SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION FROM OCTOBER 27, 1995 TO DECEMBER 31, 1995
COMMISSION FILE NUMBER: 33-16010-A
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ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.)
----------------------------------------------
COLORADO 34-1552315
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STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
13750 U. S. 281 NORTH, SUITE 610, SAN ANTONIO, TEXAS 78432
- - ---------------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRATION'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(210) 495-0565
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS) COMMON STOCK
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[ ] .
(APPLICABLE ONLY TO CORPORATE REGISTRATIONS)
<PAGE>
As of December 31, 1995, there were 8,100,000 shares of Common Stock
outstanding. Commencing October 27, 1995, the Registrant's Common Stock has
traded on the National Association of Securities Dealers Automated Quotation
System, Over-The-Counter market (NASDAQ OTC) under the symbol UFCI.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1 - BUSINESS
GENERAL
Ultrafit Centers, Inc., (formerly D.S.S., Inc.), a Colorado corporation was
formed May, 1987 (the "Company" or "Ultrafit") to primarily engage in the sale
and distribution of dental, medical, pharmaceutical and related supplies and
equipment. Prior to October 27, 1995 nor in any of its previous fiscal years,
the Company did not have meaningful business operations. On October 27, 1995,
the Company exchanged 6,600,000 shares of its Common Shares for 100% of Ultrafit
Centers, Inc., a Texas Corporation; thereafter, the Company's name was changed
from D.S.S., Inc. to Ultrafit Centers, Inc.
Ultrafit is a management company that manages and develops the Ultrafit
Preventive Medicine Centers concept through the operation of individual Ultrafit
Preventive Medicine Centers (the "Ultrafit Center(s)") and Nutritional
Biosciences, Inc. ("Nutritional Biosciences"), the Company's sole provider of
certain dietary supplements. An Ultrafit Center represents an alternative model
for health care which takes a preventive approach versus repair approach to
medicine through combining a physician-staffed medical clinic with a
state-of-the-art fitness and nutrition center. The Ultrafit program is designed
to recognize most patients have never exercised before and a majority have one
or more pre-existing illnesses such as high blood pressure, coronary artery
disease, diabetes, degenerative arthritis, rheumatoid arthritis and
osteoporosis. Therefore, at the outset, a customized patient program is
developed with appropriate exercise and diet regimen suited to the particular
patient's abilities. Each customized patient program is developed based on a
medical evaluation performed by an on-site physician. The Company has developed
a proprietary specific step-by-step enrollment process.
The Company currently operates six (6) Ultrafit Centers in the State of Texas.
As of March 1, 1996, these six (6) Centers had a combined membership of
approximately 10,000 patients. On December 1, 1995, the Company entered into an
agreement to commence operations in an Ultrafit Preventive Medicine Center in
Phoenix, Arizona.
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<PAGE>
ITEM 1 - BUSINESS (CONT'D.)
In June 1995, the Company opened a new Ultrafit Center pursuant to a joint
venture agreement with Davlin Corporation. Pursuant to the terms of the
Agreement, the Company retains a 49% ownership interest in the center. The
Company is also entitled to franchise royalties of 7% of gross revenues.
The Company also operates Nutritional Biosciences, Ultrafit's sole provider of
certain dietary supplements. Nutritional Biosciences was formed on January 30,
1986, primarily as a wholesaler of vitamins and dietary supplements. For the
twelve-month period ending December 31, 1995, Nutritional Biosciences derived
approximately sixty-six percent (66%) of its revenues from supplying Ultrafit
Centers with certain dietary supplements.
THE DEVELOPMENT OF THE ULTRAFIT STATE
The Ultrafit concept and system of preventive medicine was developed by Dr.
Joseph E. Davis, founder, Chairman of the Board of Directors and Chief Medical
Officer of the Company. During his tenure at the Heart and Lung Institute at
Bethesda, Maryland, Dr. Davis developed a keen interest in nutritional
biochemistry. The goal of Dr. Davis' work was to develop a dietary and exercise
program designed to form a preventive versus repair approach to health care. Dr.
Davis coined the term "Ultrafit State" to characterize his approach to
preventive healthcare.
In 1978, Dr. Davis opened a private practice in Nacogdoches, Texas and began to
apply his concepts in his work of rehabilitating cardiac and orthopedic
patients. In 1990, Dr. Davis published a book entitled "ULTRAFIT" describing his
program. Subsequently, Dr. Davis relocated to Edinburgh, Texas and with John
Russell, an executive of a health club group, established the first Ultrafit
Center.
AN ULTRAFIT PREVENTIVE MEDICINE FACILITY
The Company delivers its products and services to consumers through the
management operation of Ultrafit Centers. Members of each Ultrafit Center pay an
initial fee and small monthly charge to have created a customized program
incorporating matters relating to physical health, exercise and diet under the
direction of a staff physician and a team of exercise and nutrition personnel.
Each center houses facilities for patient use of various exercise equipment
including stationary bikes, weights, treadmills and other exercise equipment
necessary for the Ultrafit program.
The non-discounted initial charge to become a patient of an Ultrafit Center is
$498.00. The fee covers an initial medical evaluation which includes a cardiac
stress test, blood profile, resting electrocardiogram, urinalysis, complete
chemistry analysis and physical. Thereafter, each patient is charged a $60.00
monthly fee for use of the Center's facilities, equipment and services. The
monthly fee is collected on a pre-authorized bank draft of the patients bank
account or credit card. A patient may cancel membership by providing 60 days
notice or may move a membership to another Center by providing 30 days notice.
Patients have reciprocity at all Ultrafit Centers.
3
<PAGE>
ITEM 1 - BUSINESS (CONT'D.)
PATIENT ENROLLMENT
Upon acceptance and prior to the first appointment, each new patient is provided
with a copy of the book entitled "Ultrafit", a health review form and the rules
of the Ultrafit Center. Patients are instructed to read the book, complete the
health review and refrain from foods for 12 hours before the first appointment
because of the physical exam. Patients are also encouraged to wear clothing
appropriate for exercise and, if desired, a change of clothes.
During this evaluation portion of the Company's enrollment process, the patient
provides a blood and urine sample followed by a medical exam performed by the
on-site physician. This exam typically takes approximately one-hour and includes
treadmill evaluation. The first visit concludes with arrangements for the second
visit.
The second visit is a review of the lab results and doctors physical examination
and stress test evaluation. Using these results, the doctor can structure the
patients dietary and exercise program and scrutinize same in light of any
medical considerations. In some cases, the doctor may prescribe dietary
supplements or regimens. The second visit concludes with arranging for the third
visit.
During this phase of the enrollment process, a customized training program is
developed for the patient taking into account the factors of age, physical
limitation, weight and medical exam results and medical history. Within these
parameters, the exercise physiologist can develop a program based on goals to
lower body fat, lose inches or to develop body tone.
Patients are provided a program card and a complete demonstration of the
exercise equipment by a personal trainer employed by the Ultrafit Center. The
personal trainer will work with the patient for at least the next ten visits to
ensure a smooth and consistent transition into the Ultrafit program. During this
time, patients are taught to monitor their heart rate and technique on how to
control heart rate.
Thirty to sixty days after the initial visit, each patient is measured and
weighed. In some cases, the exercise program is graduated or decreased to keep
pace with the patient.
DIETARY PROGRAMS
In certain cases, an individual patient program includes a dietary regimen in
conjunction with a consistent exercise program. The Ultrafit program recommends
one of three diets depending upon the needs and medical condition of each
patient. Basically, the Ultrafit Diet plans allow different people to eat the
same foods, but at different calorie levels.
THE ULTRAFIT AMINO ACID DIET provides predigested amino acid tablets and
vitamin/mineral supplements for people with serious weight problems who need
help with hunger control. Predigested means that the protein has been broken
down to its most basic building blocks.
4
<PAGE>
ITEM 1 - BUSINESS (CONT'D.)
THE ULTRAFIT REDUCING DIET helps people lose weight more gradually. Just as does
the Ultrafit Amino Acid Diet, the Ultrafit Reducing Diet protects the patient's
muscle and reduces the fat in the patient's diet and on the patient's body. This
diet does not use amino acid tablets. It does require that the patient takes
vitamin/mineral supplements.
THE ULTRAFIT MAINTENANCE DIET helps people of normal weight who have health
problems achieve that Ultrafit State. It protects the patient's muscle as the
patient reduces the fat in his/her diet and on the patient's body. This diet
includes a weekly "pig-out meal."
THE BODY WARRANTY
The Company provides qualified members free limited outpatient care including:
(1) Routine Outpatient care for illness that can be appropriately treated by a
general practitioner or internist during posted office hours.
(2) All lab work completed at cost plus a nominal drawing and handling fee.
(3) All medical fees will be posted.
Conditions of eligibility for the Company's free limited outpatient care state:
"This Body Warranty remains in effect as long as the terms heretofore mentioned
are honored and the member is in good standing; members must exercise a minimum
of ten (10) times per month; members must be 14 years in age or older; and, must
be current on premiums."
The Company previously obtained its supply of Amino Acid tablets offered by the
Company to certain of its patients from Nutritional Biosciences. The Company
acquired the assets of Nutritional Biosciences on April 3, 1995, thereby
relieving dependence on an outside party for supplies of Amino Acid tablets.
COMPETITION
Management believes its competition arises primarily from health clubs and diet
centers. Although the Company believes its approach to preventive medicine
through providing a physician-staffed medical clinic with a state-of-the-art
fitness and nutrition center allows it a competitive advantage, the majority of
health clubs and diet centers have substantially greater financial and marketing
resources than the Company. Moreover, there can be no assurance that competitors
that more closely parallel the Company's method of operation might not enter
markets in which the Company has a presence at some time in the future.
5
<PAGE>
ITEM 1 - BUSINESS (CONT'D.)
INDUSTRY - PREVENTIVE MEDICINE
Although the Company shares the characteristics of a fitness center or gym as
well as the characteristics of a diet center, management considers its industry
segment is better defined as "preventive medicine."
The Company's founder developed the Ultrafit series of programs in the course of
providing services as a practicing physician. As such, while an Ultrafit Center
offers all the amenities standard to other fitness centers such as exercise
equipment, weight machines, etc., the Company's use of an on-site physician,
exercise physiologist and nutrition expert substantially differentiate it from
either health clubs or diet centers. The Company defines preventive medicine in
the same manner as the Centers for Disease Control, i.e. "preventive" medicine
are programs able to "reduce the incidence, prevalence and burden of disease and
injury and enhance health by improving physical social and mental well-being."
Management believes there is a general growing trend of acceptance for a
preventive approach to medicine versus a repair approach. According to a survey
by the U.S. Department of Health and Human Services, approximately 81 percent of
private work-sites with at least 50 employees offered some type of health
promotion activities in 1992, compared with 66 percent in 1985. An October 1993
William M. Mercer Inc. survey showed the main motivation for establishing such
programs was to reduce health care costs (83 percent). Others cited employee
interest (36 percent) and absenteeism/productivity issues (17 percent). Fourteen
percent mentioned other reasons, the most common being a concern for employee
welfare.
Among the published studies which management believes demonstrate growth in the
popularity of a preventive approach to medicine include Johnson & Johnson's Live
For Life program showed cost savings of about $180 a year for each employee.
Stanford University School of Medicine's Healthtrac program showed a reduction
of $300 in medical claims for each $30 spent on guiding individuals into
healthier lifestyles. Stratus Computer Inc. of Marlborough, Mass., is saving
about $50,000 a year on medication and diabetic treatment for its employees who
completed the HealthMatters program during 1992 and 1993.
MARKETING
The Company intends to market and develop its locations through franchising and
jointly-owned Ultrafit Centers. The rationale for franchising the Ultrafit is
based, in part, upon management's belief that new Centers can best be developed
if owned by physicians practicing preventive medicine. Additionally,
Company-owned locations require significant capital and management estimates
that expansion would be restricted to the availability of capital.
6
<PAGE>
ITEM 1 - BUSINESS (CONT'D.)
The Company has not conducted any marketing studies which would indicate a
demand or lack of demand for its approach to preventive medicine or its approach
to marketing through offering for sale jointly-owned or franchised Ultrafit
Centers. Accordingly, the Company is relying solely on the opinion of management
that a need exists in the marketplace for preventive medicine in general and for
the Ultrafit approach to preventive medicine in particular. As such, there can
be no assurance that any market exists or, if a market exists, that it would be
receptive to preventive medicine as delivered according to the Ultrafit
approach.
FRANCHISING AND JOINTLY-OWNED ULTRAFIT CENTERS.
The Company intends to develop the Ultrafit concept, in part, through obtaining
qualified franchisees, which franchisees may include, as equity participants,
physicians practicing preventive medicine. The Company is also seeking to extend
and develop its Ultrafit concept through joint venture or joint development
agreements.
Under the jointly-owned approach, the Company licenses its system for center
operation, together with its name and other materials. The Company retains 40%
to 50% ownership of each center and the purchaser provides funding to establish
a particular center. The Company envisions it will market the jointly-owned
approach exclusively to physicians who practice a preventive form of medicine
and agree to act as or provide for a full-time, on-site physician.
DEVELOPMENT OF JOINTLY-OWNED ULTRAFIT CENTERS
The Company intends to market the jointly-owned approach exclusively to
physicians who practice a preventive form of medicine and agree to act as or
provide for a full-time, on-site physician.
SALES OF FRANCHISE ULTRAFIT CENTERS
On September 21, 1994, the Company entered its first franchise agreement with
Princeton Medical Group ("PMG") for the San Antonio, Texas, area. Said area
contains two existing Ultrafit Centers which PMG continues to operate. The
Company intends to offer franchises to qualified individuals, primarily
physicians. Franchises will be awarded for an initial fee of $50,000 and a
monthly royalty of between seven percent (7%) and nine percent (9%) of gross
sales.
During the term of a franchise agreement, a franchisee must pay the Company a
continuing monthly royalty fee between seven and nine percent (7-9%) of the
gross sales of the Ultrafit Center. The Company, in its sole discretion, may
modify the royalty fee for a specific franchise under certain limited
circumstances. Such circumstances include an evaluation of market conditions,
including the degree of market penetration of the Ultrafit Centers in the area
to be developed and the demographics of the area; the number of Ultrafit Centers
to be developed; the time period for such development and the location of the
Ultrafit Center; the financial strength and experience of the franchisee and
related factors.
7
<PAGE>
ITEM 1 - BUSINESS (CONT'D.)
REGULATORY COMPLIANCE
In connection with its franchise operations and with respect to the provisioning
of medical services through the physician employees of the particular Centers,
the Company is subject to state, federal and professional medical practice
requirements.
TRADEMARKS AND COPYRIGHTS
Although the Company does not have any registered trademarks or copyrights, the
Company believes that it has proprietary rights with respect to certain of its
trademarks and copyrights.
EMPLOYEES
None of the Company's employees are subject to collective bargaining agreements.
The Company's employees have never been on strike while in the employ of the
Company. As of December 31, 1995, The Company employed individuals in the
following capacities: The following table sets forth the Company's employees by
category as of December 31, 1995:
CURRENT
CATEGORY EMPLOYEES
-------- ---------
Corporate/Administration 2
Sales and Marketing
Office/Customer Service 1
Total 3
ITEM 2 - PROPERTIES
The Company leases its facilities under various operating leases. Reference is
made to Note 12 of the Company's Notes to Consolidated Financial Statements with
respect to current and future lease obligations.
ITEM 3 - LEGAL PROCEEDINGS
The Company's property is subject to a pending legal proceeding filed in 1994 in
the U.S. Banruptcy Court for the Western District of Texas. Such action is an
outcome of the Chapter 7 bankruptcy case filed by John and Patty Russell. In
such proceeding, the Bankruptcy Trustee is seeking recovery from Dr. Davis "the
true value of the stock in DPJ" [Inc.], which company was acquired by Dr. Davis
from John Russell in 1992. The Trustee in such action is alleging, among other
matters, that the Company has liability, as a subsequent transferee of Dr.
Davis, due to the fact that, as alleged by the Trustee, DPJ was purchased by
Ultrafit for a price below its market value. The Company was named as a party in
this litigation in December 1995.
8
<PAGE>
Reference is made to Note 13 to the Company's Notes to Consolidated Financial
Statements for the year ended December 31, 1995.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the final quarter of the year, no matters were submitted to a vote of
security holders.
PART II
ITEM 5 - MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information
Commencing October 27, 1995, the Company's Common Stock is traded on the
electronic bulletin board. The high and low bid price during such period was, as
follows:
HIGH LOW
---- ---
3-1/4 2
There are currently 300,000 outstanding Warrants for the purchase of Common
Shares, in prices ranging from $1.00 to $1.50. The Warrants are effective for a
period of two years from date of issuance and would, if unexercised, expire at
midnight on December 19, 1997. There are no other options, warrants or
securities convertible into common equity of the Registrant. None of the
Registrant's securities may be sold pursuant to Rule 144. However, the Company
has undertaken to register approximately three million (3,000,000) of its Common
Shares for certain unaffiliated Shareholders of Record. The Company currently
plans to register such Common shares in the Summer of 1996.
Since inception the Company has never paid dividends on any class of its equity.
The Company does not intend to pay dividends in the future.
As of December 31, 1995, there were 288 Shareholders of Record.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has effectively limited the amount of debt incurred
in opening new Centers by utilizing internal financial and off the balance sheet
financing. With these factors in mind, the Company has improved its ratio of
total assets to total liabilities from 1.88 to 1 as of December 31, 1995, and
5.7 to 1 as of March 31, 1996.
Capital is derived from the operation of the Ultrafit Centers and from the sale
of franchises and subsequent franchise royalties. As of March 1, 1996, the
Company had six (6) Centers in operation. The fee to acquire a franchise is
$50,000 with franchise royalties ranging between 7-9% of gross sales.
Additionally, capital is derived from the sale of certain dietary and vitamin
supplements through Nutritional Biosciences. Distribution is currently through
sales at the Centers and also through advertisements in a state-wide
publication.
CAPITAL REQUIREMENTS AND SOURCE OF FUNDS
Each new center requires approximately $500,000 of capital for hard assets and
an additional $100,000 of short term working capital.
1. Ultrafit has a $1,000,000 line of credit with Mission State Bank
of Mission, Texas, (currently not utilized).
2. Ultrafit has an on-going loan/debt relationship with NationsBank.
Ultrafit has a $340,000 loan outstanding to NationsBank that is
collateralized by shares of Ultrafit's stock.
3. Ultrafit's Board of Directors has authorized Warrants for a
total of 700,000 shares of Ultrafit's stock for a total value of
$1,400,000.
EFFECT OF INFLATION
Ultrafit is affected by inflation or deflation in the areas of labor cost (which
makes up in excess of 50% of operation cost, supply cost and cost of
construction). As a result, Ultrafit uses the C.P.I. guide for project increases
in costs on an annual basis.
RESULTS OF OPERATIONS
Typically, during the first 12 months of operation, all short term working
capital is repaid. Centers are projected to be posting cash flow. At the
18-month marker, Centers are projected to be profitable.
Mature Centers (those Centers with 1,500 or more patients) produce approximately
$20,000 in excess cash, and approximately $12,000 in profit each month.
10
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Nutritional Biosciences has a 100% gross profit margin in all of its products.
Currently 2/3 of these products sold by Nutritional Biosciences are sold to
Ultrafit Centers. One-third of Nutritional Biosciences sales are sold directly
to the consumer via the telephone and Internet sales. By January 1, 1997,
Ultrafit projects that 50% of Nutritional Biosciences sales will be via the
Internet and telephone sales.
FINANCIAL CONDITION
For the year ended December 31, 1995, Ultrafit reflected a loss in operations.
However, management is optimistic about future financial results, due to the
following factors:
o Limited use of debt and the utilization of off-the-balance-sheet
financing, when possible, in opening new Centers.
o Continued strong performance by the McAllen centers.
o Change in ownership of a San Antonio franchise.
o Opening of Victoria center - expected break-even by June 1997,
profit margin of $5,000 in July 1997 with continued growth of
approximately 5% per month.
o Change in management of Harlingen center - expected break-even
by June 1996, profit margin of $5,000 in July 1996 with
continued growth of approximately 5% per month.
o Opening of the first out-of-state franchise in the Phoenix,
Arizona, area. Expected opening in June 1996, with six (6)
Centers expected to follow.
o Addition of two (2) corporate-owned centers and four (4)
franchised centers.
o Entrance of Nutritional Biosciences into the national
distribution market via the Internet. Increase in the number of
Centers operating will lead to greatly increased sales ratios,
while increases in retail sales will lead to a greater profit
margin.
Management believes all of the above factors will have a positive impact
on the financial condition of the Company.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements attached hereto, commencing on
page F-1.
ITEM 8 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements between the Company and its accountants and
auditors with respect to accounting and financial disclosure.
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<PAGE>
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information with the respect to the
Company's Officers, Directors and Key Personnel:
NAME AGE POSITIONS WITH THE COMPANY
- - ---- --- --------------------------
Joseph Davis 50 Chairman of the Board of Directors,
Chief Medical Officer
Wendell Porth 42 President, Chief Executive Officer, Director
John Russell 50 Consultant, Director
Daniel Boone 42 Director
All Directors hold office until the next annual meeting of Shareholders of the
Company or until their successors are elected and qualified. Officers hold
office until their successors are chosen or qualified, subject to earlier
removal by the Board of Directors. The Company does not have an Executive,
Nominating, Compensation or Audit Committee.
Set forth below is a biographical description of each Officer listed above and
of each Director:
Joseph E. Davis, M.D., is the Chairman of the Board of Directors and the founder
of the Ultrafit concept. Dr. Davis obtained his Doctor of Medicine at the
University of Texas, Southwestern Medical School in 1972, graduating Magna Cum
Laude. Dr. Davis completed his internship and medical residency in Massachusetts
General Hospital, Boston Massachusetts. Dr. Davis established his initial
practice in Nacogdoches, Texas, specializing in internal medicine and continued
that practice until July 1989. Dr. Davis then concentrated his efforts on the
Ultrafit Preventive Medicine concept. The New American Library published Dr.
Davis' book entitled "Ultrafit" in 1992. Dr. Davis has been the recipient of
numerous awards, including the Phi Kappa Phi National Scholastic Honorary
Society, the Alpha Omega Alpha National Medical Honor Society. Dr. Davis has
also received numerous body building awards including the Texas Timberland
Championship, South Central U. S. A. Middleweight and Mr. Mid-America Novice,
North Texas Body Building Championship.
Wendell A. Porth has served as a member of the Board of Directors and as the
Chief Executive Officer of the Company since October 27, 1995. Mr. Porth is
responsible for the formulation of corporate strategy and for corporate
development. Mr. Porth has been employed in various executive level positions
within the health care industry for the past twelve years. Mr. Porth's prior
executive level positions include associations with Humana Women's and
Children's Hospital, San Antonio, St. Luke's Lutheran Hospital, San Antonio and
Memorial Hospital, El Campo, Texas. Mr. Porth holds an MBA and BS in Finance.
12
<PAGE>
John Russell has been a director of the Company since March 1992. Since March
1992, Mr. Russell has been self-employed as a consultant in the health and
fitness industry. Mr. Russell has been a consultant to Ultrafit since March
1992. His background includes one time part- owner of International Fitness
Centers. In May 1994, Mr. Russell filed Chapter 7 petition under the bankruptcy
code.
Daniel Boone, M.D., was admitted to practice in Texas. From 1991 to 1993, Dr.
Boone managed and operated a private medical practice. From 1993 to 1995, Dr.
Boone has been employed by the Company, and has provided medical services for
the Ultrafit Center in Kerrville, Texas.
ITEM 10 - EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate cash
compensation paid, accrued or deferred to the Chief Executive Officer of the
Company and to each officer of the Company who earned in excess of $100,000 for
services rendered in all capacities to the Company during the fiscal year ended
December 31, 1995:
SUMMARY COMPENSATION TABLE
NAME AND ANNUAL ANNUAL OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- - ------------------ ---- ------ ------ ------------ ------------
Joseph Davis 1995 $120,000 $0 $0 $45,000(1)
Wendell Porth 1995 $ 65,625 $0 $0 $45,000(1)
John Russell* 1995 $120,000 $0 $0 $45,000(1)
* John Russell was paid as a consultant to the corporation, not as an employee.
(See Item 12 below).
(1) Paid in 50,000 Shares of restricted common stock at a per share price
of $1.50 per share, discounted 40% due to two-year resale restriction.
The Company's Directors do not receive compensation for acting in their
respective capacities as such.
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ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the holdings of Common Stock by each person who,
as of December 31, 1995, held of record or was known by the Company to own
beneficially more than five percent of the outstanding Common Stock of the
Company, by each Director and Officer of the Company and by all Directors and
Officers of the Company as a group.
No. of Shares and
Name and Address of Nature of Beneficial Percentage of Common
Beneficial Owner Ownership Shares Outstanding
Hartvale Holdings Ltd. 444,000 5.4%
14A Eddelston Street
London, England
Lomax Co. Limited 695,000 8.55%
P. O. Box 1792
Grand Cayman Office
Georgetown, Grand Cayman
OTC Capital Corp. 647,000 8%
P. O. Box 669
Palm Beach, Florida 33480
Joseph Davis 2,939,646 36%
500 Thompson Dr.
Kerrville, TX 78028
Daniel Boone 495,530 6%
236 Wesley
Kerrville, Texas 78028
Wendell Porth 50,000 .50%
105 Painted Post
San Antonio, Texas 78231
John Russell 50,000 .50%
13750 U.S. 281 North, Suite 610
San Antonio, Texas 78232
All Directors and Officers
as a group (4 persons) 3,535,176 43%
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ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Daniel Boone purchased 100,000 shares of additional stock in February
1996 for $100,000.00.
From March 1992 through the present, John Russell, a director of the
Company, has served as a consultant to the Company. For the fiscal year ended
December 31, 1995, Mr. Russell received consulting fees of $120,000. In the
Company's opinion, the terms of Mr. Russell's consulting agreement with the
Company are on terms no less favorable than could have
been obtained from unaffiliated third parties.
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following financial statements are included in Part II, Item 8:
PAGE
----
Independent Auditor's Report F-1
Balance Sheet as of December 31, 1995 and 1994 F-2
State of Operations for the years ended December 31, 1995, 1994, 1993 F-3
Statement of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993 F-4
Statement of Cash Flows for the years ended F-5
December 31, 1995, 1994 and 1993
Notes to Financial Statements F-6
(b) Reports of Form 8-K
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto
duly authorized.
Ultrafit Centers, Inc.
a Colorado corporation
By:
------------------------------
Wendell A. Porth, President
Dated: __________________ , 1996
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
------------------------------
Joseph Davis, M.D., Chairman of the Board of Directors
Date: July 15, 1996
---------------------------
---------------------------------,
Wendell A. Porth, Director
Date: July 15, 1996
----------------------------
----------------------------------
John Russell, Director
Date: July 15, 1996
-----------------------------
----------------------------------
Daniel Boone, M.D., Director
Date: July 15, 1996
16
<PAGE>
ANGEL E. LANA, P.A.
CERTIFIED PUBLIC ACCOUNTANT
[LETTERHEAD]
Board of Directors
Ultrafit Centers, Inc. and Subsidiaries
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheets of Ultrafit Centers, Inc.
(formerly D.S.S., Inc.) and subsidiaries as of December 31, 1995 and 1994, and
the related statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1995, 1994 and 1993. These financial statements are
the responsibility of the Company's management. My responsibility is to express
an opinion on these financial statements based on my audit. I did not audit the
1994 financial information contained in Note 2 relating to the financial
position and results of operations of acquired subsidiaries. The 1994 financial
statements of the acquired subsidiaries were audited by other auditors whose
reports have been furnished to me, and my opinion, insofar as it relates to the
1994 financial information included in Note 2, is based solely on the report of
the other auditors.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits and the report of other auditors provide a reasonable
basis for my opinion.
In my opinion, based on my audits and the report of other auditors, the
financial statements referred to above present fairly, in all materials respect,
the financial position of Ultrafit Centers, Inc. (formerly D.S.S., Inc.) and
subsidiaries as of December 31 1995 and 1994, and the results of its operations,
changes in its shareholders' equity and its cash flows for the years ended
December 31, 1995, 1994 and 1993 in conformity with generally accepted
accounting principles.
/s/ ANGEL E. LANA, P.A.
------------------------------
Angel E. Lana, P.A.
CERTIFIED PUBLIC ACCOUNTANT
April 18, 1996
Fort Lauderdale, Florida
F-1
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
------
1995 1994
-------- ------
Current Assets:
Cash $ 48,776 $ -0-
Accounts Receivable-Trade 24,729 -0-
Accounts Receivable-Other 13,181 -0-
Note Receivable-current portion 100,000 -0-
Prepaid Expense 21,000 -0-
Inventory 37,496 -0-
-------- -------
Total Current Assets 245,182 -0-
-------- -------
Property and Equipment, net of depreciation 215,875 -0-
-------- -------
Other Assets:
Note Receivable, net 115,000 -0-
Security Deposits 16,506 -0-
Development Costs, net of amortization 242,083 -0-
Joint Venture Investment-at equity 20,927 -0-
Pre-opening Costs-new center 73,597 -0-
Goodwill, net of amortization 271,614 -0-
-------- -------
Total Other Assets 739,727 -0-
-------- -------
Total Assets $1,200,784 $ -0-
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accrued Expenses $ 30,283 $ -0-
Note Payable-Bank 43,364 -0-
Notes Payable-Other 500,000 -0-
-------- -------
Total Current Liabilities 573,647 -0-
Other Liabilities:
Deferred Revenue 66,642 -0-
-------- -------
Total Liabilities 640,289 -0-
-------- -------
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock, $.50 par value; 3,000,000
shares authorized, none issued -0- -0-
Class A, Non-Voting Common Stock, $.001 par
value; 2,000,000 shares authorized, none issued -0- -0-
Common Stock, $.001 par value; 20,000,000 shares
authorized, issued and outstanding shares-
8,100,000 in 1995; 650,000 in 1994 8,100 650
Additional Paid-In Capital 1,030,238 49,289
Accumulated Deficit (477,843) (49,939)
----------- ---------
Total Shareholders' Equity 560,495 -0-
----------- ---------
Total Liabilities and Shareholders' Equity $1,200,784 $ -0-
=========== =========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- -------- ----------
Net Revenues $ 267,010 $ -0- $ -0-
Cost of goods sold 16,299 -0- -0-
----------- -------- ----------
Gross Profit 250,711 -0- -0-
----------- -------- ----------
Operating Expenses:
Personnel 138,530 -0- -0-
Marketing 16,378 -0- -0-
General and administrative 188,244 -0- 31,768
Physician services 46,500 -0- -0-
Depreciation and amortization 17,466 -0- -0-
Loss-equity investment, net of
royalties of $3,681 10,887 -0- -0-
Loss-note receivable write-down 260,000 -0- -0-
----------- -------- ----------
Total Operating Expenses 678,005 -0- 31,768
----------- -------- ----------
Other income (expense):
Interest income 284 -0- -0-
Interest expense (894) -0- -0-
----------- -------- ----------
Total Other Income (Expense) (610) -0- -0-
----------- -------- ----------
Net Loss $ (427,904) $ -0- $ (31,768)
=========== ======== ==========
Loss Per Common Share $ (0.20) $ -0- $ (0.05)
=========== ======== ==========
Weighted average number of
shares outstanding 2,092,466 650,000 650,000
=========== ======== ==========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID IN ACCUMULATED
SHARES AMOUNTS CAPITAL DEFICIT TOTAL
------ ------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance, 01/01/93 6,500,000 $6,500 $ 43,439 $ (18,171) $ 31,768
Retroactive
application of
reverse stock split-
1 share for each 10
outstanding 5,850,000 (5,850) 5,850 -0-
Net Loss, year
ended 12/31/93 (31,768) (31,768)
---------- -------- ----------- ----------- ---------
Balance, 01/01/94 650,000 650 49,289 (49,939) -0-
Activity-1994 -0-
---------- -------- ----------- ----------- ---------
Balance, 01/01/95 650,000 650 49,289 (49,939) -0-
Stock issued for
services 850,000 850 84,150 85,000
Stock issued for
acquisition of
Ultrafit Centers,
Inc. 6,600,000 6,600 896,799 903,399
Net Loss, year
ended 12/31/95 (427,904) (427,904)
---------- -------- ----------- ----------- ---------
Balance, 12/31/95 8,100,000 $8,100 $1,030,238 $(477,843) $ 560,495
========== ======== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (427,904) $ -0- $(31,768)
Adjustment to reconcile net loss to net
cash used by operating activities:
Write-down of note receivable $ 260,000
Depreciation and amortization $ 17,466 $ 40
Common stock issued for services $ 64,000
Loss-equity investment $ 10,887
Investment write-off 58,552
Changes in non-cash working capital
balances, net of effects from acquisition:
Decrease in accounts receivable-trade $ 4,618
Increase in accounts receivable-other $ (4,614)
Increase in inventory $ (2,354)
Decrease in prepaid taxes $ 730
Decrease in accounts payable $ ( 7,283)
Increase in accrued expense $ 29,647
---------- ---------- ---------
Net Cash Provided (Used) by
Operating Activities $ (47,524) $ -0- $ 19,541
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired upon business acquisition $ 163,457
Acquisition of property and equipment $ (4,308)
Increase in security deposits $ (3,674)
Increase in development costs $ (30,163)
Increase in joint venture investment $ (13,000)
Increase in pre-opening costs $ (10,900)
----------
Net Cash Provided by Investing Activities $ 101,412 $ -0- $ -0-
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to officer $ -0- $ -0- $(19,541)
Decrease in note payable-bank $ (5,112) $ -0- $ -0-
---------- ---------- ---------
Net Cash Used by Financing Activities $ (5,112) $ -0- $(19,541)
---------- ---------- ---------
Net Increase in Cash $ 48,776 $ -0- $ -0-
Cash-Beginning of Period $ -0- $ -0- $ -0-
---------- ---------- ---------
Cash-End of Period $ 48,776 $ -0- $ -0-
========== ========== ==========
Supplemental disclosures of
cash flow information:
Non-cash transactions affecting
operating and financing activities:
Operating activities:
Issuance of common stock for services $ 64,000 $ -0- $ -0-
========== ========== ==========
Financing activities:
Issuance of common stock in connection
with business acquisition $ 903,399 $ -0- $ -0-
========== ========== ==========
Interest paid $ 894 $ -0- $ -0-
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Ultrafit Centers, Inc. (the Company), formerly D.S.S., Inc., was organized under
the laws of the State of Colorado on May 27, 1987 to engage in the business of
the sale and distribution of dental, medical, pharmaceutical and other related
supplies and equipment. The Company was a development stage entity until October
27, 1995, at which time it acquired the assets and assumed the liabilities of
Ultrafit Centers, Inc. (UCI), a Texas corporation. The assets of UCI included
two wholly-owned subsidiaries. Prior to the acquisition of UCI, the Company had
no assets and no significant operating activities other than transactions
related to its formation and organization.
The acquired corporation, Ultrafit Centers, Inc. (UCI), is a management company.
It was formed on February 3, 1993, to operate and expand the Ultrafit Preventive
Medicine Centers concept which represents an alternative model for health care.
It utilizes a preventive approach to medicine by combining a physician-staffed
medical clinic providing customized patient exercise and diet programs with a
state-of-the-art fitness and nutrition center. UCI plans to franchise Ultrafit
Centers throughout the United States. UCI has two wholly-owned subsidiaries,
Ultrafit Fitness Centers, Inc. (UFCI) and Nutritional Biosciences, Inc. (NBI).
Both subsidiaries were acquired by UCI on April 3, 1995. As more fully explained
in Note 14, subsequent to December 31, 1995 UFCI ceased being a subsidiary of
the Company.
The Company issued 6,600,000 shares of common stock upon its acquisition of UCI.
The shares were valued at $903,399, representing the net book value of UCI.
Accordingly, no goodwill was recorded as a result of the acquisition.The
goodwill reflected in these financial statements represents excess of cost over
net assets acquired resulting from the acquisition by UCI of one of its
subsidiaries on April 3, 1995. The acquisition of UCI by the Company was
accounted for by the purchase method of accounting. The results of operations of
UCI and its subsidiaries is included in the accompanying financial statements
only from the date of acquisition (October 27, 1995) through December 31, 1995.
Pro forma financial information on the Company, UCI and subsidiaries is
presented in Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated. Operations for the subsidiaries acquired
during the year ended December 31, 1995 (described above and in Note 2) are
included in the consolidated results of operations since the date of
acquisition.
PER SHARE DATA - Per share data have been computed by dividing net loss by the
weighted average number of common and common equivalent shares outstanding
during the period.
REVENUE AND EXPENSE RECOGNITION - Revenue is recognized when products and
services are delivered, irrespective of when payments are received. Expenses are
recorded as liabilities are incurred, regardless of when they are paid.
F-6
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROVISION FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS - The Company records a provision
for estimated uncollectible accounts for the portion of recognized revenues
which it estimates may not be ultimately collected. The provision and related
allowance are adjusted periodically, based upon the Company's evaluation of
historical collection experience. As of the balance sheet date no allowance for
bad debts on trade accounts receivable was deemed necessary.
INVENTORY - Inventory consists of books, vitamins and dietary supplements. It is
stated at the lower of cost or market and is determined using the first-in,
first-out method.
DEVELOPMENT COSTS - Development costs are being amortized using the
straight-line method over the estimated benefit periods, ranging from 3 to 7
years. They primarily consist of direct franchise development costs. Other costs
include software and video development costs.
GOODWILL - Goodwill represents the excess of the purchase price over the fair
value of net assets acquired by UCI, Inc., prior to its acquisition by the
Company on October 27, 1995. Goodwill is being amortized on a straight-line
basis over the expected benefit period, 15 years. For the year ended December
31, 1995, the Company recorded amortization expense of $14,295, $3,176 of which
occurred after October 27, 1995 and is included in the statement of operations.
PRE-OPENING COSTS - Pre-opening costs represent direct costs incurred in the
process of readying the Company's Ultrafit Centers for operations. The costs
remain capitalized and not subject to amortization until the Center opens for
business. Once the Center commences operations the costs are amortized over the
expected useful life.
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes". SFAS 109 requires an asset and liability approach to financial
accounting and reporting for income taxes.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is computed using straight-line and accelerated methods over their estimated
useful lives ranging from 3 to 7 years.
Property and equipment are summarized as follows:
Furniture and fixtures $ 35,322
Medical and exercise equipment 267,430
---------
302,752
Less accumulated depreciation 86,877
---------
$215,875
For the year ended December 31, 1995, the Company recorded depreciation expense
of $68,262, $14,290 of which occurred after October 27, 1995 and is included in
the statement of operations.
F-7
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITION AND PRO FORMA INFORMATION
As more fully discussed in Note 1, the Company acquired Ultrafit Centers,
Inc.(UCI) on October 27, 1995, a business combination accounted for as a
purchase.Pro forma financial position and results of operations of the Company
for the periods presented below assume the Company acquired UCI as of January 1,
1994.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995
HISTORICAL HISTORICAL
THE UCI AND PRO FORMA PRO FORMA
COMPANY SUBSIDIARIES ADJUSTMENTS COMBINED
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Assets:
Current Assets $ -0- $ 224,182 $ - $ 224,182
--------- ----------- ---------- -----------
Total Assets -0- $1,179,784 $ (23,826) $1,155,958
--------- ----------- ---------- -----------
Liabilities and
Shareholders' Equity:
Current Liabilities $ -0- $ 573,647 $ - $ 573,647
Other Liabilities -0- 66,642 - 66,642
Shareholders' Equity -0- 539,495 (23,826) 515,669
--------- ----------- ---------- -----------
Total Liabilities and
Shareholders' Equity $ -0- $1,179,784 $ (23,826) $1,155,958
========= =========== ========== ===========
Net Revenue $ -0- $1,374,371 $ - $1,374,371
Cost of Revenue -0- 73,654 - 73,654
--------- ----------- ---------- -----------
Gross Profit $ -0- 1,300,717 - 1,300,717
Total Operating Expenses 64,000 1,664,851 4,765 1,733,616
--------- ----------- ---------- -----------
Net Loss from operations $(64,000) $ (364,134) $ (4,765) $ (432,899)
--------- ----------- ---------- -----------
Net Loss per common
share (primary) $ (0.05)
-----------
Weighted average common
shares outstanding-primary $8,100,000
-----------
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1994
Assets:
Current Assets $ -0- $ 228,648 $ - $ 228,648
--------- ----------- ---------- -----------
Total Assets -0- $1,203,802 $ 266,848 $1,470,650
--------- ----------- ---------- -----------
Liabilities and
Shareholders' Equity:
Current Liabilities $ -0- $ 122,782 $ 440,732 $ 563,514
Other Liabilities -0- 96,356 - 96,356
Shareholders' Equity -0- 984,664 (173,884) 810,780
--------- ----------- ---------- -----------
Total Liabilities and
Shareholders' Equity $ -0- $1,203,802 $ 266,848 $1,470,650
========= =========== ========== ===========
Net Revenue $ -0- $1,986,188 $ - $1,986,188
Cost of Revenue -0- 228,118 - 228,118
--------- ----------- ---------- -----------
Gross Profit -0- 1,758,070 - 1,758,070
Total Operating Expenses -0- 1,832,340 19,061 1,851,401
--------- ----------- ---------- -----------
Net Loss from Continuing
Operations -0- (74,270) (19,061) (93,331)
Net Loss from Discontinued
Operations -0- (35,879) - (35,879)
--------- ----------- ---------- -----------
Net Loss $ -0- $ (110,149) $ (19,061) $ (129,210)
--------- ----------- ---------- -----------
Net Loss Per Common Share:
Continuing Operations $ (0.02)
Discontinued Operations $ -
-----------
Net Loss Per Share-Primary $ (0.02)
-----------
Weighted average common
shares outstanding-primary 8,100,000
-----------
</TABLE>
The adjustments for 1995 reflects additional amortization of goodwill of $23,826
as if the acquired company, UCI, had acquired its two subsidiaries as of the
beginning of the period. The adjustments also reflect additional amortization of
$19,061 from 1994. The 1994 adjustments include net goodwill, amortization and
debt incurred by UCI in the acquisition. A subsidiary included above ceased
being part of the Company after December 31, 1995 (see Note 14).
F-8
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTE RECEIVABLE
Effective October 1, 1994, UCI sold, as the franchisor, two Ultrafit Centers
located in San Antonio, Texas for $475,000. The franchisee was required to pay
the $475,000 from available profits derived from the centers. As of December 31,
1995, the Company had not received any payments from the franchisee. Subsequent
to December 31, 1995, the Company took possession of the centers. One center was
sold for $100,000, the other was closed. The net book value of the equipment the
Company has repossessed is approximately $73,000. The Company was liable as
lessee of the two facilities sublet to the franchisee. To release itself from
any obligations relating thereto, the Company paid the landlord $20,000.
The statement of operations for the year ended December 31, 1995, includes a
charge to operations of $260,000 reflecting the write-down deemed necessary to
reflect the net realizable value of the note receivable. The note receivable is
shown on the Company's 1995 balance sheet as follows:
Note Receivable $ 475,000
Less: Allowance for uncollectibility (260,000)
----------
215,000
Less: Current portion $(100,000)
----------
115,000
=========
NOTE 4 - DEVELOPMENT COSTS
Development costs, net of amortization, are summarized as follows:
Amortization
AMOUNT PERIOD (YEARS)
------ --------------
Franchise development $220,200 7
Software development 7,190 5
Video development 14,693 3
--------
$242,083
========
NOTE 5 - JOINT VENTURE INVESTMENT
UCI opened a new Ultrafit Center in June 1995 pursuant to a joint
venture arrangement with Davlin Corporation (Davlin). As a 49% owner, the
Company is accounting for the investment under the equity method. Accordingly,
the investment is adjusted for dividends and 49% of earnings or losses. As
of December 31, 1995, the net investment amount is $20,927. The Company
is entitled to franchise royalties of 7% of gross revenues. The royalties
totalled $19,738 as of December 31, 1995, of which $3,681 was earned after
October 27, 1995 and is reflected in the statement of operations. The Company's
share of the joint venture loss as of December 31, 1995 was $39,960, of which
$14,568 occurred after October 27, 1995 and is reflected in the statement of
operations.
At December 31, 1995, the investment in Davlin exceeded the Company's share of
the underlying net assets by $36,575. The excess relates to property and
equipment and will be amortized against the Company's share of Davlin's net
income or loss on the straight-line method over the estimated useful lives of
the property and equipment beginning in 1996. Amortization is not charged to
operations in 1995 due to immateriality.
NOTE 6 - GOODWILL
On April 3, 1995, UCI acquired 100% of UFCI as follows:
ACQUISITION NET ASSETS
PRICE ACQUIRED GOODWILL
----------- ---------- --------
UFCI Acquisition $440,732 $154,823 $285,909
Less accumulated amortization 14,295
--------
$271,614
UFCI ceased being part of the Company after December 31, 1995, as more fully
discussed in Note 14.
F-9
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTE PAYABLE-BANK
Note payable to bank represents a loan made to UCI in the original amount of
$110,756. Principal is payable on demand. Monthly payments of principal and
interest in the amount of $3,000 is required. The loan has a stated interest
rate of 11% annually and matured on April 4,1996. The loan is collateralized
primarily by the equipment located at two of UCI's Ultrafit Centers. As of
December 31, 1995 the outstanding principal balance is $43,364.
The note was not paid in full at maturity, a balance of approximately $36,000
remained. The note was refinanced by way of a personal assumption of $25,000 by
the Company's principal shareholder (see Note 14). The remaining balance will be
paid by the Company over a period of six months from the original date of
maturity.
NOTE 8 - NOTES PAYABLE-OTHER
Notes payable-other consists of the following:
A. Upon the acquisition of UFCI by UCI, see Note 6, UFCI was issued a
$440,732 note payable. The note has no stated interest rate and was
scheduled to be paid in full upon its maturity date of April 3, 1996. The
note is collateralized by all the common stock of UCI, which shares are
held in escrow until the note is paid. The note is payable to related
parties (see Note 10A). The note obligation was settled subsequent to
December 31, 1995 as more fully discussed in Note 14.
$440,732
B. On April 3, 1995, UCI acquired the assets of an Ultrafit Center for a
total consideration price of $59,268 in the form of a note payable. The
note has no stated interest rate or collateralization and was scheduled to
be paid in full on April 3, 1996. The note obligation was settled
subsequent to December 31, 1995 as more fully discussed in Note 14.
59,268
--------
$500,000
========
NOTE 9 - INCOME TAXES
At December 31, 1995, the Company and its subsidiaries had net operating loss
carryforwards (subject to certain tax code limitations) of approximately
$575,000 available to offset future taxable income, if any, expiring in the
years 2008 through 2010. The effect of the future tax benefit, if any, has not
been recognized because of the Company's limited operating history.
NOTE 10 - RELATED PARTY TRANSACTIONS
Related party transactions are summarized as follows:
A. A principal officer and a director of the Company were the owners of
UFCI, acquired by UCI on April 3, 1995. Goodwill in the amount of
$285,909 related to the acquisition has been recorded. A note payable in
the amount of $440,732, referred to in Note 8A, is payable to the
aforementioned officer and the director.
B. A principal officer of the Company was the owner of NBI, acquired by
UCI on April 3, 1995 for $98,802. No goodwill related to the acquisition
has been recorded.
F-10
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.D.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIUDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTYB TRANSACTIONS (Continued)
C. Effective April 3, 1995, UCI entered into two service agreements, one
with its principal shareholder and one with a director of the Company.
Each will receive an annual compensation of $120,000 in exchange for
management services. The agreements terminated on April 3, 1996, at which
time only one was renewed for a period of two years at the same
compensation rate. The Company's president was also under contract to
manage operations through March, 1995. Total management fees paid by the
Company for year ended December 31, 1995 totaled $175,000, $40,000 of
which occurred after October 27, 1995 and is included in the statement of
operations.
D. On April 17, 1995, in an effort to stimulate franchise growth and
demonstrate a long-term commitment to the Company and the Ultrafit
concept, the Board of Directors approved a proposal entitling four Board
members to be eligible to each own single franchise center at a location
of their choice. The center would have to be operated within the
guidelines of the Franchise Agreement but no francise fees or royalties
would be paid to the Company. This option is a one-time opportunity only,
expiring on April 30, 2005.
NOTE 11 - SHAREHOLDERS' EQUITY
The Company is authorized to issue 3,000,000 shares of $.50 par value Preferred
Stock in one or more series. The Board of Directors can fix or alter the rights,
preferences, privileges and restrictions relating to dividends, conversion,
voting, redemption and liquidation without any further vote or action by the
shareholders. None has been issued to date.
The Company is also authorized to issue 2,000,000 shares of Class A, $.001 par
value, non-voting common stock having no voting, preemptive or conversion
rights. No such shares have been issued.
The Company is authorized to issue 20,000,000 shares of common stock, with a per
share par value of $.001. Holders of common stock do not have any rights of
redemption or conversion or preemptive rights to subscribe to additional shares
if issued by the Company. In the event of liquidation of the company, the common
shareholders are to share ratably in any distribution of the Company's assets
after payment of all liabilities, subject to the rights of the holders of
preferred stock.
During the Company's third quarter, a reverse stock split of 1 share for each
10 outstanding was effectuated. Total capitalization was unchanged.
On September 1, 1995, the Company entered into four consulting agreements
whereby in exchange for services to be rendered the consultants were issued
500,000 shares of common stock. The shares were registered on October 31, 1995
pursuant to a Form S-8 filing.
On October 26, 1995, the Company issued 350,000 shares of common stock in
exchange for services rendered.
The value of the services to be rendered for the 850,000 shares referred to
above is $85,000, said amount is reflected in the Statements of Sharenholders'
Equity. Services rendered through the year end was $64,000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under various operating leases. The monthly
lease obligations total $16,824. One of the leases requiring monthly payments of
$5,440 became effective after December 31, 1995. For the year ended December 31,
1995, the Company recorded rent expense of $116,396, $22,071 of which occurred
after October 27, 1995 and is included in the statement of operations.
F-11
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
At December 31, 1995 the aggregate future minimum lease payments are
as follows:
1996 $ 163,811
1997 201,891
1998 140,955
1999 75,160
2000 65,280
Thereafter 413,440
-----------
$1,060,537
===========
On August 8, 1995, the Company entered into a consulting agreement for
the purpose of establishing a franchise financing program to include Company and
franchisee locations. The agreement also includes a product support package
whereby the consultant will supervise construction, attend tradeshows and
develop vendor relations. The consultant was paid a $5,000 consulting fee and
shall receive a fee of 3% of funds obtained for the Company. The Company has the
option of paying a flat fee of $10,000 in lieu of the 3% fee. The consultant
shall be paid $500 per day, plus expenses, for work performed under the product
support package.
On December 4, 1995, the Company entered into three Executive Search Contracts.
The contracts obligate the Company to pay a recruiting fee of $25,000 for each
of three physicians which the Company hires through the efforts of the
employment agency. The contract term is for ninety days.
On December 20, 1995, the Company entered into a nine month agreement with an
organization that was to provide a broad range of services pertaining to
investor relations at a cost of $4,000 per month. The Company paid for one month
of service after which the agreement was terminated by the company for lack of
performance.
On December 26, 1995, the Company entered into a six month agreement whereby in
exchange for management consulting services the Company granted the consultant
warrants to purchase 700,000 shares of common stock. The warrants may be
exercised during a period of two years from the date of the agreementas follows
# OF COMMON SHARES
UNDERLYING WARRANTS PRICE PER SHARE
------------------- ---------------
200,000 $ 1.00
100,000 1.50
100,000 2.00
100,000 2.50
200,000 3.00
---------
700,000
=========
Subsequent to December 31, 1995, 300,000 shares were issued to the consultant to
have available for the exercise of the warrants of which 85,000 were exercised.
The Company adopted a bonus plan for its officers and directors, 10% of
net profits, if any, will be distributed annually. The Board of Directors
will determine individual bonuses payable equally between cash and common stock.
F-12
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LEGAL PROCEEDING
The Company was named as a defendant in a lawsuit in December 1995. The claim
alleges that in April 1995, a subsidiary of the Company (UCI) acquired the
assets and assumed certain liabilities of DPJ, Inc. (the entity referred to in
Note 8B) for a price far below its market value. The Company denies the
allegations and intends to vigorously defend its position. The Company believes
a judgment against it is highly doubtful and that it will prevail in the
litigation.
NOTE 14 - SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Company repossessed the
assets collateralizing a note receivable in the amount of $475,000. See Note 3.
Subsequent to December 31, 1995, the Company issued 300,000 shares of common
stock to the consulting group referred to in Note 12.
On January 25, 1996, the Company filed a Form S-8 Registration Statement
registering 705,000 shares of common stock which included the 700,000 shares
referred to in Note 12 and 5,000 shares issued subsequent to December 31, 1995
in exchange for legal services rendered.
On February 1, 1996, the Company entered into a consulting agreement for a
period of six months. In exchange for financial public relations services the
Company agreed to pay the consultant as follows:
$ WORTH OF FREE -
$ AMOUNT TRADING COMMON STOCK
-------- --------------------
Upon signing of contract $10,000 $ -0-
Within two weeks of contract date -0- 15,000 (7000 shares)
1st day of month two 10,000 15,000
1st day of month three 10,000 15,000
1st day of month four 10,000 10,000
1st day of month five 10,000 5,000
1st day of month six 10,000 5,000
-------- --------
$60,000 $65,000
The number of shares to be issued is determined by the average bid price for
five days prior to the beginning of the new contract month.
The agreement may be terminated by either party by providing written notice at
least five business days prior to the expiration of the current contract month.
On March 28, 1996, the Company issued 18,500 shares of common stock pursuant to
the consulting agreement.
On February 21, 1996, the Board of Directors approved a Directors Stock Option
Plan granting directors the option to acquire 110,000 shares of restricted
common stock, in the aggregate, at $1 per share. The plan is to remain in effect
for a period of two years.
On February 29, 1996, the Company issued 100,000 shares of restricted common
stock to a company Director in exchange for $100,000.
F-13
<PAGE>
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUBSEQUENT EVENTS (Continued)
On March 1, 1996, the Company entered into an equipment leasing contract which
requires sixty monthly payments of $706 each and contains a purchase option.
On March 4, 1996, 625,000 shares of common stock were issued to the company's
President. The shares were pledged as collateral on a $340,000 bank loan dated
March 5, 1996. The principal portion of the proceeds were used to make
operational a new fitness center located in Victoria, Texas. The loan is payable
in sixty monthly installments of $6,983 each through March 19, 2001 at an annual
interest rate of 8.25%.
On February 20, 1996, an agreement was reached between the Company and its
principal shareholder and one of its directors'. The agreement stipulates that
the Company exchange UFCI, which operates a fitness center located in Kerrville,
Texas (See Note 6), for the forgiveness of the two notes payable in the amount
of $500,000 referred to in Note 8. The principal shareholder,who will retain the
639,724 shares of restricted common stock issued to him as a result of the
Company's acquisition of UFCI, also agrees to assume $25,000 of the bank note
payable referred to in Note 7. Financial data relating to UFCI, the Kerrville
Center, (without the recognition of goodwill)as of December 31, 1995 and for the
year then ended is as follows:
AFTER DATE OF
ACQUISITION (10/27/95)
AS OF YEAR ENDED THROUGH
12/31/95 12/31/95 12/31/95
---------- ---------- ----------------------
Balance Sheet:
Assets $177,923
Liabilities $ 31,969
Shareholders' Equity $145,954
--------
$177,923
========
Statement of Operations:
Net Revenue $640,839 $132,611
Cost of Revenue 33,541 6,959
--------- ---------
Gross Profit 607,298 125,652
Total Operating Expenses 616,166 164,413
--------- ---------
Net Loss from operations $(8,868) $(38,761)
========= =========
Net Loss per common share NIL $ (0.02)
Weighted average number of ========= =========
shares outstanding 2,092,466 2,092,466
========= =========
F-14
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<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 48,776
<SECURITIES> 0
<RECEIVABLES> 137,910
<ALLOWANCES> 0
<INVENTORY> 37,496
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<PP&E> 302,752
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<CURRENT-LIABILITIES> 573,547
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<COMMON> 8,100
<OTHER-SE> 552,395
<TOTAL-LIABILITY-AND-EQUITY> 1,200,784
<SALES> 267,010
<TOTAL-REVENUES> 267,010
<CGS> 16,299
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 678,005
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<INCOME-PRETAX> (427,904)
<INCOME-TAX> (427,904)
<INCOME-CONTINUING> (427,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (427,904)
<EPS-PRIMARY> (0.20)
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