SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
Commission File Number: 0-25064
HEALTH FITNESS CORPORATION
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-1580506
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 W. 80th STREET, SUITE 560, BLOOMINGTON, MINNESOTA, 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (952) 831-6830
Securities registered under Section 12(b) of the Act:
NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 30, 2002, the aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the last
quoted price at which such stock was sold on such date as reported by the OTC
Bulletin Board, was approximately $4,029,000.
As of March 28, 2003, 12,322,908 shares of the registrant's common
stock, $.01 par value, were outstanding.
ITEM 1. BUSINESS
OVERVIEW
Health Fitness Corporation, and its wholly-owned subsidiaries (collectively, the
"Company"), provides fitness and wellness management services and programs to
corporations, hospitals, communities and universities located in the United
States and Canada. Additionally, the Company provides injury prevention programs
and on-site physical therapy services. The Company's executive offices are
located at 3600 W. 80th Street, Suite 560, Bloomington, Minnesota 55431, and its
telephone number is (952) 831-6830.
Effective on January 1, 2001, the Company sold its International Fitness Club
Network (IFCN) line of business, which organized and maintained a network of
commercial fitness and health clubs and marketed memberships in such clubs to
employees and insurance companies. IFCN accounted for approximately $656,000 in
revenues and $612,000 in direct costs during 2000.
FITNESS AND WELLNESS MANAGEMENT SERVICES AND PROGRAMS
FITNESS CENTER MANAGEMENT. The Company has been providing results-oriented
fitness center management and consulting services since 1975. The Company
currently is under contract to manage 187 corporate and 8 hospital, community or
university based fitness centers located across the United States and Canada.
Major corporations and hospitals invest in fitness centers and wellness programs
for several reasons. First, there is a body of research that indicates that
healthier employees are more productive, experience reduced levels of stress and
are absent from work less often due to sickness. Additionally, wellness
benefits, and fitness benefits in particular, are considered high priorities as
potential employees evaluate job opportunities with a given employer. Hospitals
invest in fitness centers to create a new revenue source that is not subject to
insurance or government reimbursements and to address community health
initiatives. The Company's sales staff markets to corporations, hospitals,
communities and universities primarily through telemarketing and direct mail
initiatives.
CONSULTING SERVICES. The Company provides a full range of development,
management and marketing services for corporate, hospital, community and
university-owned fitness centers. For the development of new fitness centers,
the Company provides a wide selection of consulting services, including
demographic analysis, space planning, interior design, floor plan design,
selection and sourcing of fitness equipment and fitness program design. Once a
fitness center is established, the Company generally manages all aspects of
fitness center operation, including fitness staff selection, development and
implementation of programs, as well as general fitness and facility management
supported by well-defined quality assurance guidelines.
PROGRAM SERVICES. The Company has invested considerable time and resources
developing a full menu of fee-for-service programs and services to better meet
the fitness, wellness and health needs of its individual customers. These
programs and services include:
HFC ASSESSMENT SERVICES. A full range of tools to assess the health and
well-being of selected individuals, including health risk assessments,
screenings, data management and education. General wellness or specific
assessments provide measurable results and a pathway for effective
intervention.
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HFC WELLNESS PROGRAMS. A comprehensive menu of lifestyle programs
addressing the specific issues facing a company's workforce, including
nutrition, weight loss, smoking cessation, stress management, back care,
massage therapy and educational seminars.
HFC FITNESS PROGRAMS. Customized exercise-based programs to meet
individual, group and company needs, including personal training, back
care and specialty group exercise classes.
HFC TREATMENT SERVICES. On-site services designed to provide an effective
model to prevent, manage and treat musculo-skeletal disorders in the work
environment. Services include needs analysis and regulatory compliance
consulting, ergonomic injury prevention and discomfort management.
Currently, the Company provides preventative and rehabilitative physical
therapy and occupational health services at 15 corporate sites in
California, Colorado, Kentucky and Texas.
COMPETITION
Within the business-to-business fitness center management industry, there are
relatively few national competitors. However, virtually all markets are home to
regional providers that manage anywhere from one or two sites to several sites
across state lines. With its national presence and over 25 years of history,
management believes that the Company is recognized as the leader in providing
fitness management services and is well positioned to compete in this industry.
PROPRIETARY RIGHTS
The Company does not believe it has any significant proprietary rights.
GOVERNMENT REGULATION
Management believes that there currently is no significant government regulation
which materially limits the Company's ability to provide fitness management and
consulting services to its corporate, hospital, community and university-based
clients.
EMPLOYEES
At December 31, 2002, the Company had 514 full-time and 1,758 part-time
employees. The Company's part-time employees are primarily engaged in the
staffing of the fitness centers that the Company operates for its clients. The
Company currently does not have a collective bargaining relationship with its
employees and management believes its relationship with employees is good.
INDEMNIFICATION OBLIGATIONS
A majority of the Company's management contracts with its customers include a
provision that obligates the Company 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 its employees, officers or directors in
connection with the operation of the Company's business. A majority of these
management contracts also include a provision that obligates the customer to
indemnify and hold the Company harmless against all liabilities arising out of
the acts or omissions of the customer, their employees and agents. The Company
can make no assurance that claims by its customers, or their employees, officers
or directors, will not be made in the course of operating the Company's
business.
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INSURANCE
The Company maintains general premises liability insurance of $10,000,000 per
occurrence and $10,000,000 in the aggregate per location for each of its fitness
centers and its executive offices. While the Company believes its insurance
policies to be sufficient in amount and coverage for its current operations,
there can be no assurance that coverage will continue to be available in
adequate amounts or at a reasonable cost, and there can be no assurance that the
insurance proceeds, if any, will cover the full extent of loss resulting from
any claims. The Company does not expect to incur any material rate increases
relative to the renewal of its liability insurance policies.
ITEM 2. PROPERTIES
The Company leases approximately 8,000 square feet of commercial office space at
3600 W. 80th Street, Bloomington, Minnesota 55431, under a lease that expires in
October 2007. The Company's monthly base rent for this office space is
approximately $8,500, plus taxes, insurance and other related operating costs.
ITEM 3. LEGAL PROCEEDINGS
In April 2000, HealthSouth Corporation filed a lawsuit against the Company and
two former employees in U.S. District Court in Minnesota arising out of
HealthSouth's purchase of several rehabilitation and physical therapy clinics
from the Company in May 1999. HealthSouth claimed that the two former employees
improperly diverted business away from the purchased clinics. HealthSouth
claimed damages in excess of $3,000,000, alleging misrepresentations and
breaches of warranties in the purchase agreement.
In February 2002, the U.S District Court in Minneapolis dismissed all of
HealthSouth's claims in connection with a summary judgment motion filed by the
Company, and issued an order awarding the Company a judgment of $43,156 for its
counter claim relating to certain accounts receivable. The final outcome of this
matter is pending on the outcome of an appeal made by HealthSouth.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
quarter ended December 31, 2002.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Trading of the Company's 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 sale prices for the Company's common stock.
Fiscal Year 2002: Low High
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Fourth quarter $0.35 $0.59
Third quarter 0.34 0.60
Second quarter 0.45 0.76
First quarter 0.31 0.51
Fiscal Year 2001: Low High
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Fourth quarter $0.35 $0.81
Third quarter 0.55 0.95
Second quarter 0.41 0.80
First quarter 0.33 0.78
At March 28, 2003, the published high and low sale prices for the Company's
common stock were $0.41 and $0.41 per share respectively. At March 28, 2003,
there were issued and outstanding 12,322,908 shares of common stock of the
Company held by 372 shareholders of record. Record ownership includes ownership
by nominees who may hold for multiple owners.
The Company has never declared or paid any cash dividends on its common stock
and does not intend to pay cash dividends on its common stock in the foreseeable
future. The Company presently expects to retain any earnings to finance the
development and expansion of its business. The payment of dividends, if any, is
subject to the discretion of the Board of Directors, and will depend on the
Company's earnings, financial condition, capital requirements and other relevant
factors.
In 2000, 2002 and 2003, 41,672, 32,411 and 25,247 common shares respectively,
were issued to Company employees in connection with their purchase of stock
through the Company's Employee Stock Purchase Plan.
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ITEM 6. SELECTED FINANCIAL DATA
The information in the following table for each of the five years in the period
ended December 31, 2002, has been audited by Grant Thornton LLP. The data given
below as of and for each of the five years in the period ended December 31,
2002, has been derived from the Company's Audited Consolidated Financial
Statements. Such data should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein
and in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operation.
Years Ended December 31,
2002 2001 2000 1999 1998
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STATEMENT OF OPERATIONS DATA:
REVENUE $27,865,000 $25,910,000 $26,191,000 $26,195,000 $ 25,643,000
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,001,000 1,806,000 930,000 (1,402,000) (941,000)
INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Basic 0.24 0.15 0.08 (0.12) (0.08)
Diluted 0.24 0.15 0.07 (0.12) (0.08)
BALANCE SHEET DATA (AT DECEMBER 31):
TOTAL ASSETS 12,956,000 10,199,000 10,399,000 11,324,000 18,635,000
LONG-TERM DEBT -- -- 25,000 424,000 862,000
SHAREHOLDERS' EQUITY 9,079,000 6,063,000 4,195,000 3,198,000 5,844,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BUSINESS DESCRIPTION
Health Fitness Corporation provides fitness and wellness management services and
programs to corporations, hospitals, communities and universities located in the
United States and Canada. Fitness center based services include the development,
marketing, and management of corporate, hospital, and community-based fitness
centers, health related programming, and on-site physical therapy and
occupational health services. While consumers of these services are typically
corporate employees and individuals interested in a healthy lifestyle, revenues
are generated almost exclusively through business to business, contractual
relationships.
Effective January 1, 2001, the Company sold IFCN, which maintained and sold
memberships in a network of independently-owned and operated commercial fitness
and health clubs.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of the Company's financial condition and
results of operations is based upon their consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. 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
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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, among others,
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 ratable
over the term of the contract. Certain services provided to the customer may
vary on a periodic basis and are invoiced to the customer. 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. 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.
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. Prior to January
1, 2002 goodwill was amortized on a straight-line basis over 15 to 20 years. On
January 1, 2002, the Company adopted SFAS 142 "Goodwill and Intangible Assets",
and discontinued the amortization of goodwill. 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. Goodwill totaling $74,000 was written off during
2001 relating to the sale of a subsidiary.
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, 2002, 2001, and 2000.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUE. Revenue increased $1,955,000 or 7.5% to $27,865,000 for 2002, from
$25,910,000 for 2001. Management fees and consulting revenue increased
$1,761,000 or 7.1% while occupational health services revenue increased $194,000
or 23.1%. These increases are attributed to the addition of new contracts in our
current lines of business and the expansion of our services under existing
contracts.
GROSS PROFIT. Gross profit increased $122,000 or 2.1% to $5,927,000 for 2002,
from $5,805,000 for 2001. This increase in gross profit is due to the increase
in revenue discussed previously. Gross profit as a percent of revenue decreased
to 21.3% for 2002 from 22.4% for 2001. This decrease as a percent of revenue is
primarily due to higher costs to manage certain contracts, including one
contract the Company
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obtained in early 2002 whereby the Company agreed to pay for all operating costs
of 24 corporate fitness centers.
OPERATING EXPENSES AND OPERATING INCOME. Operating expenses increased 174,000 or
3.9% to $4,617,000 for 2002, from $4,443,000 for 2001. This increase is due to a
$749,000 increase in salary expense, which was partially offset by a $574,000
decrease in selling, general and administrative expenses. The increase in
salaries expense is primarily attributed to an investment in additional sales
and marketing staff and increased employee benefits costs. The decrease in
selling, general, and administrative expenses is due to lower contract employee
and professional service expenses, as well as the adoption of SFAS 142, which
eliminated amortization expense of $401,000 associated with goodwill and
intangible assets with indefinite lives.
As a result of the previously discussed changes in Gross Profit and Operating
Expenses, Operating income decreased $53,000 or 3.9% to $1,309,000 for 2002,
from $1,362,000 for 2001.
OTHER INCOME AND EXPENSE. Interest expense increased $57,000 to $521,000 for
2002, from $464,000 for 2001. This increase is primarily due to the write-off of
unamortized financing costs and loan termination charges incurred in connection
with the Company's termination of its credit agreement with Coast Business
Credit.
The gain on sale of subsidiary for 2001 represents the net proceeds received
upon the sale of the Company's IFCN subsidiary in January 2001.
INCOME TAXES. Current income tax expense decreased $74,000 to a benefit of
$3,000 for 2002, from an expense of $71,000 for 2001. This decrease is primarily
due to the $311,000 decrease in the Company's earnings before income taxes.
The Company's deferred income tax benefit increased $1,432,000 to a benefit of
$2,209,000 for 2002, from a benefit of $777,000 for 2001. This increase is
primarily due to the recognition of the Company's remaining deferred tax
valuation allowance. As of December 31, 2002, there is no deferred tax asset
valuation allowance.
NET EARNINGS. As a result of the above, net earnings for 2002 increased
$1,195,000 to $3,001,000, compared to net earnings of $1,806,000 for 2001.
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUE. Revenues decreased $281,000 or 1.1% to $25,910,000 for 2001, from
$26,191,000 for 2000. This decrease is primarily attributed to a $656,000 loss
of revenue related to the sale of IFCN in January 2001. In addition, in July
2001, the Company lost a significant corporate contract, which decreased revenue
approximately $441,000 from 2000. The Company also experienced a $154,000
decrease in nonrecurring revenue between periods, which includes payments
received for consulting services, fitness equipment purchases, performance
bonuses and contract buyouts. By the end of 2001, the Company was able to
partially offset these revenue decreases with new, recurring management revenues
of approximately $970,000.
GROSS PROFIT. Gross profit decreased $581,000 or 9.1% to $5,805,000 for 2001,
from $6,386,000 for 2000. Also, gross profit as a percent of revenue decreased
to 22.4% for 2001 from 24.4% for 2000. These decreases are due to the following
reasons:
1. Approximately $223,000 of gross profit was lost as a result of the sale
of IFCN. Since IFCN had a higher ratio of gross profit to revenue than
the Company's other lines of business for 2000
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(34% compared to 24%), the effect of this sale caused a 0.3 percentage
points decrease between periods. This loss of gross profit, however,
was replaced by a gain on sale of approximately $229,000, which has
been recorded as Other Income (Expense) in the Company's Consolidated
Statement of Operations.
2. The $154,000 decrease in nonrecurring revenue discussed previously also
contributed to the decrease in gross profit as no direct expenses were
incurred to produce this revenue. This revenue decrease caused the
ratio of gross profit to revenue to decrease approximately 0.4
percentage points between periods.
3. In the Company's corporate fitness line of business, approximately
$106,000 of additional unreimburseable staff compensation and benefit
costs was incurred during 2001 on fixed fee management contracts. This
caused a comparative decrease in the ratio of gross profit to revenue
of approximately 0.4 percentage points.
4. In the Company's hospital/community fitness line of business, a net
gross profit decrease of approximately $110,000 occurred between 2001
and 2000 as additional fitness staff were added to new contracts during
2001 while management fees stayed fixed. These staff increases caused
the ratio of gross profit to revenue to decrease approximately 0.5
percentage points between years.
OPERATING EXPENSES AND OPERATING INCOME. Operating expenses decreased $295,000
to $4,443,000 for 2001, from $4,738,000 for 2000. Operating expenses as a
percent of revenue decreased to 17.1% for 2001 from 18.1% for 2000. Salaries for
2001 increased $277,000 to $2,117,000 from $1,840,000 for 2000. This increase is
primarily attributed to the addition of new executive management staff
subsequent to the completion of the Company's turnaround efforts, as well as
non-cash stock-based compensation charges incurred with the issuance of stock to
five new members of the board of directors in accordance with the Company's
director compensation plan. Selling, general and administrative expenses
decreased $192,000 to $2,326,000 for 2001 from $2,518,000 for 2000. This
decrease is primarily attributed to lower selling expenses, and a continued
focus on eliminating unnecessary operating expenses. Re-engineering expenses did
not occur during 2001 as the Company had completed its turnaround process by the
end of 2000.
Operating income decreased $286,000 to $1,362,000 for 2001, from $1,648,000 for
2000. This decrease is the net result of the changes in gross profit and
operating expenses discussed previously.
INTEREST EXPENSE. Interest expense decreased $218,000 to $464,000 for 2001, from
$682,000 for 2000. This decrease is due to lower average borrowings, lower
interest rates and fees.
GAIN ON SALE OF SUBSIDIARY. The gain on sale of subsidiary represents the net
proceeds realized upon the sale of IFCN.
OTHER INCOME (EXPENSE). Other income (expense) increased $39,000 to an expense
of $27,000 for 2001, from income of $12,000 for 2000. The expense for 2001
relates primarily to the write-off of fitness equipment that had been acquired
by the Company in connection with the prior management of certain fitness
centers.
INCOME TAXES. Income taxes decreased $754,000 to a benefit of $706,000 for 2001,
from an expense of $48,000 for 2000. The Company has been consistently
profitable on a quarterly basis over the past two years, and it is expected to
continue this trend. Therefore, the Company reduced its deferred tax valuation
allowance. This change in estimate resulted in a 2001 income tax benefit of
$777,000.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $869,000 to $1,250,000 for 2002, from
$381,000 for 2001. This increase is largely due to the increase in accounts
receivable and the reduction of notes payable.
On October 31, 2002, the Company entered into an annual renewable, revolving
line of credit with Merrill Lynch Business Financial Services, Inc. (the
"Merrill Loan") to refinance the Company's working capital facility with Coast
Business Credit. The maximum borrowings available on the Merrill Loan are the
lesser of $2,750,000, or 80% of the Company's trade accounts receivable less
than 90 days old. The Merrill Loan bears interest at an annual rate of 2.35%
plus the one-month LIBOR rate, or 3.77% at December 31, 2002. Borrowings under
the Merrill Loan are secured by substantially all of the Company's assets. The
Company is also required to comply with certain quarterly financial covenants,
including covenants related to the Company's minimum tangible net worth, total
liabilities to tangible net worth and fixed charge coverage. As of December 31,
2002, the Company was in compliance with all of its financial covenants under
the Merrill Loan.
As of December 31, 2002, the Company has no off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities. Refer to the
footnotes to the Company's Consolidated Financial Statements contained herein
for disclosure related to the Company's "Commitments and Contingencies."
On a short and long-term basis, the Company believes that sources of capital to
meet its obligations will be provided by cash generated through operations and
the Company's Merrill Loan. The Company does not believe that inflation has had
a significant impact on its results of its operations.
OUTLOOK AND TRENDS
The U.S. economy has been experiencing recessionary pressures, which has
resulted in many large companies laying-off a significant number of employees. A
few of the Company's customers have been affected by this economic downturn,
which has resulted in the decrease of fitness staff at some locations. At other
locations, the Company has been faced with contract cancellations. Management
believes that the effect of this economic downturn has not been material to the
Company's results of operation. In fact, Management believes that major
corporations will continue to make significant investments into employee fitness
facilities and programs as a way to retain existing employees, as well as to
recruit new employees when hiring needs increase. As one of the largest
providers of corporate fitness services, the Company is poised to meet the needs
of these companies.
An emerging trend within corporate fitness management relates to companies
asking service providers to operate their fitness center 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, the Company would derive its
management fee revenue not from its corporate client, but from the profits of
the fitness center. In the case of a company that is developing a new fitness
center for its employees, the application of this business model may require the
Company to fund operating losses until enough memberships are sold to realize
profitability. The Company believes it may have to fund operating losses for
such centers up to twelve months before profitability is reached. However, the
Company believes this model will enable the Company to leverage its experience
managing for-profit fitness centers, and may result in higher gross margins and
profitability. Currently, existing contracts representing this business model do
not represent a material contribution to the Company's results of operation.
There can be no assurance that the Company will be able to manage such centers
profitably or to fund losses for these centers until profitability is achieved.
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Lastly, the Company intends to expand its revenue opportunities by offering
additional wellness services and programs to its existing client base, including
additional health assessment and screening services, wellness programs and
educational seminars, personal fitness programming and workplace injury
assessment, prevention and treatment services. There can be no assurance that
the Company will be successful introducing these additional programs and
services to its existing customers.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Such "forward-looking" information is included
in this Form 10-K, including the MD&A section, as well as in the Company's
Annual Report to be filed with the Securities and Exchange Commission, and in
other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company).
Forward-looking statements include all statements based on future expectations
and specifically include statements relating to improving margins, growth of the
market for corporate, hospital, community and university-based fitness centers,
the development of new business models and the intention to expand the Company's
programs and services. Such forward-looking information involves important risks
and uncertainties that could significantly affect anticipated results in the
future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, leverage and debt service
(including sensitivity to fluctuations in interest rates) continued expansion of
corporate, hospital, community and university-based fitness center
opportunities, and availability of sufficient working capital.
The following risks and uncertainties also should be noted:
POTENTIAL DEPRESSIVE EFFECT ON PRICE OF COMMON STOCK ARISING FROM EXERCISE AND
SALE OF EXISTING CONVERTIBLE SECURITIES:
At December 31, 2002, the Company had outstanding stock options and stock
purchase warrants to purchase an aggregate of 2,038,997 shares of common stock.
The exercise of such outstanding stock options and stock purchase warrants and
sale of stock acquired thereby may have a material adverse effect on the price
of the Company's common stock. In addition, the exercise of such outstanding
stock options and stock purchase warrants and sale of such Company's common
stock could occur at a time when the Company would otherwise be able to obtain
additional equity capital on terms and conditions more favorable to the Company.
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MANAGEMENT OF COST-NEUTRAL OR FOR-PROFIT CENTERS:
The Company has, on a limited basis, implemented its 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 the Company
may not be successful in sufficiently managing costs and/or in raising service
levels and associated revenues, as required to achieve profit objectives.
RECENTLY PASSED LEGISLATION
SARBANES-OXLEY. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 (the "Act"), which immediately impacts Securities and
Exchange Commission registrants, public accounting firms, lawyers and securities
analysts. This legislation is the most comprehensive securities legislation
since the passage of the Securities Acts of 1933 and 1934. It has far reaching
effects on the standards of integrity for corporate management, board of
directors, and executive management. Additional disclosures, certifications and
procedures will be required of the Company. We do not expect any material
adverse effect on the Company as a result of the passage of this legislation;
however, the full scope of the Act has not yet been determined. The Act provides
for additional regulations and requirements of publicly traded companies, which
have yet to be issued.
Refer to management's certifications contained elsewhere in this report
regarding the Company's compliance with Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002.
HIPPA. The Administrative Simplification provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") require group health plans
and health care providers who conduct certain administrative and financial
transactions electronically ("Standard Transactions") to (a) comply with a
certain data format and coding standards when conducting electronic
transactions; (b) use appropriate technologies to protect the security and
integrity of individually identifiable health information transmitted or
maintained in an electronic format; and (c) protect the privacy of patient
health information. The Company's occupational health line of business, which
accounts for approximately five percent of the Company's total revenue, and the
group health plan the Company sponsors for its employees are subject to HIPAA's
requirements. The Company expects to be in compliance with HIPPA requirements
within the timeline specified for the Company's affected business areas. The
Company's corporate, hospital, community and university based fitness center
management lines of business are not subject to the requirements of HIPAA.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The Company has chosen not to
early-adopt SFAS No. 145 and believes the adoption of SFAS No. 145 will not have
a material effect on the consolidated financial position or results of
operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The Company believes that the adoption of the SFAS
No. 146 will not have a material adverse effect on its consolidated financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future, investing
in derivative financial instruments, derivative commodity instruments or other
such financial instruments. Transactions with international customers are
entered into in U.S. dollars, precluding the need for foreign currency hedges.
As a result, the exposure to market risk is not material.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company as of December 31, 2002
and 2001, and the related Consolidated Statements of Earnings, Stockholders'
Equity, and Cash Flows for each of the three years in the period ended December
31, 2002, and the notes thereto have been audited by Grant Thornton LLP,
independent certified public accountants.
CONTENTS
Page
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS....................... 14
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS........................................... 15
CONSOLIDATED STATEMENTS OF EARNINGS................................... 16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY....................... 17
CONSOLIDATED STATEMENTS OF CASH FLOWS................................. 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ 19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS....................... 29
13
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Health Fitness
Corporation and subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Fitness
Corporation and subsidiaries as of December 31, 2002 and 2001 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002.
We have also audited Schedule II of Health Fitness Corporation and subsidiaries
for each of the three years in the period ended December 31, 2002. In our
opinion, this schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information therein.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 13, 2003
14
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 91,658 $ 221,008
Trade and other accounts receivable, less allowance for doubtful accounts of
$83,500 and $84,700 at December 31, 2002 and 2001 4,036,888 3,388,856
Prepaid expenses and other 266,734 130,090
Deferred tax assets 731,500 777,300
------------ ------------
Total current assets 5,126,780 4,517,254
PROPERTY AND EQUIPMENT, net 176,206 174,912
OTHER ASSETS
Goodwill 5,308,761 5,308,761
Intangible assets, less accumulated amortization of $1,300 and $619,100 at
December 31, 2002 and 2001 6,380 186,737
Deferred tax assets 2,254,876 -
Other 82,808 11,410
------------ ------------
$ 12,955,811 $ 10,199,074
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 304,589 $ 1,442,304
Trade accounts payable 409,150 141,736
Accrued salaries, wages, and payroll taxes 1,072,982 915,379
Other accrued liabilities 415,856 223,142
Accrued benefits 267,042 169,652
Deferred revenue 1,407,437 1,243,946
------------ ------------
Total current liabilities 3,877,056 4,136,159
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none issued
or outstanding - -
Common stock, $0.01 par value; 25,000,000 shares authorized; 12,297,661 and
12,265,250 shares issued and outstanding at December 31, 2002 and 2001 122,977 122,653
Additional paid-in capital 16,997,367 16,982,522
Accumulated deficit (8,041,589) (11,042,260)
------------ ------------
9,078,755 6,062,915
------------ ------------
$ 12,955,811 $ 10,199,074
============ ============
See notes to consolidated financial statements.
15
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
REVENUE $ 27,864,997 $ 25,909,978 $ 26,190,671
COSTS OF REVENUE 21,938,385 20,105,139 19,804,356
------------ ------------ ------------
GROSS PROFIT 5,926,612 5,804,839 6,386,315
OPERATING EXPENSES
Salaries 2,866,200 2,117,407 1,840,436
Selling, general, and administrative 1,751,228 2,325,583 2,517,634
Re-engineering - - 380,103
------------ ------------ ------------
Total operating expenses 4,617,428 4,442,990 4,738,173
------------ ------------ ------------
OPERATING INCOME 1,309,184 1,361,849 1,648,142
OTHER INCOME (EXPENSE)
Interest expense (521,106) (464,039) (681,847)
Gain on sale of subsidiary - 228,613 -
Other, net 950 (26,707) 12,321
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 789,028 1,099,716 978,616
INCOME TAX EXPENSE (BENEFIT) (2,211,643) (706,285) 48,447
------------ ------------ ------------
NET EARNINGS $ 3,000,671 $ 1,806,001 $ 930,169
============ ============ ============
NET EARNINGS PER SHARE:
Basic $ 0.24 $ 0.15 $ 0.08
Diluted 0.24 0.15 0.07
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,284,364 12,232,283 12,133,085
Diluted 12,428,440 12,433,715 12,451,095
See notes to consolidated financial statements.
16
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------------ ------------ ------------ -------------
BALANCE AT JANUARY 1, 2000 12,112,015 $ 121,120 $ 16,855,438 $(13,778,430) $ 3,198,128
Issuance of common stock in
connection with contract services
and incentive compensation 9,500 95 6,780 - 6,875
Issuance of common stock through
stock purchase plan 41,672 417 12,054 - 12,471
Issuance of common stock through
earnout provisions 2,063 21 8,231 - 8,252
Issuance of warrants in connection
with professional services rendered - - 39,000 - 39,000
Net earnings - - - 930,169 930,169
---------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 12,165,250 121,653 16,921,503 (12,848,261) 4,194,895
Issuance of common stock for board
of directors compensation 100,000 1,000 54,000 - 55,000
Repricing of warrants previously
issued - - 3,234 - 3,234
Issuance of options in connection
with professional services rendered - - 3,785 - 3,785
Net earnings - - - 1,806,001 1,806,001
---------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 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
---------- ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2002 12,297,661 $ 122,977 $ 16,997,367 $( 8,041,589) $ 9,078,755
========== ============ ============ ============ ============
See notes to consolidated financial statements.
17
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 3,000,671 $ 1,806,001 $ 930,169
Adjustment to reconcile net earnings
to net cash provided by operating activities:
Common stock, options, and warrants issued for professional services and
compensation - 62,019 45,875
Depreciation and amortization 175,239 699,969 826,543
Amortization of financing costs 175,774 116,332 58,166
Deferred taxes (2,209,076) (777,300) -
(Gain) loss on disposal of assets - (16,907) 1,420
Asset impairment - - 25,000
Gain on sale of subsidiary - (228,613) -
Change in assets and liabilities:
Trade and other accounts receivable (648,032) (55,802) 140,275
Prepaid expenses and other (136,644) (84,401) (36,850)
Other assets (71,398) (7,962) 76,591
Trade accounts payable 267,414 (84,754) (315,669)
Accrued liabilities and other 447,707 (422,285) 301,574
Deferred revenue 163,491 31,003 (117,078)
Discontinued operations - (106,734) (613,892)
------------ ------------ ------------
Net cash provided by operating activities 1,165,146 930,566 1,322,124
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (114,293) (124,384) (48,217)
Net proceeds from sale of subsidiary - 392,198 2,700
Payments in connection with earn-out provisions - - (203,538)
Collection of notes receivable - - 168,026
Payment of non-compete agreement - (30,000) (90,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities (114,293) 237,814 (171,029)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable 24,663,045 26,568,592 30,326,170
Repayments of note payable (25,800,760) (27,812,090) (30,502,496)
Repayments of subordinated debt - - (115,000)
Repayments of long term obligations - (126,804) (229,711)
Payment of financing costs (57,657) (50,000) (248,996)
Proceeds from the issuance of common stock 15,169 - 12,471
Discontinued operations - - (60,455)
------------ ------------ ------------
Net cash used in financing activities (1,180,203) (1,420,302) (818,017)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (129,350) (251,922) 333,078
CASH AT BEGINNING OF YEAR 221,008 472,930 139,852
------------ ------------ ------------
CASH AT END OF YEAR $ 91,658 $ 221,008 $ 472,930
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental cash flow information and noncash investing and financing
activities:
2002 2001 2000
-------- -------- ---------
Cash paid for interest $362,100 $358,980 $ 617,482
Assignment of note payable and note receivable
to third party - - 408,166
See notes to consolidated financial statements.
18
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and its wholly owned subsidiaries
(the Company) provide fitness and wellness management services and
programs to corporations, hospitals, communities and universities
located in the United States and Canada. Fitness and wellness
management services include the development, marketing and management
of corporate, hospital, community and university based fitness centers,
injury prevention and work-injury management consulting, and on-site
physical therapy. Programs include wellness and health programs 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 and Cash Equivalents - The Company considers all highly liquid
investments with an original maturity of three months or less to be
cash equivalents. The Company maintains cash balances at several
financial institutions, 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 and
cash equivalents.
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.
Property and Equipment - Property and equipment is stated at cost.
Depreciation and amortization are computed using both straight-line and
accelerated methods over the useful lives of the assets.
Goodwill - Goodwill represents the excess of the purchase price and
related costs over the fair value of net assets of businesses acquired.
Prior to January 1, 2002 goodwill was amortized on a straight-line
basis over 15 to 20 years. On January 1, 2002, the Company adopted SFAS
142 "Goodwill and Intangible Assets", and discontinued the amortization
of goodwill (see note 8).
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. Goodwill totaling $74,000 was written off during 2001
relating to the sale of a subsidiary (see note 2).
19
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Intangible Assets - The Company's intangible assets include deferred
financing costs, noncompete agreements, and other intangible assets.
Deferred financing costs are amortized on a straight-line method over
the term of the credit agreement. Noncompete agreements consist of
agreements with certain individuals which cover periods of two to seven
years and prohibit the individuals from directly or indirectly
competing with the Company and are amortized over the term of the
noncompete agreement. All intangible assets except deferred financing
costs were fully amortized as of December 31, 2002. Other intangible
assets totaling $125,000 were written off in 2001 against the proceeds
of the sale of a subsidiary (see note 2).
Revenue Recognition - Revenue is recognized at the time the service is
provided to the customer. For annual contracts, monthly amounts are
recognized ratable 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 $451,100 and $335,790 at
December 31, 2002 and 2001.
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 the deferred
revenue were $1,158,626 and $1,123,197 at December 31, 2002 and 2001.
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.
Net Earnings Per Share - Basic net earnings per share is computed by
dividing net earnings by the number of weighted average common shares
outstanding. Diluted net earnings per share is computed by dividing 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 1,290,697, 1,935,527 and
2,103,902 shares of common stock with weighted average exercise prices
of $1.88, $2.25 and $2.54 were excluded from the 2002, 2001 and 2000
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, 2002, 2001, and 2000. 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:
20
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------- ---------- ---------
Net earnings,
as reported $3,000,671 $1,806,001 $ 930,169
Less:
Compensation
expense
determined
under the fair
value method,
net of tax (74,474) (89,928) (171,819)
---------- ---------- ---------
Proforma net
earnings 2,926,197 1,716,073 758,350
========== ========== =========
Earnings per
Share:
Basic-as
reported $ 0.24 $ 0.15 $ 0.08
========== ========== =========
Basic-
proforma $ 0.24 $ 0.14 $ 0.06
========== ========== =========
Diluted-
as reported $ 0.24 $ 0.15 $ 0.07
========== ========== =========
Diluted-
proforma $ 0.24 $ 0.14 $ 0.06
========== ========== =========
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:
2002 2001 2000
------------ ------------ -------
Dividend yield None None None
Expected volatility 105.0% 105.0% 78.6%
Expected life of option 1 to 4 years 1 to 5 years 5 years
Risk-free interest rate 5.50% 5.50% 6.18%
Weighted average fair value of options
on grant date $0.33 $0.35 $0.21
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.
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.
Reclassifications - Certain 2001 and 2000 amounts have been
reclassified to conform to the 2002 presentation. These
reclassifications had no effect on net earnings or stockholders' equity
as previously reported.
2. SALE OF ASSETS
On January 1, 2001, the Company sold the stock of a wholly owned
subsidiary, David W. Pickering, Inc., a fitness club network provider.
The Company received $425,000 and recorded a gain on sale of $228,613.
Operating results for David W. Pickering, Inc. for the year ended
December 31, 2000 were as follows:
21
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Revenue $ 656,127
Cost of revenue 432,779
---------
Gross profit 223,348
Operating expenses 178,856
---------
Operating income $ 44,492
=========
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
Useful Life 2002 2001
------------- ---------- ----------
Leasehold improvements Term of lease $ 37,612 $ 88,057
Office equipment 3-7 years 960,262 886,724
Software 3 years 156,581 156,581
Health care equipment 1-5 years 366,017 362,876
---------- ----------
1,520,472 1,494,238
Less accumulated depreciation and amortization 1,344,266 1,319,326
---------- ----------
$ 176,206 $ 174,912
========== ==========
4. FINANCING
Note Payable - On October 31, 2002, the Company entered into a
revolving line of credit with Merrill Lynch Business Financial
Services, Inc. (the "Merrill Loan") to refinance the Company's working
capital facility with Coast Business Credit. The maximum borrowings
available on the Merrill Loan are the lesser of $2,750,000, or 80% of
the Company's trade accounts receivable less than 90 days old. The
Merrill Loan bears interest at the one-month LIBOR rate plus 2.35%
(effective rate of 3.77% at December 31, 2002). Borrowings under the
Merrill Loan are collateralized by substantially all of the Company's
assets. The Company is also required to comply with certain quarterly
financial covenants, including covenants related to the Company's
minimum tangible net worth, total liabilities to tangible net worth and
fixed charge coverage. The Company was in compliance with all of its
financial covenants at December 31, 2002.
Prior to October 31, 2002, the Company maintained a working capital
facility with Coast Business Credit. Interest on outstanding borrowings
was computed at the prime rate plus 3% with a minimum interest rate of
9.0% (effective rate of 9.0% at December 31, 2001). The Company was
required to pay minimum monthly interest equal to the effective
interest rate times $2.5 million.
22
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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 $136,000,
$148,000 and $213,000 for the years ended December 31, 2002, 2001 and
2000.
Minimum rent payments due under operating leases are as follows:
Years ending December 31:
2003 $127,000
2004 120,000
2005 122,000
2006 124,000
2007 103,000
Thereafter 7,000
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 $132,000,
$122,000 and $103,000 for the years ended December 31, 2002, 2001 and
2000.
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. 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 577,700 shares of common stock are
reserved for additional grants of options under the plan at December
31, 2002. 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, 2000 983,905 $ 2.81
Granted 315,000 0.30
Forfeited (330,000) 2.46
-------- ------
Outstanding at December 31, 2000 968,905 2.12
23
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Granted 412,000 0.66
Forfeited (147,075) 2.83
--------- ------
Outstanding at December 31, 2001 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
========= ======
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Options exercisable at December 31:
2002 852,500 $ 1.67
2001 799,663 $ 2.12
2000 553,904 $ 2.99
The following table summarizes information about stock options at
December 31, 2002:
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 - $0.44 345,000 3.78 $ 0.30 170,000 $ 0.31
0.47 - 0.69 632,300 5.20 0.55 260,000 0.59
0.95 70,000 8.59 0.95 47,500 0.95
2.25 - 3.00 275,000 3.21 2.80 275,000 2.80
4.00 100,000 .58 4.00 100,000 4.00
--------- -------
1,422,300 4.31 $ 1.19 852,500 $ 1.67
========= =======
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 405,238 shares are unissued and
remain available for issuance at December 31, 2002. There were 32,411
and 41,672 shares issued under the plan during 2002 and 2000. The
Company did not issue shares under the plan in 2001.
Warrants - The Company has outstanding warrants to directors, selling
agents, and consultants in consideration for services performed and in
connection with the issuance of debt.
During 2000, the Company issued warrants to purchase 150,000 shares of
common stock in connection with professional services rendered to the
Company during the year. The options were valued at $39,000 using the
Black-Scholes valuation model.
A summary of the stock warrants activity is as follows:
24
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Exercise
Number of Price
Shares Per Share
--------- --------------
Outstanding at January 1, 2000 1,816,314 $ 1.00 - 4.00
Granted 198,316 0.30 - 3.00
Forfeited (397,133) 2.50 - 4.00
---------
Outstanding at December 31, 2000 1,617,497 0.30 - 4.00
Forfeited (250,800) 2.19 - 3.00
---------
Outstanding at December 31, 2001 1,366,697 0.30 - 4.00
Forfeited (750,000) 2.25
---------
Outstanding at December 31, 2002 616,697 0.30 - 4.00
=========
Warrants exercisable at December 31:
2002 616,697 $ 0.30 - 4.00
2001 1,366,697 0.30 - 4.00
2000 1,617,497 0.30 - 4.00
7. INCOME TAXES
Income tax expense (benefit) consists of the following:
2002 2001 2000
------------ ---------- --------
Current $ (2,567) $ 71,015 $ 48,477
Deferred (2,209,076) (777,300) -
------------ ---------- --------
$ (2,211,643) $ (706,285) $ 48,447
============ ========== ========
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:
2002 2001 2000
------------ ----------- ---------
Tax expense computed at statutory rates $ 268,300 $ 322,700 $ 316,300
State tax benefit, net of federal effect 38,400 46,900 32,000
Nondeductible goodwill amortization 10,200 156,600 159,300
Change in valuation allowance (2,501,200) (1,237,300) (447,500)
Other (27,343) 4,815 (11,653)
------------ ----------- ---------
$ (2,211,643) $ (706,285) $ 48,447
============ =========== =========
At December 31, 2002, the Company had approximately $7,341,000 of
federal operating loss carryforwards. The carryforwards expire through
2019.
The components of deferred tax assets (liabilities) at December 31
consist of the following:
25
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001
----------- -----------
Current:
Allowance for accounts receivable $ 33,400 $ 48,800
Accrued employee benefits 98,200 88,700
Tax accounting change adjustment - -
Self funded insurance 79,900 -
Tax loss carryforwards 520,000 639,800
----------- -----------
Net current asset 731,500 777,300
Noncurrent:
Depreciation and amortization (500) 9,800
Tax loss carryforwards 2,225,276 2,461,400
Other 30,100 30,000
----------- -----------
Net non-current asset 2,254,876 2,501,200
----------- -----------
Net deferred tax asset 2,986,376 3,278,500
Less valuation allowance - (2,501,200)
----------- -----------
$ 2,986,376 $ 777,300
=========== ===========
8 ACCOUNTING PRONOUNCEMENTS
ADOPTION OF ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002 the Company adopted Statement of Financial
Accounting Standards (SFAS) 141, "Business Combinations," and SFAS 142,
"Goodwill and Intangible Assets,". SFAS 141 eliminates the
pooling-of-interest method of accounting for business combinations and
requires intangible assets acquired in business combinations to be
recorded separately from goodwill. The adoption of SFAS 141 did not
affect the Company's consolidated financial position or statement of
earnings. SFAS 142 eliminates the amortization of goodwill and other
intangible assets with indefinite lives and requires that these assets
be tested for impairment annually or whenever an impairment indicator
arises using a two step impairment test outlined in SFAS 142. Effective
January 1, 2002, the Company discontinued the amortization of goodwill.
The Company completed its transitional goodwill impairment test at June
30, 2002 and determined that no potential impairment exists. 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,
2002.
The pro forma effect of adopting SFAS 142 on net earnings and net
earnings per share for the years ended December 31, 2001 and 2000
compared to actual results for the year ended December 31, 2002 is
noted as follows:
26
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------- ----------- ----------
Net earnings as reported 3,001,671 $ 1,806,001 $ 930,169
Goodwill amortization - 400,661 405,818
---------- ----------- ----------
Adjusted net earnings $3,001,671 $ 2,206,662 $1,335,987
========== =========== ==========
Basic net earnings per share:
Net earnings per share as reported $ 0.24 $ 0.15 $ 0.08
Goodwill amortization per share - 0.03 0.03
---------- ----------- ----------
Adjusted net earnings per share $ 0.24 $ 0.18 $ 0.11
========== =========== ==========
Diluted net earnings per share:
Net earnings per share as reported $ 0.24 $ 0.15 $ 0.08
Goodwill amortization per share - 0.03 0.03
---------- ----------- ----------
Adjusted net earnings per share $ 0.24 $ 0.18 $ 0.11
========== =========== ==========
Amortization expense of other intangible assets totaled $238,015,
$231,560 and $192,765 for the twelve months ended December 31, 2002,
2001 and 2000. Amortization expense is expected to be $6,381 for the
year ending December 31, 2003.
Effective for the year ended December 31, 2002 the Company adopted SFAS
148, Accounting for Stock-based Compensation-Transition and Disclosure.
SFAS 148 amends the disclosure and certain transition provisions of
statement 123, Accounting for Stock-Based Compensation. The disclosure
requirements of this pronouncement are included in the financial
statements for the year ended December 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." The
Company has chosen not to early-adopt SFAS No. 145 and believes the
adoption of SFAS No. 145 will not have a material effect on the
consolidated financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The Company believes that
the adoption of the SFAS No. 146 will not have a material adverse
effect on its consolidated financial position or results of operations.
27
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- ------------- ------------
2002
Revenue $ 6,687,394 $ 6,686,808 $ 6,934,758 $ 7,556,037
Gross profit 1,474,291 1,453,537 1,420,449 1,578,335
Net earnings 787,321 771,188 777,465 664,697
Net earnings per share
Basic $ 0.06 $ 0.06 $ 0.06 $ 0.05
Diluted 0.06 0.06 0.06 0.05
Weighted average common shares
outstanding
Basic 12,265,250 12,265,250 12,289,558 12,297,661
Diluted 12,396,891 12,486,488 12,413,530 12,400,022
Quarter ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- ------------- ------------
2001
Revenue $ 6,426,456 $ 6,578,716 $ 6,356,489 $ 6,548,317
Gross profit 1,366,985 1,487,600 1,519,422 1,430,832
Net earnings 457,458 222,178 182,876 943,489
Net earnings per share
Basic $ 0.04 $ 0.02 $ 0.01 $ 0.08
Diluted 0.04 0.02 0.01 0.08
Weighted average common shares
outstanding
Basic 12,165,250 12,165,250 12,264,163 12,265,250
Diluted 12,690,417 12,711,750 12,503,377 12,429,049
28
HEALTH FITNESS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Balance at Charged to Charged to Balance
Beginning Costs and Other accounts Deductions at End
Description of Period Expenses Describe Describe of Period
------------------ ---------- --------- -------------- -------------- ----------
Allowance for doubtful accounts
and returns:
Year ended December 31, 2002 $ 84,700 $ - - $ (1,200) (a) $ 83,500
Year ended December 31, 2001 262,600 (28,000) - (149,900) (a) $ 84,700
Year ended December 31, 2000 187,900 98,000 - (23,300) (a) 262,600
(a) Accounts receivable written off as uncollectible
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The names, ages and positions of the Company's executive officers are
as follows:
Name Age Position
Jerry V. Noyce 58 President, Chief Executive Officer and
Director
Wesley W. Winnekins 41 Chief Financial Officer and Treasurer
James A. Narum 46 Senior Vice President-Corporate Business Development
Jeanne C. Crawford 45 Vice President-Human Resources and Secretary
Jerry V. Noyce has been President and Chief Executive Officer of the
Company since November 2000 and a director since January 2001. From October 1973
to March 1997, he was Chief Executive Officer and Executive Vice President of
Northwest Racquet, Swim & Health Clubs. From March 1997 to November 1999 Mr.
Noyce served as Regional Chief Executive Officer of CSI/Wellbridge Company, the
successor to Northwest Racquet, where he was responsible for all operations at
the Northwest Clubs and the Flagship Athletic Club.
Wesley W. Winnekins has been Chief Financial Officer and Treasurer of
the Company since February 2001. Prior to joining the Company, Mr. Winnekins
served as CFO (from January 2000 to February 2001) of University.com, Inc., a
privately held provider of on line learning solutions for corporations. From
June 1995 to April 1999 he served as CFO and vice president of operations for
Reality Interactive, a publicly held developer of CD-ROMs and online training
for the corporate market. From June 1993 to May 1995 he served as controller and
director of operations for The Marsh, a Minneapolis-based health club, and was
controller of the Greenwood Athletic Club in Denver from October 1987 to January
1989.
James A. Narum has been the Company's Senior Vice President-Corporate
Business Development since December 2001, 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 C. Crawford has been the Company's Vice President of Human
Resources since July 1998 and Secretary of the Company since February 2001. From
July 1996 through July 1998, Ms. Crawford served as a Human Resource consultant
to the Company. From October 1991 through September 1993, Ms. Crawford served as
Vice President of Human Resources for RehabClinics, Inc. a publicly held
outpatient rehabilitation company. From May 1989 through October 1991, Ms.
Crawford served as Director of Human Resources for Greater Atlantic Health
Service, an HMO and physicians medical group. From 1979 through 1989, Ms.
Crawford served in various human resources management positions in both the
retail and publishing industries.
The information required by Item 10 relating to directors and
compliance with Section 16 of the Exchange Act is incorporated herein by
reference to the sections entitled "Election of Directors" and
31
"Section 16(a) Beneficial Ownership Reporting Compliance" which appear in the
Company's definitive proxy statement for its 2003 Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
to the section entitled "Executive Compensation" which appears in the Company's
definitive proxy statement for its 2003 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference
to the section entitled "Principal Shareholders and Management Shareholdings"
which appears in the Company's definitive proxy statement for its 2003 Annual
Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference
to the section entitled "Certain Transactions" which appears in the Company's
definitive proxy statement for its 2003 Annual Meeting.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
(collectively, the "Certifying Officers") are responsible for establishing and
maintaining disclosure controls and procedures for the Company. The Certifying
Officers have concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure. The Certifying Officers also have indicated that there were
no significant changes in the Company's internal controls or other factors that
could significantly affect such controls subsequent to the date of their
evaluation, and there were no corrective actions with regard to significant
deficiencies and material weaknesses.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report.
(1) Financial Statements. The following financial
statements are included in Part II, Item 8 of this
Annual Report on Form 10-K:
Report of Grant Thornton LLP on Consolidated
Financial Statements and Financial Statement Schedule
as of December 31, 2002 and 2001 and for each of the
three years in the period ended December 31, 2002
Consolidated Balance Sheets as of December 31, 2002
and 2001
Consolidated Statements of Earnings for each of the
three years in the period ended December 31, 2002
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended December
31, 2002
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 2002
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules. The following
consolidated financial statement schedule is included
in Item 8:
Schedule II-Valuation and Qualifying Accounts
All other financial statement schedules have been
omitted, because they are not applicable, are not
required, or the information is included in the
Financial Statements or Notes thereto
(3) Exhibits. See "Exhibit Index to Form 10-K"
immediately following the signature page of this Form
10-K
(b) Reports on Form 8-K
The Company filed a report on from 8-K on October 28th 2002 to
report that a press release had been issued to announce that it has
been selected by 3M to develop and operate onsite employee fitness
centers at the company's headquarters in St. Paul, Minnesota.
33
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 4, 2003 HEALTH FITNESS CORPORATION
By /s/ Jerry Noyce.
----------------------------------
Jerry Noyce
Chief Executive Officer
(Principal Executive Officer)
34
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears above or below constitutes and appoints Jerry Noyce and Wesley
Winnekins, or either of them, his true and lawful attorneys-in-fact, and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Date
----------------------------------- ------------
/s/ Jerry Noyce
------------------------------------ Chief Executive Officer and Director
Jerry Noyce (principal executive officer) April 4, 2003
/s/ Wesley Winnekins
------------------------------------ Chief Financial Officer
Wesley Winnekins (principal financial and accounting officer) April 4, 2003
/s/ James A. Bernards
------------------------------------
James A. Bernard Director April 4, 2003
/s/ K. James Ehlen, MD
------------------------------------
K. James Ehlen, MD Director April 4, 2003
/s/ John C. Penn
------------------------------------
John C. Penn Director April 4, 2003
/s/ Mark W. Sheffert
------------------------------------
Mark W. Sheffert Director April 4, 2003
/s/ Linda Hall Whitman
------------------------------------
Linda Hall Whitman Director April 4, 2003
/s/ Rodney A. Young
------------------------------------
Rodney A. Young Director April 4, 2003
35
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Jerry V. Noyce, certify that:
1. I have reviewed this annual report on Form 10-K of Health
Fitness Corporation;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 4, 2003
By /s/ Jerry V. Noyce
---------------------------------
Jerry V. Noyce
Chief Executive Officer
36
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Wesley W. Winnekins, certify that:
1. I have reviewed this annual report on Form 10-K of Health
Fitness Corporation;
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 4, 2003
By /s/ Wesley W. Winnekins
---------------------------------
Wesley W. Winnekins
Chief Financial Officer
37
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-K
Exhibit No. Description
----------- ------------------------------------------------------------
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1997
3.2 Restated By-Laws of the Company - incorporated by reference
to the Company's Registration Statement on Form SB-2 No.
33-83784C
4.1 Specimen of Common Stock Certificate - incorporated by
reference to the Company's Registration Statement on Form
SB-2 No. 33-83784C
10.1 Standard Office Lease Agreement (Net) dated as of June 13,
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 1995 Stock Option Plan - incorporated by reference
to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1995
*10.5 Amendment to Company's 1995 Stock Option Plan - incorporated
by reference to Part II, Item 4 of the Company's Form 10-QSB
for the quarter ended June 30, 1997
*10.6 Employment agreement dated November 30, 2000 between Company
and Jerry V. Noyce-incorporated by reference to the Company's
Form 10K for the year ended December 31, 2000.
*10.7 Employment agreement dated April 21, 1995 between the Company
and James A. Narum, as amended October 19, 1999, November 2,
2000 and March 25, 2003.
*10.8 Employment agreement dated February 9, 2001 between Company
and Wesley W. Winnekins-incorporated by reference to the
Company's Form 10K for the year ended December 31, 2000.
*10.9 Employment agreement dated March 1, 2003 between Company and
Jeanne Crawford
10.10 Agreement of Purchase and Sale of Stock of David W.
Pickering, Inc. dated January 1, 2001 - incorporated by
reference to the Company's Quarterly Report on form 10-QSB
for the quarter ended September 30, 2001
10.11 WCMA Loan and Security Agreement dated October 31, 2002
between the Company and Merrill Lynch Business Financial
Services, Inc. incorporated by reference to the Company's
Form 10Q for the quarter ended September 30, 2002
11.0 Statement re: Computation of Earnings per Share
21.1 Subsidiaries
23.1 Consent of Grant Thornton LLP
38
Exhibit No. Description
----------- ------------------------------------------------------------
24.1 Power of Attorney (included on Signature Page)
99.1 Certification by Jerry Noyce, Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification by Wesley Winnekins, Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
----------------------
* Indicates management contract or compensatory plan or arrangement
39