UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2004
Commission File Number: 0-25064
HEALTH FITNESS CORPORATION
--------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1580506
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 AMERICAN BLVD W., 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, 2004, 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 $16,723,770.
As of March 30, 2005, 12,652,370 shares of the registrant's common stock,
$.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE PROXY STATEMENT FOR THE 2005 ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
ITEM 1. BUSINESS
OVERVIEW
Health Fitness Corporation, together with its wholly-owned subsidiaries
(collectively, the "Company"), provides fitness and health management services
and programs to corporations, hospitals, communities and universities located in
the United States and Canada.
On December 8, 2003, the Company purchased the business assets of the Health &
Fitness Services Division of Johnson & Johnson Health Care Systems Inc., or as
referred to herein as JJHCS. Prior to the acquisition, the Company was the
largest provider of corporate fitness management services, while JJHCS was a
leading provider of employee health and wellness management services, although
JJHCS also managed corporate fitness centers. The Company completed this
acquisition in order to broaden its platform of fitness center management
contracts, as well as to obtain additional expertise in the area of employee
health promotion and management services. By combining the best practices,
programs and people of both companies, the Company believes it is uniquely
positioned to meet the growing demands of major corporations by providing
solutions that address employee health issues and the rising cost of corporate
healthcare.
As the leading provider of fitness and health management services and programs,
the Company currently has agreements with approximately 150 customers to 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 the Company's customers are Fortune 1000 companies.
The Company, a Minnesota corporation, has its executive offices at 3600 American
Blvd W., Suite 560, Bloomington, Minnesota 55431, and its telephone number is
(952) 831-6830. The Company maintains an internet website at www.hfit.com.
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.
To capitalize on the fitness and health management opportunities within the
corporate, hospital, community and university markets, the Company reorganized
in March 2005, to focus more clearly on the two core areas of its business:
Fitness Management Services and Health Management Services. Within each area,
the Company provides three types of services: (i) Staffing Services, (ii)
Program Services and (iii) Consulting Services. On a combined basis, Staffing
Services currently account for 95.2% of total revenue, Programs Services account
for 4.5% of total revenue and Consulting Services account for 0.3% of total
revenue.
FITNESS MANAGEMENT SERVICES
STAFFING SERVICES. The Company has 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
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to develop and equip these fitness centers, and generally pay for all operating
expenses. The Company derives 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. The Company has 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 the
Company's managed fitness centers and include personal training, weight loss
programs, seminars, specialty fitness classes and massage therapy. The Company
derives 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 the
Company 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, the Company 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. The Company has agreements with corporations to staff and
manage the delivery of health promotion programs, lifestyle counseling services
to onsite and remote customer employees and injury prevention and treatment
services. These relationships may or may not involve the management of an
on-site fitness center. The Company derives 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.
PROGRAM SERVICES. The Company offers 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. Such services are either developed
within the Company or are made available through third-party partners, and
include paper and web-based health risk assessments, biometric screenings to
assess blood profiles, data collection, management and reporting and educational
literature and programs. The Company can also offer its customers access to the
HFC e-Health Platform, an electronic health education platform.
The Company also offers 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 its Occupational Health practice, the Company offers 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. The Company can also provide its 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. The Company 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.
3
Within these two areas of business, the duration of the Company's management
services agreements vary widely, from those that are month-to-month, to those
that have a term of up to 5 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.
The Company manages its business by looking at the component revenue derived
from its Fitness and Health Management Services areas of business. The following
table provides a breakout of these revenues for each of the years ending
December 31, 2004, 2003 and 2002:
Unaudited
-----------------------------------------
2004 2003 2002
----------- ----------- -----------
Fitness Management Services
Staffing Services $38,949,432 $28,330,612 $27,518,808
Program Services 2,069,228 815,940 222,776
Consulting Services 160,263 50,500 123,413
----------- ----------- -----------
41,178,923 29,197,052 27,864,997
----------- ----------- -----------
Health Management Services
Staffing Services 10,975,012 2,192,085 -
Program Services 277,498 49,149 -
Consulting Services 23,235 40,536 -
----------- ----------- -----------
11,275,745 2,281,770 -
----------- ----------- -----------
Total Revenue
Staffing Services 49,924,444 30,522,697 27,518,808
Program Services 2,346,726 865,089 222,776
Consulting Services 183,498 91,036 123,413
----------- ----------- -----------
$52,454,668 $31,478,822 $27,864,997
----------- ----------- -----------
GROWTH STRATEGY
The Company's growth strategy is to continue to expand its Fitness and Health
Management Staffing Services, along with continuing to grow its Program and
Consulting Services revenue from existing and prospective customers. In the
long-term, Management believes that the Company can be the leading integrator of
fitness and health services for corporations and other large organizations. Key
elements of the Company's growth strategy include:
- Further develop Fitness and Health Management Programs and Services
through internal expertise, partnerships and potential mergers or
acquisitions.
- Expand existing Fitness Management customer relationships to include
comprehensive Health Management Services.
- Pursue customer opportunities with mid-sized companies and other
smaller organizations.
- Continue to pursue opportunities to offer on-site Fitness and Health
Management Services for large organizations.
- Explore international growth opportunities.
4
OPERATIONS
The Company is reorganized into two operational areas, Fitness Management and
Health Management, effective March 15, 2005. This reorganization both reflected
and formalized the Company's focus on these two core areas of operation over the
past two years. In Fitness Management, there are two National Vice Presidents,
each of whom manage a number of regions. In Health Management, there is one
National Vice President, who manages all of the Company's 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
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.
The Company's 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 the Company's Program Services.
SALES AND MARKETING
The Company markets its services to both corporations and members of the fitness
centers it manages. The Company's sales force actively pursues new corporate
customers across a wide variety of industries. The Company's sales force is
primarily responsible for identifying potential corporate customers and sales
lead partners, and managing the overall sales process.
The Company has a corporate marketing department that supports its managed
fitness centers through the development of marketing programs and promotional
materials.
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.
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 its national presence and almost 30 years of history, management
believes that the Company is recognized as a leading provider of corporate
fitness and health management services, and is well positioned to compete in
this industry.
PROPRIETARY RIGHTS
The Company has three registered trademarks, "Insight"(R), "It Pays To Be
Healthy"(R) and "Live For Life"(R). The Company does not have any other
significant proprietary rights.
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GOVERNMENT REGULATION
Management believes that there currently is no significant government regulation
which materially limits the Company's ability to provide fitness and health
management and consulting services to its corporate, hospital, community and
university-based clients.
EMPLOYEES
At December 31, 2004, the Company had 760 full-time and 2,570 part-time and
on-call employees, of which approximately 40 were employed at the Company's
corporate, divisional and regional offices, with the remainder primarily engaged
in the staffing of fitness, wellness and occupational health centers and
programs. The Company has an agreement with the United Auto Workers Union
regarding approximately 10 of its employees that work at fitness centers owned
by DaimlerChrysler Corporation. Management believes its relationship with
employees is good.
INDEMNIFICATION OBLIGATIONS
A majority of the Company's management agreements 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.
INSURANCE
The Company maintains 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 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.
AVAILABLE INFORMATION
The Company files reports with the Securities and Exchange Commission, or as
referred to herein as the SEC, including annual reports on Form 10-K, quarterly
reports on Form 10-Q and other reports from time to time. The Company is an
electronic filer and the SEC maintains an Internet site at www.sec.gov that
contains the reports, proxy, information statements and other information filed
electronically. In addition, the Company maintains at its website, and makes
available free of charge, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as
soon as reasonably practicable after such information is filed electronically
with the SEC. The information provided on the Company's website is not a part of
this report, and is therefore not incorporated by reference unless such
information is otherwise specifically referenced elsewhere in this report.
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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. The
Company believes that it can provide 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. The Company continues to feel
the effect of these economic changes in the form of competitive prices the
Company must offer for its services in order to renew its customer agreements,
or to obtain new customers. Although the Company believes that price competition
will not materially affect results of operations, the Company believes that
price competition will continue for the foreseeable future.
A trend that may further develop within the Company's 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, the Company would derive its management fee revenue not from its
corporate client, but from the profits of the fitness center. 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 twenty-four months
before profitability could be 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 present a material
risk or represent a material contribution to the Company's results of operation.
However, there is no assurance that the number and scope of such contracts will
not become material in the future or that the Company will be able to manage
such centers profitably or to fund losses for these centers until profitability
is achieved.
RISK FACTORS/FORWARD-LOOKING STATEMENTS
The foregoing discussion and the discussion contained in Item 7 of this Form
10-K contain various "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. Forward-looking statements are based on
current expectations or beliefs concerning future events. Such statements can be
identified by the use of terminology such as "anticipate," "believe,"
"estimate," "expect," "intend," "may," "could," "possible," "plan," "project,"
"will," "forecast" and similar words or expressions. The Company's
forward-looking statements generally relate to its growth strategies, recent
reorganization, financial results, marketing efforts, acquisition plans and cash
requirements. Although it is not possible to foresee all of the factors that may
cause actual results to differ from the Company's forward-looking statements,
such factors include, among others, the risk factors that follow. However,
Investors are cautioned that all forward-looking statements involve risks and
uncertainties.
THE COMPANY MAY EXPERIENCE DIFFICULTY MANAGING GROWTH, INCLUDING ATTRACTING
QUALIFIED STAFF. The Company has experienced substantial growth during the past
few years, both organically and by acquisition. The Company's 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
7
and health improvement programs and services and hire and train qualified staff.
The Company may experience difficulty in attracting and retaining qualified
staff in various markets to meet growth opportunities. Further, in order to
attract qualified staff, the Company may be required to pay higher salaries and
enhance benefits in more competitive markets, which may result in a material
adverse effect on the Company's results of operation and financial condition.
Sustaining growth may require the Company to sell its services at lower prices
to remain competitive, which may result in a material adverse effect on the
Company's results of operation and financial condition. There can be no
assurance that the Company will be able to manage expanding operations
effectively or that it will be able to maintain or accelerate its growth, and
any failure to do so may result in a material adverse effect on the Company's
results of operation and financial condition.
FAILURE TO DEVELOP AND ACQUIRE HEALTH MANAGEMENT PROGRAMS AND SERVICES COULD
HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The
Company's growth strategy depends in part upon continuous development and
improvement of attractive and effective health management programs and services.
The Company's failure to anticipate trends or to successfully develop, improve
or implement such programs or services may have a material adverse effect on the
Company's results of operation and financial condition. The Company currently
contracts 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 the
Company, there is no assurance that the Company would be able to replace such
third-party partner programs and services, and if the Company could not do so,
the Company's ability to pursue its growth strategies would be seriously
compromised.
THE COMPANY IS DEPENDENT ON MAINTAINING ITS CORPORATE RELATIONSHIPS. The
majority of the Company's 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 the Company has 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 the Company's results of operation and
financial condition.
THE COMPANY'S CUSTOMERS ARE PRIMARILY CORPORATIONS AND THEREFORE ITS FINANCIAL
RESULTS ARE SUBJECT TO GENERAL ECONOMIC CONDITIONS. The Company's revenue,
expenses and net income are subject to general economic conditions. A
significant portion of the Company's 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 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, the Company may have to reduce
the number of staff assigned to manage a customer's fitness center.
Additionally, the Company's operations in Canada are subject to foreign currency
risk, although these operations currently represent less than 5% of the
Company's overall revenues. These factors may have a material adverse effect on
the Company's results of operation and financial condition.
THE COMPANY IS DEPENDENT ON ITS KEY EMPLOYEES. THE LOSS OF ANY OF THESE
EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PERFORMANCE AND RESULTS OF
OPERATIONS. The success of the Company is highly dependent on the efforts,
abilities and continued services of its executive officers and other key
employees. The loss of any of the executive officers or key employees may have a
material adverse effect on the Company results of operation and financial
condition. The Company believes that its future success will depend on its
ability to attract, motivate and retain highly-skilled corporate, divisional,
regional and site-based personnel. Although historically the Company has been
successful in retaining the services of its senior management, there can be no
assurance that the Company will be able to do so in the future.
THE COMPANY OPERATES WITHIN A HIGHLY COMPETITIVE MARKET AGAINST FORMIDABLE
COMPANIES. The Company competes for new and existing corporate customers in a
highly fragmented and competitive
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market. Management believes that the Company's 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, the Company may be at
a price disadvantage with respect to the competition, as such competition may
propose a substantially lower price than the Company. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors, or that competitive pressures faced by the Company will not have a
material adverse effect on the Company's results of operation and financial
condition.
THE COMPANY'S RESULTS OF OPERATIONS COULD BE ADVERSELY IMPACTED BY LITIGATION.
Because of the nature of its business, the Company expects that it may be
subject to claims and litigation alleging negligence or other grounds for
liability arising from injuries or other harm to the customers it serves. The
Company has occasionally been named a defendant in claims relating to accidents
that occurred in the fitness centers it manages. There can be no assurance that
additional claims will not be filed, and that the Company's insurance will be
adequate to cover liabilities resulting from any claim.
THE COMPANY COULD EXPERIENCE A POTENTIAL DEPRESSIVE EFFECT ON THE PRICE OF ITS
COMMON STOCK FOLLOWING THE EXERCISE AND SALE OF EXISTING CONVERTIBLE SECURITIES.
At December 31, 2004, the Company had outstanding stock options and warrants to
purchase an aggregate of 3,336,870 shares of common stock. The Company also had
outstanding 1,063,945 shares of preferred stock that are convertible into
2,127,890 shares of common stock. The exercise of such outstanding stock options
and warrants and the sale of the common stock acquired thereby, as well as the
conversion of preferred stock and the sale of common 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 warrants and sale
of such shares of the Company's common stock could occur at a time when the
Company might otherwise be able to obtain additional equity capital on terms and
conditions more favorable to the Company.
THE COMPANY HAS RECENTLY HAD TO IMPLEMENT A BUSINESS MODEL FOR MANAGING
CORPORATE FITNESS CENTERS ON A COST-NEUTRAL OR FOR-PROFIT BASIS. SUCH MODEL MAY
NOT BE PROFITABLE. The Company has, 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 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.
ITEM 2. PROPERTIES
The Company leases approximately 8,000 square feet of commercial office space in
Bloomington, Minnesota, under a lease that expires in October 2007. The
Company's monthly base rent for this office space is approximately $10,700, plus
taxes, insurance and other related operating costs. Additionally, the Company
leases approximately 1,500 square feet of commercial office space in Piscataway,
New Jersey, under a lease that expires on December 31, 2005. The Company's
monthly rent for this office space is $1,500.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to claims and suits arising in the
ordinary course of its business. Such claims have, in the past, generally been
covered by insurance. Management believes the resolution of other legal matters
will not have a material effect on the Company's 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 the
Company's insurance will be adequate to cover all liabilities that may arise out
of claims brought against the Company.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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.
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
Low High
----- ----
Fiscal Year 2003:
Fourth quarter $1.01 $1.33
Third quarter 0.51 1.01
Second quarter 0.39 0.55
First quarter 0.38 0.50
At March 30, 2005, the published high and low sale prices for the Company's
common stock were $2.65 and $2.60 per share respectively. On March 30, 2005,
there were issued and outstanding 12,652,370 shares of common stock of the
Company.
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 2004, 2003 and 2002, 80,454, 53,423 and 32,411 common shares were issued to
Company employees in connection with their purchase of stock through the
Company's Employee Stock Purchase Plan.
The Company did not repurchase any of its securities during the fourth quarter
ending December 31, 2004.
10
ITEM 6. SELECTED FINANCIAL DATA
The data given below as of and for each of the five years in the period ended
December 31, 2004, 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,
2004 2003 2002 2001 2000
STATEMENT OF OPERATIONS DATA (in
thousands except per share amounts):
REVENUE $ 52,455 $ 31,479 $ 27,865 $ 25,910 $ 26,191
NET EARNINGS (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS 1,588 (27) 3,001 1,806 930
NET EARNINGS PER COMMON SHARE:
Basic $ 0.13 $ 0.00 $ 0.24 $ 0.15 $ 0.08
Diluted $ 0.10 $ 0.00 $ 0.24 $ 0.15 $ 0.07
BALANCE SHEET DATA (in thousands):
TOTAL ASSETS $ 20,901 $ 19,808 $ 12,956 $ 10,199 $ 10,399
LONG-TERM DEBT $ 1,613 $ 4,350 - - $ 25
SHAREHOLDERS' EQUITY $ 11,484 $ 9,732 $ 9,079 $ 6,063 $ 4,195
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS DESCRIPTION
Health Fitness Corporation, together with its wholly-owned subsidiaries, or as
referred to herein as the Company, provide fitness and health management
services and programs to corporations, hospitals, communities and universities
located in the United States and Canada.
On December 8, 2003, the Company purchased the business assets of the Health &
Fitness Services Division of Johnson & Johnson Health Care Systems Inc., or as
referred to herein as JJHCS. Prior to the acquisition, the Company was the
largest provider of corporate fitness management services, while JJHCS was a
leading provider of employee health and wellness management services, although
JJHCS also managed corporate fitness centers. The Company completed this
acquisition in order to broaden its platform of fitness center management
contracts, as well as to obtain additional expertise in the area of employee
health promotion and management services. By combining the best practices,
programs and people of both companies, the Company believes it is uniquely
positioned to meet the growing demands of major corporations by providing
solutions that address employee health issues and the rising cost of corporate
healthcare.
As the leading provider of fitness and health management services and programs,
the Company currently has agreements with approximately 150 customers to 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 the Company's customers are Fortune 1000 companies.
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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 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.
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.
12
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.
13
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
14
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $1,701,000 to $3,956,000 for 2004, from
$2,255,000 for 2003. This increase is largely attributable to the increase in
accounts receivable and deferred tax assets, offset by increases in accounts
payable, accrued salaries, wages and payroll taxes, as well as deferred revenue.
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, or referred to herein as the Wells Loan. The initial
draw on the Wells Loan totaled $1,255,204, which was used to refinance a
revolving line of credit with Merrill Lynch Business Financial Services, Inc.,
or referred to herein as the 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, the proceeds of which were placed into escrow 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 decreased $250,000 on the last day of
each calendar quarter, beginning September 30, 2003, and will expire 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 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.
On August 25, 2003, the Company entered into a $3,000,000 Securities Purchase
Agreement with Bayview to provide the Company with acquisition financing and
general working capital, referred to herein as the Bayview Investment. The
Bayview Investment was initially structured as a bridge note, referred to herein
as the Bridge Note, the proceeds of which the Company placed into escrow to fund
a portion of the JJHCS asset purchase.
On December 8, 2003, the $3,000,000 Bridge Note issued to Bayview was converted
into a $2,000,000 term note, referred to herein as the Term Note, $1,000,000 in
Preferred Stock and a warrant to purchase common stock of the Company per the
terms set forth in the August 25, 2003 Securities Purchase Agreement. The Term
Note bears interest at 12% per year, payable monthly, and will mature on
December 8, 2008. The Term Note may 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 Bayview Investment is secured by a subordinated
security interest in substantially all of the Company's assets.
15
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 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 and contains the same
terms as described above. In addition, Bayview may require redemption of the
Preferred Stock and PIK Dividends upon a default under the Term Note.
The warrant issued to Bayview represents the right to purchase 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 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.
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 December 31, 2004.
The following table represents the Company's contractual obligations at December
31, 2004:
Payments Due By Period
Less Than ---------------------- More Than
Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years
---------- --------- ------------ ------------ ---------
Long-term obligations $1,613,000 $ -- $ -- $1,613,000 $ --
Operating leases 720,000 266,000 453,000 1,000 --
As of December 31, 2004, 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 Wells Loan. The Company does not believe that inflation has had a
significant impact on its results of its operations.
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, among other things, all 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
Company's intention to expand the Company's programs and services. Such
forward-looking
16
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 those matters identified and discussed in Item 1 of this 10-K under
"Risk Factors/Forward-Looking Statements."
RECENTLY PASSED LEGISLATION
SARBANES-OXLEY. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002, referred to herein as 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.
Refer to management's certifications contained elsewhere in this report
regarding the Company's compliance with Sections 302 and 906 of the Act.
HIPPA. The Administrative Simplification provisions of the Health Insurance
Portability and Accountability Act of 1996, referred to herein as HIPAA, require
group health plans and health care providers who conduct certain administrative
and financial transactions electronically, referred to herein as 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, health risk
assessment and health coaching services, in addition to 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 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,
17
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 June 30, 2005.
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.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheets of the Company 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, and the notes thereto have been audited by Grant Thornton LLP,
independent registered public accounting firm.
CONTENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM................ 20
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS......................................... 21
CONSOLIDATED STATEMENTS OF OPERATIONS............................... 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY..................... 23
CONSOLIDATED STATEMENTS OF CASH FLOWS............................... 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS..................... 38
19
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
20
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.
21
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.
22
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.
23
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.
24
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.
25
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.
26
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
27
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
==========
28
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.
29
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.
30
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 -
31
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
32
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.
33
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.
34
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.
35
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.
36
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
37
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
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer, referred to
collectively herein as 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.
ITEM 9B. OTHER INFORMATION
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 Third Amendment to Credit Agreement and Consent dated December 29, 2004
between the Company and Wells Fargo is attached as an exhibit to this report on
Form 10-K.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Our Board of Directors has adopted a Code of Ethics & Business Conduct for all
employees and directors. A copy of this document is available on our website at
www.hfit.com, free of charge, under the Investor Relations section. We will
satisfy any disclosure requirements under Item 10 or Form 8-K regarding an
amendment to, or waiver from, any provision of the Code with respect to our
principal executive officer, principal financial officer, principal accounting
officer and persons performing similar functions by disclosing the nature of
such amendment or waiver on our website or in a report on Form 8-K.
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", "Code of Ethics" and "Section 16(a)
Beneficial Ownership Reporting Compliance" which appear in the Company's
definitive proxy statement for its 2005 Annual Meeting.
The names, ages and positions of the Company's executive officers are as
follows:
Name Age Position
Jerry V. Noyce 60 President, Chief Executive Officer and
Director
Wesley W. Winnekins 43 Chief Financial Officer and Treasurer
Jeanne C. Crawford 47 Vice President-Human Resources and Secretary
James A. Narum 48 National Vice President of Account Services-Fitness
Management
David Hurt 39 National Vice President of Account Services-Fitness
Management
Katherine Hamlin 38 National Vice President of Account Services-Health
Management
Brian Gagne 42 Vice President-Programs and Partnerships
Mike Seethaler 50 National Vice President-Business Development
Ralph Colao 50 Vice President-Consulting and Best Practices
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.
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
40
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.
James A. 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.
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
41
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.
Our Board of Directors has determined that Mr. Robert Marzec, a member of the
audit committee and an independent director, is an audit committee financial
expert, as defined under 401(h) of Regulation S-K.
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 2005 Annual Meeting. Such information is
incorporated herein by reference.
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 2005 Annual Meeting.
Such information is incorporated herein by reference.
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 2005 Annual Meeting. Such information is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference to
the section entitled "Audit Fees", which appears in our definitive proxy
statement for our 2005 Annual Meeting. Such information is incorporated herein
by reference.
42
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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,
2004 and 2003 and for each of the three years in the period
ended December 31, 2004
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Earnings for each of the three
years in the period ended December 31, 2004
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 2004
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2004
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
43
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-K
Exhibit No. Description
----------- -----------
**3.1 Articles of Incorporation, as amended on September 20, 2004
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 10-K 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-incorporated by
reference to the Company's Form 10-K for the year ended
December 31, 2002.
*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-incorporated by reference to the
Company's Form 10-K for the year ended December 31,
2002.
44
Exhibit No. Description
----------- -----------
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
10.12 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
10.13 Securities Purchase Agreement, dated August 25, 2003,
between the Company and certain of its subsidiaries, on
the one hand, and Bayview Capital Partners LP, on the
other hand - incorporated by reference to the Company's
Quarterly Report on form 10-QSB for the quarter ended
September 30, 2003
10.14 Asset Purchase Agreement, dated August 25, 2003, between the
Company and Johnson & Johnson Health Care Systems Inc.
- incorporated by reference to the Company's Quarterly Report
on form 10-QSB for the quarter ended September 30, 2003
10.15 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
10.16 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
10.17 Amendment No. 2 to Securities Purchase Agreement between
the Company and certain of its subsidiaries, on the one
hand, and Bayview Capital Partners LP, on the other
hand, dated April 2, 2004 - incorporated by reference to
the Company's Quarterly Report on form 10-Q for the
quarter ended March 31, 2004
10.18 Amendment No. 3 to Securities Purchase Agreement between
the Company and certain of its subsidiaries, on the one
hand, and Bayview Capital Partners LP, on the other
hand, dated May 14, 2004 - incorporated by reference to
the Company's Quarterly Report on form 10-Q for the
quarter ended March 31, 2004
10.19 Agreement Regarding Closing of Escrow Account, by and among
Health Fitness Corporation, Johnson & Johnson Healthcare Systems
Inc., Wells Fargo Bank, National Association (as Lender) and
Wells Fargo Bank, National Association (as Escrow Agent)
- incorporated by reference to the Company's Quarterly Report on
form 10-Q for the quarter ended September 30, 2004
**10.20 Third Amendment to Credit Agreement and Consent between the
Company and Wells Fargo Bank, N.A., dated December 29, 2004
**10.21 Director Compensation Arrangements
**10.22 2004/2005 Executive Bonus Plan
**10.23 Compensation Arrangements For Executive Officers For Fiscal
Year 2005
**11.0 Statement re: Computation of Earnings per Share
45
Exhibit No. Description
----------- -----------
**21.1 Subsidiaries
**23.1 Consent of Grant Thornton LLP
**31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
**31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
**32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
**32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
----------------------
* Indicates management contract or compensatory plan or arrangement
**Filed herewith
46