $ 0.13 $ 0.00 $ 0.24 $ 0.15 $ 0.08
========== ========== ======== ======== ======== ======== ========
Diluted $ 0.10 $ 0.08 $ 0.10 $ 0.00 $ 0.24 $ 0.15 $ 0.07
========== ========== ======== ======== ======== ======== ========
SEPTEMBER 30, AS OF DECEMBER 31,
------------- ------------------------------------------------------
2005 2004 2003 2002 2001 2000
------------- ---------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Assets $ 19,899 $ 20,934 $ 19,808 $ 12,956 $ 10,199 $ 10,399
Long-Term Debt -- 1,613 4,350 -- -- 25
Shareholders' Equity 13,270 11,484 9,732 9,079 6,063 4,195
Supplementary Financial Information
FISCAL YEAR 2005
QUARTER ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
------------ ------------ -------------
Revenue $ 13,465,101 $ 13,678,615 $ 13,464,278
Gross profit 3,441,802 3,450,616 3,498,814
Net earnings applicable to common 627,934 498,183 506,488
shareholders
Net earnings per share
Basic $ 0.05 $ 0.04 $ 0.04
Diluted
0.04 0.03 0.03
Weighted average common shares outstanding
Basic 12,619,603 12,652,370 12,863,971
Diluted 16,614,522 16,618,997 16,662,753
FISCAL YEAR 2004
QUARTER ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------------- ------------- ------------- -------------
Revenue $ 12,666,374 $ 13,129,715 $ 13,154,340 $ 13,504,239
Gross profit 3,086,937 3,442,358 3,347,083 3,582,839
Net earnings applicable to common shareholders 336,707 470,754 465,164 314,995
Net earnings per share
Basic $ 0.03 $ 0.04 $ 0.04 $ 0.03
Diluted
0.02 0.03 0.03 0.02
Weighted average common shares outstanding
Basic 12,409,619 12,483,979 12,550,679 12,566,735
Diluted 16,038,913 16,066,003 16,122,175 16,349,043
FISCAL YEAR 2003
QUARTER ENDED
-------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------ ------------- --------------
Revenue $ 7,518,205 $ 7,732,626 $ 7,445,094 $ 8,782,897
Gross profit 1,654,399 1,581,142 1,465,768 1,833,888
Net earnings (loss) applicable to common
shareholders 267,980 217,333 87,786 (600,353)
Net earnings (loss) per share
Basic $ 0.02 $ 0.02 $ 0.01 $ (0.05)
Diluted
0.02 0.02 0.01 (0.05)
Weighted average common shares outstanding
Basic 12,308,321 12,322,908 12,341,284 12,356,315
Diluted 12,404,312 12,467,821 12,743,441 12,356,315
7
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
consider carefully the risks and uncertainties described below and the other
information included in this prospectus, including our annual and interim
financial statements, before deciding to invest in shares of our common stock.
If any one of the following risks or uncertainties actually occurs, any
combination thereof occurs, our business, prospects, financial condition and
operating results would likely suffer, possibly materially. In that event, the
market price of our common stock could decline and you could lose all or part of
your investment.
RISKS RELATING TO OUR BUSINESS
THE TIMING OF NEW AND LOST MANAGEMENT SERVICE CONTRACTS MAY NOT BE
INDICATIVE OF TRENDS IN OUR BUSINESS OR OF FUTURE QUARTERLY FINANCIAL RESULTS.
We evaluate our business, in part, by reviewing trends in our financial
performance. Management believes an important indicator of our outlook is
revenue to be derived from fitness and health management service contracts we
enter into with customers. Fitness and health management service contracts are
often long-term contracts (i.e., 3 - 5 years), contain annual, automatic
renewals and generally require 30 to 60 days notice to terminate, or to avoid
the automatic annual renewal feature. Revenue from new contracts often is not
recognized for a period of 90 to 180 days after proposal acceptance due to lead
times necessary to execute a contract and hire staff to begin providing
services. Since termination notice periods are considerably less than the time
it takes to begin servicing new contracts, the revenue lost in a reporting
period may significantly exceed the revenue gained from new contracts.
Because of these timing differences, management generally does not view
changes in quarterly revenue, whether sequential or comparable prior quarter
changes, to be indicative of our outlook or trends in our business or to be
reflective of revenue expected in succeeding quarters. Rather, management
generally evaluates revenue trends in our fitness and health management services
business based upon 12- to 18-month periods since we believe this helps minimize
the timing impact from new and terminated contracts. Management cautions
investors not to place undue reliance upon fluctuations in quarterly revenue
viewed in isolation from revenue information over longer periods of time (e.g.,
comparative trailing 12-month information), and to not view quarterly revenue as
necessarily being indicative of our outlook or results to be expected in future
quarters.
FAILURE TO IDENTIFY ACQUISITION OPPORTUNITIES MAY LIMIT OUR GROWTH. An
important part of our growth has been the acquisition of complementary
businesses. We may choose to continue this strategy in the future. Management's
identification of suitable acquisition candidates involves risks inherent in
assessing the value, strengths, weaknesses, overall risks and profitability of
acquisition candidates. Management may be unable to identify suitable
acquisition candidates. If we do not make suitable acquisitions, we may find it
more difficult to realize growth objectives and to enhance shareholder value.
In addition, future acquisitions may be dilutive to shareholders, cause us
to incur additional indebtedness and large one-time expenses or create
intangible assets that could result in significant amortization expense. If we
spend significant funds or incurs additional debt, our ability to obtain
necessary financing may decline and we may be more vulnerable to economic
downturns and competitive pressures. Management cannot guarantee that we will be
able to successfully complete any future acquisitions, or that we will be able
to finance such acquisitions.
WE MAY NOT REALIZE THE ANTICIPATED BENEFITS OF ACQUISITIONS WE COMPLETE. On
December 23, 2005, we acquired HealthCalc.Net, Inc. In the future, we may
acquire other businesses. The process of
8
integrating new businesses into our operations poses numerous risks, including:
- an inability to assimilate acquired operations, information systems
and technology platforms, and internal control systems and products;
- diversion of management's attention;
- difficulties and uncertainties in transitioning business relationships
from the acquired entity to us; and
- the loss of key employees of acquired companies.
If we are unsuccessful in integrating HealthCalc, or any other future
acquisitions, into our operations, we might not realize all of the anticipated
benefits of such acquisitions. In such instances, our acquisitions might not be
accretive to our earnings, the costs of such acquisitions may otherwise outweigh
the benefits of such acquisitions and the market price of our common stock might
decline.
WE MAY EXPERIENCE DIFFICULTY MANAGING GROWTH, INCLUDING ATTRACTING
QUALIFIED STAFF. We have experienced growth during the past few years, both
organically and by acquisition. Our ability to grow in the future will depend on
a number of factors, including the ability to obtain new customers, expand
existing customer relationships, develop additional fitness and health
improvement programs and services and hire and train qualified staff. We may
experience difficulty in attracting and retaining qualified staff in various
markets to meet growth opportunities. Further, in order to attract qualified
staff, we may be required to pay higher salaries and enhance benefits in more
competitive markets, which may result in a material adverse effect on our
results of operation and financial condition. Sustaining growth may require us
to sell our services at lower prices to remain competitive, which may result in
a material adverse effect on our results of operation and financial condition.
There can be no assurance that we will be able to manage expanding operations
effectively or that we will be able to maintain or accelerate our growth, and
any failure to do so may result in a material adverse effect on our results of
operation and financial condition.
FAILURE TO RENEW EXISTING CUSTOMER CONTRACTS COULD HAVE A NEGATIVE EFFECT
ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our growth strategy
depends in part upon continuous development and improvement of attractive and
effective health management programs and services. Our failure to anticipate
trends or to successfully develop, improve or implement such programs or
services may have a material adverse effect on our results of operation and
financial condition. We currently contract with third party partners to provide
a portion of such programs and services and anticipates that this will continue
to be the case. If any of such third party partners no longer made these
programs and services available to us, there is no assurance that we would be
able to replace such third-party partner programs and services, and if we could
not do so, our ability to pursue growth strategies would be seriously
compromised.
WE ARE DEPENDENT ON MAINTAINING OUR CORPORATE RELATIONSHIPS. The majority
of our contracts are with large corporations regarding the management of on-site
fitness centers. While the specific terms of such agreements vary, some
contracts are subject to early termination by the corporate customer without
cause. Although we have a history of consistent contract renewals, there can be
no assurance that future renewals will be secured. The early termination or
non-renewal of corporate contracts may have a material adverse effect on our
results of operation and financial condition.
OUR FINANCIAL RESULTS ARE SUBJECT TO DISCRETIONARY SPENDING OF OUR
CUSTOMERS. Our revenue, expenses and net income are subject to general economic
conditions. A significant portion of our revenue is derived from companies who
historically have reduced their expenditures for on-site fitness management
services during economic downturns. Should the economy weaken, or experience
more
9
significant recessionary pressures, corporate customers may reduce or eliminate
their expenditures for on-site fitness center management services, and
prospective customers may not commit resources to such services. Also, should
the size of a customer's workforce be reduced, we may have to reduce the number
of staff assigned to manage a customer's fitness center. Additionally, our
operations in Canada are subject to foreign currency risk, although these
operations currently represent less than 5% of our overall revenues. These
factors may have a material adverse effect on our results of operation and
financial condition.
THE LOSS OF ANY OF OUR KEY EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR PERFORMANCE AND RESULTS OF OPERATIONS. Our success is highly dependent on
the efforts, abilities and continued services of our executive officers and
other key employees. The loss of any of the executive officers or key employees
may have a material adverse effect on our results of operation and financial
condition. We believe that our future success will depend on our ability to
attract, motivate and retain highly-skilled corporate, divisional, regional and
site-based personnel. Although historically we have been successful in retaining
the services of our senior management, there can be no assurance that we will be
able to do so in the future.
WE OPERATE WITHIN A HIGHLY COMPETITIVE MARKET AGAINST FORMIDABLE COMPANIES.
We compete for new and existing corporate customers in a highly fragmented and
competitive market. Management believes that our ability to compete successfully
depends on a number of factors, including quality and depth of service,
locational convenience and cost. The market for on-site fitness center
management services is price-sensitive. From time to time, we may be at a price
disadvantage with respect to the competition, as such competition may offer
competing services at substantially lower prices than ours. There can be no
assurance that we will be able to compete successfully against current and
future competitors, or that competitive pressures we face will not have a
material adverse effect on our results of operation and financial condition.
OUR RESULTS OF OPERATIONS COULD BE ADVERSELY IMPACTED BY LITIGATION.
Because of the nature of our business, we expect that the Company may be subject
to claims and litigation alleging negligence or other grounds for liability
arising from injuries or other harm to the customers we serve. We have
occasionally been named a defendant in claims relating to accidents that
occurred in the fitness centers we manage. There can be no assurance that
additional claims will not be filed, and that our insurance will be adequate to
cover liabilities resulting from any claim.
WE COULD EXPERIENCE A POTENTIAL DEPRESSIVE EFFECT ON THE PRICE OF OUR
COMMON STOCK FOLLOWING THE EXERCISE AND SALE OF EXISTING CONVERTIBLE SECURITIES.
At December 31, 2005, we had outstanding stock options and warrants to purchase
an aggregate of 3,853,856 shares of common stock. The exercise of such
outstanding stock options and warrants and the sale of the common stock acquired
thereby, may have a material adverse effect on the price of our common stock. In
addition, the exercise of such outstanding stock options and warrants and sale
of such shares of our common stock could occur at a time when we might otherwise
be able to obtain additional equity capital on terms and conditions more
favorable to us.
WE HAVE IMPLEMENTED, ON A LIMITED BASIS, A BUSINESS MODEL FOR MANAGING
CORPORATE FITNESS CENTERS ON A COST-NEUTRAL OR FOR-PROFIT BASIS. We have, on a
limited basis, implemented a model of managing corporate fitness centers on a
cost-neutral or for-profit basis without receiving a management fee from the
corporate owner of such centers. Corporate-owned centers are resistant to
significant membership fees and fee increases, and we may not be successful in
sufficiently managing costs and/or in raising service levels and associated
revenues, as required to achieve profit objectives.
OUR COMMON STOCK IS THINLY TRADED, AND SUBJECT TO VOLATILITY. Our common
stock is traded on the
10
Over the Counter Bulletin Board. Investing in OTC securities is speculative and
carries a high degree of risk. Many OTC securities are relatively illiquid, or
"thinly traded," which can enhance volatility in the share price and make it
difficult for investors to buy or sell without dramatically affecting the quoted
price or may be unable to sell a position at a later date. As a result, you may
find it more difficult to dispose of or obtain accurate quotations as to the
price of our shares of the common stock. If limited trading in our stock
continues, it may be difficult for you to sell their shares in the public market
at any given time at prevailing prices.
IF THERE ARE SUBSTANTIAL SALES OF OUR COMMON STOCK, OUR STOCK PRICE COULD
DECLINE. If our existing shareholders sell a large number of shares of our
common stock or the public market perceives that existing shareholders might
sell shares of common stock, the market price of our common stock could decline
significantly. All of the shares being sold in this offering will be freely
tradable without restriction or further registration under the federal
securities laws, unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act.
We have registered approximately 4,200,000 shares of common stock that are
authorized for issuance under our stock plans. As of December 31, 2005,
2,677,291 shares were subject to outstanding options. Such shares can be freely
sold in the public market upon issuance, subject to the restrictions imposed on
our affiliates under Rule 144.
ADVERSE EFFECT OF UNDESIGNATED STOCK AND ANTI-TAKEOVER PROVISIONS. Our
authorized capital includes 8,499,000 shares of undesignated stock. Our board of
directors has the power to issue any or all of the shares of undesignated stock,
including the authority to establish one or more series and to fix the powers,
preferences, rights and limitations of such class or series, without seeking
shareholder approval. Further, as a Minnesota corporation, we are subject to
provisions of the Minnesota Business Corporations Act, or MBCA, regarding
"control share acquisitions" and "business combinations." We may, in the future,
consider adopting additional anti-takeover measures. The authority of our board
to issue undesignated stock and the anti-takeover provisions of the MBCA, as
well as any future anti-takeover measures adopted by us, may, in certain
circumstances, delay, deter or prevent takeover attempts and other changes in
control of the company not approved by our board of directors. As a result, our
shareholders may lose opportunities to dispose of their shares at favorable
prices generally available in takeover attempts or that may be available under a
merger proposal and the market price, voting and other rights of the holders of
common stock may also be affected. See "Description of Capital Stock."
11
USE OF PROCEEDS
Although we may receive cash proceeds from the exercise of warrants related
to the issuance of common stock covered by this prospectus, we will not receive
any proceeds from the periodic sales, if any, of the common stock covered by
this prospectus.
PRICE RANGE OF COMMON STOCK
Trading of our common stock is 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 bid prices for our common stock.
LOW HIGH
----- -----
FISCAL YEAR 2005:
Fourth quarter $1.89 $2.63
Third quarter 2.10 2.65
Second quarter 2.25 2.65
First quarter 2.33 2.90
LOW HIGH
----- -----
FISCAL YEAR 2004:
Fourth quarter $1.52 $2.95
Third quarter 1.37 1.75
Second quarter 1.40 1.90
First quarter 1.21 2.15
At February 28, 2006, the low and high sale price was $2.36 and $2.45,
respectively.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not intend to pay cash dividends on our common stock in the foreseeable
future. We presently expect to retain any earnings to finance the development
and expansion of our business. The payment of dividends, if any, is subject to
the discretion of the Board of Directors, and will depend on our earnings,
financial condition, capital requirements and other relevant factors. Our credit
facility with Wells Fargo Bank restricts our ability to declare or pay dividend
on any class of our capital stock or to redeem any shares of capital stock.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our annual and interim
financial statements and the related notes included elsewhere in this prospectus
and in prospectus supplements. Some of the information contained in this
discussion includes forward-looking statements that involve risks and
uncertainties. You should review the "Risk Factors" section of this prospectus
and in prospectus supplements for a discussion of important factors that could
cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis and in any similar discussions or analyses contained in prospectus
supplements.
OVERVIEW
We provide fitness center and health management services and programs to
corporations, hospitals, communities and universities located in the United
States and Canada.
On December 8, 2003, we purchased the business assets of the Health &
Fitness Management Services Division of Johnson & Johnson Health Care Systems
Inc., or as referred to herein JJHCS. Prior to the acquisition, we were the
largest provider of corporate fitness center management services, while JJHCS
was a leading provider of employee health and wellness management services,
although JJHCS also managed corporate fitness centers. We completed the
acquisition in order to broaden our platform of fitness center management
contracts, as well as to obtain additional expertise in the area of employee
health promotion and management services.
On December 23, 2005, we acquired all of the capital stock of
HealthCalc.Net, Inc. (HealthCalc), a leading provider of web-based fitness,
health management and wellness programs to corporations, health care
organizations, physicians and athletic/fitness centers. Management believes that
owning HealthCalc's proven technology platform is an important element of our
overall strategy of growing our health management services. HealthCalc has been
one our technology providers for approximately ten years. HealthCalc's web-based
platform provides customers with a variety of tools and resources to identify
opportunities to impact health care costs through lifestyle improvement programs
for individuals. In addition to other services, the HealthCalc platform allows
individuals to take periodic online health assessments, track their daily
exercise, receive online health coaching, and provide access to the latest
health education and information in an internet-based environment.
The discussion in this section includes the effects of the JJHCS
acquisition from and after December 8, 2003, and does not include the effects of
the HealthCalc transaction whatsoever.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States to the extent required to be so prepared. Preparation of the
consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures. On an on-going basis, management evaluates its
estimates and judgments, including those related to revenue recognition, trade
and other accounts receivable, goodwill, and stock-based compensation. By their
nature, these estimates and judgments are subject to an inherent degree of
uncertainty. Management bases its estimates and judgments on historical
experience, observation of trends in the industry, information provided by
customers and other outside sources and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of their
consolidated financial statements.
Revenue Recognition - Revenue is recognized at the time the service is provided
to the customer. For annual contracts, monthly amounts are recognized ratably
over the term of the contract. Certain services provided to the customer may
vary on a periodic basis. The revenues relating to these services are estimated
in the month that the service is performed. Amounts received from customers in
advance of providing services are treated as deferred revenue and recognized
when the services are provided. The Company has contracts with third-parties to
provide ancillary services in connection with their fitness and wellness
management services and programs. Under such arrangements, the third-parties
invoice and receive payments from the Company based on transactions with the
ultimate customer. The Company does not recognize revenues related to such
transactions as the ultimate customer assumes the risk and rewards of the
contract and the amounts billed to the customer are either at cost or with a
fixed markup.
13
Trade and Other Accounts Receivable - Trade and other accounts receivable
represent amounts due from companies and individuals for services and products.
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.
Goodwill - Goodwill represents the excess of the purchase price and related
costs over the fair value of net assets of businesses acquired. The carrying
value of goodwill and other intangible assets is tested for impairment on an
annual basis or when factors indicating impairment are present. Projected
discounted cash flows are used in assessing these assets.
Stock-Based Compensation - The Company utilizes the intrinsic value method of
accounting for its stock based employee compensation plans. All options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant and accordingly, no compensation cost is reflected in net
earnings for the years ended December 31, 2004, 2003, and 2002.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2005 AS COMPARED TO
THE QUARTER ENDED SEPTEMBER 30, 2004.
Revenue. Revenues increased $310,000, or 2.4%, to $13,464,000 for the three
months ended September 30, 2005, from $13,154,000 for the three months ended
September 30, 2004. This increase is attributable to fitness and health program
services growth of $329,000 and growth from consulting services of $9,000. The
growth in fitness and health program services is primarily attributable to
higher utilization by fitness center members. These increases were partially
offset by a decrease in staffing services revenue of $28,000, which is
attributed to a $351,000 decrease in fitness management staffing services. The
decrease in fitness management staffing revenue for the third quarter is
attributed to higher-than-normal revenue attrition from contracts that were
acquired in December 2003. Since contract attrition can be unpredictable, we
generally do not view short-term changes in contract revenue to be indicative of
future results, or a trend in the business. New contracts the Company secures
may take 90 to 180 days to generate full revenue. At the same time, many of our
contracts can be terminated on 30 days' notice. Because this timing difference
can temporarily affect revenue results, we generally evaluates prospective
revenue trends over a 12 to 18 month period.
Gross Profit. Gross profit increased $152,000, or 4.5%, to $3,499,000 for
the three months ended September 30, 2005, from $3,347,000 for the three months
ended September 30, 2004. This increase is primarily attributed to a $225,000
refund of 2004 worker's compensation insurance premiums, which is due to
favorable 2004 claims activity. We also experienced a $139,000 increase in
program services gross profit, which is primarily due to revenue growth.
Offsetting these increases was a $184,000 decrease in gross profit from staffing
services, which is primarily due to termination of fitness center staffing
contracts and higher costs for employee medical benefits.
As a percent of revenue, gross profit increased to 26.0%, from 25.4% for
the third quarter of 2004. This increase is due primarily to the refund of 2004
worker's compensation insurance premium being offset by contract terminations
that had higher margins and higher costs for employee medical benefits.
Operating Expenses. Operating expenses increased $202,000, or 8.4%, to
$2,615,000 for the three months ended September 30, 2005 from $2,413,000 for the
three months ended September 30, 2004. This increase is primarily attributed to
anticipated increases in salaries and other operating expenses in our contract
administration, programs management, sales and corporate administration areas.
Other Income and Expense. Interest expense decreased $122,000 to income of
$4,000 for the three months ended September 30, 2005, compared to an expense of
$118,000 for the same period in 2004. This decrease is primarily due to the
December 2004 repayment of our $2,000,000 Senior Subordinated Note held by
Bayview Capital Partners LP. Since there was interest income for the third
quarter of 2005, our cost of borrowed funds was inconsequential. The cost of
borrowed funds during the third quarter of 2004 was 9.8%.
14
Income Taxes. Income tax expense increased $24,000 to $354,000 for the
three months ended September 30, 2005 compared to $330,000 for the same period
in 2004. The increase is primarily due to the $68,000 increase in earnings
before taxes.
Net Earnings Applicable to Common Shareholders. As a result of the above,
net earnings applicable to common shareholders for the three months ended
September 30, 2005 increased $41,000, or 8.8%, to $506,000, from $465,000 for
the three months ended September 30, 2004.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004.
Revenue. Revenues increased $1,658,000, or 4.3%, to $40,608,000 for the
nine months ended September 30, 2005, from $38,950,000 for the nine months ended
September 30, 2004. This increase is attributable to fitness and health program
services growth of $1,168,000, health management staffing services growth of
$969,000 and growth from consulting services of $56,000. Growth in these areas
was primarily attributable to incremental business from existing customers.
Fitness management staffing services decreased $535,000 in 2005 compared to
2004. The decrease in fitness management staffing revenue is attributed to
higher-than-normal revenue attrition from contracts that were acquired in
December 2003. Since contract attrition can be unpredictable, we generally do
not view short-term changes in contract revenue to be indicative of future
results, or a trend in the business. New contracts we secure may take 90 to 180
days to generate full revenue. At the same time, many of our contracts can be
terminated on 30 days' notice. Because this timing difference can temporarily
affect revenue results, we generally evaluate prospective revenue trends over a
12 to 18 month period.
Gross Profit. Gross profit increased $514,000, or 5.2%, to $10,391,000 for
the nine months ended September 30, 2005, from $9,877,000 for the nine months
ended September 30, 2004. This increase is due primarily to revenue growth and
the refund of 2004 worker's compensation insurance premium discussed previously.
As a percent of revenue, gross profit increased to 25.6%, from 25.4% for the
nine months ended September 30, 2005. This increase is due primarily to the
refund of 2004 worker's compensation insurance premium, which is being offset by
decreases from contract terminations that had higher margins and higher costs
for employee medical benefits.
Operating Expenses. Operating expenses increased $250,000, or 3.4%,
to$7,528,000 for the nine months ended September 30, 2005, from $7,278,000 for
the nine months ended September 30, 2004. This increase is primarily attributed
to anticipated increases in salaries and other operating expenses in our
contract administration, programs management, sales and corporate administration
areas.
Other Income and Expense. Interest expense decreased $357,000 to $24,000
for the nine months ended September 30, 2005, compared to $381,000 for the same
period in 2004. This decrease is primarily due to the December 2004 repayment of
our $2,000,000 Senior Subordinated Note held by Bayview Capital Partners LP.
Since interest was immaterial for the nine months ended September 30, 2005, our
cost of borrowed funds was inconsequential. The cost of borrowed funds for the
nine months ended September 30, 2004 was 7.5%.
Income Taxes. Income tax expense increased $251,000 to $1,134,000 for the
nine months ended September 30, 2005, compared to $883,000 for the same period
in 2004. The increase is primarily due to the $614,000 increase in earnings
before taxes.
Net Earnings Applicable to Common Shareholders. As a result of the above,
net earnings
applicable to common shareholders for the nine months ended September 30, 2005
increased $360,000, or 28.3%, to $1,633,000, from $1,273,000 for the nine months
ended September 30, 2004.
15
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
REVENUE. Revenue increased $20,976,000, or 66.6%, to $52,455,000 for 2004, from
$31,479,000 for 2003. Of this increase, $18,761,000 is attributable to the
acquisition of JJHCS, and $641,000 is attributable to revenue from new
management contracts secured in 2004. Also contributing to this increase is a
$92,000 increase in consulting revenue. The remaining increase of $1,482,000 is
attributable to an increase in sales of the Company's fitness and health
improvement program services.
GROSS PROFIT. Gross profit increased $6,924,000, or 105.9%, to $13,459,000 for
2004, from $6,535,000 for 2003. Of this increase, $6,298,000 is attributable to
growth of management and program services related to the acquisition of JJHCS.
The remaining increase of $626,000 is attributable to new management contracts
secured in 2004, as well as growth in our fitness and health improvement program
services.
OPERATING EXPENSES AND OPERATING INCOME. Operating expenses increased
$4,752,000, or 92.0%, to $9,919,000 for 2004, from $5,167,000 for 2003. Of this
increase, $805,000 represents a non-cash expense related to the amortization of
acquired intangible assets. The remaining increase of $3,947,000 is primarily
attributed to the cost of salaries, benefits and other expenses of the JJHCS
management team.
As a result of the previously discussed changes in gross profit and operating
expenses, operating income increased $2,173,000, or 158.8%, to $3,541,000 for
2004, from $1,368,000 for 2003.
OTHER INCOME AND EXPENSE. Interest expense increased $261,000 to $466,000 for
2004, from $204,000 for 2003. This increase is primarily due to the debt
facilities the Company secured to finance the JJHCS acquisition. In addition,
the Company incurred a $475,000 one-time charge in December 2004, of which
$395,000 was non-cash, in connection with the early repayment of a $2,000,000
Senior Secured Subordinated Note.
INCOME TAXES. Current income tax expense increased $399,000 to $928,000 for
2004, from $529,000 for 2003. This increase is attributable to the increase in
earnings before income taxes.
The changes in income tax expense between 2004 and 2003 had no material effect
on the Company's cash position for 2004 due to available net operating loss
carryforwards.
The Company's effective tax rate decreased to 35.7% for 2004, compared to 45.5%
for 2003. This decrease is primarily attributable to an adjustment to deferred
tax assets relating to a change in the Company's computation of state net
operating loss utilization.
NET EARNINGS. As a result of the above, net earnings for 2004 increased
$1,041,000 to $1,674,000, compared to net earnings of $633,000 for 2003.
DIVIDENDS TO PREFERRED SHAREHOLDERS. To finance the Company's acquisition of
JJHCS, the Company sold $1,000,000 in Series A Convertible Preferred Stock, or
as referred to herein as the Preferred Stock, to Bayview Capital Partners LP, or
as referred to herein as Bayview. The Preferred Stock was issued to Bayview at a
price of $1.00 per share, resulting in the issuance of 1,000,000 shares. The
Preferred Stock has a stated dividend rate of 6% per year, computed on a simple
interest basis, paid in kind in the form of additional shares of Preferred Stock
using a price of $1.00 per share, or as referred to herein as the PIK Dividends.
The Company accrued dividends of $86,400 and $3,834 for the years ended December
31, 2004 and 2003.
At the option of the holder, the Preferred Stock, including any PIK Dividends,
may be converted, at any time and from time to time, into common stock of the
Company at a price of $0.50 per share.
16
When Bayview made its commitment to invest in the Company on August 25, 2003,
the fair value of the Company's common stock to be received upon conversion of
the Preferred Stock was greater than the conversion price of the preferred
stock, which resulted in a beneficial conversion feature. Accordingly, the
Company calculated a $656,096 beneficial conversion feature which has been
recorded as a deemed dividend in the consolidated statement of operations for
the year ended December 31, 2003.
YEARS ENDED DECEMBER 31, 2003 AND 2002
REVENUE. Revenue increased $3,614,000, or 13.0%, to $31,479,000 for 2003, from
$27,865,000 for 2002. Of this increase, $1,220,000 is attributed to the
acquisition of JJHCS. The remaining increase of $2,394,000 is attributed to the
addition of new contracts in our current lines of business and the expansion of
services under existing contracts.
GROSS PROFIT. Gross profit increased $608,000, or 10.3%, to $6,535,000 for 2003,
from $5,927,000 for 2002. Of this increase, $379,000 is attributed to the
acquisition of JJHCS. The remaining increase of $229,000 is attributed to the
addition of new contracts in our current lines of business and the expansion of
services under existing contracts. As a percent of revenue, gross profit
decreased to 20.8% for 2003 from 21.3% for 2002. This decrease is primarily due
to start-up expenses for two corporate fitness centers the Company began
managing during 2003 on an at-risk basis. The Company believes that gross
margins at these centers will improve over time as new memberships are sold.
OPERATING EXPENSES AND OPERATING INCOME. Operating expenses increased $550,000,
or 11.9%, to $5,167,000 for 2003, from $4,617,000 for 2002. This increase is due
to a $379,000 increase in salary expense, which is primarily attributed to
additional staff related to the Company's acquisition of JJHCS, and higher
employee benefits costs. The $171,000 increase in selling, general, and
administrative expenses is primarily due to the Company's acquisition, including
approximately $74,000 of acquisition-related depreciation and amortization and
$60,000 of professional fees that could not be capitalized.
As a result of the previously discussed changes in gross profit and operating
expenses, operating income increased $59,000, or 4.5%, to $1,368,000 for 2003,
from $1,309,000 for 2002.
OTHER INCOME AND EXPENSE. Interest expense decreased $317,000 to $204,000 for
2003, from $521,000 for 2002. This decrease is primarily due to lower debt
levels and interest rates during 2003 compared to 2002.
INCOME TAXES. Current income tax expense increased $82,000 to an expense of
$79,000 for 2003, from a benefit of $3,000 for 2002. This increase is due to the
utilization of net operating losses for various states in 2002, which were not
available to the Company in 2003.
The Company's deferred income tax expense increased $2,659,000 to $450,000 for
2003, from a benefit of $2,209,000 for 2002. This increase is attributable to
the Company reducing its remaining deferred tax asset valuation allowance during
the year ended December 31, 2002.
The changes in income tax expense between 2003 and 2002 had no material effect
on the Company's cash position for 2003.
NET EARNINGS. As a result of the above, net earnings for 2003 decreased
$2,368,000 to $633,000, compared to net earnings of $3,001,000 for 2002.
DIVIDENDS TO PREFERRED SHAREHOLDERS. To finance the Company's acquisition of
JJHCS, the Company sold the Preferred Stock to Bayview. The Preferred Stock was
issued to Bayview at a price of $1.00 per
17
share, resulting in the issuance of 1,000,000 shares. As of December 31, 2003,
the Company accrued PIK Dividends of $3,834.
At the option of the holder, the Preferred Stock, including any PIK Dividends,
may be converted, at any time and from time to time, into common stock of the
Company at a price of $0.50 per share. When Bayview made its commitment to
invest in the Company on August 25, 2003, the fair value of the Company's common
stock to be received upon conversion of the Preferred Stock was greater than the
conversion price of the preferred stock, which resulted in a beneficial
conversion feature. Accordingly, the Company calculated a $656,096 beneficial
conversion feature which has been recorded as a deemed dividend in the
consolidated statement of operations for the year ended December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board, referred to herein
as FASB, issued Statement 151, Inventory Costs. Statement 151 amends the
guidance in Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing,
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material. Statement 151 is effective for
companies that incur inventory costs during fiscal years beginning after June
15, 2005. Adoption of Statement 151 is not anticipated to have an impact on the
Company's financial position or results of operation.
In December 2004, the FASB issued Statement 153, Exchanges of Nonmonetary
Assets. Statement 153 amends Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transaction. Statement 153 eliminates the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. Statement 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. Adoption of Statement
153 is not anticipated to have an impact on the Company's financial position or
results of operation.
In December 2004, the FASB issued Statement 123R, Share-Based Payment. Statement
123R is a revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supercedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights and employee share
purchase plans, and provides that the fair value of such share-based
compensation be expensed in a company's financial statements. The Company
expects that the adoption of Statement 123R will result in a decrease of net
income in future periods due to additional compensation expense attributed to
employee stock options. The Company does not expect the expense related to
employee stock options to be materially different from amounts previously
disclosed on a proforma basis. The Company will be required to implement
Statement 123R in connection with its Quarterly Report on For 10-Q for the
period ended March 30, 2006.
18
LIQUIDITY AND CAPITAL RESOURCES
Our working capital increased $773,000 to $4,729,000 at September 30, 2005,
compared to working capital of $3,956,000 at December 31, 2004. The increase in
working capital is due primarily to an increase in prepaid expense and accounts
receivable and decreases in accrued expenses and deferred revenue, which were
offset by decreases in deferred tax assets and cash, and an increase in other
accrued liabilities.
In addition to cash flows generated from operating activities, our other
source of liquidity and working capital is provided by a $7,500,000 Credit
Agreement with Wells Fargo Bank, N.A. (the "Wells Loan"). The availability of
the Wells Loan decreases $250,000 on the last day of each calendar quarter,
beginning September 30, 2003, and matures on June 30, 2007. The facility
provided maximum borrowing capacity of $5,250,000 and $6,000,000 at September
30, 2005 and December 31, 2004. Actual borrowing availability under the Wells
Loan is based upon a percentage of our eligible accounts receivable, less any
outstanding amounts, which were $0 and $1,612,759, respectively, at September
30, 2005 and December 31, 2004. Excluding current outstanding balances, and
based upon eligible accounts receivable, $5,152,467 and $3,758,851 was available
for borrowing on such respective dates.
On November 14, 2005, we issued an aggregate of 1,000 shares of Series B
Convertible Preferred Stock (the "Series B Stock") (together with warrants to
purchase 1,530,000 Shares of common stock for $2.40 per share) to a limited
number of accredited investors for an aggregate purchase price of $10.2 million.
After selling commissions and expenses, we received net proceeds of
approximately $9.4 million. The Series B Stock automatically converts into
5,100,000 shares of common stock effective on the date the SEC first declares
effective the registration statement to which this prospectus relates. We used
approximately $5.1 million of the net proceeds from the issuance of the Series B
Stock to redeem, effective November 15, 2005: (i) all of the outstanding shares
of Series A Convertible Preferred Stock, which were convertible into 2,222,210
shares of common stock, and (ii) warrants to purchase 1,275,463 shares of common
stock if exercised for cash, or 916,458 shares of common stock if exercised on a
"cash-less" exercise basis, which warrants were issued to original purchaser of
the Series A Convertible Preferred Stock. We used substantially all of the
remainder of the net proceeds to acquire HealthCalc.Net, Inc.
We believe that sources of capital to meet our existing obligations and
conduct our operations over the next 12 months will be provided by cash
generated through operations and our Wells Loan. From time to time, we may
purchase significant assets or other entities as we attempt to grow our business
and expand our services. In the event we make any such acquisitions, we may be
required to obtain additional debt or equity financing. There can be no
assurance that our efforts to obtain any such additional financing will be
successful or on terms favorable to us. If we sell equity securities, existing
shareholders may suffer economic and voting dilution.
As of September 30, 2005, we believe that cash expected to be generated
through current operations and availability from our Wells Loan will be
sufficient to meet our obligations for the next 12 months.
As of September 30, 2005, we did not have any off-balance sheet
arrangements or transactions with unconsolidated, limited purpose entities.
19
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our long-term obligations bear interest at a variable rate. As a
result, we may from time to time be exposed to market risks related to changes
in interest rates. However, at September 30, 2005, we did not have any
outstanding long-term obligations with variable rates. Based upon historical
borrowing levels, we believe future exposure to interest rate risk is
immaterial.
We have no history of, and do 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.
20
OUR BUSINESS
OVERVIEW
As a leading provider of fitness center management and health management
programs to corporations, hospitals, communities and universities located in the
United States and Canada, we currently have agreements with approximately 150
customers to staff and manage more than 400 fitness and wellness centers,
including 224 corporate fitness centers, 55 corporate wellness programs, 13
corporate occupational health programs, 17 hospital, commercial and
university-based fitness centers and wellness programs, and 95 corporate sites
that do not have full-time staff. Approximately 70 of our customers are Fortune
1000 companies.
Major corporations, hospitals and universities invest in fitness centers
and health improvement programs for several reasons. We believe it is becoming
widely accepted that healthier employees are more productive, experience reduced
levels of stress and are absent from work less often due to illness.
Additionally, companies are struggling to deal with the escalating cost of
providing employee healthcare benefits, which have been and are expected to
continue increasing at double-digit rates. Many companies are beginning to
recognize that employees are their most important asset, and consider employee
health improvement initiatives a top priority.
On December 8, 2003, we purchased the business assets of the Health &
Fitness Management Services Division of Johnson & Johnson Health Care Systems
Inc. ("JJHCS"). We completed the JJHCS acquisition primarily to obtain
additional expertise in the area of employee health management services, but
also to broaden our platform of fitness center management contracts.
On December 23, 2005, we acquired all of the capital stock of
HealthCalc.Net, Inc. ("HealthCalc"), a leading provider of web-based fitness,
health management and wellness programs to corporations, health care
organizations, physicians and athletic/fitness centers. We believe owning the
technology platform developed by HealthCalc is an important element of our
overall strategy of growing our health management services. HealthCalc had been
one our technology providers for approximately ten years prior to the
acquisition. Our new web-based platform provides customers with a variety of
tools and resources to identify opportunities to impact health care costs
through lifestyle improvement programs for individuals. In addition to other
services, the our new technology platform allows individuals to take periodic
online health assessments, track their daily exercise, receive online health
coaching, and provide access to the latest health education and information in
an internet-based environment.
OUR BUSINESS MODEL
Major corporations, hospitals and universities invest in fitness centers
and health improvement programs for several reasons. First, it is widely
understood that healthier employees are more productive, experience reduced
levels of stress and are absent from work less often due to illness.
Additionally, companies are struggling to deal with the escalating cost of
providing employee healthcare benefits, which has increased at double-digit
rates due to technological advancements and the decreasing overall health of
employees within the labor market. Many companies are beginning to recognize
that employees are their most important asset, and consider employee health
improvement initiatives a top priority.
In March 2005, we reorganized our operations to focus more clearly on the
two areas of our business: fitness management services and health management
services. Within each area, we provide three types of services: (i) staffing
services, which generally include on-site staff at our customer's site to manage
daily operations, (ii) program services, which generally include personal
training, weight loss
21
programs, seminars, specialty fitness classes, massage therapy, paper and
web-based health risk assessments, biometric screenings to assess blood
profiles, data collection, management and reporting and educational literature
and programs, and (iii) consulting services, which typically include fitness
center floor plan designs, interior design plans, selection and sourcing of
fitness equipment, fitness program design and analysis of the effectiveness of
employee health improvement programs. For the nine months ended September 30,
2005 and year ended December 31, 2004, staffing services accounted for
approximately 92.7% and 95.2% of total revenue, program services accounted for
approximately 6.9% and 4.5% of total revenue and consulting services accounted
for approximately 0.4% and 0.3% of total revenue.
Key elements of our growth strategy include efforts to: (i) further
develop fitness and health management programs and services through internal
expertise, partnerships and potential mergers or acquisitions; (ii) expand
existing fitness management relationships to include comprehensive health
management services; (iii) pursue customer opportunities with mid-sized
companies and other smaller organizations, who are generally underserved and in
need of employee health management services because of rising healthcare costs;
(iv) continue to pursue opportunities to offer on-site fitness management
services to large organizations; and (v) explore international growth
opportunities as large companies begin to broaden their scope of participation
in employee health management programs.
FITNESS MANAGEMENT SERVICES
Staffing Services. We have agreements with corporations to staff and
manage fitness centers that have been developed by these companies for use by
employees. Our customers invest the resources to develop and equip these fitness
centers, and generally pay for all operating expenses. We derive revenue from
these services through the reimbursement of staff costs, including wages, taxes
and benefits, reimbursement of the cost of liability insurance, and also
receives a management fee to cover the cost of regional and corporate support
services. We have agreed to manage a limited number of corporate fitness centers
on a cost-neutral or for-profit basis without receiving a management fee from
the corporate owner of such centers. Neither the revenues nor the operating
costs from such contracts are material at this point, but it is possible that
this management model will become more prevalent in the future.
Program Services. Services in this category are generally provided at our
managed fitness centers and include personal training, weight loss programs,
seminars, specialty fitness classes and massage therapy. We derive revenue from
these programs, typically from the individual member, on a fee-for-service
basis.
Consulting Services. Companies that are planning new fitness centers
employ us to develop floor plan designs, interior design plans, selection and
sourcing of fitness equipment and fitness program design. For companies that
desire to develop a commercial fitness center, we can perform a comprehensive
analysis of market potential for the center. Services can include demographic
analysis, market analysis, and multiple-year financial business plan
development.
HEALTH MANAGEMENT SERVICES
Staffing Services. We have agreements with corporations to staff and
manage the delivery of health promotion programs, lifestyle counseling services
and injury prevention and treatment services to onsite and remote customer
employees. These relationships may or may not involve the management of an
on-site fitness center. We derive revenue from these services through the
reimbursement of staff costs, including wages, taxes and benefits, reimbursement
of the cost of liability insurance, and also receives a management fee to cover
the cost of regional and corporate support services.
22
Program Services. We offer a comprehensive menu of products and services
to assess the health risks of customer employees, as well as lifestyle programs
that target specific health risks. Our program services, which we have either
developed internally or make available through third-party partners, include
paper and web-based health risk assessments, biometric screenings to assess
blood profiles, data collection, management, and reporting and educational
literature and programs. We also offer customers access to the HFC e-Health
Platform, an electronic health education platform.
We also offer health improvement advisory services to customer employees.
Such services can range from interpretation of health risk assessment and
screening results, to individualized health improvement coaching support. These
services can be delivered face-to-face using trained Company staff, or
telephonically through qualified partners.
Through our Occupational Health practice, we offer on-site programs to
prevent, manage and treat musculo-skeletal disorders in the work environment.
Services include ergonomic injury prevention, discomfort management and physical
therapy treatment.
Revenue from these program services are generally paid by the corporate
customer, although such customer may ask its employees to share in the cost.
Consulting Services. We provide our customers with a comprehensive
analysis of the effectiveness of employee health improvement programs, with a
focus on improving return on investment. This service also creates a road map
for companies that are considering investing in an employee health and wellness
initiative. We also provides a suite of occupational health consulting services,
including injury prevention program design, work-hardening programs, injury
treatment and return-to-work programs and regulatory compliance consulting.
Within these two areas of business, the duration of our management
services agreements vary widely, from those that are month-to-month, to those
that have a term of up to five years. A typical management services contract
carries a term of three years, with revenue recognized upon delivery of service.
Contract duration for Program and Consulting Services generally ranges from
month-to-month to twelve months, depending on the scope of services to be
delivered. Revenue for these services are recognized upon delivery of service.
We manage our business primarily by looking at the component service
revenue derived from our fitness and health management services areas of
business.
The following table provides a breakout of revenue and gross profit for
our two business segments for the nine month periods ended September 30, 2005
and 2004, and for each of the years ending December 31, 2004, 2003 and 2002. You
should read this financial information together with our complete financial
statements and the related notes, and our "Management's Discussion and Analysis
of Financial Condition and Results of Operations," each included elsewhere
herein.
(unaudited)
Nine months ended (unaudited)
September 30, Year ended December 31,
---------------------------- ------------------------------------------
2005 2004 2004 2003 2002
------------ ----------- ------------ ------------ ------------
Fitness Management Revenue
Staffing Services $ 28,801,495 $ 29,336,224 $ 38,949,432 $ 28,330,612 $ 27,518,808
Program Services 2,350,584 1,411,836 2,069,228 815,940 222,776
Consulting Services 163,658 114,588 160,263 50,500 123,413
31,315,737 30,862,648 41,178,923 29,197,052 27,864,997
23
Health Management Revenue
Staffing Services $ 8,829,253 $ 7,860,008 10,975,012 2,192,085 -
Program Services 438,211 209,443 277,498 49,149 -
Consulting Services 24,793 18,330 23,235 40,536 -
9,292,257 8,087,781 11,275,745 2,281,770 -
Total Revenue
Management Services $ 37,630,748 $ 37,196,232 $ 49,924,444 $ 30,522,697 $ 27,518,808
Program Services 2,788,795 1,621,279 2,346,726 865,089 222,776
Consulting Services 188,451 132,918 183,498 91,036 123,413
$ 40,607,994 $ 38,950,429 $ 52,454,668 $ 31,478,822 $ 27,864,997
GROWTH STRATEGY
Our growth strategy is to continue expanding our fitness and health
management staffing services, along with continuing to grow our program and
consulting services revenue from existing and prospective customers. In the
long-term, management believes that we can be a leading integrator of fitness
and health services for corporations and other large organizations. Key elements
of our growth strategy include:
- further developing our health improvement programs and
services through internal expertise, partnerships and
potential acquisitions;
- leveraging existing site-based customer relationships into
higher margin fitness and health improvement programs and
services;
- pursuing customer opportunities with mid-sized companies and
other organizations;
- continuing to pursue opportunities to offer on-site management
services for large organizations; and
- exploring international growth opportunities.
OPERATIONS
Effective March 2005, we reorganized into two operational areas, fitness
management and health management. This reorganization both reflected and
formalized our focus on these two core areas of operation over the past two
years. In fitness management, we have two National Vice Presidents, each of whom
manage a number of regions. In health management, we have one National Vice
President, who manages all of our health management customers. Each region,
which is generally organized along geographic lines, is headed by a Regional
Vice President who is responsible for fitness center and wellness program
staffing, as well as managing service quality, financial performance and client
relationships. A typical fitness center is managed by a team of degreed fitness
professionals under the leadership of the center's Program Manager. The Program
Manager has day-to-day operating responsibility for the center, including staff
management, customer relations, membership sales, implementation and promotion
of fitness and health programs and the financial performance of the center.
24
Our corporate office provides centralized administrative support,
including accounting and finance, human resources and payroll, information and
technology systems, sales and marketing, as well as general management for the
development and delivery of our program services.
PROPERTIES
We lease approximately 8,000 square feet of commercial office space in
Bloomington, Minnesota, under a lease that expires in October 2007. Our monthly
base rent for this office space is approximately $10,700, plus taxes, insurance
and other related operating costs. Additionally, we lease approximately 1,500
square feet of commercial office space in Piscataway, New Jersey, under a lease
that expires on December 31, 2006. Our monthly rent for this office space is
$1500.
SALES AND MARKETING
We market our services to both corporations and members of the fitness
centers it manages. Our sales force actively pursues new corporate customers
across a wide variety of industries. Our sales force is primarily responsible
for identifying potential corporate customers and sales lead partners, and
managing the overall sales process.
We have a corporate marketing department that supports our managed fitness
centers through the development of marketing programs and promotional materials.
OUTLOOK AND TRENDS
The high cost of employee health care has become a key concern for many
corporations. According to published reports, annual health care costs are
expected to continue to increase at double digit rates for the next several
years due to a number of factors, including an aging workforce, unhealthy
populations entering the workforce and obesity-related medical conditions due to
poor nutrition and inactivity. Management believes that many companies will be
interested in addressing the health needs of employees, their dependents and
retirees, including implementation of specific strategies to help "at-risk"
individuals, as part of a broader strategy to reduce health care costs. We
believe we have the products, services, expertise and personnel to meet this
objective.
The U.S. economy has experienced recessionary pressures in recent years,
which has negatively affected the corporate landscape. We continue to feel the
effect of these economic changes in the form of competitive prices we must offer
for our services in order to renew our customer agreements, or to obtain new
customers. Although we believe that price competition will not materially affect
results of operations, we believe that price competition will continue for the
foreseeable future.
A trend that may further develop within our fitness center management
business relates to companies asking service providers to operate their fitness
centers on a cost-neutral or for-profit basis. These cost-conscious companies
desire to minimize or eliminate the subsidization of fitness center operating
costs by keeping costs within the revenues being realized from employee
memberships and other sources of revenue. In connection with this form of
business model, we would derive our management fee revenue not from our
corporate client, but from the profits of the fitness center. The application of
this business model may require us to fund operating losses until enough
memberships are sold to realize profitability. We believe we may have to fund
operating losses for such centers up to twenty-four months before profitability
could be reached. However, we believe this model will enable us\ to leverage our
experience managing for-profit fitness centers, and may result in higher gross
margins and profitability. Currently, existing contracts representing this
business model do not present a material risk
25
or represent a material contribution to our results of operation. However, there
can be no assurance that the number and scope of such contracts will not become
material in the future or that we will be able to manage such centers profitably
or to fund losses for these centers until profitability is achieved.
SIGNIFICANT CUSTOMER RELATIONSHIP
At December 31, 2004, we had one customer relationship that provided 10.3%
of our total revenue. For this customer, we provide fitness center management
and wellness program administration services for approximately 55 locations. The
agreement expires December 31, 2006, and will automatically renew for successive
one-year periods unless either party delivers written notice at least 90 days
prior to termination. We believe that our relationship with this customer is
good.
COMPETITION
Within the business-to-business fitness and health management services
industry, there are relatively few national competitors. However, virtually all
markets are home to regional providers that manage several sites within their
geographic areas. With our national presence and almost 30 years of history,
management believes that we are recognized as a leading provider of corporate
fitness and health management services, and is well positioned to compete in
this industry.
PROPRIETARY RIGHTS
We have three registered trademarks, "Insight"(R), "It Pays To Be
Healthy"(R) and "Live For Life"(R). We do not have any other significant
proprietary rights.
GOVERNMENT REGULATION
Management believes that there currently is no significant government
regulation which materially limits our ability to provide fitness and health
management and consulting services to our corporate, hospital, community and
university-based clients.
EMPLOYEES
At December 31, 2004, we had 760 full-time and 2,570 part-time and on-call
employees, of which approximately 40 were employed at our corporate, divisional
and regional offices, with the remainder primarily engaged in the staffing of
fitness, wellness and occupational health centers and programs. We have an
agreement with the United Autos Workers Union regarding approximately 10 of our
employees that work at fitness centers owned by DaimlerChrysler Corporation.
Management believes our relationship with employees is good.
INDEMNIFICATION OBLIGATIONS
A majority of our management agreements include a provision that obligate
us to indemnify and hold harmless the customer 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
our employees, officers or directors in connection with the operation of our
business. A majority of these management contracts also include a provision that
obligates the customer to indemnify and hold us harmless against all liabilities
arising out of the acts or omissions of the customer, their employees and
agents. We can make no assurance that claims by our customers, or their
employees, officers or directors, will not be made in the course of operating
our business.
26
INSURANCE
We maintain the following types of insurance policies: commercial general
liability, professional liability, automobile liability, commercial property,
employee dishonesty, employment practices, directors and officers liability,
workers compensation and excess umbrella liability. The policies provide for a
variety of coverages and are subject to various limitations, exclusions and
deductibles. While we believe our insurance policies are sufficient in amount
and coverage for our 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.
LEGAL PROCEEDINGS
We may be, from time to time, subject to claims and suits arising in the
ordinary course of our business. Claims have, in the past, generally been
covered by insurance. Management does not believe the resolution of any such
legal matters will have a material effect on our financial condition or results
of operations, although no assurance can be given with respect to the ultimate
outcome of any such actions. Furthermore, there can be no assurance that our
insurance will be adequate to cover all liabilities that may arise out of claims
brought against the Company.
27
MANAGEMENT
NAME AGE POSITION
---- --- --------
James A. Bernards (1), (3) 58 Director
K. James Ehlen, M.D. 60 Director
Robert J. Marzec (2), (4) 60 Director
Cary Musech (3) 47 Director
Jerry V. Noyce 60 President, CEO and Director
John C. Penn (2), (4) 65 Chairman
Mark W. Sheffert (2), (3), (4) 57 Director
Linda Hall Whitman (1), (2) 56 Director
Rodney A. Young (1) 50 Director
Wesley W. Winnekins 44 Chief Financial Officer and Treasurer
James A. Narum 48 National Vice President of Account Services - Fitness Management
Jeanne C. Crawford 47 Vice President-Human Resources and Secretary
David T. Hurt 39 National Vice President of Account Services - Fitness Management
Katherine M. Hamlin 38 National Vice President of Account Services - Health Management
Brian Gagne 42 Vice President - Programs and Partnerships
Michael R. Seethaler 50 National Vice President - Business Development
Ralph T. Colao 50 Vice President - Consulting and Best Practices
Michael Zdychnec 49 Vice President - Marketing
John Ellis 46 Chief Information Officer
Pete Egan 44 Chief Science Officer
(1) Member of Compensation Committee
(2) Member of Nominating Committee
(3) Member of Finance Committee
(4) Member of Audit Committee
JAMES BERNARDS, a director of the Company since March 1999, serving as
Chairman of the Board from 1999 through 2003. In addition, Mr. Bernards served
as a director of the Company from 1993 to 1998. Mr. Bernards has served as
President of Brightstone Capital, LLC, a venture capital firm, since 1985 and
President of Facilitation Incorporated, a consulting firm since founding it in
July 1993. Prior to that time he was President of Stirtz Bernards & Co., a CPA
firm he founded and with which he had been a partner for more than 12 years. Mr.
Bernards is also a director of three public companies, FSI International, Inc.,
August Technology Corporation and Entegris, Inc., and several private companies.
JIM EHLEN, M.D., a director of the Company since April 2001, currently
serves as Chief Executive Officer of the Halleland Health Consulting Group, a
Minneapolis-based health consulting firm. From February 2001 to February 2003,
Dr. Ehlen served as Chief, Clinical Leadership for Humana Inc., a national
managed care organization. He was Executive Leader of Health Care Practice for
Halleland Health Consulting Group from May 2000 to February 2001 and was a
self-employed health care consultant from June 1999 to May 2000. From October
1988 to June 1999, Dr. Ehlen served as Chief Executive Officer of Allina Health
System, an integrated health care organization. Dr. Ehlen currently provides
medical advisory consulting services to the Company as a representative of
Halleland Health
28
Consulting. See "Certain Transactions" contained within this Proxy Statement.
Dr. Ehlen is also a director of Transoma Medical, Inc., IZEX Technologies, Inc.,
Cardtronic Technology, Inc., privately- held companies, and GelStat Corporation,
a publicly-held company.
ROBERT MARZEC, a director of the Company since May 2004, retired from
PricewaterhouseCoopers in 2002, where he was an audit partner and a public
accountant for 35 years. Mr. Marzec is also a director of Medtox Scientific,
Inc., and Apogee Enterprises, Inc., both of which are publicly-held companies.
CARY MUSECH, a director of the Company since December 2003, serves as Chief
Executive Officer of Bayview Capital Management LLC ("Bayview Management"), the
general partner of Bayview Capital Partners LP ("Bayview Partners"), a private
equity investment firm. Pursuant to the terms of a stock purchase agreement
entered into in December 2003, Bayview Partners had the right to designate an
individual for one directorship on the Company's Board of Directors. Mr. Musech
was designated as the Bayview Partners nominee. Mr. Musech co-founded Bayview
Management and Bayview Partners in June 1998. Since November 2004, he has also
served as Chief Executive Officer of Tonka Bay Equity Partners LLC, the
investment advisor for Bayview Partners. From October 1993 to November 1997, Mr.
Musech was the Chief Financial Officer of Wright Products Corporation, a
privately-held manufacturer and distributor of storm and screen door hardware.
From February 1984 to September 1993, Mr. Musech was a corporate finance
specialist for US Bank (formerly First Bank System) and Wells Fargo Bank, N.A.
(formerly Norwest Corporation) where he developed expertise in financing
complex, highly leveraged transactions including buyouts, acquisitions,
recapitalizations and growth financings. From January 1981 to January 1984, Mr.
Musech was an auditor with Ernst & Young.
JERRY NOYCE has been President and Chief Executive Officer of the Company
since November 2000 and a director since February 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 Norwest Clubs and the Flagship Athletic Club.
JOHN PENN, a director of the Company since April 2001 and Chairman of the
Board since January 2004, currently serves as President, CEO and Chairman of
Intek Plastics, Inc., a custom extruder of plastic products for the window and
door industries. From 1999 to 2003, he served as Vice Chairman and Chief
Executive Officer of Satellite Companies, a family-owned group of three
companies engaged in the manufacture and international sales of portable
restroom equipment, distribution and rental of relocateable buildings, and sales
and maintenance of private aircraft. He served for 21 years as an outside board
member of those companies before joining them as an employee in 1999. For 25
years prior to joining Satellite Companies, Mr. Penn served as chief executive
officer of several companies in the manufacturing and medical industries,
including Center for Diagnostic Imaging, Benson Optical and Arctic Enterprises.
Mr. Penn is also a director of Angeion Corporation, a publicly-held company.
MARK SHEFFERT, a director of the Company since January 2001, has served as
Chairman and Chief Executive Officer of Manchester Companies, Inc., an
investment banking and business advisory firm, since December 1989. Prior to
that, he was President of First Bank System, Inc. (now U.S. Bank) a $28 billion
bank holding company headquartered in Minneapolis, Minnesota. He also served as
Chairman and CEO for First Trust, a $20 billion trust company based in St. Paul,
Minnesota. For 10 years prior to First Bank, Mr. Sheffert served as President
and Chief Operating Officer of North Central Insurance Company. Mr. Sheffert has
served on the Board of Directors for over thirty companies, including NYSE,
NASDAQ and private companies, and he currently serves on the Board of BNCCORP,
Inc., a publicly-held company.
29
LINDA HALL WHITMAN, PhD, a director of the Company since April 2001, was
Chief Executive Officer of MinuteClinic, a healthcare services company, from
2002-2005, and is currently serving as consultant to the company. Prior to that,
she was President of Ceridian Performance Partners (an employee benefits
provider), Ceridian Corporation from 1996 through 2000 and Vice President,
Business Integration at Ceridian from 1995 to 1996. From 1980 to 1995 she served
in various management and executive positions with Honeywell, Inc., including
Vice President, Consumer Business Group from 1993 to 1995. Ms. Whitman has been
a director of MTS Systems Incorporation since 1985 and August Technology
Corporation from 2001 - 2006. She served on the Ninth District Federal Reserve
Bank Board as a Class C Director from 1999 - 2005, and served as its Chair from
2004 - 2005.
RODNEY YOUNG, a director of the Company since April 2001, has served as
President, Chief Executive Officer and director of Angeion Corporation, a
medical company, since November 2004, joining Angeion as its Executive Vice
President in July 2004. Mr. Young was Chief Executive Officer and President of
LecTec Corporation, a developer, manufacturer and marketer of healthcare
consumer and over-the-counter pharmaceutical products, from August 1996 to July
2003, also serving as its Chairman of the Board of LecTec from November 1996 to
July 2003. Prior to that, Mr. Young served Baxter International, Inc. for five
years in various management roles, most recently as Vice President and General
Manager of the Specialized Distribution Division. Mr. Young also serves as a
director of Possis Medical, Inc., a publicly-held company, and Delta Dental Plan
of Minnesota.
WESLEY 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 NARUM has been the Company's National Vice President of Account
Services - Fitness Management since December 2003, Senior Vice
President-Corporate Business Development from December 2001 to December 2003,
and served as Corporate Vice President of Operations-Corporate Health and
Fitness Division from November 2000 to December 2001. From 1995 until November
2000, Mr. Narum was responsible for national operations in the Company's
Corporate Health and Fitness Division. 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.
JEANNE 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.
30
DAVID HURT serves as National Vice President of Account Services-Fitness
Management, where he is responsible for the operation of accounts within the
Company's Fitness Management business area. He directs the overall development
and management of corporate hospital, community, and university fitness center
operations. Mr. Hurt has been active in the industry for more than 16 years. His
experience in health and fitness management began in 1988 with the Valley
Wellness Center in Harrisonburg, Virginia. In recent years, he has been involved
in the successful development and management of several start-up fitness center
projects ranging in size from 45,000 - 150,000 square feet.
KATHERINE HAMLIN was appointed as the Company's National Vice President of
Account Services-Health Management, in March 2005. In this role, she directs the
overall development and management of the Company's Health Management accounts.
From December 2003 to March 2005, she served as the Company's Vice President of
Marketing. Previously, Ms. Hamlin spent 15 years with the Health & Fitness
Division of Johnson & Johnson Health Care Systems Inc., a subsidiary of Johnson
& Johnson, a business acquired by the Company. Ms. Hamlin was the Director of
Marketing Services and National Sales leading business expansion in the United
States and internationally, while exploring new markets. Ms. Hamlin serves on
the board for International Council on Active Aging (ICAA), and American
Marketing Association (AMA). She is a member of the Alliance for Work Life
Progress (AWLP), National Business Group on Health (NBGH) and Wellness Councils
of America (WELCOA).
BRIAN GAGNE has served as the Company's Vice President, Programs and
Partnerships, since December 2003. In this role, he is responsible for
establishing the direction and managing the resources that develop and deliver
the Company's branded fitness and health management programs and services. Mr.
Gagne brings more than 16 years of health, fitness and wellness experience in
the corporate, commercial and medical fitness markets. Mr. Gagne joined the
Company after the acquisition of Johnson & Johnson Health Care Systems in
December 2003. Prior to Health Fitness, he was the Director of Integrated
Behavioral Solutions and was responsible for the strategic design and
development of patient education programs and tools for the Johnson & Johnson
Family of Companies. Mr. Gagne started his career in 1987 as an Exercise
Physiologist at Gottlieb Health & Fitness Center (GHFC).
MIKE SEETHALER joined the Company as National Vice President of Business
Development in December 2003. In this role, Mr. Seethaler directs all new client
and prospective client relationships. Mr. Seethaler was formerly Sales Director,
Global Account Sales for Rockwell Automation, where he had responsibility for a
$400 million business line. During his 20 years at Rockwell, he held various
positions in training, performance, marketing, and customer support. He has been
a proven visionary with a consistent record of sales and sales management
experience in all aspects of value-added consultative selling. He also received
more than 13 awards and professional recognition for public speaking, sales
training, team building and financial performance from Rockwell.
RALPH COLAO has been the Company's Vice President of Consulting and Best
Practices since December 2003. Mr. Colao leads the Company's initiatives to
expand its Health Management consulting businesses. Prior to joining the
Company, he was National Director of Operations for the Health & Fitness
Services Division of Johnson & Johnson Health Care Systems, a business acquired
by the Company. Mr. Colao has in excess of 24 years of related experience, and
is an active member of the American College of Sports Medicine and National
Business Group on Health.
MICHAEL ZDYCHNEC serves as the Company's Vice President of Marketing, and
has over 26 years of experience in the health care industry working directly
with consumers, health plans, employers, and health care providers. Most
recently, Zdychnec was Senior Vice President of marketing and product
development for ACN Group, a business unit within United HealthGroup. In this
capacity, he was responsible for the planning, development, and launch of a
consumer health and wellness product line for the organization. Prior to joining
ACN Group in 1996, Zdychnec held a variety of senior management positions in
marketing, operations, product development, and consulting with health care
organizations throughout the United States. He is a graduate of Iowa State
University with his B.S. in economics and marketing research.
JOHN F. ELLIS Serves as the Company's Chief Information Officer. John is
formerly the Founder and Chief Executive officer of HealthCalc.Net, Inc., which
we acquired in December 2005. From January 1995 to August 1999, Mr. Ellis held a
position of Senior Specialist with Perot Systems, an Information Technology
consulting group. From November 1989 to January 1995, Mr. Ellis held a position
of Vice President of Information Technology at People Karch International, a
health and fitness software development and services firm. Mr. Ellis holds a
B.S. in Physical Education from The Citadel.
PETER A. EGAN serves as the Company's Chief Science Officer. Mr. Egan is
formerly the Founder of HealthCalc.Net, Inc., which we acquired in December
2005. Immediately prior to that, from April 1994 to July 1996, Mr. Egan served
as a Database Systems Developer for Berger & Co., Dallas, Texas. From November
1993 to July 1995, Mr. Egan served as a Database Systems Developer for
Wellington Consulting, Fort Lee, New Jersey, and from March 1992 to November
1993 Mr. Egan was Director of Development for People Karch International, Ltd.,
Dallas, Texas and Chantilly, Virginia. From June 1985 to March 1992, Mr. Egan
was Manager of Preventative Medicine at Sandia National Laboratories,
Albuquerque, New Mexico. Mr. Egan holds a Ph.D in Exercise Physiology from the
University of New Mexico and a B.U.S. from the University of New Mexico in
University Studies/Exercise Science.
31
DIRECTOR ARRANGEMENTS
Other than with respect to Mr. Musech, as nominee of Bayview Partners
pursuant to an investment agreement entered into in December 2003, there is no
other arrangement or understanding with pursuant to which any person was
selected as a director. On November 15, 2005, Bayview Partners's investment was
fully redeemed (except for an insignificant number of warrants) and Bayview
Partner's investment agreement was terminated. Mr. Musech has indicated that he
will continue to serve as a director until our next annual meeting (typically
held in May of each year) but that, as a result of our redemption of
substantially all of Bayview Partner's investment, he likely will not seek
reelection as a director. There are no family relationships among the Company's
directors.
BOARD COMMITTEES
Audit Committee.
The Audit Committee is comprised of directors Robert J. Marzec (Chair),
Mark W. Sheffert and John C. Penn. Messrs. Marzec, Sheffert and Penn are, in the
judgment of the Board of Directors, "independent" directors. The Board also
believes that each member of the Audit Committee satisfies the independence
criteria of Nasdaq Rule 4200(a)(15) (though not required to comply with such
provision) and the criteria of Section 10A(m)(3) of the Securities Exchange Act
of 1934. The Audit Committee is responsible for the oversight relating to our
systems of internal and disclosure controls and our financial accounting and
reporting matters. The Committee is also responsible for the appointment,
compensation, retention and oversight of the work of any publicly registered
accounting firm, including our independent registered public accountants. The
Charter for the Audit Committee is attached as Exhibit A to the Proxy Statement
for the 2004 Annual Meeting of Shareholders. The Audit Committee met 7 times
during fiscal 2005.
Audit Committee Financial Expert
The Board has determined that Robert J. Marzec is the "audit committee
financial expert" as defined by Item 401(h)(2) of Regulation S-K under the
Securities Act of 1933. The designation of Mr. Marzec as the audit committee
financial expert does not impose on Mr. Marzec any duties, obligations or
liability that are greater than the duties, obligations and liability imposed on
Mr. Marzec as a member of the Audit Committee and the Board of Directors in the
absence of such designation or identification.
Compensation Committee
The Compensation Committee consists of Linda Hall Whitman (Chair), James A.
Bernards and Rodney A. Young. Each member of the Compensation Committee is, in
the judgment of the Board of Directors, an "independent" director. The
Compensation Committee is charged with oversight responsibility for management's
performance and the adequacy and effectiveness of compensation and benefit
plans. In addition, the Compensation Committee makes recommendations to the
Board of Directors regarding remuneration arrangements for senior management,
and adoption of employee compensation and benefit plans. Though not required to
comply with such provision, the Board believes that each member of the
Compensation Committee satisfies the independence criteria of Nasdaq Rule
4200(a)(15). The Compensation Committee met 3 times during fiscal 2005.
Finance Committee
The Finance Committee, which consists of Mark W. Sheffert (Chair), James A.
Bernards, and Cary Musech, and is charged with exploring strategic opportunities
and the methods that might be available for financing such opportunities. The
Finance Committee met 17 during fiscal 2005.
32
Nominating Committee
Our Nominating Committee consists of the Chairman of the Board (John C.
Penn), the Chairman of the Audit Committee (Robert J. Marzec), the Chairman of
the Compensation Committee (Linda Hall Whitman) and the Chairman of the Finance
Committee (Mark W. Sheffert). Though not required to comply with such provision,
The Board believes that each member of the Nominating Committee satisfies the
independence criteria of Nasdaq Rule 4200(a)(15). The Nominating Committee did
not meet during fiscal 2005.
The Nominating Committee has not adopted a charter. We have not yet adopted
a nominating policy regarding director nominee proposals by shareholders and
does not believe such a policy is needed because shareholders are free at any
time to recommend a nominee to be considered by the Board by submitting a
written proposal to the Chairman of the Board of Directors, at Health Fitness
Corporation, 3600 American Boulevard West, Suite 560, Bloomington, Minnesota
55431. A consent signed by the proposed nominee agreeing to be considered as a
director should accompany the written proposal. The proposal should include the
name and address of the nominee, in addition to the qualifications and
experience of said nominee.
The independent directors will consider the attributes of the candidates
and the needs of the Board and will review all candidates in the same manner,
regardless of the source of the recommendation. In evaluating director nominees,
a candidate should have certain minimum qualifications, including being able to
read and understand basic financial statements, be familiar with our business
and industry, have high moral character and mature judgment, and be able to work
collegially with others. In addition, factors such as the following shall be
considered:
- appropriate size and diversity of the Board;
- needs of the Board with respect to particular talent and
experience;
- knowledge, skills and experience of nominee;
- familiarity with domestic and international business affairs;
- legal and regulatory requirements;
- appreciation of the relationship of our business to the changing
needs of society; and
- desire to balance the benefit of continuity with the periodic
injection of the fresh perspective provided by a new member.
ELECTION OF DIRECTORS
The Board of Directors has fixed the number of directors for the 2005 year
at nine (9). Under applicable Minnesota law, the election of each director
requires the affirmative vote by a plurality of the voting power of the shares
present and entitled to vote on the election of directors at the Annual Meeting
at which a quorum is present.
DIRECTOR COMPENSATION
Under a compensation plan for outside directors, directors who are not
employees of the Company receive the following compensation:
1. Each director receives an annual cash retainer of $12,000 payable
quarterly at a rate of $3,000 in advance of each quarter.
2. The chairperson of the board receives an additional annual cash
retainer of $6,000 payable quarterly at a rate of $1,500 in advance
of each quarter.
3. The chairperson of the audit committee receives an additional annual
cash retainer of $5,000 payable quarterly at a rate of $1,250 in
advance of each quarter.
4. The chairperson of the compensation committee receives an additional
annual cash retainer of $2,500 payable quarterly at a rate of $625 in
advance of each quarter.
5. The chairperson of the finance and nominating committees receives a
$250 committee meeting fee (in addition to fees paid to all committee
members for their attendance at such committee meetings).
6. Each director receives a cash payment of $1,000 for attending each
regular and special board meeting. Telephonic board meetings, or a
director's telephonic attendance at a board meeting, are compensated
at 75% of the full payment.
33
7. Committee members receive a cash payment of $500 for attending each
regular and special committee meeting up to the following annual
limit: Compensation Committee - eight meetings; and Audit Committee -
eight meetings. The Finance Committee and Nominating Committee do not
have an annual limit on the number of meetings. Telephonic committee
meetings, or the director's telephonic attendance at a committee
meeting, will be compensated at 75% of the full payment.
8. Upon the initial election to the Board of Directors, a director
receives a grant of 20,000 shares of common stock.
9. Upon the initial election to the Board of Directors and annually
thereafter, a director will receive a six-year fully vested option to
purchase 15,000 shares of common stock. The option will have an
exercise price equal to the fair market value of the common stock on
the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of our last three fiscal years to the Chief Executive Officer
and to our other four most highly compensated executive officers who received
compensation in excess of $100,000 during fiscal 2005 (such individuals referred
to as the "named executive officers").
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted Securities LTIP All Other
Name and Principal Fiscal Stock Underlying Payouts Compensation
Position Year Salary ($) Bonus ($) Other ($) Awards ($) Options ($) ($)
--------- ---- ---------- --------- --------- ---------- ------- ----- -------------
Jerry V. Noyce, President 2005 249,134 73,558 8,400(2) -- 40,000 -- --
and Chief Executive 2004 243,269 -- 8,400 -- 80,000 -- --
Officer 2003 238,050 10,000 8,400 -- 102,000 -- --
Wesley W. Winnekins, 2005 158,770 33,000 -- -- 10,000 -- --
Chief Financial Officer 2004 143,780 -- -- -- 17,000 -- --
2003 131,159 15,000 -- -- 27,000 -- --
Jeanne C. Crawford, Vice 2005 134,752 24,747 -- -- 7,500 -- --
President - Human 2004 128,895 8,766 -- -- 35,000 -- --
Resources 2003 123,311 20,230 -- -- 25,000 -- --
Brian Gagne, Vice 2005 130,361 21,456 -- -- 15,000 -- --
President - Programs and 2004 125,221 8,658 27,489(3) -- -- -- --
Partnerships (1)
Michael Seethaler, 2005 123,070 29,260 -- -- 15,000 -- --
National Vice President- 2004 120,101 10,000 -- -- -- -- --
Business Development (1)
------------------------
(1) Such persons first became executive officers during fiscal 2004.
(2) Amount represents payments for a car allowance and country club
membership. See "Employment Agreements - Jerry V. Noyce."
(3) Amount represents payments for relocation expenses.
34
STOCK OPTIONS GRANTED IN FISCAL 2005
The following table sets forth information regarding stock options granted
to the named executive officers during the fiscal year ended December 31, 2005.
We have not granted stock appreciation rights.
Amounts in the following table represent potential realizable gains that
could be achieved for the options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
calculated based on the requirements of the Securities and Exchange Commission
and do not represent an estimate or projection of our future common stock
prices. These amounts represent certain assumed rates of appreciation in the
value of our common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises depend on the future performance
of the common stock and overall stock market conditions. The amounts reflected
in the following table may not necessarily be achieved.
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED ANNUAL
SECURITIES OPTIONS EXERCISE RATES OF STOCK PRICE
UNDERLYING GRANTED TO PRICE PER APPRECIATION FOR
OPTIONS EMPLOYEES IN SHARE EXPIRATION OPTION TERM
-------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
-------- -------------- ------------- --------- ---------- ---------- ----------
Jerry V. Noyce 40,000 (1) 16% $2.62 2/24/11 35,642 80,860
Wesley W. Winnekins 10,000 (1) 4% $2.62 2/24/11 8,911 20,215
Jeanne C. Crawford 7,500 (1) 3% $2.62 2/24/11 6,683 15,161
Brian Gagne 7,500 (1) 3% $2.81 2/4/11 7,168 16,261
7,500 (1) 3% $2.62 2/24/11 6,683 15,161
Michael Seethaler 7,500 (1) 3% $2.81 2/4/11 7,168 16,261
7,500 (1) 3% $2.62 2/24/11 6,683 15,161
------------------------
(1) Exercisable in four annual increments, each in the amount of 25% of the
number of shares granted, commencing on the first anniversary of the date
of grant.
AGGREGATED OPTION EXERCISES IN 2005 AND YEAR-END OPTION 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.
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON EXERCISE VALUE OPTIONS AT 12/31/05 12/31/05(1)
NAME (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ---- --------- ------------------------- -------------------------
Jerry V. Noyce -- -- 422,500 / 161,500 $897,155 / $170,120
Wesley W. Winnekins -- -- 117,000 / 51,500 $222,080 / $66,540
Jeanne C. Crawford -- -- 77,500 / 45,000 $147,600 / $36,675
Brian Gagne -- -- 20,000 / 35,000 $27,600 / $27,675
Michael Seethaler -- -- 20,000 / 35,000 $28,800 / $28,875
------------------------
(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the market price of the common stock at fiscal year end
and the option exercise price per share multiplied by the number of shares
subject to options. The closing price as of December 30, 2005 on the OTC
Bulletin Board was $2.63.
35
EQUITY COMPENSATION PLANS
2005 Stock Option Plan
A general description of the basic features of the 2005 Plan is presented
below, but such description is qualified in its entirety by reference to the
full text of the 2005 Plan.
Purpose. The purpose of the 2005 Plan is to advance the interests of the
Company and our shareholders by enabling us to attract and retain qualified
persons as employees, directors and consultants, by providing an incentive to
such individuals through equity participation in the Company.
Term. Options may be granted under the 2005 Plan until December 15, 2014,
or until such earlier date as the 2005 Plan is discontinued or terminated by the
Board.
Administration. The 2005 Plan is administered by the Board of Directors or
by a Committee of the Board of Directors (the "Administrator"). The 2005 Plan
gives broad powers to the Administrator to administer and interpret the 2005
Plan, including the authority to select the individuals to be granted options
and to prescribe the particular form and conditions of each option granted.
Eligibility. All of our salaried employees (including of any or our
subsidiaries) are eligible to receive incentive stock options pursuant to the
2005 Plan. All salaried employees, non-employee directors and officers of, and
consultants to, the Company or any subsidiary are eligible to receive
nonqualified stock options. As of December 31, 2005, the Company had
approximately 559 salaried employees (of which 12 are executive officers)
and eight directors who are not employees.
Options. When an option is granted under the 2005 Plan, the Administrator
at its discretion specifies the option price, the type of option (either
"incentive" or "nonqualified") to be granted, and the number of shares of common
stock which may be purchased upon exercise of the option. The exercise price of
an incentive stock option may not be less than 100% of the fair market value of
the Company's common stock and the option price of a nonqualified option may not
be less than 85% of the fair market value of the Company's common stock on the
date of grant. The closing price of our common stock (i.e., the fair market
value) on December 30, 2005 was $2.63 per share. The term during which the
option may be exercised and whether the option will be exercisable immediately,
in stages or otherwise are set by the Administrator, but the term of an
incentive stock option may not exceed ten years from the date of grant.
Optionees may pay for shares upon exercise of options with cash, certified check
or common stock of the Company valued at the stock's then fair market value.
Each stock option granted under the 2005 Plan is nontransferable during the
lifetime of the optionee. Each outstanding option under the 2005 Plan may
terminate earlier than its stated expiration date in the event of the optionee's
termination of employment, directorship or other relationship with the Company.
Amendment. The Board of Directors may from time to time suspend or
discontinue the 2005 Plan or revise or amend it in any respect; provided, the
2005 Plan may not, without the approval of the
36
shareholders, be amended in any manner that will (a) materially increase the
number of shares subject to the 2005 Plan except as provided in the case of
stock splits, consolidations, stock dividends or similar events; (b) materially
modify the requirements for eligibility for participation in the 2005 Plan; (c)
materially increase the benefits accruing to optionees under the 2005 Plan or
(d) cause incentive stock options to fail to meet the requirements of the
Internal Revenue Code.
Federal Income Tax Consequences of the 2005 Plan. Under present law, an
optionee will not realize any taxable income on the date a nonqualified option
is granted pursuant to the 2005 Plan. Upon exercise of the option, however, the
optionee must recognize, in the year of exercise, ordinary income equal to the
difference between the option price and the fair market value of the Company's
common stock on the date of exercise. Upon the sale of the shares, any resulting
gain or loss will be treated as capital gain or loss. The Company will receive
an income tax deduction in its fiscal year in which options are exercised, equal
to the amount of ordinary income recognized by those optionees exercising
options, and must withhold income and other employment-related taxes on such
ordinary income.
Incentive stock options granted under the 2005 Plan are intended to qualify
for favorable tax treatment under Code Section 422. Under Section 422, an
optionee recognizes no taxable income when the option is granted. Further, the
optionee generally will not recognize any taxable income when the option is
exercised if he or she has at all times from the date of the option's grant
until three months before the date of exercise been an employee of the Company.
The Company ordinarily is not entitled to any income tax deductions upon the
grant or exercise of an incentive stock option. Certain other favorable tax
consequences may be available to the optionee if he or she does not dispose of
the shares acquired upon the exercise of an incentive stock option for a period
of two years from the granting of the option and one year from the receipt of
the shares.
EMPLOYMENT AGREEMENTS
JERRY V. NOYCE. In November 2000, the Company entered into an employment
agreement with Jerry Noyce, the Company's President and Chief Executive Officer.
Salary increases under the agreement are determined by the Compensation
Committee. Mr. Noyce's current annual base salary under the agreement is
$250,096. Mr. Noyce is also eligible to earn an annual bonus based on criteria
set by the Board. Mr. Noyce also receives normal and customary employee benefits
and fringe benefits, including a $500 per month car allowance and up to $200 per
month for a country club membership. The agreement may be terminated by either
party upon written notice to the other party. If Mr. Noyce is terminated without
"cause," he will continue to receive his base salary for a period of 12 months
following such termination. If the agreement is terminated by the Company
because of a change of control, Mr. Noyce will receive his base salary for a
period of 24 months following termination. If Mr. Noyce resigns as a result of a
change of control because he will not be named chief executive officer of the
new controlling entity, he will receive his base salary for a period of 12
months following termination.
WESLEY W. WINNEKINS. The Company has an employment agreement with Wes
Winnekins, the Company's Chief Financial Officer, which agreement was effective
as of February 9, 2001 and continues for an indefinite term until terminated in
accordance with the agreement. Mr. Winnekins' current annual base salary under
his employment agreement is $162,000. Mr. Winnekins is also eligible to earn an
annual bonus based on criteria set by the Company's CEO and approved by the
Compensation Committee. The agreement may be terminated by either party upon
written notice to the other party. If Mr. Winnekins is terminated without
"cause," he will continue to receive his base salary for a period of three
months following such termination.
JEANNE C. CRAWFORD. The Company has an employment agreement with Jeanne
Crawford, Vice President - Human Resources, which agreement was effective as of
March 1, 2003 and continues for an
37
indefinite term until terminated in accordance with its terms. Ms. Crawford's
current annual base salary under the agreement is $136,105. Ms. Crawford is also
eligible to earn an annual bonus based on criteria set by the Company's CEO and
approved by the Compensation Committee. The agreement may be terminated by
either party upon written notice to the other party. If Ms. Crawford is
terminated without "cause," she will continue to receive her base salary for a
period of three months following such termination.
BRIAN GAGNE. The Company has an employment agreement with Brian Gagne, Vice
President - Programs and Partnerships, which agreement was effective as of
December 8, 2003 and continues for an indefinite term until terminated in
accordance with its terms. Mr. Gagne's current annual base salary under the
agreement is $131,890. Mr. Gagne is also eligible to earn an annual bonus based
on criteria set by the Company's CEO and approved by the Compensation Committee.
The agreement may be terminated by either party upon written notice to the other
party. If Mr. Gagne is terminated without "cause," he will continue to receive
his base salary for a period of three months following such termination.
MICHAEL SEETHALER. The Company has an employment agreement with Michael
Seethaler, National Vice President - Business Development, which agreement was
effective as of December 22, 2003 and continues for an indefinite term until
terminated in accordance with its terms. Mr. Seethaler's current annual base
salary under his employment agreement is $124,200. Mr. Seethaler is also
eligible to earn an annual bonus based on criteria set by the Company's CEO and
approved by the Compensation Committee. The agreement may be terminated by
either party upon written notice to the other party. If Mr. Seethaler is
terminated without "cause," he will continue to receive his base salary for a
period of three months following such termination.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act provides that
unless prohibited or limited by a corporation's articles of incorporation or
bylaws, a corporation must indemnify its current and former officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
penalties, fines and amounts paid in settlement which, in each case, were
incurred in connection with actions, suits or proceedings in which such person
is a party by reason of the fact that he or she was an officer, director,
employee or agent of the corporation, if such person i) has not been indemnified
by another organization or employee benefit plan for the same judgments,
penalties, fines, including without limitation, excise taxes assessed against
the person with respect to an employee benefit plan, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding with respect to the same acts or omissions, ii)
acted in good faith, iii) received no improper personal benefit and statutory
procedure has been followed in the case of any conflict of interest by a
director, iv) in the case of any criminal proceedings, had no reasonable cause
to believe the conduct was unlawful, and v) in the case of acts or omissions
occurring in the person's performance in the official capacity of director or,
for a person not a director, in the official capacity of officer, committee
member, employee or agent, reasonably believed that the conduct was in the best
interests of the corporation, or, in the case of performance by a director,
officer, employee or agent of the corporation as a director, officer, partner,
trustee, employee or agent of another organization or employee benefit plan,
reasonably believed that the conduct was not opposed to the best interests of
the corporation. Section 302A.521 requires the corporation to advance, in
certain circumstances and upon written request, reasonable expenses prior to
final disposition. Section 302A.521 also permits a corporation to purchase and
maintain insurance on behalf of its officers, directors, employees and agents
against any liability which may be asserted against, or incurred by, such
persons in their capacities as officers, directors, employees and agents of the
corporation, whether or not the corporation would have been required to
indemnify the person against the liability under the provisions of such section.
38
Our articles of incorporation limit personal liability for breach of the
fiduciary duty of our directors to the fullest extent provided by the Minnesota
Business Corporation Act. Our articles of incorporation eliminate the personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on i) the director's duty of loyalty to us, ii) acts
or omissions not made in good faith, iii) acts or omissions involving
intentional misconduct, iv) payments of improper dividends, v) violations of
state securities laws and vi) acts occurring prior to the date such provision
was added. Any amendment to or repeal of such provision shall not adversely
affect any right or protection of a director of ours for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
Our bylaws provide that each director and officer, past or present, and each
person who serves or may have served at our request as a director, officer,
employee or agent of another corporation or employee benefit plan and their
respective heirs, administrators and executors, will be indemnified by us to
such extent as permitted by Minnesota Statutes, Section 302A.521, as now enacted
or hereafter amended.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
39
RELATED PARTY TRANSACTIONS
K. James Ehlen, M.D., is a director of the Company. On December 1, 2003, we
entered into a Professional Services Agreement with Dr. Ehlen, representing
Halleland Health Consulting. The scope of services provided by Dr. Ehlen
primarily included serving as our Medical Advisor, representing the Company as
its lead clinical representative with clients, and supporting our evaluations
and enhancements of our corporate health and wellness services strategy. The
agreement stated that Dr. Ehlen would receive a monthly retainer of $10,000 and
expire after 120 days. On April 1, 2004, we renewed the agreement with Dr.
Ehlen. The new agreement stated that Dr. Ehlen would receive a monthly retainer
of $7,500 and expired on December 31, 2004. Currently, Dr. Ehlen continues to
provide substantially the same services to us on a month-to-month basis. For
fiscal year 2004, we paid Dr. Ehlen $100,000 for his services.
Cary Musech, who became a director of the Company on December 8, 2003, is
the Chief Executive Officer of Bayview Capital Management LLC, the general
partner of Bayview Partners. On December 8, 2003, we issued a $2,000,000 term
note (the "Term Note") to Bayview Partners, along with 1,000,000 shares of
Series A Convertible Preferred Stock (the "Series A Stock") and a ten-year
warrant to purchase 1,210,320 shares of common stock at $0.50 per share. The
Series A Stock had a stated dividend rate of 6% per year, computed on a simple
interest basis, paid in kind in the form of additional shares of Preferred Stock
using a price of $1.00 per share ("PIK Dividends"). Between December 31, 2003
and November 14, 2005, an aggregate of 111,105 shares of Series A Stock were
issued to Bayview Partners in payment of the dividends. At the option of Bayview
Partners, the Series A Stock, including any PIK Dividends, was convertible into
common stock at a price of $0.50 per share. On December 29, 2004, the Company
repaid the Term Note to Bayview Partners. On November 14, 2005, we redeemed all
of the Series A Stock, which was convertible into 2,222,210 shares of common
stock, and the warrant which was exercisable for 1,210,320 shares of common
stock, for approximately $5.1 million.
40
PRINCIPAL SHAREHOLDERS
The following table sets forth as of December 31, 2005 certain information
regarding beneficial ownership of our common stock by:
- Each person known to us to beneficially own 5% or more of our common
stock;
- Each named executive officer;
- Each of our directors; and
- All of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934. Beneficial ownership generally means having
sole or shared voting or investment power with respect to securities. Unless
otherwise indicated in the footnotes to the table, each person named in the
table has sole voting and investment power with respect to the shares of common
stock set forth opposite the shareholder's name. We have based our calculation
of the percentage of beneficial ownership on 13,787,349 shares of common stock
outstanding on December 31, 2005. Unless otherwise noted below, the address of
each beneficial owner listed on the table is c/o Health Fitness Corporation,
3600 American Blvd. W., Suite 560, Bloomington, Minnesota 55431.
NAME OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS(1)
------------------------ ------ -------------------
5% BENEFICIAL OWNERS:
Pequot Capital Management, Inc. 3,898,440(2) 22.0%
500 Nyala Farm Road
Westport, CT 06880
Perkins Capital Management, Inc. 2,709,267(3) 19.7%
730 East Lake Street
Wayzata, MN 55391
Magnetar Capital Master Fund, Ltd. 1,624,350(4) 10.5%
c/o Magnetar Financial LLC
1603 Orrington Ave., 13th Floor
Evanston, IL 60201
Gruber & McBaine Capital Management 1,097,890(5) 7.4%
50 Osgood Place - Penthouse
San Francisco, CA 94133
NAMED EXECUTIVE OFFICERS AND DIRECTORS:
Jerry V. Noyce 453,186(6) 3.2%
Jeanne C. Crawford 166,545(7) 1.2%
Wesley W. Winnekins 128,000(8) *
Brian Gagne 25,972(9) *
Michael Seethaler 13,750(10) *
James A. Bernards 176,000(11) 1.3%
Mark W. Sheffert 151,000(12) 1.1%
Cary Musech 127,431(13) *
John C. Penn 86,000(14) *
41
NAME OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS(1)
------------------------ ------ -------------------
Linda Hall Whitman 86,000(14) *
Rodney A. Young 86,000(14) *
K. James Ehlen, M.D. 78,500(15) *
Robert J. Marzec 50,000(16) *
All executive officers and directors 2,007,195(17) 13.2%
as a group (20 persons)
----------
* Less than one percent.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them as of December 31, 2005, 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) Shares beneficially owned by Pequot Capital Management, Inc. represent: (i)
2,998,800 shares of common stock issuable upon the conversion of 588 shares
of Series B Convertible Preferred Stock ("Series B Stock"), which convert
into common stock at the rate 5,100 shares of common stock for each share
of Series B Stock; and (ii) 899,640 shares of common stock issuable
pursuant to currently exercisable warrants.
Shares beneficially owned by Pequot Capital Management are held of record
by the following investment funds in the following amounts: Pequot Scout
Fund, L.P., 1,306,110 shares; Pequot Mariner Master Fund, L.P., 676,260
shares; Premium Series PCC Limited - Cell 33, 53,040 shares; Pequot
Diversified Master Fund, Ltd., 86,190 shares; Pequot Navigator Offshore
Fund, Inc., 530,400 shares; Premium Series PCC Limited - Cell 32, 92,820
shares; Pequot Healthcare Fund, L.P., 497,250 shares; Pequot Healthcare
Institutional Fund, L.P., 99,450 shares; and Pequot Healthcare Offshore
Fund, Inc., 556,920 shares.
Pequot Capital Management, who is the Investment Manager/Advisor (as
applicable) to the above named funds, exercises sole voting and investment
power for all the shares, except that Pequot Capital Management does not
hold voting power over 53,040 and 92,820 shares held of record by Premium
Series PCC Limited Cell 33 and Cell 32, respectively. Arthur J. Samberg is
the controlling shareholder of Pequot Capital Management, and disclaims
beneficial ownership of the shares except for his pecuniary interest in the
above-named investment funds.
(3) In its most recent Schedule 13G/A filing with the Securities and Exchange
Commission on January 27, 2006, Perkins Capital Management, Inc. represents
that it has sole voting power over 946,000 of the shares, no voting power
over the remaining 1,763,267 shares and sole dispositive power over all
such shares.
(4) Represents 1,249,500 shares issuable upon conversion of 245 shares of
Series B Stock, and 374,850 shares issuable pursuant to currently
exercisable warrants. Mr. Alec Litowitz possesses voting and/or dispositive
power over shares held by Magnetar Capital Master Fund, Ltd. Mr. Litowitz
disclaims any beneficial ownership of the shares beneficially held by
Magnetar Capital Master Fund, Ltd.
(5) Includes 601,800 shares issuable upon conversion of 118 shares of Series B
Stock, and 180,540 shares issuable pursuant to currently exercisable
warrants. All shares are held in varying amounts by Lagunitas Partners LP,
Gruber & McBaine International, Jon D. and Linda W. Gruber Trust and J.
Patterson McBaine. Jon D. Gruber and J. Patterson McBaine, through Gruber &
McBaine Capital Management, possess shared voting and/or investment power
over shares held by Lagunitas Partners LP and Gruber & McBaine
International. Messrs. Gruber and Patterson disclaim any beneficial
ownership over the shares held by Lagunitas Partners LP and Gruber &
McBaine International. Jon D. Gruber possesses sole voting and/or
investment over shares held by Jon D. and Linda W. Gruber Trust. J.
Patterson McBaine possesses sole voting and investment power over shares
held in his name.
42
(6) Includes 423,500 shares which may be purchased upon exercise of options
that were exercisable by Mr. Noyce as of December 31, 2005, or within 60
days of such date.
(7) Includes 86,875 shares which may be purchased upon exercise of options by
Ms. Crawford which were exercisable as of December 31, 2005, or within 60
days of such date. Also includes 39,000 shares held by Ms. Crawford's
spouse.
(8) Represents shares which may be purchased upon exercise of options that were
exercisable as of December 31, 2005, or within 60 days of such date.
(9) Includes 23,750 shares which may be purchased upon exercise of options by
Mr. Gagne which were exercisable as of December 31, 2005, or within 60 days
of such date.
(10) Represents shares which may be purchased upon exercise of options that were
exercisable as of December 31, 2005, or within 60 days of such date.
(11) Includes 10,000 shares held by an employee benefit plan over which Mr.
Bernards has voting and investment power, and 80,000 shares which may be
purchased upon exercise of options that were exercisable by Mr. Bernards as
of December 31, 2005, or within 60 days of such date. Also includes 50,000
shares held by Brightstone Capital, LLC ("Brightstone"). As President of
Brightstone, Mr. Bernards may be deemed to share voting and/or investment
power over the shares. Mr. Bernards disclaims any beneficial ownership of
the shares held by Brightstone.
(12) Includes 66,000 shares which may be purchased upon exercise of options by
Mr. Sheffert which were exercisable as of December 31, 2005, or within 60
days of such date. Also includes a currently exercisable warrant to
purchase 75,000 shares held by Manchester Business Services, Inc.
("Manchester"). As President, Chief Executive Officer and controlling
shareholder of Manchester, Mr. Sheffert may be deemed to share voting
and/or investment power over the shares underlying such warrant. Mr.
Sheffert disclaims any beneficial ownership of the shares held by
Manchester.
(13) Includes 20,000 shares beneficially owned by Bayview Capital Partners LP
("Bayview Partners"), 62,431 shares that may be purchased upon exercise of
warrants that were exercisable as of December 31, 2005, or within 60 days
of such date, and 45,000 shares that may be purchased upon exercise of
options that were exercisable by Mr. Musech as of December 31, 2005, or
within 60 days of such date. Mr. Musech is the Chief Executive Officer of
Bayview Capital Management LLC ("Bayview Management"), which is the general
partner of Bayview Partners. Mr. Musech serves as one of five members of
the Board of Governors of Bayview Management, and the Board of Governors
makes all investment decisions on behalf of Bayview Partners, including any
decisions regarding acquisition or disposition of securities of the
Company. As a result, Mr. Musech may be deemed to share voting and/or
investment power over the shares held by Bayview. Mr. Musech disclaims any
beneficial ownership of the shares held by Bayview Partners.
(14) Includes 66,000 shares which may be purchased upon exercise of options by
each of Mr. Penn, Ms. Whitman and Mr. Young that were exercisable as of
December 31, 2005, or within 60 days of such date.
(15) Includes 58,500 shares which may be purchased upon exercise of options be
Mr. Ehlan that were exercisable as of December 31, 2005, or within 60 days
of such date.
(16) Includes 30,000 shares which may be purchased upon exercise of options by
Mr. Marzec that were exercisable as of December 31, 2005, or within 60 days
of such date.
(17) Includes 1,412,681 shares which may be purchased upon exercise of options
and warrants that were exercisable as of December 31, 2005, or within 60
days of such date. Excludes 655,673 shares held of record by three
officers, but held in escrow at Wells Fargo Bank, National Association, and
subject to forfeiture on or prior to approximately June 30, 2007 in
accordance the terms of that certain Escrow Agreement dated December 23,
2005 to which such officers, Wells Fargo and the Company are parties.
43
SELLING STOCKHOLDERS
The shares of common stock covered by this prospectus include an aggregate
of 6,651,000 shares. The common stock covered by this prospectus includes:
- 5,100,000 shares of common stock issuable upon conversion of 1,000
shares of Series B Convertible Preferred Stock ("Series B Stock") we
issued on November 14, 2005 in a private placement to a limited number
of accredited investors; and
- up to 1,530,000 shares of common stock, equal to 30% of the number of
shares of common stock issuable upon conversion of the Series B Stock,
we may be required to issue from time to time upon exercise, for cash,
of warrants we issued on November 14, 2005 to the original purchasers
of the Series B Stock.
- up to 51,000 shares of common stock we may be required to issue from
time to time upon exercise of warrants we issued on November 14, 2005
to the placement agents (or their affiliates) for the Series B Stock.
All 1,000 shares of Series B Stock, which are not covered by this
prospectus, will automatically be converted into an aggregate 5,100,000 shares
of our common stock upon the date the Securities and Exchange Commission
declares effective the registration statement to which this prospectus relates.
The Series B stock and the warrants were issued in reliance upon exemptions from
registration under the Securities Act of 1933, as amended, afforded by Section
4(2) and Rule 506 of Regulation D thereunder.
Set forth below are the names of the Selling Stockholders, the number of
shares of our common stock beneficially owned by each Selling Stockholder as of
the date of this prospectus and the number of shares that may be offered or sold
hereby. Beneficial ownership is determined under the rules of the SEC, and
generally includes having sole or shared voting or investment power with respect
to securities. To our knowledge, except as indicated in the footnotes to this
table, each person named in the table has sole voting and investment power with
respect to all shares of common stock shown in the table. Because the Selling
Stockholders may offer all or some portion of the shares, we have assumed for
purposes of the table below that all securities covered by this prospectus will
be sold.
Since the Selling Stockholders provided this information, each of them may
have sold, transferred or otherwise disposed of all or a portion of their common
stock in a transaction exempt from the registration requirements of the
Securities Act or otherwise. Information concerning additional Selling
Stockholders not identified in this prospectus shall be set forth in
post-effective amendments. Transferees, successors and donees of Selling
Stockholders identified in this prospectus may be named in supplements to this
prospectus.
Except as otherwise expressly stated, to our knowledge none of the Selling
Stockholders has, or within the past three years has had, any position, office
or other material relationship with us or any of our affiliates.
44
COMMON STOCK OWNED
NUMBER OF NUMBER OF AFTER OFFERING*
SHARES SHARES ----------------------
BENEFICIALLY OFFERED NUMBER OF
NAME OWNED HEREBY SHARES PERCENTAGE
---- ------------ --------- --------- ----------
Pequot Capital Management, Inc.(1) 3,898,440 3,898,440 -- --
Magnetar Capital Master Fund, Ltd.(2) 1,624,350 1,624,350 -- --
Lagunitas Partners LP(3) 739,420 490,620 248,800** 1.2%***
CAMOFI Master LDC(4) 291,720 291,720 -- --
Gruber & McBaine International(5) 199,350 132,600 66,750** ****
Jon D. and Linda W. Gruber Trust(6) 79,560 79,560 -- --
J. Patterson McBaine(7) 79,560 79,560 -- --
Cherry Tree Core Growth Fund, LLLP(8) 33,150 33,150 -- --
Daniel Yamron(9) 24,225 24,225 -- --
Patrick A. O'Shea(9) 24,225 24,225 -- --
Brown Advisory Securities, LLC(10) 2,550 2,550 -- --
--------- --------- -------
6,996,550 6,681,000 315,550
* Assumes the sale of all shares of common stock covered by this prospectus.
** These shares of common stock were purchased in the open market, and are not
covered by this prospectus.
*** Calculated based upon 13,787,349 shares outstanding as of December 31,
2005, and assuming the sale of all 6,681,000 shares covered by this
prospectus (i.e., based upon a total number of outstanding shares equal to
20,468,349).
**** Less than 1.0%.
----------
(1) Shares beneficially owned by Pequot Capital Management, Inc. represent: (i)
2,998,800 shares of common stock issuable upon the conversion of 588 shares
of Series B Convertible Preferred Stock ("Series B Stock"), which convert
into common stock at the rate 5,100 shares of common stock for each share
of Series B Stock; and (ii) 899,640 shares of common stock issuable
pursuant to currently exercisable warrants.
Shares beneficially owned by Pequot Capital Management are held of record
by the following investment funds in the following amounts: Pequot Scout
Fund, L.P., 1,306,110 shares; Pequot Mariner Master Fund, L.P., 676,260
shares; Premium Series PCC Limited - Cell 33, 53,040 shares; Pequot
Diversified Master Fund, Ltd., 86,190 shares; Pequot Navigator Offshore
Fund, Inc., 530,400 shares; Premium Series PCC Limited - Cell 32, 92,820
shares; Pequot Healthcare Fund, L.P., 497,250 shares; Pequot Healthcare
Institutional Fund, L.P., 99,450 shares; and Pequot Healthcare Offshore
Fund, Inc., 556,920 shares.
Pequot Capital Management, which is the Investment Manager/Advisor (as
applicable) to the above named funds, exercises sole voting and investment
power for all the shares, except that Pequot Capital Management does not
hold voting power over 53,040 and 92,820 shares held of record by Premium
Series PCC Limited Cell 33 and Cell 32, respectively. Arthur J. Samberg is
the controlling shareholder of Pequot Capital Management, and disclaims
beneficial ownership of the shares except for his pecuniary interest in the
above-named investment funds.
Pequot Capital Management has identified itself as an affiliate of a
registered broker-dealer and, accordingly, may be deemed an underwriter of
these securities. See "Plan of Distribution" for required disclosure on
this Selling Stockholder.
(2) Represents 1,249,500 shares issuable upon conversion of 245 shares of
Series B Stock, and 374,850 shares issuable pursuant to currently
exercisable warrants. Mr. Alec Litowitz possesses voting and/or dispositive
power over shares beneficially owned by Magnetar Capital Master Fund, Ltd.
Mr. Litowitz disclaims any beneficial ownership of the shares beneficially
held by Magnetar Capital Master Fund, Ltd.
(3) Includes 377,400 shares issuable upon conversion of 74 shares of Series B
Stock, and 113,220 shares issuable
45
pursuant to currently exercisable warrants. Jon D. Gruber and J. Patterson
McBaine, through Gruber & McBaine Capital Management, possess shared voting
and/or investment power over shares held by Lagunitas Partners LP. Messrs.
Gruber and Patterson disclaim any beneficial ownership over the shares held
by Lagunitas Partners LP. Pursuant to Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, and Rule 13d-5(b) thereunder, this
Selling Stockholder may also be deemed to be the beneficial owner of all or
a portion of securities that are beneficially owned by other Selling
Stockholders denoted by footnotes (5) - (7).
(4) Includes 224,400 shares issuable upon conversion of 44 shares of Series B
Stock, and 67,320 shares issuable pursuant to currently exercisable
warrants. Mr. Richard Smithline possesses sole voting and/or investment
power over shares held by CAMOFI Master LDC. Mr. Smithline disclaims any
beneficial ownership over the shares held by CAMOFI Master LDC.
(5) Includes 102,000 shares issuable upon conversion of 20 shares of Series B
Stock, and 30,600 shares issuable pursuant to currently exercisable
warrants. Jon D. Gruber and J. Patterson McBaine, through Gruber & McBaine
Capital Management, possess shared voting and/or investment power over
shares held by Gruber & McBaine International. Messrs. Gruber and Patterson
disclaim any beneficial ownership over the shares held by Gruber & McBaine
International. Pursuant to Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended, and Rule 13d-5(b) thereunder, this Selling Stockholder
may also be deemed to be the beneficial owner of all or a portion of
securities that are beneficially owned by other Selling Stockholders
denoted by footnotes (3) and (6) - (7).
(6) Represents 61,200 shares issuable upon conversion of 12 shares of Series B
Stock, and 18,360 shares issuable pursuant to currently exercisable
warrants. Jon D. Gruber possesses sole voting and/or investment power over
shares held by Jon D. and Linda W. Gruber Trust. Pursuant to Section
13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule
13d-5(b) thereunder, this Selling Stockholder may also be deemed to be the
beneficial owner of all or a portion of securities that are beneficially
owned by other Selling Stockholders denoted by footnotes (3), (5) and (7).
(7) Represents 61,200 shares issuable upon conversion of 12 shares of Series B
Stock, and 18,360 shares issuable pursuant to currently exercisable
warrants. J. Patterson McBaine possesses sole voting and/or investment
power over shares held in his name. Pursuant to Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, and Rule 13d-5(b) thereunder,
this Selling Stockholder may also be deemed to be the beneficial owner of
all or a portion of securities that are beneficially owned by other Selling
Stockholders denoted by footnotes (3) and (5) - (6).
(8) Represents 25,500 shares issuable upon conversion of 5 shares of Series B
Stock, and 7,650 shares issuable pursuant to currently exercisable
warrants. Mr. Gordon Stoffer possesses sole voting and/or investment power
over all of the shares. This Selling Stockholder has identified itself as
an affiliate of a registered broker-dealer and, accordingly, may be deemed
an underwriter of these securities. See "Plan of Distribution" for required
disclosure on this Selling Stockholder.
(9) Represents 24,225 shares issuable pursuant to currently exercisable
warrants. This Selling Stockholder has identified himself as an affiliate
of a registered broker-dealer and, accordingly, may be deemed an
underwriter of this common stock. See "Plan of Distribution" for required
disclosure on this Selling Stockholder. This Selling Stockholder received
compensation from us for acting as an affiliate of a placement agent for
the Series B Stock, and as such may be deemed to have had a material
relationship with us in the past three years.
(10) Represents 2,550 shares issuable pursuant to currently exercisable
warrants. This Selling Stockholder has identified itself as a registered
broker-dealer and, accordingly, is deemed to be an underwriter with respect
to its common stock. Mr. Thomas Schweizer, Jr. possesses sole voting and/or
investment power over shares held by Brown Advisory Securities, LLC. Mr.
Schweizer, Jr. disclaims beneficial ownership over the shares held by Brown
Advisory Securities, LLC. See "Plan of Distribution" for required
disclosure on this Selling Stockholder. This Selling Stockholder received
compensation from us for acting as a placement agent for the Series B
Stock, and as such may be deemed to have had a material relationship with
us in the past three years.
46
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell any or all of their
shares of common stock covered by this prospectus on any stock exchange, market
or trading facility on which the shares are traded or in private transactions.
These sales may be at prevailing market prices or at other negotiated prices.
The Selling Stockholders may use any one or more of the following methods when
selling shares covered by this prospectus:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- to cover short sales;
- broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares covered by this prospectus
under Rule 144 under the Securities Act, if available, rather than under this
prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amending the list of
Selling Stockholders to include the pledgee, transferee or other successors in
interest as Selling Stockholders under this prospectus. The Selling Stockholders
also may transfer the shares of common stock in other circumstances, in which
case the transferees or other successors in interest identified in a prospectus
supplement, if required, will be Selling Stockholders for purposes of this
prospectus.
In connection with the sale of common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn
47
engage in short sales of the common stock in the course of hedging the positions
they assume. The Selling Stockholders may also sell shares of common stock short
and deliver these securities to close out their short positions, or loan or
pledge the common stock to broker-dealers that in turn may sell these
securities. The Selling Stockholders may also enter into option or other
transactions with broker-dealers or other financial institutions or the creation
of one or more derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
Upon the Company being notified in writing by a Selling Stockholder that
any material arrangement has been entered into with a broker-dealer for the sale
of common stock through a block trade, special offering, exchange distribution
or secondary distribution or a purchase by a broker or dealer, a supplement to
this prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such Selling Stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of common stock were sold, (iv)the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out in this prospectus, and (vi)
other facts material to the transaction. In addition, upon the Company being
notified in writing by a Selling Stockholder that a donee or pledge intends to
sell more than 500 shares of common stock, a supplement to this prospectus will
be filed if then required in accordance with applicable securities law.
To our knowledge, based upon information provided to us by Selling
Stockholders, the only Selling Stockholder who is a registered broker-dealer is
Brown Advisory Securities, LLC. As such, they are deemed to be underwriters of
the common stock underlying their warrants within the meaning of the Securities
Act. We are not aware of any underwriting plan or agreement, underwriter's or
dealer's compensation, or passive market-making or stabilization transactions
involving the purchase or distribution of its common stock.
Each Selling Stockholder who is an affiliate of a registered broker-dealer
has represented to us that it purchased the securities in the ordinary course of
business and that at the time of such purchase, the Selling Stockholder had no
agreements or understandings, directly or indirectly, with any person to
distribute such securities.
The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the Selling Stockholder and/or the purchasers.
The Selling Stockholders will be responsible to comply with the applicable
provisions of the Securities Act and Exchange Act, and the rules and regulations
thereunder promulgated, including, without limitation, Regulation M, as
applicable to such Selling Stockholders in connection with resales of their
respective shares under this Registration Statement.
The Company is required to pay all fees and expenses (but not selling
commissions) incident to the registration of the shares, but the Company will
not receive any proceeds from the sale of the common stock. The Company has
agreed to indemnify the Selling Stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act. If the
Selling Stockholders use this prospectus for any sale of the common stock, they
will be subject to the prospectus delivery requirements of the Securities Act.
The Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M of the Exchange Act, which may limit the timing of purchases and sales of any
of the shares of common stock by the Selling Stockholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making activities with
respect to the shares of common stock.
48
DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to our Amended and Restated Articles of Incorporation, we have
60,000,000 shares of authorized capital stock, which consists of 50,000,000
shares of common stock, 1,500,000 shares of Series A Convertible Preferred Stock
(the "Series A Stock"), 1,000 shares of Series B Convertible Preferred Stock
(the "Series B Stock") and 8,499,000 shares of undesignated stock.
COMMON STOCK
Holders of common stock are entitled to receive such dividends as are
declared by the Board of Directors, out of funds legally available for the
payment of dividends. We expect to retain any earnings to finance development of
our business. Accordingly, we do not anticipate payment of any dividends on our
common stock for the foreseeable future.
In the event of any liquidation, dissolution or winding up, the holders of
each share of common stock are entitled to share equally in any balance of our
assets available for distribution.
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the shareholders. There is no cumulative voting for election
of directors, which means that a majority of the shareholders may elect all of
the members of the Board of Directors. Holders of common stock have no
preemptive rights to subscribe for or to purchase any additional shares of
common stock or other obligations convertible into shares of common stock or
Preferred Stock which we may, hereafter, issue.
All of the outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock are not liable for further calls or
assessments.
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "HFIT." On December 31, 2005, we had issued and outstanding 13,787,349
shares of common stock (excluding all 6,681,000 shares covered by this
prospectus). According to the records of our transfer agent, as of December 31,
2005, there were 494 holders of record of our common stock.
SERIES A CONVERTIBLE PREFERRED STOCK
Our Amended and Rested Articles of Incorporation designate 1,500,000 shares
of Series A Convertible Preferred Stock (the "Series A Stock"). Effective
November 15, 2005, we redeemed all issued and outstanding shares of Series A
Stock, which are not available for reissuance. As of the date of this
prospectus, no shares of Series A Stock were outstanding. Although future
issuance of shares of Series A Stock is unlikely, 391,178 shares of Series A
Stock are available for original issuances after the date of this prospectus.
The rights and preferences of the Series A Stock include:
- Each share of Series A Stock is entitled to a number of votes
equal to the number of shares of common stock into which it is
then convertible. Holders of Series A Stock vote together as one
class together with holders of common stock, except in certain
limited circumstances.
49
- Each share of Series A Stock is convertible at the option of the
holder into two shares of common stock (or such greater number as
may result from weighted average anti-dilution adjustments that
reduce the conversion price).
- Holders of Series A Stock are entitled to certain pre-emptive
rights in connection with future direct or indirect issuances of
equity securities.
- Each share of Series A Stock has a stated dividend rate of 6% per
year calculated based upon the initial per share issuance price
of $1.00. Dividends are payable in-kind in the form of additional
shares of Series A Stock using a price of $1.00 per share.
- In the event of a liquidation, dissolution or winding up, holders
of Series A Stock are entitled to a liquidation preference of $1
per share plus a decreasing liquidation premium of 3% prior to
December 8, 2006, 2% prior to December 8, 2007 and 1% prior to
December 8, 2007.
- Each share of Series A Stock contains redemption provisions upon
a change of control, among other events. The redemption price is
the greater of the liquidation value (described above) or the
fair market value of the Series A Stock on an as-converted basis.
SERIES B CONVERTIBLE PREFERRED STOCK
Effective November 14, 2005, our Board of Directors authorized the
designation of 1,000 shares of Series B Convertible Preferred Stock (the "Series
B Stock"). Effective November 14, 2005, we issued 1,000 shares of Series B
Stock. As of December 31, 2005, all 1,000 shares of Series B Stock we issued on
November 14, 2005 remained outstanding. Effective on the date that the SEC first
declares effective the registration statement to which this prospectus relates,
all shares of Series B Stock will automatically be converted into an aggregate
of 5,100,000 shares of common stock (i.e., a conversion rate of 5,100 for each
share of Series B Stock).
Each share of Series B Stock is entitled to a number of votes equal to the
number of shares of common stock into which it is then convertible (i.e., 5,100
votes). Except as required by law, holders of Series B Stock vote together as
one class together with holders of common stock. Each share of Series B Stock
has a stated dividend rate of 5% per year calculated based upon the initial per
share issuance price of $10,200.
UNDESIGNATED SHARES
Our Amended and Restated Articles of Incorporation authorize the Board of
Directors to establish more than one class or series of shares. As of the date
of this prospectus, we had 8,499,000 undesignated shares available for the Board
of Directors to establish additional classes or series. In establishing a class
or series, the Board is authorized to set the voting rights, liquidation
preferences, dividend rights, conversion rights, redemption rights, and certain
other rights and preferences. Although there is no current intention to do so,
the Board of Directors may issue shares of a class or series of Preferred Stock
with rights which could adversely affect the voting power of the holders of
common stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These
50
provisions are intended to provide management flexibility and to enhance the
likelihood of continuity and stability in the composition of our Board of
Directors and in the policies formulated by our Board and to discourage an
unsolicited takeover of the Company, if the Board determines that such a
takeover is not in the best interests of the Company and our shareholders.
However, these provisions could have the effect of discouraging certain attempts
to acquire us which could deprive our shareholders of opportunities to sell
their shares of common stock at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
certain exceptions, to any acquisition of our voting stock (from a person other
than the company and other than in connection with certain mergers and exchanges
to which the company is a party) resulting in the acquiring person owning 20% or
more of our voting stock then outstanding. Section 302A.671 requires approval of
any such acquisitions by a majority vote of our shareholders prior to its
consummation. In general, shares acquired in the absence of such approval are
denied voting rights and are redeemable at their then fair market value by the
company within 30 days after the acquiring person has failed to give a timely
information statement to us or the date the shareholders voted not to grant
voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits us or any of our subsidiaries from entering into any transaction with
a shareholder under which the shareholder purchases 10% or more of our voting
shares (an "interested shareholder") within four years following the date the
person became an interested shareholder, unless the transaction is approved by a
committee of all of the disinterested members of our board of directors serving
before the interested shareholder acquires the shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Wells Fargo Bank,
N.A. Its address is P.O. Box 64854, St. Paul, Minnesota 55164.
LISTING
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "HFIT."
51
LEGAL MATTERS
The validity of the Shares being offered hereby is being passed upon for us
by Fredrikson & Byron, P.A. Such legal advice is solely for our benefit and not
for any shareholder or prospective investor.
EXPERTS
The financial statements of Health Fitness Corporation appearing in this
prospectus for the year ended December 31, 2004, were audited by Grant Thornton
LLP, independent registered public accounting firm, as set forth in its report
thereon included herein, given on the authority of such firm as experts in
accounting and auditing.
The financial statements of HealthCalcNet, Inc. appearing in this
prospectus for the year ended December 31, 2004, were audited by Weaver and
Tidwell, L.L.P., independent registered public accounting firm, as set forth in
its report thereon included herein, given on the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports, proxy statements and other information with the
SEC. Copies of the reports, proxy statements and other information may be
examined without charge at the Public Reference Section of the SEC, 450 Fifth
Street, N.W. Room 1024, Washington, D.C. 20549 or on the Internet at
http://www.sec.gov. Copies of all or a portion of such materials can be obtained
from the Public Reference Section of the SEC upon payment of prescribed fees.
Please call the SEC at: (800) SEC-0330 for further information about the Public
Reference Room.
We also make most of our filings available on our website at www.hfit.com.
We are not including the information on our website as part of this prospectus
or any prospectus supplements.
52
Health Fitness Corporation
Index to Financial Statements
Page
----
PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements.. F-2
Unaudited Pro Forma Combined Balance Sheet as of September 30, 2005 F-3
Unaudited Pro Forma Combined Statement of Operations for the nine
months ended September 30, 2005.................................... F-4
Unaudited Pro Forma Combined Statement of Operations for the year
ended December 31, 2004............................................ F-5
Notes to Unaudited Pro Forma Combined Financial Statements......... F-6
HEALTH FITNESS CORPORATION
Interim Unaudited Consolidated Financial Statements
Unaudited Consolidated Balance Sheets as of September 30, 2005 and
December 31, 2004.................................................. F-9
Unaudited Consolidated Statements of Earnings for the Three and
Nine Months Ended September 30, 2005 and 2004...................... F-10
Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2005 and 2004.................................. F-11
Notes to Unaudited Consolidated Financial Statements............... F-12
Annual Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm............ F-17
Consolidated Balance Sheets as of December 31, 2004 and 2003....... F-18
Consolidated Statements of Operations for the Years Ended December
31, 2004, 2003 and 2002............................................ F-19
Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2004, 2003 and 2002................................... F-20
Consolidated Statements of Cash Flows for the Years Ended December
31, 2004, 2003 and 2002............................................ F-21
HEALTHCALC.NET, INC.
Interim Unaudited Financial Statements
Unaudited Balance Sheets as of September 30, 2005 and December
31, 2004........................................................... F-36
Unaudited Statements of Operations for nine months ended September
30, 2005 and September 30, 2004.................................... F-37
Unaudited Statements of Cash Flows for nine months ended September
30, 2005 and September 30, 2004.................................... F-38
Notes to Unaudited Financial Statements............................ F-39
Annual Financial Statements
Report of Independent Registered Public Accounting Firm............ F-42
Balance Sheets as of December 31, 2004 and 2003.................... F-43
Statement of Operations for the year ended December 31, 2004....... F-44
Statement of Stockholders' Equity (Deficit) for the year ended
December 31, 2004.................................................. F-45
Statement of Cash lows for the year ended December 31, 2004........ F-46
Notes to Financial Statements...................................... F-47
F-1
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements of Health
Fitness Corporation ("Health Fitness") are based upon Health Fitness' historical
financial statements, adjusted to give effect to Health Fitness' acquisition of
HealthCalc.Net, Inc. ("HealthCalc") in accordance with the terms of that certain
Stock Purchase Agreement between Health Fitness and HealthCalc, dated as of
December 23, 2005 (the "Stock Purchase Agreement").
The unaudited pro forma combined results of operations for the nine months ended
September 30, 2005 and year ended December 31, 2004 give effect to our
acquisition of HealthCalc as if it had occurred at the beginning of each of the
respective periods. The unaudited pro forma combined balance sheet as of
September 30, 2005 gives effect to our acquisition of HealthCalc as if it
occurred on September 30, 2005. The pro forma information contained in the pro
forma combined financial statements may not be indicative of the information
that we would have reported had our acquisition of HealthCalc actually occurred
on a date earlier than December 23, 2005, or of our future financial results or
prospects.
The unaudited pro forma combined financial statements do not include the effects
of two transactions that occurred subsequent to September 30, 2005, and prior to
December 23, 2005. You should be aware of the following transactions since the
transactions and the accounting treatment for them may cause the unaudited pro
forma combined financial statements not to be indicative of the financial
results, including cash balances and earnings per share, or prospects of the
combined businesses subsequent to September 30, 2005:
- On November 14, 2005, Health Fitness issued an aggregate of 1,000
shares of Series B Convertible Preferred Stock ("the Series B
Stock") to a limited number of accredited investors for an aggregate
gross purchase price of $10.2 million. After selling commissions and
expenses, Health Fitness received net proceeds of approximately $9.4
million. Pursuant to the Securities Purchase Agreement, the Series B
Stock automatically converts into 5,100,000 shares of common stock
on the date the SEC first declares effective a registration
statement for the common stock. Health Fitness also issued to the
same investors 5-year warrants (the "Warrants") to purchase
1,530,000 shares of common stock, equal to 30% of the number of
shares of common stock issuable upon conversion of the Series B
Stock, for $2.40 per share, subject to weighted-average
anti-dilution adjustments for any future issuances or deemed
issuances of equity securities for less than $2.40 per share, which,
if any such future issuances were to occur, may reduce the stated
exercise price of $2.40 per share. We also issued the placement
agents for the Series B Stock (or their affiliates) warrants to
purchase 102,000 shares of common stock on substantially the same
terms as the Warrants, except the exercise price of such warrants is
$2.00 per share.
We have not finalized the accounting treatment for the issuance of
the Series B Stock and the Warrants. However, we currently
anticipate that we will record a one-time deemed dividend in
connection with the issuance of the Series B Stock, and that we will
account for the value of the Warrants as a deemed liability in
accordance with the interpretive guidance in EITF Issue No. 05-4,
"The Effect of a Liquidated Damages Clause on a Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, 'Accounting
for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock'" and EITF 00-19 "Accounting for
Derivative Financial Instruments, Indexed to, and Potentially
Settled in a Company's Own Stock." The Emerging Issues Task Force
has not finalized EITF Issue No. 05-4. The deemed dividend would not
represent a contractual obligation to pay the dividend. EITF Issue
00-19 also requires us to revalue the Warrants as a derivative
instrument periodically in connection with changes in the underlying
stock price and other assumptions, with the change in value recorded
as non-cash income or expense.
- On November 16, 2005, Health Fitness used approximately $5.1 million
of the net proceeds from the issuance of the Series B Stock to
redeem, effective as of November 15, 2005: (i) all of the
outstanding shares of Series A Convertible Preferred Stock, which
were convertible into 2,222,210 shares of common stock, and (ii)
warrants to purchase 1,275,463 shares of common stock if exercised
for cash, or 916,458 shares of common stock if exercised on a
"cash-less" exercise basis, which warrants were issued to original
purchaser of the Series A Convertible Preferred Stock.
Health Fitness used substantially all of the remainder of the net
proceeds from the issuance of the Series B Stock to acquire
HealthCalc on December 23, 2005.
The unaudited pro forma combined financial statements should be read in
conjunction with the foregoing explanatory information and the accompanying
explanatory notes, the historical financial statements and related notes of
Health Fitness previously filed and the financial statements and related notes
of HealthCalc appearing elsewhere in this prospectus.
F-2
HEALTH FITNESS CORPORATION AND HEALTHCALC.NET, INC.
PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
(UNAUDITED)
Pro Forma
Health Acquisition Pro Forma
Fitness HealthCalc Adjustments Combined
----------- ---------- ----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 38,031 $ 72,192 (3,934,108) (a) $(3,788,890)
34,995 (a)
Trade and other accounts receivable, net 8,428,337 157,155 (20,176) (a) 8,565,316
Prepaid expenses and other 840,576 840,576
Deferred tax assets 483,100 483,100
----------- --------- ---------- -----------
Total current assets 9,790,044 229,347 (3,919,289) 6,100,102
PROPERTY & EQUIPMENT, net 190,581 56,540 (953) (a) 246,168
COMPUTER SOFTWARE, net 1,762,000 (a) 1,762,000
OTHER ASSETS
Goodwill 9,022,501 4,117,851 (a) 13,140,352
Customer contracts, net 248,056 85,000 (a) 333,056
Trademark, net 228,068 136,000 (a) 364,068
Deferred tax assets 352,000 352,000
Other 67,720 186,000 (a) 253,720
----------- --------- ---------- -----------
$19,898,970 $ 285,887 $2,366,609 $22,551,466
=========== ========= ========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 799,167 $ 41,072 $ 517,555 (a) $ 1,358,411
617 (a)
Accrued salaries, wages and payroll taxes 1,885,032 1,885,032
Other accrued liabilities 378,568 378,568
Accrued self funded insurance 184,592 184,592
Line of credit 27,128 (523) (a) 26,605
Deferred revenue 1,814,137 72,552 (5,905) (a) 1,880,784
----------- --------- ---------- -----------
Total current liabilities 5,061,496 140,752 511,744 5,713,992
COMMITMENTS & CONTINGENCIES
CONVERTIBLE PREFERRED STOCK 1,567,715 1,567,715
STOCKHOLDERS' EQUITY
Common stock 129,070 5,000 8,473 (a) 137,543
(5,000) (b)
Additional paid-in capital 17,982,591 1,991,527 (a) 19,974,118
Accumulated comprehensive income 6,717 6,717
Accumulated earnings (deficit) (4,848,619) 140,635 (140,635) (b) (4,848,619)
Treasury stock (500) 500 (b) --
----------- --------- ---------- -----------
13,269,759 145,135 1,854,865 15,269,759
----------- --------- ---------- -----------
$19,898,970 $ 285,887 $2,366,609 $22,551,466
=========== ========= ========== ===========
F-3
HEALTH FITNESS CORPORATION AND HEALTHCALC.NET, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005
(UNAUDITED)
Pro Forma
Health Acquisition Pro Forma
Fitness HealthCalc Adjustments Combined
-------------- ---------- ----------- -----------
REVENUE $ 40,607,994 $1,816,821 $ (493,031) (c) $41,931,784
COSTS OF REVENUE 30,216,762 447,864 (493,031) (c) 30,171,595
------------ ---------- ---------- -----------
GROSS PROFIT 10,391,232 1,368,957 11,760,189
OPERATING EXPENSES
Salaries 4,243,782 877,812 5,121,594
Other selling, general and administrative 2,625,037 314,166 13,897 (d) 3,217,400
264,300 (g)
Amortization of acquired intangible assets 659,432 85,000 (e) 792,732
20,400 (f)
27,900 (h)
------------ ---------- ---------- -----------
Total operating expenses 7,528,251 1,191,978 411,497 9,131,726
------------ ---------- ---------- -----------
OPERATING INCOME 2,862,981 176,979 (411,497) 2,628,463
OTHER INCOME (EXPENSE)
Interest expense (24,214) (3,095) (27,309)
Other, net (4,394) (4,394)
------------ ---------- ---------- -----------
EARNINGS BEFORE INCOME TAXES 2,834,373 173,884 (411,497) 2,596,760
INCOME TAX EXPENSE (BENEFIT) 1,133,749 (95,045) (i) 1,038,704
------------ ---------- ---------- -----------
NET EARNINGS 1,700,624 173,884 (316,452) 1,558,056
Dividend to preferred shareholders 68,019 68,019
------------ ---------- ---------- -----------
NET EARNINGS TO COMMON SHAREHOLDERS $ 1,632,605 $ 173,884 $ (316,452) $ 1,490,037
============ ========== ========== ===========
NET EARNINGS PER SHARE
Basic $ 0.13 $ 0.11
Diluted $ 0.10 (j) $ 0.09
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,704,035 (k) 13,551,316
Diluted 16,633,799 (k) 17,481,080
F-4
HEALTH FITNESS CORPORATION AND HEALTHCALC.NET, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
Pro Forma
Health Acquisition Pro Forma
Fitness HealthCalc Adjustments Combined
-------------- ---------- ----------- ------------
REVENUE $52,454,668 $1,876,470 (246,780) (c) $ 54,084,358
COSTS OF REVENUE 38,995,451 538,296 (246,780) (c) 39,286,967
----------- ---------- ---------- ------------
GROSS PROFIT 13,459,217 1,338,174 14,797,391
OPERATING EXPENSES
Salaries 5,600,203 1,091,200 6,691,403
Other selling, general and administrative 3,440,134 275,261 18,529 (d) 4,086,324
352,400 (g)
Amortization of acquired intangible assets 878,333 85,000 (e) 1,027,733
27,200 (f)
37,200 (h)
----------- ---------- ---------- ------------
Total operating expenses 9,918,670 1,366,461 520,329 11,805,460
----------- ---------- ---------- ------------
OPERATING INCOME (LOSS) 3,540,547 (28,287) (520,329) 2,991,931
OTHER INCOME (EXPENSE)
Interest expense (465,571) (4,537) (470,108)
Interest costs - early debt repayment (474,669) -- (474,669)
Other, net 1,642 6,113 7,755
----------- ---------- ---------- ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 2,601,949 (26,711) (520,329) 2,054,909
INCOME TAX EXPENSE (BENEFIT) 927,929 (218,816) (i) 709,113
----------- ---------- ---------- ------------
NET EARNINGS (LOSS) 1,674,020 (26,711) (301,513) 1,345,796
Dividend to preferred shareholders 86,400 86,400
----------- ------------
NET EARNINGS (LOSS) TO COMMON SHAREHOLDERS $ 1,587,620 $ (26,711) $ (301,513) $ 1,259,396
=========== ========== ========== ============
NET EARNINGS PER SHARE
Basic $ 0.13 $ 0.09
Diluted $ 0.10 (j) $ 0.08
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,503,345 (k) 13,350,626
Diluted 16,151,017 (k) 16,998,298
F-5
HEALTH FITNESS CORPORATION AND HEALTHCALC.NET, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
This pro forma financial information reflects the pro forma results of
Health Fitness Corporation's (Health Fitness) acquisition of HealthCalc.Net,
Inc. (HealthCalc). On December 23, 2005, Health Fitness acquired all of the
capital stock of HealthCalc for $6 million in cash and stock with the
potential for additional amounts to be paid under an earn-out provision
based upon HealthCalc achieving certain revenue objectives for calendar year
2006 (the Transaction). Assets acquired by Health Fitness as a result of the
Transaction consist primarily of customer contracts, trademarks and
tradenames, software and other health and wellness intangibles.
The unaudited pro forma combined financial statements (Pro Forma Financial
Statements) give effect to the Transaction (using the purchase method of
accounting) as of September 30, 2005 for the accompanying pro forma combined
balance sheet, and as of January 1, 2005 for the accompanying pro forma
combined statement of operations for the nine months ended September 30,
2005, and January 1, 2004 for the accompanying pro forma combined statement
of operations for the year ended December 31, 2004. The Pro Forma Financial
Statements are presented for illustrative purposes only and should not be
construed as indicative of the financial condition or results of operations
that Health Fitness would have reported had Health Fitness and HealthCalc in
fact been combined as of September 30, 2005 or as of the beginning of the
periods covered in the Pro Forma Financial Statements, as the case may be,
or of the financial results or prospects of the combined businesses
subsequent to September 30, 2005.
These pro forma combined financial statements should be read in conjunction
with the explanatory paragraph preceding the Pro Forma Financial Statements,
the interim unaudited and annual Consolidated Financial Statements of Health
Fitness as of and for the nine month period ended September 30, 2005 and
year ended December 31, 2004 as well as the interim unaudited and annual
Financial Statements and related Notes of HealthCalc as of and for the nine
month period ended September 30, 2005 and year ended December 31, 2004, all
appearing elsewhere in this prospectus.
F-6
NOTE B - PRO FORMA ADJUSTMENTS
(a) On December 23, 2005, Health Fitness acquired all of the capital stock of
HealthCalc. Health Fitness paid $3.9 million in cash and issued $2 million
in common stock, representing 847,281 shares, to HealthCalc's shareholders
at the closing of the acquisition. Health Fitness may become obligated to
pay or issue, as the case may be, an additional amount of up to $2 million
in cash, common stock, or a combination thereof, to HealthCalc's
shareholders under a 12-month, earn-out formula based upon HealthCalc
achieving certain revenue objectives for fiscal year 2006.
The following purchase price allocation represents a preliminary estimate
of the fair market value of the assets acquired from HealthCalc. This
preliminary estimate of fair market values, which are subject to
adjustment, were determined through an independent appraisal in accordance
with Statement of Financial Accounting Standards No. 142:
PURCHASE PRICE
Cash price paid $3,934,108
Common stock issued 2,000,000
Acquisition costs 517,555
Cash acquired (107,187)
Liabilities assumed 134,941
----------
Total purchase price $6,479,417
----------
PURCHASE PRICE ALLOCATION
1. Accounts receivable 136,979
2. Property and equipment 55,587
3. Computer software 1,762,000
4. Customer contracts 85,000
5. Trademark/Tradenames 136,000
6. Other intangibles 186,000
----------
Excess of cost over assets acquired $4,117,851
==========
1. Accounts receivable represents amounts owed from customers, less
amounts previously owed by Health Fitness.
2. Property and equipment acquired consists of computer equipment, office
furniture and fixtures.
3. Computer software represents the value assigned to a proprietary
web-based technology system that delivers health and wellness tools and
services to customers.
4. Customer contracts represent the value assigned to HealthCalc customer
contracts.
5. Trademark/tradenames represents the value assigned to the trademark
"HealthCalc" and various tradenames used within the computer software that
was acquired by Health Fitness.
6. Other intangible represents the value assigned to HealthCalc's customer
list.
(b) To eliminate HealthCalc equity:
Common stock $5,000
Accumulated earnings (deficit) 140,635
Treasury stock (500)
F-7
(c) To eliminate revenue and cost of revenue deductions related to services
provided by HealthCalc to Health Fitness customers.
(d) To record additional depreciation over three years relating to $55,587 of
acquired property and equipment.
(e) To record additional amortization over eight months (weighted average
remaining contract life) relating to $85,000 fair value assigned to
acquired customer contracts.
(f) To record additional amortization over five years relating to $136,000
fair value assigned to an acquired trademark and tradenames.
(g) To record additional depreciation over five years relating to $1,762,000
fair value assigned to computer software.
(h) To record additional amortization over five years relating to $186,000
fair value assigned to other intangibles consisting primarily of customer
lists.
(i) To record additional tax expense (benefit) related to HealthCalc's status
as a Subchapter S corporation in addition to the pro forma change in
earnings (loss) before taxes.
(j) Diluted earnings per share on a pro forma combined basis is determined
using net earnings before subtracting the dividend to preferred
shareholders, which assumes that the preferred shareholders have converted
their investment to common stock.
(k) Basic and diluted weighted average shares outstanding include 847,281
shares issued to HealthCalc shareholders, which have not been adjusted
for the issuance of the Series B Stock or the redemption of the Series A
Convertible Preferred Stock.
F-8
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2005 2004
------------- ------------
ASSETS
CURRENT ASSETS
Cash $ 38,031 $ 241,302
Trade and other accounts receivable, less allowances of $199,400 and $210,700 8,428,337 8,147,430
Prepaid expenses and other 840,576 213,954
Deferred tax assets 483,100 1,660,100
------------- ------------
Total current assets 9,790,044 10,262,786
PROPERTY AND EQUIPMENT, net 190,581 150,308
OTHER ASSETS
Goodwill 9,022,501 9,022,501
Customer contracts, less accumulated amortization of $1,481,900 and $875,700 248,056 854,306
Trademark, less accumulated amortization of $129,000 and $75,800 228,068 274,167
Other intangible assets, less accumulated amortization of $86,300 and $81,300 11,767 61,493
Deferred tax assets 352,000 221,400
Other 55,953 87,015
------------- ------------
$ 19,898,970 $ 20,933,976
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 799,167 $ 840,155
Accrued salaries, wages, and payroll taxes 1,885,032 2,768,734
Other accrued liabilities 378,568 495,770
Accrued self funded insurance 184,592 225,500
Deferred revenue 1,814,137 1,977,093
------------- ------------
Total current liabilities 5,061,496 6,307,252
LONG-TERM OBLIGATIONS - 1,612,759
COMMITMENTS AND CONTINGENCIES - -
CUMULATIVE CONVERTIBLE PREFERRED STOCK, 10,000,000 shares
authorized, 1,111,105 and 1,063,945 issued and outstanding 1,567,715 1,530,232
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 50,000,000 shares authorized;
12,907,023 and 12,582,170 shares issued and outstanding 129,070 125,822
Additional paid-in capital 17,982,591 17,836,675
Accumulated comprehensive income 6,717 2,459
Accumulated deficit (4,848,619) (6,481,223)
------------- ------------
13,269,759 11,483,733
------------- ------------
$ 19,898,970 $ 20,933,976
============= ============
See notes to consolidated financial statements.
F-9
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
REVENUE $13,464,278 $13,154,340 $40,607,994 $38,950,429
COSTS OF REVENUE 9,965,464 9,807,257 30,216,762 29,074,051
----------- ----------- ----------- -----------
GROSS PROFIT 3,498,814 3,347,083 10,391,232 9,876,378
OPERATING EXPENSES
Salaries 1,449,297 1,408,482 4,243,782 4,180,760
Other selling, general and administrative 945,540 784,560 2,625,037 2,438,170
Amortization of acquired intangible assets 220,095 219,583 659,432 658,750
----------- ----------- ----------- -----------
Total operating expenses 2,614,932 2,412,625 7,528,251 7,277,680
----------- ----------- ----------- -----------
OPERATING INCOME 883,882 934,458 2,862,981 2,598,698
OTHER INCOME (EXPENSE )
Interest expense 4,035 (118,102) (24,214) (380,698)
Other, net (2,404) 908 (4,394) 2,298
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 885,513 817,264 2,834,373 2,220,298
INCOME TAX EXPENSE 354,206 330,500 1,133,749 882,873
----------- ----------- ----------- -----------
NET EARNINGS 531,307 486,764 1,700,624 1,337,425
Dividend to preferred shareholders 24,819 21,600 68,019 64,800
----------- ----------- ----------- -----------
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 506,488 $ 465,164 $ 1,632,605 $ 1,272,625
=========== =========== =========== ===========
NET EARNINGS PER SHARE:
Basic $ 0.04 $ 0.04 $ 0.13 $ 0.10
Diluted 0.03 0.03 0.10 0.08
WEIGHTED AVERAGE COMMON SHARES:
Basic 12,836,971 12,550,679 12,704,035 12,482,060
Diluted 16,662,753 16,122,175 16,633,799 16,078,873
See notes to consolidated financial statements.
F-10
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------
2005 2004
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,700,624 $1,337,425
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation of property and equipment 63,786 71,520
Amortization of intangible assets and other 653,350 746,171
Deferred taxes 1,046,400 728,917
Common stock issued for compensation - 60,600
Changes in operating assets and liabilities, net of assets acquired:
Trade and other accounts receivable (280,907) (2,695,366)
Prepaid expenses and other (626,622) (96,832)
Other assets 31,062 23,183
Trade accounts payable (36,728) (223,765)
Accrued liabilities and other (1,041,812) 1,357,945
Deferred revenue (162,958) 98,011
----------- ----------
Net cash provided by operating activities 1,346,195 1,407,809
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (104,059) (56,017)
Other (7,084) -
Acquisition of business - (256,927)
----------- ----------
Net cash used in investing activities (111,143) (312,944)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable 13,837,389 13,087,343
Repayments of note payable (15,450,148) (14,835,830)
Proceeds from issuance of common stock 163,008 71,540
Proceeds from the exercise of stock options 11,428 35,247
Proceeds from closing cash escrow account - 471,999
----------- ----------
Net cash used in financing activities (1,438,323) (1,169,701)
----------- ----------
NET (DECREASE) IN CASH (203,271) (74,836)
CASH AT BEGINNING OF PERIOD 241,302 281,294
----------- ----------
CASH AT END OF PERIOD $ 38,031 $ 206,458
=========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information
Cash paid for interest $ 30,297 $ 293,226
Cash paid for taxes 403,651 116,365
Noncash investing and financing activities affecting cash flows:
Dividend to preferred shareholders 68,019 64,800
See notes to consolidated financial statements.
F-11
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the third
quarter ended September 30, 2005 have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information. Financial information as of December 31, 2004 has
been derived from our audited consolidated financial statements. In accordance
with the rules and regulations of the United States Securities and Exchange
Commission, the Company has omitted footnote disclosures that would
substantially duplicate the disclosures contained in the audited financial
statements of the Company. The unaudited consolidated financial statements
should be read together with the financial statements for the year ended
December 31, 2004, and footnotes thereto included in the Company's Form 10-K as
filed with the United States Securities and Exchange Commission on March 31,
2005.
In the opinion of management, the interim consolidated financial statements
include all adjustments (consisting of normal recurring accruals) necessary for
the fair presentation of the results for interim periods presented. These
financial statements include some amounts that are based on management's best
estimates and judgments. These estimates may be adjusted as more information
becomes available, and any adjustment could be significant. The impact of any
change in estimates is included in the determination of earnings in the period
in which the change in estimate is identified. Operating results for the nine
months ended September 30, 2005 are not necessarily indicative of the operating
results that may be expected for the year ended December 31, 2005.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and its wholly owned subsidiaries (the
Company) provide fitness and health management services and programs to
corporations, hospitals, communities and universities located in the United
States and Canada. Fitness and health management services include the
development, marketing and management of corporate, hospital, community and
university based fitness centers, injury prevention and work-injury management
consulting, on-site physical therapy and employee health management services.
Programs include wellness and health programs for individual customers,
including health risk assessments, biometric screenings, nutrition and weight
loss programs, smoking cessation, massage therapy, back care and ergonomic
injury prevention.
Consolidation - The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Cash - The Company maintains cash balances at several financial institutions,
and at times, such balances exceed insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash.
Trade and Other Accounts Receivable - Trade and other accounts receivable
represent amounts due from companies and individuals for services and products.
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
determines its allowance for discounts and doubtful accounts by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the customer's current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes off accounts receivable when they
become uncollectible, and payments subsequently received on such
F-12
receivable are credited to the allowance. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
and their geographic dispersion.
Property and Equipment - Property and equipment are stated at cost. Depreciation
and amortization are computed using both straight-line and accelerated methods
over the useful lives of the assets.
Goodwill - Goodwill represents the excess of the purchase price and related
costs over the fair value of net assets of businesses acquired. The carrying
value of goodwill is not amortized, but is tested for impairment on an annual
basis or when factors indicating impairment are present. Projected discounted
cash flows are used in assessing these assets.
Intangible Assets - The Company's intangible assets include customer contracts
and trademark that are amortized on a straight-line basis. Customer contracts
represent the fair value assigned to acquired management contracts and are
amortized over the remaining life of the contracts, of which 4 months remain at
September 30, 2005. Trademark represents the value assigned to an acquired
trademark and is amortized over a period of five years.
Revenue Recognition - Revenue is recognized at the time the service is provided
to the customer. For annual contracts, monthly amounts are recognized ratably
over the term of the contract. Certain services provided to the customer may
vary on a periodic basis and are invoiced to the customer in arrears. The
revenues relating to theses services are estimated in the month that the service
is performed based the cost of the services.
Amounts received from customers in advance of providing the services of the
contract are treated as deferred revenue and recognized when the services are
provided.
The Company has contracts with third-parties (e.g. janitorial services) to
provide ancillary services in connection with their fitness and wellness
management services and programs. Under such arrangements the third-parties
invoice and receive payments from the Company based on transactions with the
ultimate customer. The Company does not recognize revenues related to such
transactions as the ultimate customer assumes the risk and rewards of the
contract and the amounts billed to the customer are either at cost or with a
fixed markup.
Comprehensive Income - Comprehensive income represents net earnings adjusted for
foreign currency translation adjustments. Total comprehensive income was
$1,636,863 and $1,269,462 for the nine months ended September 30, 2005 and 2004.
Net Earnings Per Share - Basic net earnings per common share is computed by
dividing net earnings applicable to common shareholders by the number of
weighted average common shares outstanding. Diluted net earnings per share is
computed by dividing net earnings applicable to common shareholders plus
dividends to preferred shareholders (net earnings) by the number of weighted
average common shares outstanding, and common share equivalents relating to
stock options and stock warrants, when dilutive.
Common stock options and warrants to purchase 584,163 and 470,100 shares of
common stock were excluded from the three months ended September 30, 2005 and
2004 calculation, and 481,298 and 365,100 shares were excluded from the nine
months ended September 30, 2005 and 2004 calculation because they are
anti-dilutive.
Stock-based Compensation - The Company utilizes the intrinsic value method of
accounting for its stock based employee compensation plans. All options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant and accordingly, no compensation cost is reflected in net
earnings for the three and nine months ended September 30, 2005 and 2004. The
following table illustrates the effect on net earnings and earnings per share if
the Company had applied the fair value method of accounting for stock options:
F-13
Three Months ended Nine Months ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ---------- ---------- -----------
Net earnings, applicable to common
Shareholders - basic $ 506,488 $ 465,164 $ 1,632,605 $ 1,272,625
Add: Dividends to preferred shareholders 24,819 21,600 68,019 64,800
----------- ----------- ----------- -----------
Net earnings - diluted 531,307 486,764 1,700,624 1,337,425
----------- ----------- ----------- -----------
Less: Compensation expense determined
under the fair value method, net of tax (41,533) (23,445) (179,198) (137,438)
----------- ----------- ----------- -----------
Proforma net earnings - basic $ 464,955 $ 441,719 $ 1,453,407 $ 1,135,187
=========== =========== =========== ===========
Proforma net earnings - diluted $ 489,774 $ 463,319 $ 1,521,426 $ 1,199,987
=========== =========== =========== ===========
Earnings per Share:
Basic, as reported $ 0.04 $ 0.04 $ 0.13 $ 0.10
=========== =========== =========== ===========
Basic, proforma $ 0.04 $ 0.04 $ 0.11 $ 0.09
=========== =========== =========== ===========
Diluted, as reported $ 0.03 $ 0.03 $ 0.10 $ 0.08
=========== =========== =========== ===========
Diluted, proforma $ 0.03 $ 0.03 $ 0.09 $ 0.07
=========== =========== =========== ===========
The proforma information above should be read in conjunction with the related
historical information.
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:
2005 2004
------------ ---------
Dividend yield None None
Expected volatility 61% - 78% 88%
Expected life of option 1-4 years 1-4 years
Risk-free interest rate 2.43% - 3.47% 3.27%
Weighted average fair value of options on grant date $1.27 $1.01
In December 2004, the Financial Accounting Standards Board (FASB), issued
Statement 123R, Share-Based Payment. Statement 123R is a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supercedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The revision requires all entities to recognize compensation expense
in an amount equal to the fair value of share-based payments granted to
employees.
In April 2005, the United States Securities and Exchange Commission announced
the adoption of a new rule that amended the compliance dates for Statement 123R
as first adopted by the FASB. As a result of this change, the Company is
required to implement Statement 123R beginning with the Company's next fiscal
year starting January 1, 2006. The Company expects that the adoption of
Statement 123R will result in a decrease of net income due to additional
compensation expense attributed to employee stock options.
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 long-term obligations, 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, 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.
F-14
NOTE 3. FINANCING
On August 22, 2003, the Company entered into a $7,500,000 Credit Agreement with
Wells Fargo Bank, N.A. to provide the Company with acquisition financing and
general working capital (the "Wells Loan"). Working capital advances from the
Wells Loan are available on a revolving basis and are based upon a percentage of
the Company's eligible accounts receivable, less any amounts previously drawn.
At the option of the Company, the Wells Loan bears interest at prime or the
one-month LIBOR plus a margin of 2.25% to 2.75% based upon the Company's Senior
Leverage Ratio (effective rate of 6.75% and 5.25% at September 30, 2005 and
December 31, 2004). Borrowing capacity under the Wells Loan decreases $250,000
on the last day of each calendar quarter, beginning September 30, 2003, and
matures on June 30, 2007. The facility provided maximum borrowing capacity of
$5,250,000 and $6,000,000 at September 30, 2005 and December 31, 2004. Excluding
current outstanding balances, and based upon eligible accounts receivable,
$5,152,467 and $3,758,851 was available for borrowing on such respective dates.
Borrowings under the Wells Loan are collateralized by substantially all of the
Company's assets. The Company is required to comply with certain monthly
financial covenants, including a fixed charge coverage ratio, minimum earnings
before interest, taxes, depreciation and amortization, cash flow leverage ratio
and a senior leverage ratio. At September 30, 2005, the Company had no
outstanding balance under the Wells Loan, and was in compliance with all of its
financial covenants.
On August 25, 2003, the Company entered into a $3,000,000 Securities Purchase
Agreement with Bayview Capital Partners LP ("Bayview") to provide the Company
with acquisition financing and general working capital (the "Bayview
Investment"). The Bayview Investment was initially structured as a bridge note
(the "Bridge Note"), the proceeds of which were placed into escrow to fund a
portion of our purchase of the Health & Fitness Services Division of Johnson &
Johnson Health Care Systems Inc.
On December 8, 2003 (the "Effective Date"), the $3,000,000 Bridge Note issued to
Bayview was converted into a $2,000,000 term note (the "Term Note"), $1,000,000
in Series A Convertible Preferred Stock (the "Preferred Stock") and a warrant to
purchase common stock of the Company (the "Warrant") pursuant to the terms set
forth in the August 25, 2003 Securities Purchase Agreement.
The Preferred Stock was issued to Bayview at a price of $1.00 per share,
resulting in 1,000,000 shares issued on the Effective Date. The Preferred Stock
has a stated dividend rate of 6% per year, computed on a simple interest basis,
paid in kind in the form of additional shares of Preferred Stock using a price
of $1.00 per share ("PIK Dividends"). At the option of the holder, the Preferred
Stock, including any PIK Dividends, may be converted, at any time and from time
to time, into common stock of the Company at a price of $0.50 per share. In
addition, Bayview may require redemption of the Preferred Stock and PIK
Dividends upon a change of control or default (including default under the Term
Note).
The Warrant issued to Bayview on the Effective Date represents the right to
purchase, subject to customary weighted-average anti-dilution adjustments,
1,210,320 shares of common stock, which represented 8% of the Company's common
stock outstanding on a fully diluted basis at the Effective Date, excluding the
common stock issuable to Bayview upon conversion of the Preferred Stock. The
Warrant is exercisable at any time for a period of ten years at an exercise
price equal to $0.50 per share, and the shares obtainable upon exercise of the
Warrant may be put to the Company at fair market value (net of the exercise
price) upon a change of control or default.
On December 29, 2004, the Company prepaid its Bayview Term Note by utilizing
funds from the Wells Loan. In connection with the Term Note repayment, the
Company also paid a prepayment penalty of $80,000, which represents 4% of the
face value of the Term Note. In addition, the Company incurred a one-time,
non-cash charge to interest expense of $394,669, representing $345,754 of
unamortized difference between the face value of the Term Note and its assigned
relative fair value, as well as $48,916 of unamortized financing costs related
to the Term Note. At the same time, the Company and Wells Fargo agreed to amend
the Wells Loan to change the senior leverage ratio covenant to reflect the
Company's financial position subsequent to the Term Note repayment. The Company
was in compliance with this change in covenant at September 30, 2005.
F-15
Balances of long-term obligations are as follows:
September 30, December 31,
2005 2004
------------- ------------
Wells Loan $ 0 $ 1,612,759
The outstanding principal balance on the Wells Loan matures June 2007.
NOTE 4. INCOME TAXES
The Company records income taxes in accordance with the liability method of
accounting. Deferred income taxes are provided for temporary differences between
the financial reporting and tax basis of assets and liabilities and federal
operating loss carryforwards. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of the enactment.
Income taxes are calculated based on management's estimate of the Company's
effective tax rate, which takes into consideration a federal tax rate of 34% and
an effective state tax rate of 6%. At December 31, 2004, the Company had
approximately $3,343,000 of federal operating loss carryforwards. The
carryforwards, if they are not used, will expire in 2021.
NOTE 5. STOCK OPTIONS
The Company maintains a stock option plan for the benefit of certain eligible
employees and directors of the Company. A total of 1,163,600 shares of common
stock are reserved for additional grants of options under the plan at September
30, 2005. Generally, the options outstanding (1) are granted at prices equal to
the market value of the stock on the date of grant, (2) vest over various terms
and, (3) expire over a period of five or ten years from the date of grant.
A summary of stock option activity for the nine months ended September 30, 2005
is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding at December 31, 2004 1,921,550 $ 1.06
Granted 175,000 2.70
Exercised (23,375) 0.49
---------- ------
Outstanding at March 31, 2005 2,073,175 1.21
Granted 150,000 2.48
---------- ------
Outstanding at June 30, 2005 2,223,175 $ 1.29
Granted 17,500 2.24
Exercised (78,750) 0.34
---------- ------
Outstanding at September 30, 2005 2,161,925 $ 1.34
========== ======
F-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of
Health Fitness Corporation and subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
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 the standards of the
Public Company Accounting Oversight Board (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. The Company
is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Health
Fitness Corporation and subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The accompanying
Schedule II of Health Fitness Corporation and subsidiaries is presented for
purposes of additional analysis and is not a required part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
March 17, 2005
F-17
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
----------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 241,302 $ 281,294
Trade and other accounts receivable, less allowances of $210,700
and $131,000 at December 31, 2004 and 2003 8,147,430 5,218,224
Prepaid expenses and other 213,954 187,347
Deferred tax assets 1,660,100 850,300
----------------- -------------
Total current assets 10,262,786 6,537,165
PROPERTY AND EQUIPMENT, net 150,308 177,217
OTHER ASSETS
Goodwill 9,022,501 8,725,574
Customer contracts, less accumulated amortization of $875,700 and
$67,400 at December 31, 2004 and 2003 854,306 1,662,639
Trademark, less accumulated amortization of $75,800 and $5,800 at
December 31, 2004 and 2003 274,167 344,166
Other intangible assets, less accumulated amortization of $81,300
and $4,200 at December 31, 2004 and 2003 61,493 138,582
Cash held in escrow - 471,999
Deferred tax assets 221,400 1,686,301
Other 87,015 64,458
----------------- -------------
$ 20,933,976 $ 19,808,101
================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 840,155 $ 569,730
Accrued salaries, wages, and payroll taxes 2,768,734 1,607,157
Other accrued liabilities 495,770 450,255
Accrued self funded insurance 225,500 228,084
Deferred revenue 1,977,093 1,427,057
----------------- -------------
Total current liabilities 6,307,252 4,282,283
LONG-TERM OBLIGATIONS 1,612,759 4,350,012
PREFERRED STOCK, $0.01 par value; 10,000,000 shares authorized,
1,063,945 and 1,003,833 shares issued and outstanding at December
31, 2004 and 2003 1,530,232 1,443,833
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 50,000,000 shares authorized;
12,582,170 and 12,357,334 shares issued and outstanding at
December 31, 2004 and 2003 125,822 123,573
Additional paid-in capital 17,836,675 17,671,536
Accumulated comprehensive income from foreign currency translation 2,459 5,707
Accumulated deficit (6,481,223) (8,068,843)
----------------- -------------
11,483,733 9,731,973
----------------- -------------
$ 20,933,976 $ 19,808,101
================= =============
See notes to consolidated financial statements.
F-18
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
REVENUE $52,454,668 $31,478,822 $27,864,997
COSTS OF REVENUE 38,995,451 24,943,625 21,938,385
----------- ----------- -----------
GROSS PROFIT 13,459,217 6,535,197 5,926,612
OPERATING EXPENSES
Salaries 5,600,203 3,244,639 2,866,200
Other selling, general and administrative 3,440,134 1,849,317 1,751,228
Amortization of acquired intangible assets 878,333 73,194 -
----------- ----------- -----------
Total operating expenses 9,918,670 5,167,150 4,617,428
----------- ----------- -----------
OPERATING INCOME 3,540,547 1,368,047 1,309,184
OTHER INCOME (EXPENSE)
Interest expense (465,571) (204,430) (521,106)
Interest costs - early debt repayment (474,669) - -
Other, net 1,642 (2,405) 950
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 2,601,949 1,161,212 789,028
INCOME TAX EXPENSE (BENEFIT) 927,929 528,536 (2,211,643)
----------- ----------- -----------
NET EARNINGS 1,674,020 632,676 3,000,671
Deemed dividend to preferred shareholders - 656,096 -
Dividend to preferred shareholders 86,400 3,834 -
----------- ----------- -----------
NET EARNINGS (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 1,587,620 $ (27,254) $ 3,000,671
=========== =========== ===========
NET EARNINGS PER COMMON SHARE:
Basic $ 0.13 $ - $ 0.24
Diluted 0.10 - 0.24
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,503,345 12,332,363 12,284,364
Diluted 16,151,017 12,332,363 12,428,440
See notes to consolidated financial statements.
F-19
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Common Stock Additional Accumulated Total
-------------------- Paid-in Comprehensive Accumulated Stockholders' Comprehensive
Shares Amount Capital Income Deficit Equity Income
---------- --------- ------------ ------------- ------------- ------------- -------------
BALANCE AT JANUARY 1, 2002 12,265,250 $ 122,653 $ 16,982,522 - $ (11,042,260) $ 6,062,915
Issuance of common stock through
stock purchase plan 32,411 324 14,845 - - 15,169
Net earnings - - - - 3,000,671 3,000,671 $3,000,671
---------- --------- ------------ ------------- ------------- ----------- ----------
Comprehensive Income $3,000,671
==========
BALANCE AT DECEMBER 31, 2002 12,297,661 122,977 16,997,367 - (8,041,589) 9,078,755
Issuance of common stock through
stock purchase plan 53,423 533 23,506 - - 24,039
Issuance of common stock for options 6,250 63 2,375 - - 2,438
Issuance of warrants - - 648,288 - - 648,288
Deemed dividend to preferred
shareholders - - - - (656,096) (656,096)
Dividend to preferred shareholders - - - - (3,834) (3,834)
Net earnings - - - - 632,676 632,676 $ 632,676
Foreign currency translation - - - 5,707 - 5,707 5,707
---------- --------- ------------ ------------- ------------- ----------- ----------
Comprehensive Income $ 638,383
==========
BALANCE AT DECEMBER 31, 2003 12,357,334 123,573 17,671,536 5,707 (8,068,843) 9,731,973
Issuance of common stock through
stock purchase plan 80,454 805 70,736 - - 71,541
Issuance of common stock for options 66,100 661 34,586 - - 35,247
Issuance of common stock for board
of directors compensation 40,000 400 60,200 - - 60,600
Issuance of warrants 38,282 383 (383) - - -
Dividend to preferred shareholders - - - - (86,400) (86,400)
Net earnings - - - - 1,674,020 1,674,020 $1,674,020
Foreign currency translation - - - (3,248) - (3,248) (3,248)
---------- --------- ------------ ------------- ------------- ----------- ----------
Comprehensive Income $1,670,772
==========
BALANCE AT DECEMBER 31, 2004 12,582,170 $ 125,822 $ 17,836,675 $ 2,459 $ (6,481,223) $11,483,733
========== ========= ============ ============= ============= ===========
See notes to consolidated financial statements.
F-20
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,674,020 $ 632,676 $ 3,000,671
Adjustment to reconcile net earnings to net cash provided by operating
activities:
Common stock issued for Board of Directors compensation 60,600 - -
Depreciation 93,030 152,538 175,239
Amortization 1,034,654 17,775 175,774
Interest on escrow account (2,611) (7,388) -
Deferred taxes 655,101 449,775 (2,209,076)
Loss on disposal of assets - 5,796 -
Interest - early debt repayment 345,754 - -
Change in assets and liabilities, net of assets acquired:
Trade and other accounts receivable (2,929,206) (1,181,336) (648,032)
Prepaid expenses and other (26,607) 119,387 (136,644)
Other assets (22,557) 18,350 (71,398)
Trade accounts payable 267,178 203,897 267,414
Accrued liabilities and other 1,204,508 529,616 447,707
Deferred revenue 550,036 19,620 163,491
----------- ----------- -----------
Net cash provided by operating activities 2,903,900 960,706 1,165,146
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (66,121) (89,761) (114,293)
Net cash payment made for acquisition (296,927) (5,570,813) -
----------- ----------- -----------
Net cash used in investing activities (363,048) (5,660,574) (114,293)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable 18,257,358 5,178,174 24,663,045
Repayments of note payable (19,419,599) (4,957,763) (25,800,760)
Proceeds from issuance of bridge note financing - 3,000,000 -
Payment to cash escrow account - (3,000,000) -
Proceeds from cash escrow account 474,609 4,785,389 -
Repayments of long term obligations (2,000,000) - -
Payment of financing costs - (142,773) (57,657)
Proceeds from the issuance of common stock 71,541 24,039 15,169
Proceeds from the exercise of stock options 35,247 2,438 -
----------- ----------- -----------
Net cash provided by (used in) financing activities (2,580,844) 4,889,504 (1,180,203)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (39,992) 189,636 (129,350)
CASH AT BEGINNING OF YEAR 281,294 91,658 221,008
----------- ----------- -----------
CASH AT END OF YEAR $ 241,302 $ 281,294 $ 91,658
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information:
Cash paid for interest $ 438,111 $ 191,073 $ 362,100
Cash paid for taxes 160,827 91,858 18,400
Noncash investing and financing activities affecting cash flows:
Proceeds from the Wells Loan placed in escrow - 2,250,000 -
Conversion of bridge note to term note, preferred stock and warrants - (3,000,000) -
Deemed dividend to preferred shareholders - (656,096) -
Dividend to preferred shareholders (86,400) (3,834) -
See notes to consolidated financial statements.
F-21
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and its wholly owned subsidiaries
(the Company) provide fitness and health management services and programs
to corporations, hospitals, communities and universities located in the
United States and Canada. Fitness and health management services include
the development, marketing and management of corporate, hospital,
community and university based fitness centers, worksite health promotion,
injury prevention and work-injury management consulting, and on-site
physical therapy. Programs include fitness and health services for
individual customers, including health risk assessments, nutrition and
weight loss programs, smoking cessation, massage therapy, back care and
ergonomic injury prevention.
Consolidation - The consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Cash - The Company maintains cash balances at several financial
institutions, and at times, such balances exceed insured limits. The
Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on cash.
Trade and Other Accounts Receivable - Trade and other accounts receivable
represent amounts due from companies and individuals for services and
products. 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 determines its allowance for discounts and doubtful
accounts by considering a number of factors, including the length of time
trade accounts receivable are past due, the Company's previous loss
history, the customer's current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a
whole. The Company writes off accounts receivable when they become
uncollectible, and payments subsequently received on such receivable are
credited to the allowance. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers and
their geographic dispersion.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization are computed using both straight-line and
accelerated methods over the useful lives of the assets.
Goodwill - Goodwill represents the excess of the purchase price and
related costs over the fair value of net assets of businesses acquired.
The carrying value of goodwill is tested for impairment on an annual basis
or when factors indicating impairment are present. Projected discounted
cash flows are used in assessing these assets. The Company elected to
complete the annual impairment test of goodwill on December 31 each year
and determined that its goodwill relates to one reporting unit for
purposes of impairment testing. The Company determined that there was no
impairment of goodwill at December 31, 2004, 2003 and 2002.
F-22
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Intangible Assets - The Company's intangible assets include customer
contracts, trademark, and deferred financing costs and are amortized on a
straight-line basis. Customer contracts represent the fair value assigned
to acquired management contracts and will be amortized over the remaining
life of the contracts, approximately 25-35 months. Trademark represents
the value assigned to an acquired trademark and is amortized over a period
of five years. Deferred financing costs are amortized over the term of the
related credit agreement. Amortization expense for intangible assets
totaled $955,422, $83,800, and $238,000 for the twelve months ended
December 31, 2004, 2003, and 2002.
Expected future amortization of intangible assets is as follows:
Years ending December 31
------------------------
2005 $840,545
2006 194,017
2007 86,767
2008 68,635
Thereafter -
Cash Held In Escrow - Cash held in escrow represents the funds remaining
after payment of the purchase price for the Company's acquisition. Such
funds remained in escrow until all parties subject to the escrow agreement
agreed that all conditions related to the acquisition were satisfied. At
that time (September 2004), the remaining funds in escrow were used to pay
down the Company's long-term obligations.
Revenue Recognition - Revenue is recognized at the time the service is
provided to the customer. The Company determines its allowance for
discounts by considering historical discount history and current payment
practices of its customers. For annual contracts, monthly amounts are
recognized ratably over the term of the contract. Certain services
provided to the customer may vary on a periodic basis and are invoiced to
the customer in arrears. The revenues relating to theses services are
estimated in the month that the service is performed. Accounts receivable
related to estimated revenues were $593,715 and $610,139 at December 31,
2004 and 2003.
Amounts received from customers in advance of providing the services of
the contract are treated as deferred revenue and recognized when the
services are provided. Accounts receivable relating to deferred revenue
were $1,935,964 and $1,381,002 at December 31, 2004 and 2003.
The Company has contracts with third-parties to provide ancillary services
in connection with their fitness and wellness management services and
programs. Under such arrangements the third-parties invoice and receive
payments from the Company based on transactions with the ultimate
customer. The Company does not recognize revenues related to such
transactions as the ultimate customer assumes the risk and rewards of the
contract and the amounts billed to the customer are either at cost or with
a fixed markup.
Comprehensive Income - Comprehensive income is net earnings plus certain
other items that are recorded directly to stockholders' equity. For the
Company, comprehensive income represents net earnings adjusted for foreign
currency translation adjustments. Comprehensive income is disclosed in the
consolidated statement of stockholders' equity.
F-23
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Net Earnings Per Common Share - Basic net earnings per common share is
computed by dividing net earnings applicable to common shareholders by the
number of weighted average common shares outstanding. Diluted net earnings
per common share is computed by dividing net earnings applicable to common
shareholders plus dividends to preferred shareholders by the number of
weighted average common shares outstanding, and common share equivalents
relating to stock options and stock warrants, when dilutive, and
convertible preferred stock.
Common stock options and warrants to purchase 400,100, 491,000 and
1,290,697 shares of common stock with weighted average exercise prices of
$2.54, $1.92 and $1.88 were excluded from the 2004, 2003 and 2002 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. All options
granted had an exercise price equal to the market value of the underlying
common stock on the date of grant and accordingly, no compensation cost is
reflected in net earnings for the years ended December 31, 2004, 2003, and
2002. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value method to its
stock-based compensation plans.
2004 2003 2002
------------- ------------- -------------
Net earnings (loss) applicable to common shareholders $ 1,587,620 $ (27,254) $ 3,000,671
Less: Compensation expense determined under the fair value
method, net of tax (171,500) (76,040) (74,474)
------------- ------------- -------------
Proforma net earnings, basic $ 1,416,120 $ (103,294) $ 2,926,197
Add: Dividends to preferred shareholders 86,400 -- --
------------- ============= -------------
Proforma net earnings, diluted $ 1,502,520 $ (103,294) $ 2,926,197
============= ============= =============
Earnings per Share:
Basic-as reported $ 0.13 $ 0.00 $ 0.24
============= ============= =============
Basic-proforma $ 0.11 $ (0.01) $ 0.24
============= ============= =============
Diluted-as reported $ 0.10 $ 0.00 $ 0.24
============= ============= =============
Diluted-proforma $ 0.09 $ (0.01) $ 0.24
============= ============= =============
The proforma information above should be read in conjunction with the
related historical information.
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:
2004 2003 2002
------------- ------------- --------------
Dividend yield None None None
Expected volatility 88% 88.4%-105.0% 105.0%
Expected life of option 1 to 4 years 1 to 4 years 1 to 4 years
Risk-free interest rate 3.3% 2.90%-3.27% 5.50%
Weighted average fair value of options
on grant date $1.02 $0.48 $0.33
F-24
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
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 long-term obligations,
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,
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.
Income Taxes - Deferred income taxes are provided for temporary
differences between the financial reporting and tax basis of assets and
liabilities and federal operating loss carryforwards. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of the enactment.
2. PURCHASE OF ASSETS
On December 8, 2003 (the "Effective Date"), the Company purchased the
business assets of the Health & Fitness Management Services Business of
Johnson & Johnson Health Care Systems Inc. (JJHCS). Assets acquired by the
Company consisted primarily of client contracts, proprietary wellness,
lifestyle and health promotion programs, software, and other health and
wellness services. As part of the transaction, the Company entered into a
multi-year management contract with another subsidiary of Johnson &
Johnson whereby the Company will manage more than 50 Johnson & Johnson
affiliate fitness center sites. The Company also entered into a one-year
agreement to use 660 square feet of office space of JJHCS for a fee of
$1,500 per month, which was renewed through December 31, 2005.
The acquisition has been accounted for using the purchase method of
accounting. The fair market value of the assets acquired resulted in the
following purchase price allocation:
Cash price paid for assets $4,990,862
Acquisition costs incurred 836,879
----------
Total purchase price $5,827,741
==========
Purchase Price Allocation
Inventory $ -
Property and equipment 34,000
Customer contracts 1,730,000
Trademark 350,000
Excess of cost over assets acquired 3,713,741
----------
$5,827,741
==========
F-25
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
During 2004, an additional $205,473 was paid to JJHCS for four contract
assignments. The Company also incurred an additional $51,455 of
acquisition related costs. The Company also determined that $40,000
previously allocated to inventory was obsolete. These additional amounts
were recorded to goodwill.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
Useful Life 2004 2003
------------- ------------ -------------
Leasehold improvements Term of lease $ 11,757 $ 4,127
Office equipment 3-7 years 1,075,003 1,034,365
Software 3 years 170,406 159,772
Health care equipment 1-5 years 388,850 383,906
------------ -------------
1,646,016 1,582,170
Less accumulated depreciation and amortization 1,495,708 1,404,953
------------ -------------
$ 150,308 $ 177,217
============ =============
4. FINANCING
On August 22, 2003, the Company entered into a $7,500,000 Credit Agreement
with Wells Fargo Bank, N.A. to provide the Company with acquisition
financing and general working capital (the "Wells Loan"). The initial draw
on the Wells Loan of $1,255,204 was used to refinance a revolving line of
credit with Merrill Lynch Business Financial Services, Inc. ("Merrill
Lynch Loan"). The Company repaid all amounts owed, and canceled the
Merrill Lynch Loan, which accrued interest at the one-month LIBOR rate
plus 2.35%. On August 25, 2003, the Company made a draw of $2,250,000 on
the Wells Loan to fund a portion of the JJHCS asset purchase.
Working capital advances from the Wells Loan are based upon a percentage
of the Company's eligible accounts receivable, less any amounts previously
drawn. At the option of the Company, the Wells Loan bears interest at
prime or the one-month LIBOR plus a margin of 2.25% to 2.75% based upon
the Company's Senior Leverage Ratio (effective rate of 5.25% and 4.00% at
December 31, 2004 and 2003). The availability of the Wells Loan decreases
$250,000 on the last day of each calendar quarter, beginning September 30,
2003, and expires on June 30, 2007. Borrowing capacity under the Wells
Loan totaled $6,000,000 and $7,000,000 at December 31, 2004 and 2003, and
all borrowings are collateralized by substantially all of the Company's
assets. The Company is not required to make minimum monthly payments of
principal, and interest payments are made each month. The Company also is
required to comply with certain quarterly financial covenants, including a
fixed charge coverage ratio, minimum earnings before interest, taxes,
depreciation and amortization, cash flow leverage ratio and a balance
sheet leverage ratio. At December 31, 2004, the Company had $1,612,759
outstanding under the Wells Loan, and was in compliance with all of its
financial covenants.
F-26
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
On August 25, 2003, the Company entered into a $3,000,000 Securities
Purchase Agreement with Bayview Capital Partners LP ("Bayview") to provide
the Company with acquisition financing and general working capital (the
"Bayview Investment"). On the Effective Date, the $3,000,000 Bridge Note
issued to Bayview was converted into a $2,000,000 term note (the "Term
Note"), $1,000,000 in Series A Convertible Preferred Stock (the "Preferred
Stock") and a warrant to purchase common stock of the Company (the
"Warrant") per the terms set forth in the August 25, 2003 Securities
Purchase Agreement. The Bayview Investment is secured by a subordinated
security interest in substantially all of the Company's assets. The
Bayview Investment contains identical financial covenants to those in the
Wells Loan described above. At December 31, 2004, the Company was in
compliance with all of its financial covenants.
The Term Note accrued interest at 12% per year, payable monthly, and
matures on December 8, 2008. The Term Note could be prepaid, in whole or
in part, at any time, provided that the prepayment is accompanied by a
premium ranging from 5% in year 1 to 1% in year 5.
The Preferred Stock was issued to Bayview at a price of $1.00 per share,
resulting in 1,000,000 shares issued on the Effective Date. The Preferred
Stock has a stated dividend rate of 6% per year, computed on a simple
interest basis, paid in kind in the form of additional shares of Preferred
Stock using a price of $1.00 per share ("PIK Dividends"). At the option of
the holder, the Preferred Stock, including any PIK Dividends, may be
converted, at any time and from time to time, into common stock of the
Company at a price of $0.50 per share. In addition, Bayview may require
redemption of the Preferred Stock and PIK Dividends upon a change of
control or default (including default under the Term Note).
The Warrant issued to Bayview on the Effective Date represents the right
to purchase 1,210,320 shares of common stock, which represents 8% of the
Company's common stock outstanding on a fully diluted basis at the
Effective Date, excluding the common stock issuable to Bayview upon
conversion of the Preferred Stock. The Warrant is exercisable at any time
for a period of ten years at an exercise price equal to $0.50 per share,
and the shares obtainable upon exercise of the Warrant may be put to the
Company at fair market value (net of the exercise price) upon a change of
control or default.
The investment proceeds received from Bayview were allocated based upon
the relative fair value of each instrument, which resulted in the
following allocation:
Value assigned to Preferred Stock $ 783,904
Value assigned to Warrants 648,288
Value assigned to Term Note 1,567,808
----------
$3,000,000
==========
The $432,192 difference between the $2,000,000 face value of the Term Note
and its assigned relative fair value is being amortized as interest
expense over the 5-year term of the Term Note.
F-27
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
When Bayview made its commitment to invest in the Company on August 25,
2003, the fair value of the Company's common stock to be received upon
conversion of the Preferred Stock was greater than the conversion price of
the preferred stock, which resulted in a beneficial conversion feature.
Accordingly, the Company calculated a $656,096 beneficial conversion
feature, which was recorded as a deemed dividend in the statement of
operations for the year ended December 31, 2003.
On December 29, 2004, the Company prepaid its Bayview Term Note by
utilizing funds from the Wells Loan. In connection with the Term Note
repayment, the Company also paid a prepayment penalty of $80,000, which
represents 4% of the face value of the Term Note. In addition, the Company
incurred a one-time, non-cash charge to interest expense of $394,669,
representing $345,754 of unamortized difference between the face value of
the Term Note and its assigned relative fair value, as well as $48,915 of
unamortized financing costs related to the Term Note. At the same time,
the Company and Wells Fargo Bank, N.A. agreed to amend the Wells Loan to
change the senior leverage ratio covenant to reflect the Company's
financial position subsequent to the Term Note repayment. The Company was
in compliance with this change in covenant at December 31, 2004.
Balances of long-term obligations as of December 31:
2004 2003
----------- ----------
Wells Loan $ 1,612,759 $2,775,000
Bayview Term Note - 2,000,000
----------- ----------
1,612,759 4,775,000
Discount on Bayview Term Note - (424,988)
----------- -----------
$ 1,612,759 $4,350,012
=========== ==========
Any outstanding balance on the Wells Loan becomes due and payable in June
2007.
5. 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. Costs incurred under operating leases
are recorded as rent expense and totaled approximately $271,000, $162,000
and $136,000 for the years ended December 31, 2004, 2003 and 2002.
Minimum rent payments due under operating leases are as follows:
Years ending December 31:
-------------------------
2005 $266,000
2006 248,000
2007 187,000
2008 18,000
2009 1,000
Thereafter -
F-28
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.
6. BENEFIT PLAN
The Company maintains a 401(k) plan whereby employees are eligible to
participate in the plan providing they have attained the age of 18 and
have completed one month of service. The plan was amended in December 2002
to allow participants to contribute up to 20% of their earnings effective
April 1, 2003. Previously, participants were able to contribute up to 15%
of their earnings. The Company may make certain matching contributions
which were approximately $277,000, $140,000 and $132,000 for the years
ended December 31, 2004, 2003 and 2002.
7. EQUITY
Stock Options - The Company maintains a stock option plan for the benefit
of certain eligible employees and directors of the Company and its
subsidiaries. A total of 1,506,100 shares of common stock are reserved for
additional grants of options under the plan at December 31, 2004.
Generally, the options outstanding (1) are granted at prices equal to the
market value of the stock on the date of grant, (2) vest over various
terms and, (3) expire over a period of five or ten years from the date of
grant.
A summary of the stock option activity is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding at January 1, 2002 1,233,830 $ 1.54
Granted 330,700 0.49
Forfeited (142,230) 2.64
---------- -------
Outstanding at December 31, 2002 1,422,300 1.19
Granted 496,300 0.80
Exercised (6,250) 0.39
Forfeited (201,450) 2.88
---------- -------
Outstanding at December 31, 2003 1,710,900 0.88
Granted 320,100 1.87
Exercised (66,100) 0.53
Forfeited (43,350) 0.54
---------- -------
Outstanding at December 31, 2004 1,921,550 $ 1.06
========== =======
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Options exercisable at December 31:
2004 1,249,450 $ 1.05
2003 947,575 $ 1.05
2002 852,500 $ 1.67
F-29
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
The following table summarizes information about stock options at December
31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding In Years Price Exercisable Price
--------------- ----------- ------------------- -------- ----------- --------
$0.30 - $0.39 475,600 2.55 $0.33 301,400 $0.31
0.47 - 0.69 640,600 3.50 0.56 495,800 0.56
0.95 - 1.25 285,250 5.63 1.17 117,250 1.12
1.26 - 2.27 320,100 5.38 1.87 135,000 1.57
3.00 200,000 2.34 3.00 200,000 3.00
--------- ---------
1,921,550 3.77 $1.06 1,249,450 $1.05
========= =========
Employee Stock Purchase Plan - The Company maintains an Employee Stock
Purchase Plan which allows employees to purchase shares of the Company's
common stock at 90% of the fair market value. On November 6, 2002 the
Company amended the plan to increase the available shares by 300,000. A
total of 700,000 shares of common stock are reserved for issuance under
this plan, of which 271,361 shares are unissued and remain available for
issuance at December 31, 2004. There were 80,454, 53,423 and 32,411 shares
issued under the plan during 2004, 2003 and 2002.
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.
In December 2003, a warrant to purchase 1,210,320 shares of common stock
was issued to Bayview in connection with acquisition financing provided to
the Company. The Warrant will be exercisable at any time for a period of
ten years at an exercise price equal to $0.50 per share, and the shares
obtainable upon exercise of the Warrant may be put to the Company at fair
market value (net of the exercise price) upon a change of control or
default.
In December 2003, a warrant to purchase 100,000 shares of common stock was
issued to Goldsmith, Agio, Helms Securities, Inc. for broker services
provided to the Company in connection with the JJHCS acquisition (the
"Goldsmith Warrant"). The Goldsmith Warrant will be exercisable at any
time for a period of five years at an exercise price equal to $0.50 per
share.
F-30
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
A summary of the stock warrants activity is as follows:
Exercise
Number of Price
Shares Per Share
------------ ---------------
Outstanding at January 1, 2002 1,366,697 $ 0.30 - 4.00
Forfeited (750,000) 2.25
------------
Outstanding at December 31, 2002 616,697 0.30 - 4.00
Granted 1,310,320 0.50
Forfeited (466,697) 1.00 - 4.00
------------
Outstanding at December 31, 2003 1,460,320 0.30 - 0.50
Exercised (38,282) 0.30
Forfeited (6,718) 0.30
------------
Outstanding at December 31, 2004 1,415,320 0.30 - 0.50
============
Warrants exercisable at December 31:
2004 1,415,320 $ 0.30 - 0.50
2003 1,460,320 0.30 - 0.50
2002 616,697 0.30 - 4.00
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
2004 2003 2002
----------- ---------- -----------
Current $ 272,828 $ 78,761 $ (2,567)
Deferred 655,101 449,775 (2,209,076)
----------- ---------- -----------
$ 927,929 $ 528,536 $(2,211,643)
=========== ========== ===========
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:
2004 2003 2002
----------- ----------- -----------
Tax expense computed at statutory rates $ 884,700 $ 394,800 $ 268,300
State tax benefit, net of federal effect 154,600 51,800 38,400
Nondeductible goodwill amortization - - 10,200
Change in valuation allowance - - (2,501,200)
Adjustment to income tax provision accruals (199,700) 76,000 (53,200)
Other 88,329 5,936 25,857
----------- ----------- -----------
$ 927,929 $ 528,536 $(2,211,643)
=========== =========== ===========
At December 31, 2004, the Company had approximately $3,343,000 of federal
operating loss carryforwards. The carryforwards, if they are not used,
will expire in 2021. For 2004, 2003 and 2002, a portion of the operating
loss carryforwards were used to reduce federal taxes payable by
approximately $1,030,000, $440,000 and $298,000.
F-31
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
The components of deferred tax assets at December 31 consist of the
following:
2004 2003
---------- ----------
Current:
Allowances $ 39,200 $ 52,400
Accrued employee benefits 179,300 141,900
Tax loss carryforwards 1,441,600 656,000
---------- ----------
Net current asset $1,660,100 $ 850,300
========== ==========
Noncurrent:
Depreciation and amortization $ 221,400 $ 31,900
Tax loss carryforwards - 1,608,400
Other - 46,001
---------- ----------
Net non-current asset $ 221,400 $1,686,301
========== ----------
9. ACCOUNTING PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board, referred to
herein as FASB, issued Statement 151, Inventory Costs. Statement 151
amends the guidance in Accounting Research Bulletin No. 43, Chapter 4,
Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material. Statement
151 is effective for companies that incur inventory costs during fiscal
years beginning after June 15, 2005. Adoption of Statement 151 is not
anticipated to have an impact on the Company's financial position or
results of operation.
In December 2004, the FASB issued Statement 153, Exchanges of Nonmonetary
Assets. Statement 153 amends Accounting Principles Board Opinion No. 29,
Accounting for Nonmonetary Transaction. Statement 153 eliminates the
exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. Statement 153 is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15,
2005. Adoption of Statement 153 is not anticipated to have an impact on
the Company's financial position or results of operation.
In December 2004, the FASB issued Statement 123R, Share-Based Payment.
Statement 123R is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supercedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Statement 123R
covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans, and provides that
the fair value of such share-based compensation be expensed in a company's
financial statements.
The Company will be required to implement Statement 123R in connection
with its Quarterly Report on Form 10-Q for the period ended June 30, 2005.
The Company expects that the adoption of Statement 123R will result in a
decrease of net income in future periods due to additional compensation
expense attributed to employee stock options.
F-32
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
The Company does not expect the expense related to employee stock options
to be materially different from amounts previously disclosed on a proforma
basis.
10. SIGNIFICANT CUSTOMER RELATIONSHIP
At December 31, 2004, the Company had one customer relationship that
provided 10.3% of its total revenue. For this customer, the Company
provides fitness center management and wellness program administration
services for approximately 55 locations. The agreement expires December
31, 2006, and will automatically renew for successive one year periods
unless either party delivers written notice at least 90 days prior to
termination. The Company believes that its relationship with this customer
is good.
11. RELATED PARTY TRANSACTION
In December 2003, the Company entered into a services agreement with K.
James Ehlen, M.D., a member of the Company's Board of Directors. The scope
of services provided to the Company primarily include serving as the
Company's Medical Advisor, and supporting the development of the Company's
corporate health services strategy. For 2004 and 2003, Dr. Ehlen was paid
$100,000 and $10,000 for his services. In 2002, there were no compensation
payments to Dr. Ehlen for his medical advisory services.
F-33
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter ended
--------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- ------------- ------------
2004
Revenue $12,666,374 $13,129,715 $13,154,340 $13,504,239
Gross profit 3,086,937 3,442,358 3,347,083 3,582,839
Net earnings applicable to common shareholders 336,707 470,754 465,164 314,995
Net earnings per share
Basic $ 0.03 $ 0.04 $ 0.04 $ 0.03
Diluted 0.02 0.03 0.03 0.02
Weighted average common shares outstanding
Basic 12,409,619 12,483,979 12,550,679 12,566,735
Diluted 16,038,913 16,066,003 16,122,175 16,349,043
Quarter ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
------------ ------------ ------------- ------------
2003
Revenue $ 7,518,205 $ 7,732,626 $ 7,445,094 $ 8,782,897
Gross profit 1,654,399 1,581,142 1,465,768 1,833,888
Net earnings applicable to common shareholders 267,980 217,333 87,786 (600,353)
Net earnings per share
Basic $ 0.02 $ 0.02 $ 0.01 $ (0.05)
Diluted 0.02 0.02 0.01 (0.05)
Weighted average common shares outstanding
Basic 12,308,321 12,322,908 12,341,284 12,356,315
Diluted 12,404,312 12,467,821 12,743,441 12,356,315
F-34
HEALTH FITNESS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004 2003 AND 2002
Balance at Charged to Charged to Balance
Beginning Costs and Other accounts Deductions at End
Description of Period Expenses Describe Describe of Period
---------------------------- ----------- ---------- -------------- ----------- ---------
Trade and other accounts
receivable allowances:
Year ended December 31, 2004 $ 131,000 $ 79,700 - $ - (a) $ 210,700
Year ended December 31, 2003 88,900 61,500 - (19,400)(a) 131,000
Year ended December 31, 2002 84,700 5,400 - (1,200)(a) 88,900
(a) Accounts receivable written off as uncollectible
F-35
HEALTHCALC.NET, INC.
BALANCE SHEETS
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
2005 2004
--------- ---------
Unaudited
ASSETS
CURRENT ASSETS
Cash $ 72,192 $ 234,045
Trade accounts receivable, less allowances of $0 157,155 122,171
Prepaid expenses and other -- 2,495
--------- ---------
Total current assets 229,347 358,711
PROPERTY AND EQUIPMENT, net 56,540 38,559
--------- ---------
$ 285,887 $ 397,270
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Trade accounts payable $ 41,072 $ 96,825
Other accrued liabilities -- 60,649
Line of credit 27,128 29,452
Deferred revenue 72,552 239,093
--------- ---------
Total current liabilities 140,752 426,019
COMMITMENTS & CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value; 1,000,000 shares
authorized; 500,000 shares issued and 450,000
shares outstanding 5,000 5,000
Accumulated earnings (deficit) 140,635 (33,249)
Treasury stock, 50,000 shares at cost (500) (500)
--------- ---------
145,135 (28,749)
--------- ---------
$ 285,887 $ 397,270
========= =========
The accompanying notes are an integral part of these financial statements.
F-36
HEALTHCALC.NET, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
2005 2004
----------- -----------
REVENUE $ 1,816,821 $ 1,151,335
COSTS OF REVENUE 447,864 307,547
----------- -----------
1,368,957 843,788
GROSS PROFIT
OPERATING EXPENSES
Salaries 877,812 629,411
Other selling, general and administrative 314,166 179,036
----------- -----------
1,191,978 808,447
----------- -----------
OPERATING INCOME 176,979 35,341
OTHER INCOME (EXPENSE)
Interest expense (3,095) (3,815)
Other -- 6,113
----------- -----------
EARNINGS BEFORE INCOME TAXES 173,884 37,639
INCOME TAX EXPENSE (BENEFIT) -- --
----------- -----------
NET EARNINGS $ 173,884 $ 37,639
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-37
HEALTHCALC.NET, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 173,884 $ 37,639
Adjustment to reconcile net earnings to net cash used in
operating activities:
Depreciation 11,290 9,175
Change in assets and liabilities:
Trade accounts receivable (34,984) 31,230
Prepaid expenses and other 2,495 6,316
Trade accounts payable (55,753) (286,023)
Other accrued liabilities (60,649) (1,290)
Deferred revenue (166,541) 2,815
--------- ---------
Net cash used in operating activities (130,258) (200,138)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (29,271) (5,541)
--------- ---------
Net cash used in investing activities (29,271) (5,541)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit (2,324) (1,889)
--------- ---------
Net cash used in financing activities (2,324) (1,889)
--------- ---------
NET DECREASE IN CASH (161,853) (207,568)
CASH AT BEGINNING OF YEAR 234,045 239,290
--------- ---------
CASH AT END OF YEAR $ 72,192 $ 31,722
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 3,095 $ 3,815
The accompanying notes are an integral part of these financial statements.
F-38
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - HealthCalc.Net, Inc. (the "Company"), is a leading provider of
web-based fitness, health management and wellness programs to
corporations, health care organizations, physicians and athletic/fitness
centers. The Company's web-based platform provides customers with a
variety of tools and resources to identify opportunities to impact health
care costs through lifestyle improvement programs for individuals. The
web-based platform allows individuals to take periodic online health
assessments, track daily exercise results, receive online health coaching
and obtain access to the latest health information and education in an
internet-based environment.
The Company is a Subchapter S corporation organized under the laws of the
State of Texas.
Basis of Presentation - The accompanying unaudited interim financial
statements and related notes should be read in conjunction with the
audited December 31, 2004 Financial Statements and related notes of
HealthCalc.Net, Inc., which are an integral part of the unaudited interim
financial statements. The unaudited interim financial statements include
all adjustments (consisting only of normal recurring adjustments) and
accruals necessary in the judgment of management for a fair presentation
of such statements. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
Advertising - The Company expenses advertising costs as they are incurred.
Advertising expense for the period ended September 30, 2005 and 2004 was
$29,187 and $11,998, respectively.
Stock-Based Compensation - In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS No. 123."
This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company accounts for stock-based compensation using Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and
has not adopted the recognition provisions of SFAS No. 123, as amended by
SFAS No. 148. The exercise price of options granted under the stock option
plan (Note 4) is equal to the market price of the underlying stock on the
date of grant. Therefore, no compensation cost was recorded under APB No.
25.
If the company had determined compensation cost for the stock-based
compensation plan in accordance with the fair value method prescribed by
SFAS No. 123, proforma net income for the nine months ended September 30,
2005 and 2004 would have been as follows:
F-39
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
2005 2004
--------- ---------
Net income, as reported $ 173,884 $ 37,639
Stock-based employee compensation expense,
net of related tax effects (2,358) (2,115)
--------- ---------
Net income, proforma $ 171,526 $ 35,524
========= =========
The weighted average fair value of options granted during 2005 and 2004
was $0.17 and $0.05, respectively. The fair of each option on the date of
grant was estimated using the Black-Scholes option pricing model with the
following assumptions:
2005 2004
-------- -----------
Risk free rate of return 3.10% 0.93%-1.20%
Expected life of option 6 years 6 years
Expected volatility N/A N/A
Dividend yield None None
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2005 and
December 31, 2004:
Useful
Life 2005 2004
------- ------- -------
Computer equipment 5 years $74,630 $60,288
Office furniture 5 years 20,994 6,065
------- -------
95,624 66,353
Less accumulated depreciation 39,084 27,794
------- -------
$56,540 $38,559
======= =======
3. FINANCING
The Company maintains two lines of credit totaling $129,000 with Wells
Fargo Bank N.A to provide the Company with general working capital. The
lines of credit bear interest at 14.50%. The Company is required to make
minimum monthly payments as determined by Wells Fargo.
Line of credit balances at September 30, 2005 and December 31, 2004 are as
follows:
2005 2004
-------- --------
Wells Fargo Bank N.A. $ 27,128 $ 29,452
======== ========
F-40
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
4. EQUITY
Stock Options - The Company maintains a stock option plan for the benefit
of certain eligible employees of the Company. Generally, the options
outstanding are granted at prices equal to the market value of the stock
on the date of grant, vest on a straight line basis over five years and
expire six years from the date of grant.
At September 30, 2005 and 2004, the Company had outstanding stock options
totaling 100,700 and 93,950, respectively, with a weighted average
exercise price of $1.00 per share for each period. At September 30, 2005
and 2004, 57,050 and 38,260 option shares were exerciseable at a weighted
average exercise price of $1.00 per share.
5. SIGNIFICANT CUSTOMER RELATIONSHIP
At September 30, 2005 and 2004, the Company had two customers that each
provided more than 10% of its total revenue. On a combined basis, these
customers provided approximately 44% of total revenues for each period.
The services provided to these customers include web-based technology
services and on-site biometric screening services.
6. RELATED PARTY TRANSACTION
For the nine months ended September 30, 2004, the Company recorded
management fee revenue of $17,500 related to payments received from E2
Consulting, L.L.C., a Texas limited liability company, whose principal
business activities involve the maintenance and support of a desktop
version of the Company's web-based software tools. Such management fee
revenue was for technical consulting and development services provided by
the Company. The principal owners of the Company are also the principal
owners of E2 Consulting. No such management fee income was recorded by the
Company for the nine months ended September 30, 2005.
7. SUBSEQUENT EVENTS
On December 23, 2005, Health Fitness Corporation (HFC) acquired all of the
outstanding capital stock of the Company for $6 million in cash and stock
with the potential for additional amounts to be paid under an earn-out
provision based upon the Company achieving certain revenue objectives for
calendar year 2006. Immediately prior to HFC's acquisition of the Company,
E2 Consulting, L.L.C. (described more in note 6 above) was merged with and
into the Company in exchange for $70,000.
F-41
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Stockholders of Health Fitness Corporation
We have audited the accompanying balance sheets of HealthCalc.Net, Inc.
(Company) as of December 31, 2004 and 2003, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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 that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HealthCalc.Net, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the year ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
December 23, 2005
F-42
HEALTHCALC.NET, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS
Cash $ 234,045 $ 239,290
Trade accounts receivable, less allowances of $0 122,171 138,587
Prepaid expenses and other 2,495 6,316
--------- ---------
Total current assets 358,711 384,193
PROPERTY AND EQUIPMENT, net 38,559 38,833
--------- ---------
$ 397,270 $ 423,026
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Trade accounts payable $ 96,825 $ 304,694
Other accrued liabilities 60,649 29,870
Line of credit 29,452 32,555
Deferred revenue 239,093 57,945
--------- ---------
Total current liabilities 426,019 425,064
COMMITMENTS & CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value; 1,000,000 shares
authorized; 500,000 shares issued and 450,000
shares outstanding 5,000 5,000
Accumulated deficit (33,249) (6,538)
Treasury stock, 50,000 shares at cost (500) (500)
--------- ---------
(28,749) (2,038)
--------- ---------
$ 397,270 $ 423,026
========= =========
The accompanying notes are an integral part of these financial statements.
F-43
HEALTHCALC.NET, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
2004
----------
REVENUE $1,876,470
COSTS OF REVENUE 538,296
----------
GROSS PROFIT 1,338,174
OPERATING EXPENSES
Salaries 1,091,200
Other selling, general and administrative 275,261
----------
1,366,461
----------
OPERATING LOSS (28,287)
OTHER INCOME (EXPENSE)
Interest expense (4,537)
Other 6,113
----------
LOSS BEFORE INCOME TAXES (26,711)
INCOME TAX EXPENSE (BENEFIT) --
----------
NET LOSS $ (26,711)
==========
The accompanying notes are an integral part of these financial statements.
F-44
HEALTHCALC.NET, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2004
Total
Common Stock Stockholders'
----------------------- Accumulated Treasury Equity
Shares Amount Deficit Stock (Deficit)
------- ------- ----------- -------- -------------
BALANCE AT JANUARY 1, 2004 500,000 $ 5,000 $ (6,538) $ (500) $ (2,038)
Net loss -- -- (26,711) -- (26,711)
------- ------- ----------- -------- -------------
BALANCE AT DECEMBER 31, 2004 500,000 $ 5,000 $ (33,249) $ (500) $ (28,749)
======= ======= =========== ======== =============
The accompanying notes are an integral part of these financial statements.
F-45
HEALTHCALC.NET, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
2004
---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (26,711)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation 11,978
Change in assets and liabilities:
Trade accounts receivable 16,416
Prepaid expenses and other 3,821
Trade accounts payable (207,869)
Other accrued liabilities 30,779
Deferred revenue 181,148
---------
Net cash provided by operating activities 9,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (11,704)
---------
Net cash used in investing activities (11,704)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit (3,103)
---------
Net cash used in financing activities (3,103)
---------
NET DECREASE IN CASH (5,245)
CASH AT BEGINNING OF YEAR 239,290
---------
CASH AT END OF YEAR $ 234,045
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,537
The accompanying notes are an integral part of these financial statements.
F-46
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - HealthCalc.Net, Inc. (the "Company"), is a leading provider of
web-based fitness, health management and wellness programs to
corporations, health care organizations, physicians and athletic/fitness
centers. The Company's web-based platform provides customers with a
variety of tools and resources to identify opportunities to impact health
care costs through lifestyle improvement programs for individuals. The
web-based platform allows individuals to take periodic online health
assessments, track daily exercise results, receive online health coaching
and obtain access to the latest health information and education in an
internet-based environment.
The Company is a Subchapter S corporation organized under the laws of the
State of Texas.
Cash - The Company maintains its cash account at one financial
institution. The Company has not experienced any losses in such account
and believes it is not exposed to any significant credit risk on cash. The
Company considers all highly liquid instruments with an original maturity
of three months or less to be cash equivalents.
Trade and Other Accounts Receivable - Trade accounts receivable represent
amounts due from companies and individuals for services and products. 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 determines its allowance for discounts and doubtful accounts
by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company's previous loss history, the
customer's current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivable are credited to the
allowance.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the useful
lives of the assets.
Revenue Recognition - Revenue is recognized at the time the service is
provided to the customer. The Company determines its allowance for
discounts by considering historical discount history and current payment
practices of its customers. For annual contracts, monthly amounts are
recognized ratably over the term of the contract. Certain services
provided to the customer may vary on a periodic basis and are invoiced to
the customer in arrears. The revenues relating to theses services are
estimated in the month that the service is performed.
Amounts received from customers in advance of providing the services of
the contract are treated as deferred revenue and recognized when the
services are provided. Amounts received from new customers for website
activation fees are treated as deferred revenue and recognized over a
period of three years, which is the estimated life of a new customer.
Advertising - The Company expenses advertising costs as they are incurred.
Advertising expense for the period ended December 31, 2004 was $20,085.
F-47
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
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 long-term obligations,
if recalculated based on current interest rates, would not significantly
differ from the recorded amounts.
Use of Estimates - Preparing 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, disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation - In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS No. 123."
This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company accounts for stock-based compensation using Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and
has not adopted the recognition provisions of SFAS No. 123, as amended by
SFAS No. 148. The exercise price of options granted under the stock option
plan (Note 6) is equal to the market price of the underlying stock on the
date of grant. Therefore, no compensation cost was recorded under APB No.
25.
If the Company had determined compensation cost for the stock-based
compensation plan in accordance with the fair value method prescribed by
SFAS No. 123, proforma net loss for the year ended December 31, 2004 would
have been as follows:
2004
--------
Net loss, as reported $(26,711)
Stock-based employee compensation expense,
net of related tax effects (2,820)
--------
Net loss, proforma $(29,531)
========
The weighted average fair value of options granted during 2004 was $0.05.
The fair of each option on the date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Risk free rate of return 0.93%-1.20%
Expected life of option 6 years
Expected volatility N/A
Dividend yield None
F-48
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
Useful --------------------------------
Life 2004 2003
------- -------- --------
Computer equipment 5 years $ 60,288 $ 48,583
Office furniture 5 years 6,065 6,065
-------- --------
66,353 54,648
Less accumulated depreciation 27,794 15,815
-------- --------
$ 38,559 $ 38,833
======== ========
3. FINANCING
The Company maintains two lines of credit totaling $129,000 with Wells
Fargo Bank N.A to provide the Company with general working capital. The
lines of credit bear interest at 14.50%. The Company is required to make
minimum monthly payments as determined by Wells Fargo.
Line of credit balances are as follows:
December 31,
--------------------------------
2004 2003
-------- --------
Wells Fargo Bank N.A. $ 29,452 $ 32,555
======== ========
4. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases office space under an operating lease that
expires on June 30, 2008. Costs incurred under this operating lease are
recorded as rent expense and totaled approximately $40,500 for the year
ended December 31, 2004.
Minimum rent payments due under operating leases are as follows:
Years ending December 31:
2005 $ 54,655
2006 75,672
2007 82,734
2008 44,394
F-49
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
5. BENEFIT PLAN
The Company maintains a SIMPLE-IRA Plan whereby employees may contribute
pre-tax wages to the Plan up to a maximum of $10,000 for 2005. The Company
matches 100% of an employee's contributions up to a maximum of 3% of the
employee's wages. The Company's contributions totaled $22,217 for the year
ended December 31, 2004.
6. EQUITY
Stock Options - The Company maintains a stock option plan for the benefit
of certain eligible employees of the Company. Generally, the options
outstanding are granted at prices equal to the market value of the stock
on the date of grant, vest on a straight line basis over five years and
expire six years from the date of grant.
A summary of the stock option activity is as follows:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Outstanding at January 1, 2004 62,450 $1.00
Granted 31,500 $1.00
------
Outstanding at December 31, 2004 93,950 $1.00
======
At December 31, 2004, 38,260 option shares were exerciseable at a weighted
average exercise price of $1.00 per share.
7. INCOME TAXES
Since the Company is organized as a Subchapter S corporation, no income
tax provision is maintained in the Company's accounting records. Any
income or loss generated by the Company from operations flows directly to
the owners of the business as ordinary income or loss.
8. SIGNIFICANT CUSTOMER RELATIONSHIP
At December 31, 2004, the Company had three customers that each provided
more than 10% of its total revenue. On a combined basis, these customers
provided approximately 50% of total revenues. The services provided to
these customers include web-based technology services and on-site
biometric screening services.
F-50
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
9. RELATED PARTY TRANSACTION
For the year ended December 31, 2004, the Company recorded management fee
revenue of $17,500 related to payments received from E2 Consulting,
L.L.C., a Texas limited liability company, whose principal business
activities involve the maintenance and support of a desktop version of the
Company's web-based software tools. Such management fee revenue was for
technical consulting and development services provided by the Company. The
principal owners of the Company are also the principal owners of E2
Consulting.
10. SUBSEQUENT EVENTS
On December 23, 2005, Health Fitness Corporation (HFC) acquired all of the
outstanding capital stock of the business of the Company for $6 million in
cash and stock with the potential for additional amounts to be paid under
an earn-out provision based upon the Company achieving certain revenue
objectives for calendar year 2006. Immediately prior to HFC's acquisition
of the Company, E2Consulting, L.L.C. (described more in note 9 above) was
merged with and into the Company for $70,000.
F-51
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
registration for resale of the common stock covered by this registration
statement. All of such expenses, except for the SEC registration fee, are
estimated.
SEC Registration Fee .................................................. $ 1,894
Legal Fees ............................................................ 20,000
Accountants Fees and Expenses ......................................... 30,000
Printing Expenses ..................................................... 1,000
Blue Sky Fees and Expenses ............................................ 2,000
Transfer Agent Fees and Expenses ...................................... 1,106
-------
Miscellaneous ......................................................... $56,000
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company involving service as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3,
requires payment by the Company, upon written request, of reasonable expenses in
advance of final disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested majority of the Board
of Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
shareholders, or by a court.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the securities listed
below pursuant to exemptions from registration under the Securities Act.
On August 25, 2003, we entered into a $3,000,000 Securities Purchase
Agreement with Bayview Capital Partners LP to provide us with acquisition
financing and general working capital (the "Bayview Investment"). The Bayview
Investment was initially structured as a bridge note (the "Bridge Note"), the
proceeds of which we placed into escrow to fund a portion of an asset purchase.
Upon closing of the asset purchase in December 2003, the $3,000,000 Bridge Note
was converted into a $2,000,000 term
II-1
note, $1,000,000 in Series A Convertible Preferred Stock and a warrant to
purchase 1,210,320 shares of common stock. In December 2003, a warrant to
purchase 100,000 shares of common stock was issued to Goldsmith, Agio, Helms
Securities, Inc. for broker services provided to us in connection with the asset
purchase. All of the foregoing issuances were made in reliance upon Section
4(2).
Effective November 14, 2005, we entered into a Securities Purchase
Agreement with five accredited investors for the sale of an aggregate of 1,000
shares of its Series B Convertible Preferred Stock (the "Series B Stock"), at an
aggregate purchase price of $10.2 million. After selling commissions and
expenses, we received net proceeds of approximately $9.4 million. The Series B
Stock will automatically convert into 5,100,000 shares of common stock effective
on the date the SEC declares effective this registration statement. We also
issued the original purchasers of the Series B Stock 5-year warrants to purchase
1,530,000 shares of common stock, equal to 30% of the number of shares of common
stock issuable upon conversion of the Series B Stock, for $2.40 per share. We
also issued the placement agents (or their affiliates) of the Series B Stock
warrants to acquire 102,000 shares of common stock on substantially the same
terms as the Warrants issued to the original purchasers of the Series B Stock,
except the exercise price of such warrants is $2.00 per share. Such securities
were offered and issued in reliance on the exemption from registration provided
by Section 4(2). We used approximately $5.1 million of the net proceeds from the
issuance of the Series B Stock to redeem, effective November 15, 2005: (i) all
of the outstanding shares of Series A Convertible Preferred Stock, which were
convertible into 2,222,210 shares of common stock, and (ii) warrants to purchase
1,275,463 shares of common stock if exercised for cash, or 916,458 shares of
common stock if exercised on a "cash-less" exercise basis, which warrants were
issued to original purchaser of the Series A Convertible Preferred Stock. We
used substantially all of the remainder of the net proceeds for our acquisition
of HealthCalc.Net, Inc. on December 23, 2005.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. See the Exhibit Index following the Power of Attorney at the
end of this registration statement.
(b) Financial Statement Schedule.
Schedules have been omitted because they are not applicable or not required
because the information is included elsewhere in the financial statements or the
related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant further undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
II-2
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the SEC pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent
no more than 20% change in maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Minneapolis, State of Minnesota, on March 7, 2006.
HEALTH FITNESS CORPORATION
By /s/ Jerry V. Noyce
-------------------------------------
Jerry V. Noyce,
Chief Executive Officer and President
POWER OF ATTORNEY
In accordance with the requirement of the securities Act of 1933, this
amendment to the registration statement was signed by the following persons in
the capacities and on the date indicated.
Signatures Title
---------- -----
/s/ Jerry V. Noyce* Chief Executive Officer,
------------------------------------ President (principal executive
Jerry V. Noyce officer) and Director
/s/ Wesley W. Winnekins* Chief Financial Officer
------------------------------------ (principal financial and
Wesley W. Winnekins accounting officer)
/s/ James A. Bernards* Director
------------------------------------
James A. Bernards
/s/ K. James Ehlen, M.D.* Director
------------------------------------
K. James Ehlen, M.D.
/s/ Robert J. Marzec* Director
------------------------------------
Robert J. Marzec
II-4
/s/ Cary Musech* Director
------------------------------------
Cary Musech
/s/ John C. Penn* Director
------------------------------------
John C. Penn
/s/ Mark W. Sheffert* Director
------------------------------------
Mark W. Sheffert
/s/ Linda Hall Whitman* Director
------------------------------------
Linda Hall Whitman
/s/ Rodney A. Young* Director
------------------------------------
Rodney A. Young
* By Jerry V. Noyce
-------------------------------------
Jerry V. Noyce
As attorney-in-fact pursuant
to Powers of Attorney previously filed
Date: March 7, 2006
II-5
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
HEALTH FITNESS CORPORATION
EXHIBIT INDEX TO FORM S-1
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Incorporation, as amended on September 20, 2004 -
incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2004
3.2 Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock(1)
3.3 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock - incorporated by reference to the
Company's Form 8-K filed November 16, 2005(1)
3.3 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
5.1 Opinion of Fredrikson & Byron, P.A.
10.1 Standard Office Lease Agreement (Net) dated as of June 13, 1996
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 Amendment dated March 1, 2001 to Standard Office Lease Agreement
(Net) dated as of June 13, 1996 covering a portion of the
Company's headquarters - incorporated by reference to the
Company's Form 10K for the year ended December 31, 2000
10.3 Second Amendment, dated June 12, 2002, to Standard Office Lease
Agreement dated as of June 13, 1996 - incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 2002
*10.4 Company's 2005 Stock Option Plan - incorporated by reference to
the Company's Form 8-K dated June 7, 2005
*10.5 Forms of Incentive Stock Option Agreement and Form of
Non-Qualified Stock Option Agreement under the 2005 Stock Option
Plan - incorporated by reference to the Company's Form 8-K dated
June 7, 2005
*10.6 Employment agreement dated November 30, 2000 between the Company
and Jerry V. Noyce - incorporated by reference to the Company's
Form 10-K for the year ended December 31, 2000
*10.7 Employment agreement dated February 9, 2001 between Company and
Wesley W. Winnekins - incorporated by reference to the Company's
Form 10-K for the year ended December 31, 2000
*10.8 Employment agreement dated March 1, 2003 between Company and
Jeanne Crawford - incorporated by reference to the Company's Form
10-K for the year ended December 31, 2002
*10.9 Employment agreement dated December 8, 2003 between the Company
and Brian Gagne, - incorporated by reference to the Company's Form
10-Q for the fiscal quarter ended March 31, 2005
*10.10 Employment agreement dated December 22, 2003 between the Company
and Michael Seethaler, - incorporated by reference to the
Company's Form 10-Q for the fiscal quarter ended March 31, 2005
10.11 Credit Agreement, dated August 22, 2003, between the Company and
Wells Fargo Bank, National Association - incorporated by reference
to the Company's Quarterly Report on form 10-QSB for the quarter
ended September 30, 2003
10.12 Third Amendment, dated August 25, 2003, to Standard Office Lease
Agreement dated as of June 13, 1996, between the Company and NEOC
Holdings LLC - incorporated by reference to the Company's
Quarterly Report on form 10-QSB for the quarter ended September
30, 2003
II-6
10.13 Second Amendment to Credit Agreement and Waiver of Defaults
between the Company and Wells Fargo Bank, N.A., dated May 14, 2004
- incorporated by reference to the Company's Quarterly Report on
form 10-Q for the quarter ended March 31, 2004
10.14 Third Amendment to Credit Agreement and Consent between the
Company and Wells Fargo Bank, N.A., dated December 29, 2004 -
incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 2004
10.15 Securities Purchase Agreement dated November 14, 2005 between the
Company and the Purchasers listed on Exhibit A-1 - incorporated by
reference to the Company's Form 8-K filed November 16, 2005
10.16 Registration Rights Agreement dated November 14, 2005 between the
Company and the Purchasers listed on Exhibit A-1 - incorporated by
reference to the Company's Form 8-K filed November 16, 2005
10.17 Form of Warrant issued pursuant to the Securities Purchase
Agreement dated November 14, 2005 - incorporated by reference to
the Company's Form 8-K filed November 16, 2005
10.18 Stock Purchase Agreement dated December 23, 2005 between the
Company, HealthCalc.Net, Inc., Peter A. Egan and John F. Ellis,
among others - incorporated by reference to the Company's Form 8-K
filed December 29, 2005
10.19 Escrow Agreement dated December 23, 2005 between the Company,
Wells Fargo Bank, National Association, Peter A. Egan and John F.
Ellis, among others - incorporated by reference to the Company's
Form 8-K filed December 29, 2005
10.20 Shareholders' Agreement dated December 23, 2005 between the
Company, Peter A. Egan and John F. Ellis - incorporated by
reference to the Company's Form 8-K filed December 29, 2005
21.1 Subsidiaries - incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004
23.1 Consent of Grant Thornton LLP
23.2 Consent of Weaver and Tidwell, L.L.P.
23.3 Consent of Fredrikson & Byron, P.A. (included in Exhibit 5.1)
24.1 Power of Attorney(1)
* Indicates management contract or compensatory plan or arrangement
(1) Previously Filed
II-7