FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
Commission file number: 0-20654
HEALTHTECH INTERNATIONAL, INC.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Nevada 36-3797495
HEALTHTECH INTERNATIONAL, INC.
1237 South Val Vista Drive
Mesa, Arizona 85204
602-396-0660
Securities registered pursuant to section 12(g) of the Act:
Common Stock
Class A Common Stock Purchase Warrants
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 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. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
<PAGE>
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
As of December 31, 1996
Title Outstanding
Common Stock 7,337,588
Class A Common Stock Purchase Warrants 5,965,007
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Not Applicable.
Total number of sequentially numbered pages in this report 145. The Exhibit
Index begins on Page 51.
<PAGE>
Part I
Item 1. Business.
(general development of business)
HEALTHTECH INTERNATIONAL, INC., ("HealthTech," the "Company" or the
"Registrant") is a leading investor owned health care company. HealthTech owns,
operates and develops health care, wellness and fitness centers, for its own
account, which include state-of-the-art sports exercise facilities, advanced
sports training, primary medical and chiropractic care, advanced diagnostic
testing and therapeutic and post surgical rehabilitation. In addition the
company manufactures and markets health equipment and accessories and is a
management and consulting company to the fitness and health care industries
(collectively referred to as the "Core" business). The Company operates its
health clubs through individual wholly owned subsidiaries under the name
"Results Sports and Fitness." In December 1994, a new management team assumed
control of the Company and redirected its focus to become a vertically
integrated health care holding company. On February 8, 1995 the Company moved
its domicile for incorporation to the State of Nevada and in October 1995 the
Company changed to its present name from "USA Health Technologies, Inc." (under
which name the company was incorporated in Colorado in 1990). In the first
quarter of fiscal 1995 the Company's stock traded on the NASDAQ ( National
Association of Securities Dealers Automated Quotation System) A small cap market
under the symbol "Club," effective January 10, 1996 the Company's symbol was
changed to "GYMM" (for its common stock) and "GYMMW" (for its warrants). In
fiscal year 1995, the new management team divested certain businesses which were
identified as not having the necessary potential to complement and enhance the
Core line of business. These divestitures included sales of certain subsidiaries
which had: (i) interests and rights to make and sell a dual wheel drive mountain
sport bicycle (2 BI 2, L.P., (a Texas limited partnership); (ii) interest to
manufacture, market and sell the a line of computerized machines, the
"Evaluator" used in physical therapy and occupational evaluation therapy (sale
of Healthcare USA, Inc.); and, (iii) interests in manufacturing, marketing and
selling a proprietary line of motorized therapeutic beds used for rehabilitation
(sale of Inch by Inch, International, Ltd.). The effect of the fiscal 1995
divestitures was to create capital for the Company's growth and reduction of
debt in fiscal 1996 as well as allowing management to focus on more profitable
operations. In March of fiscal 1996 HealthTech paid debentures (approximately
$500,000 in Company debt) which were due in September 1995 for a payment of
$229,000.00 cash and $240,000.00 in restricted (under Rule-144) Company stock
valued at market price at the time of payment. Also based upon the stock price
at the time of the transaction and subsequent to fiscal 1996, the Company
exchanged 2.7 million shares of restricted (under Rule-144) Company stock for
the cancellation of a $500,000 note payable to FWY 405, Inc.
In addition to paying off or down debt, the Company also restructured the debt
on some of its facilities from short term loans to longer term financing at more
favorable market rates. The 87,000 square foot Midland facility was refinanced
at an interest of two percentage points over the banks prime rate. The fee for
the refinancing was one point. Before the refinancing, the Midland facility had
short term financing that required $100,000 principal payments every 60 days to
keep the loan current. The short loan on the 56,000 sq. ft. Fort Worth facility
was also re-negotiated such that half the existing short term loan was converted
to long-term debt at nine and one-half percent interest rate. Prior to putting
the long-term financing in place the loan on the Fort Worth facility was due
October 4, 1996. To further increase cash flow, in October of 1996 the Company
entered into an agreement with its Chairman and President whereby each would
forego their base compensation and where possible each agreed to be compensated
for performance on a commission basis for expansion and acquisition deals the
Company completes. The Board of Directors approved the commissions structure as
compensation for services rendered in the course of their duties and because the
plan was based upon reasonable management incentives to expand and grow the
Company's operations as well as an incentive for the key executives to remain
with the Company and provide continuity and management expertise necessary for
successful operations.
Company Structure / Strategy / Competition
Management's experience is that health club clientele rate cleanliness, the
variety of activities and exercise equipment, and the availability to
immediately use their desired work out equipment as the most desired factors
within their health club or when choosing a new club. HealthTech's operating
philosophy
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potential facilities that do not meet the customers needs and expectations are
renovated to accommodate and efficiently manage peak work-out traffic, equipped
with large amounts of the most popular fitness equipment (i.e., stair climbers,
tread mills and free weights) and remodeled to create environments that motivate
customers to join the clubs and regularly attend the facility to exercise as
well as for their general health needs. Discussed in more detail below, the
Company has entered into a joint venture whereby medical clinics now operate in
the health clubs, therefore HealthTech clientele can visit a HealthTech facility
for all of their general medical care, chiropractic care, X-ray and other
advanced diagnostics, blood testing, full service post surgical and therapeutic
rehabilitation, and several types of behavioral and educational counseling (i.e.
pain management, weight loss, etc.). Management believes the success of the
health care clinics in the clubs substantiates that clientele are looking for
health care centers rather than traditional health clubs.
HealthTech currently operates four health clubs that consist of approximately
200,000 square feet of indoor facilities and over another 80,000 square feet of
outdoor facilities, including tennis courts, cabanas, outdoor gyms, swimming
pools and spas for a total of almost 300,000 square feet of athletic and health
facilities situated on almost twenty acres of property. HealthTech's management
has structured the Company vertically to take advantage of key attributes of the
Company's management team, which recognizes that reducing high overhead
(construction, real estate and equipment costs) is a significant factor in the
success of individual clubs and health club companies. Health clubs are a
service industry unlike many in that they require physical facilities and
equipment in order for the service to be provided. If the cost of the facility,
whether to purchase or build is high it will create a significant stress factor
in the growth and profitability of that facility; HealthTech's management
recognizes this and through management's experience as real estate developers
pursue and structure acquisitions such that the clubs do not have to carry the
kind of high overhead that management knows will negatively impact operations.
In addition management looks to acquire clubs that are mismanaged and
undervalued that can be turned around with HealthTech's extensive management
expertise. During the last quarter of 1996, the Company installed new computer
membership management software within each of the four health clubs. This system
provides the ability to centrally manage the billing function at the corporate
office. This centralization will reduce billing expenses and improve reporting
and membership management within the clubs. In conjunction with the newly
acquired accounting system, operations will have access to real-time reporting
to improve management of the clubs. The new management systems also allow for
health club members to make payments to the Company through electronic fund
transfers directly from the clientele's bank account to the Company's account.
Management believes the addition of the in-house clinical services has profit
and cash flow potential far above what is typically generated at free standing
clinics because of the increased exposure to the services at the clubs as well
as clientele's proximity to the services. The results for the first quarter of
operations of the clinics exceed what is typically expected in the industry from
clinics of similar size.
In addition to its two major competitors discussed below the Company competes
generally with recreational facilities established by governments and
businesses, the YMCA and YWCA, racquetball and tennis clubs, country clubs,
weight control businesses and individually owned or privately held chains of
health clubs. However the Company believes that it has one of the strongest and
most experienced management teams in the industry as well as state of the art
facilities run by highly qualified staffs that give HealthTech an advantage over
its competitors.
HealthTech's largest competitor (Bally's) is concentrating on the development of
clubs 35,000 square feet or smaller that do not have a full complement of
amenities (known as a dry facility: no pool, steam room or possibly spa).
Although HealthTech is expanding its market segments to include youth and
seniors the Company's management has identified its core market segment as men
and women in their 20's, 30's and 40's and this segment of the market management
believes desires full service facilities which include pools, tennis, basketball
and outdoor activities, where possible, and light food and beverage at a
minimum. As already discussed above HealthTech, has also expanded its clubs
services to include chiropractic and primary medical services and, by doing so,
management believes it has created a new standard by which full service (or
"mega") clubs will be defined in the industry. HealthTech believes that it is
the industry leader in evolving health clubs into health care centers.
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HealthTech's most significant other competitor, The Sports Club Company, like
HealthTech, focuses on large super clubs that offer a great deal of variety to
their customers. The Sports Club's focus is to create what they call "Urban
Country Clubs" for which they charge a premium. HealthTech believes that its
concept of health care centers focuses on the expansion of income streams beyond
those normally associated with the fitness portion of the health care industry
to third party payments from health insurance companies and others. HealthTech
also believes its facilities can charge the same premiums its competitors do
because its facilities have many of the same amenities (pools, spas, racquet
sports, basketball, etc.) as the "Urban Country Clubs"
Another element of the Company's vertical integration is the wholly owned
subsidiary, Fitness Performance Inc. ("FPI") which distributes fitness and
health equipment and goods to the Company's own clubs, thereby decreasing the
cost of overhead/capital leases, and other health facility operations
domestically and internationally. FPI also provides management, systems,
construction and development consulting services to health care companies and
real estate developers in the United States and internationally.
Expansion and Acquisitions
In June, 1996, HealthTech acquired the Stark Street Athletic Club in Portland,
Oregon. The 17,000 square foot club includes fitness facilities and equipment,
strength training, aerobics, racquetball, tanning, child care and over 900
members. The club is now operated under the Results Sports & Fitness name
banner. The facility was purchased for approximately 69,000 shares of restricted
(Rule-144) Company stock and assumption of the approximately $460,000.00 in debt
including the first mortgage on the property. Management believes that while the
Portland facility is not the size of many full amenity clubs, which are the main
focus of the Company's acquisition strategy, the Portland facility will be
profitable because of the structure of the acquisition. Further the Company
plans to install a primary medical and chiropractic clinic in the club, which In
keeping with the Company's growth philosophy, will establish it as a full
amenity facility.
One of the ways the Company expands its Core line of business is to acquire
health and fitness clubs that are poorly managed and/or financially distressed
that management believes still contain characteristics that, once integrated
with HealthTech's management, will enable them to thrive, build their membership
base and begin to generate significant income. Turning around distressed
facilities often involves renovations, additional equipment leasing, re-training
existing staff and installation of medical clinics. The entire process requires
twelve to eighteen months before the health club is fully "turned around". The
newly acquired club in Portland, Oregon, and the Ft. Worth club (Results
Riverbend, Inc.) will soon complete the turnaround process.
In the third quarter of 1996, HealthTech entered into an agreement with ULTI-MED
Health Centers, Inc. ("ULTI-MED"), the nations second largest publicly held
chiropractic service company, whereby HealthTech provides clinic space in a
certain number of its facilities and ULTI-MED provides health care services to
patients and club members in those facilities. During the 5 year agreement,
ULTI-MED will develop, manage and operate general medical (including but not
limited to advanced diagnostics such as nerve conductive velocity testing,
electromyelograms, Doppler arteriograms and venous flow analysis), chiropractic,
therapeutic and post surgical rehabilitation clinics in HealthTech's facilities.
The agreement provides for ULTI-MED to pay HealthTech a one time, non refundable
fee, for the right to establish and operate the clinics. The income from the
clinics is HealthTech's and from the net profits of the operations the Company
pays ULTI-MED a percentage of the profits. At January 31, 1997 there were
clinics in two of the Company's facilities and HealthTech's medical revenues for
the first quarter of the operations were approximately $300,000 for December
1996 ($ 3,600,000 annualized) and approximately $500,000 for January 1997
($6,000,000 annualized). With the installation of the ULTI-MED clinics in the
Company's health clubs, the Company has embarked on expanding into full service
health care and has identified and captured income streams from third party
payors such as medical insurance, state funded workers compensation, corporate
and state funded managed care programs as well as no-fault and personal injury
claims.
<PAGE>
The Company acquired deferred advertising and broadcast air-time credits,
primarily in exchange for common stock. While the credits are not recognized as
currency in the United States they can be traded for various goods and services,
assigned, sold or transferred. Therefore the Company views the use of these
credits as the functional equivalent of cash (See discussion of the Primus
transaction below).The credits have expirations ranging from 5 to 10 years from
date of issuance of September 29, 1995, and January 1, 1994, respectively.
Management's strategy to fully utilize this asset is to: (i) use the credits as
an incentive to gain management consulting contracts; (ii) joint venture with
service providers, manufactures and distributors and use the credits as the
Company's capital contribution in joint ventures; and/or, (iii) sell the credits
to enterprises, including those which the Company is a participant, which desire
to market products over various television/radio networks. Because obtaining
management consulting contracts is a highly competitive business the Company
believes the advertising credits will give the Company an advantage over what
its competitors can offer. Therefore the Company's management believes that the
advertising time credits are an asset that augments the Company's vertical
structure by strengthening the management lines of business. Management
contemplates the Company will realize significant value when the advertising
credits are converted to capital contributions in the joint ventures it will
pursue. The Company's management believes that the broadcast air time credits
have a dollar value in excess of $7,000,000.00 and that after the use of
$5,400,000.00 worth of credits as part of the purchase price of Primus,
discussed below, the remaining balance of broadcast credits is approximately
$2,000,000.00. Please refer to the notes to the consolidated financial
statements for how the credits are treated for accounting purposes.
Subsequent to fiscal 1996 the Company entered into a definitive agreement with
Primus Health Care Systems. LLC ("Primus") whereby HealthTech acquires all of
the operating assets and liabilities of Primus through the purchase of all of
the outstanding stock of Primus' wholly owned subsidiary. Primus is a primary
contractor to ULTI-MED and operates and manages ULTI-MED's two health care
centers as well as two of its own clinics. HealthTech's management estimates the
value of the Primus acquisition at approximately $7,200,000.00 and for the
purchase price HealthTech will acquire: current assets comprised of medical and
chiropractic account receivables, fixed assets (equipment, fixtures and
furniture), management contracts for the two clinics Primus operates,
significant management expertise (including the services of Mr. J. R. Kirkham
who is the chairman of the board of ULTI-MED and general manager of Primus) and
the income stream associated with the operations. The purchase price for Primus
is made up of four components: (i) 500,000 shares of R-144 restricted stock;
(ii) 1,000,000 registered options to purchase HealthTech common stock at a
strike price of $1.00 per share; (iii) $3,000,000.00 worth of prepaid television
advertising credits; and, (iv) $2,400,000.00 worth of prepaid radio advertising
credits. HealthTech believes that the Primus acquisition will expand and
strengthen the leading edge industry position that the Company has taken in
establishing health centers.
Summary Overview of Operations and Business Development
In December 1994 when the new management took over, HealthTech had gross
revenues of approximately $600,000 in each of the prior fiscal years. During a
total of ten months of operation (six months with positive growth) under the new
management the Company reported revenues of over $2,670,000 in fiscal 1995. In
fiscal 1996 HealthTech is reporting revenues of more than double the previous
fiscal year at $5,700,000, almost a 1,000% increase over revenues prior to new
management taking over. The Company was able to more than double its revenue in
fiscal 1996 despite the fact that management still considers two of its
facilities in the "turn around" stage. As discussed above and/or disclosed
elsewhere in the Report and its exhibits, the Company has divested itself of
several non-performing subsidiaries, added another health club (which only has
several months operations in the reported gross revenue for the year),
significantly strengthened the management team, installed new accounting and
administrative systems and settled significant lawsuits that arose from the
prior management's stewardship. In addition, in fiscal 1996 the Company embarked
upon the development and operation of the health center concept with the
construction of its first two primary medical care clinics within its health
clubs, which did not come fully on line until subsequent to the fiscal year end
as well as having significant negotiations underway for the purchase of other
clubs (i.e. another club in the Dallas/FT. Worth and numerous other areas) and
companies, all of which management believes will significantly increase the size
and financial strength of the Company in fiscal 1997 if consummated. Based upon
revenues generated in the first months of operations of the two medical clinics,
management believes current clinic income could account for approximately an
additional $8,000,000 in annualized revenue.
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the current clinic performance is an indication of the revenue the medical
operations will yield, the annualized income of three clinics to be developed
(two more in presently owned facilities and one in a facility planned to be
purchased) could be $12,000,000. Additional clinic income could also be derived
from the Primus transaction discussed above. The Company has not done any
purchase due diligence on the two clinics operated by Primus, however, it has
reason to believe that Primus operates its clinics in a substantially similar
manner to the clinics in the Company's facilities and each could produce
approximately $5,000,000 in annual revenues. Based upon past performance, the
new and stronger management, the new systems in place and the consummation of
transactions that are contemplated and being actively pursued, HealthTech's
management has budgeted goals well in excess of $20,000,000 in revenues for
fiscal 1997 and very possibly 35 to 40 million dollars. This budgeted projection
is speculative and only the opinion of management, however, management believes
that it's current budgets are more realistic at this date than if the Company
had projected in fiscal 1994 that it would triple the prior years revenue in
fiscal 1995 and double 1995's revenue in fiscal 1996 as a short term goal.
Management
As a service company HealthTech's largest asset is its employees. HealthTech's
management believes that they have assembled one of the finest management teams
in the industry and as the Company grows will be able to train and hire
employees that will continue to strengthen and add value to the Company. Below
is a description of some of the experience of HealthTech's senior management.
Gordon L. Hall is Chairman of the Board of Directors and Chief Executive Officer
("CEO") of the Company and has over eighteen years of business experience in the
health and fitness industry, having developed over forty athletic and fitness
centers across the United States. Mr. Hall has also served as the Chairman and
CEO of several publicly held companies and operated his private real estate and
development companies which in the aggregate have been involved in over one
billion dollars of retail value commercial and residential real estate
transactions. Mr. Hall's other business experience includes being one of the
founding partners of Phoenix National Bank (which grew and was profitable
through the 1980's and was eventually purchased by Norwest Bank), the ownership
and development of golf courses, jewelry stores and construction companies.
Tim Williams is the President and a Director of HealthTech. Mr. Williams has
over 20 years experience in the health and fitness industry. In 1975, he
co-founded Nautilus Aerobics Plus and was instrumental in building the company
to 11 locations within seven years and employing in excess of 600 people.
Revenues for Nautilus Plus exceeded $16.8 million on an annualized basis. In
1982, Mr. Williams co-founded 24 Hour Nautilus Super Spas with Mr. Gordon Hall.
This chain dominated the northern California market in the 1980's and is now the
second largest health club chain in the United States. Mr. Williams was also a
founding partner of Nautilus Group Japan which distributes equipment in Asia
through Mitsubishi Corp. and franchises health clubs throughout Japan with
Sumitomo Corp.
Mr. Perry Dusch is Director of Health & Fitness Operations and been a Director
and the Secretary of the Company since December 1995. Mr. Dusch has been
involved in the health and fitness industry since 1978. His experience includes
the building of training facilities, as well as the operation of a personal
training program. Mr. Dusch is the Tri-State director of the National Federation
of Professional Trainers [NFPT]. Mr. Dusch is also a patent holder and fitness
infomercial provider.
Joseph R. Kirkham, Senior Vice President and President of the Medical Operations
Division, has been in the health and fitness industry for more than twenty years
and during most of that time has held senior and upper level management
positions with several of the Country's largest health club chains as well as
owning and operating health clubs for his own account. In the last five years
Mr. Kirkham has pioneered the health care center concept and in doing so has
taken Ulti-Med Health Care Centers, Inc. public, served as Director of the
Ulti-Med and is currently its Chairman of the Board of Directors. Under Mr.
Kirkham's direction Ulti-Med converted the health clubs it owned and operated
into primary medical care facilities three years ago. Mr. Kirkham has also
served as a consultant to Pinnacle Financial, an investment banking house
serving small public companies.
<PAGE>
Mr. Stephen Smith, as of the date of this Report, is Vice President of Finance
and Chief Financial Officer. Mr. Smith has over twenty-five years of managerial
experience, including an extensive private club background. A graduate of the
University of Texas at Dallas, Mr. Smith is a CPA licensed in Texas and Arizona
and is a member of the Arizona Society of Certified Public Accountants, the
Institute of Management Accountants and the American Institute of Certified
Public Accountants (AICPA).
In March 1996, Mr. Phil Hernon, a recent Mr. USA, became a member of the
Company's Elite Fitness Advisory Board. In addition to his duties on the Elite
Fitness Advisory Board, it is planned Mr. Hernon will be involved in programs
that increase HealthTech market share in the youth and senior markets and
involved in programs that will broaden the base of services already offered to
the existing club membership. Mr. Hernon will also be invited to attend and
represent HealthTech at regional and national trade shows.
It is contemplated that once finalized, the Primus acquisition will include
HealthTech hiring or entering into contracts for services with some of the
management of Primus in addition to Mr. Joseph Kirkham. Preliminary agreements
have been made between Dr. Mark A. Darner, D.C., one of the pioneers of the
health care center concept as well as the acting president and chief of staff of
ULTI-MED and David M. Kirkham vice president, treasurer and secretary of
ULTI-MED. Mr. D. M. Kirkham has been in the health and fitness industry for
seventeen years. He has been a regional manager for several large health club
chains and owned and operated two facilities for his own account. Each will
become an executive of HealthTech and be responsible for operations and
expansion of the Company's medical operations. In addition, Dr. Darner is
anticipated to become the Company's chief of staff as well as overseeing the
Company's clinic quality assurance programs.
The Company has approximately 140 employees which the Company believes must be
well trained and knowledgeable to keep the companies facilities operating
properly and growing. All new employees are trained in customer service, safety
and equipment and facility use. The Company conducts on going training classes
and workshops for management, sales people and trainers which are intended to
educate the Company's employees in the areas of customer satisfaction, human
resource management, physical asset management, risk management, sales and
marketing strategies and Company philosophy. All Company trainers must be
certified and instruct the new employees in the use of equipment and member
service with respect to equipment. All aerobics instructors are also required to
be certified and attend yearly workshops which focus on new and innovative
routines and injury prevention. Each club has three to seven sales people and
the Company places great emphasis on keeping the sales staff trained and
motivated. Many of the sales seminars and workshops are conducted by the
Company's senior management.
For a more detailed description of some of the Company's significant Employees
see Item 10 of this Report.
Government Regulations
HealthTech's domestic operations, like most companies, are subject to federal,
state and local regulations to varying degrees depending upon the specific
activity and location of the operation. Most states, including those states with
current operations and those which the Company plans to expand into have laws
with respect to consumer contracts that could apply to health club memberships.
These laws are generally referred to as "cooling off" statutes whereby a member
that just signed a contract for a membership would have a certain time to
rescind the contract and be reimbursed. HealthTech does not view the "cooling
off" laws as materially impacting its operations or contemplated growth.
With respect to the income derived from primary medical care and chiropractic
services management believes the "cooling off" statutes do not apply. The health
clinic income is primarily made up of private third party payers and patient pay
(including Blue Cross, Blue Shield and the like). The Company does not derive a
material part of its income from either Medicare or Medicaid programs which are
heavily regulated. The Company has focused on third party payer contracts for
two reasons: (i) the contracts pay higher rates for services then do Medicare
and Medicaid; and, (ii) the contracts are not subject to the same regulations
and restrictions as Medicare and Medicaid.
<PAGE>
World Wide Web Site
On August 28, 1996 HealthTech officially opened its new World Wide Web site on
the Internet. The address for the site is WWW.GYMM.COM. The comprehensive site
includes special areas for broker/dealers and investors as well as information
about the company's chain of Results Sports and Fitness Clubs for people
interested in joining a club in their area.
Investors can access general company and management information, current forms
10-Q and 10-K, all announcements, and special pages covering growth strategy,
market evaluation and frequently asked questions. Both club members and the
financial community have electronic access to the Company's Chairman and
President via their respective e-mail addresses (Gordon Hall, Chairman address
is [email protected] and Tim Williams, President, can be reached at
[email protected]
Item 2. Properties.
FACILITY NO. ONE
Results Sports and Fitness - Tucson
6444 East Broadway
Tucson, Arizona 85710
The Company owned facility is comprised of a 27,390 square foot health club
building (which includes: ten racquetball courts, cardiovascular equipment
rooms, a nursery, storage area, massage rooms, a weight lifting room, an
aerobics studio, two locker rooms with a sauna, whirlpool and steam baths), and
approximately 8,000 additional square feet surrounding the building which
includes an outdoor gym area and Junior Olympic swimming pool. Please refer to
the notes to the consolidated financial statements in the item 8. Financial
Statements and Supplementary Data of this Form for the amount of the mortgage
and capital equipment lease obligations associated with this property.
FACILITY NO. TWO
Results Sports and Fitness - Midland
225 Corporate Drive
Midland, Texas 79705
The approximately 87,000 square foot complex is owned by HealthTech and contains
a 56,004 square foot building that houses the fitness center and a 32,760 square
feet building housing indoor tennis courts. The club's amenities include
commercial offices, racquetball courts, snack bars, one lap pool, two smaller
pools, eight outdoor tennis courts, an exercise room and an aerobic room. The
facility is on approximately eight acres of land. Please refer to the notes to
the consolidated financial statements in the item 8. Financial Statements and
Supplementary Data of this Form for the amount of the mortgage and capital
equipment lease obligations associated with this property.
FACILITY NO. THREE
Results Sports and Fitness - Ft Worth
2201 East Loop 820
Ft Worth, Texas 76118
The Company owns the approximately 10 acre complex consists of approximately
57,500 square feet and is made up of a 55,084 square foot main building and a
2,400 square foot gazebo/cabana on the complex annex (approximately six acres).
The facility includes: saunas, cabanas, twelve tennis courts (two indoors),
racquetball courts, nutrition bar, one lap pool, two smaller pools, and exercise
rooms. Please refer to the notes to the consolidated financial statements in the
item 8. Financial Statements and Supplementary Data of this Form for the amount
of the mortgage and capital equipment lease obligations associated with this
property.
<PAGE>
FACILITY NO. FOUR
Results Sports and Fitness - Portland
14513 S. E. Stark Street
Portland, Oregon 97233
The Company owned Portland club consists of 17,000 square feet which offers
fitness facilities and equipment, strength training, aerobics, racquetball,
tanning, and child care and has over 900 members. The facility was refitted with
new equipment in December 1996. Also see Item 1.
CORPORATE HEADQUARTERS
1237 South Val Vista Drive
Mesa, Arizona 85204
Telephone: 602/396-0660
HealthTech's headquarters is in a stand alone multi-tenant office building. The
Company's suite of offices include executive, accounting, human resources and
operations that are occupied by the current staff of twelve. The facility is
leased from an affiliated and related entity (FWY). HealthTech is the anchor
tenant in building and as such had a lease agreement that included free rent
through December 31,1996. The Company's rent thereafter will be approximately
$7,500 per month subject to expansion within in the building.
PROPERTIES TO BE ACQUIRED IN PRIMUS TRANSACTION
The Primus acquisition will result in the Company having two addition clinic
facilities. The Primus facilities are health care centers that offer
chiropractic and primary medical care, as more fully described in Item 1.
above.
Item 3. Legal Proceedings.
HealthTech is not a party to any pending material litigation nor is the property
of the Company subject to any material proceedings or assessments. With respect
to disclosures required under Regulations S-K section 229.103 please refer to
Item 10 of this report.
Item 4. Submission of Matters to a Vote of Security Holders.
NONE
(In calendar year 1997 the Company will give notice to all shareholders of the
time and place of the fiscal '95 and '96 annual meetings which will be
combined.)
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information: The principal United States market for trading the
Company's common stock is the NASDAQ, "Small Cap" market. The following are the
high and low sales prices for the Registrant's common equity for each full
quarterly period for the past two fiscal years and are annotated as follows: (1)
The sales prices for this period are adjusted to reflect a 50:1 reverse stock
split. (2) In November, 1995 the Company split its stock units to allow separate
trading of the common stock and Class A warrants. In fiscal 1996 the Company
extended the expiration of the warrants several times and the last extension
will allow the warrants to remain valid through March 31, 1997. The strike price
for the warrants is one warrant plus $15.00 for one share of common stock. The
sales prices for this period reflect the common stock price less the warrant
price. (3) The sales prices reflect the price of only the common stock as traded
subsequent to the Class A Warrant split.
Quarter: High: Low:
Oct. 1, 1994 - Dec. 3 1, 1994 14 1/16 (1)(2) 4 11/16 (1)(2)
Jan. 1, 1995 - Mar. 31, 1995 9 3/8 (1)(2) 1 1/4 (1)(2)
Apr. 1, 1995 - Jun. 30, 1995 12 1/8 (2) 3 7/8 (2)
Jul. 1, 1995 - Sept. 30, 1995 10 3/8 (2) 4 5/8 (2)
Oct. 1, 1995 - Dec. 3 1, 1995 5 1/2 (3) 2 1/3 (3)
Jan. 1. 1996 - Mar. 31, 1996 5 3/4 (3) 2 (3)
Apr. 1, 1996 - Jun. 30, 1996 4 1/2 (3) 2 5/16 (3)
Jul. 1, 1996 - Sept. 30, 1996 3 15/16 (3) 1 9/16 (3)
(b) Holders: As of December 31, 1996, the holders of each class of common was:
7,337,588 common and 5,965,007 Class A Common Stock Purchase Warrants
(c) Dividends: There were no cash dividends declared on any class of its common
equity by the registrant for the two most recent fiscal years or any subsequent
interim period for which financial statements are required to be presented by
Section 210.3 of Regulation S-X.
Item 6: Selected Financial Data
The selected financial data below is presented under the captions "Statement of
Operations Data" and "Balance Sheet Data" as of the end of each of the years in
the five year period. The Company adopted September 30 as the end of its fiscal
year in fiscal 1993. The financial data presented for 1992 reflects the nine
months ended September 30, 1992.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
All references are to fiscal years and the financial statements presented in
Item 8 of this report are incorporated by this reference. The following
discussion should be read in conjunction therewith.
Overview
In 1996 the Company grew in size (assets and revenues) and in the health care
field (both health and fitness and medical operations). The comparability of the
results of operations between years presented is limited due to the following
changes in the Company:
A. The divestiture of the previous operations of the Company prior to mid-1995
B. The acquisition of three health clubs during various periods of fiscal 1995
C. The acquisition of a fourth health club during the quarter ended June 30,
1996
<PAGE>
The EBIDA analysis below is one method to measure the performance and status of
the Company at September 30, 1996. The EBIDA should not be considered an
alternative to any measure of performance or liquidity promulgated under
generally accepted accounting principals (GAAP) nor should it be considered as
an indicator of the Company's overall financial performance.
EBIDA is calculated as follows:
1996 1995
---- ----
Loss before income taxes and
extraordinary items ($538,640) ($1,555,753)
Interest expense 374,946 199,724
Depreciation & amortization 587,745 76,464
Earnings before interest,
depreciation and amortization $424,051 ($1,279,565)
Liquidity
At September 30, 1995, the Company's current ratio was 1:5; at September 30,
1996, the current ratio was 1:3 and the debt to equity ratio was 1:4. During
1996 the Company was able to improve the current ratio through successfully
restructuring short-term debt. In 1997, the Company will continue to seek out
financing and capital to support its growth and acquisition plans. Following
this course of action will also continue to reduce short-term debt and improve
the current ratio for 1997.
During 1996, working capital was greatly impacted through the payment of
$500,000 towards the retirement of debt on the Midland property. Due to the new
long-term financing on the property, these demands will not continue in 1997.
The Company successfully negotiated an extension of the loan on the Fort Worth
property. As a result of the terms of the extension, the Company will retire 50%
of the debt on the property in fiscal 1997. The Company is pursuing long-term
financing on the property which will provide significant, additional working
capital. In addition, the Company continues to seek additional financing at more
favorable rates on its other properties (see Notes to the financial statements
in Item 8.).
The Company significantly reduced the executive compensation expense component
of corporate overhead by converting from a cash and/or stock payments plan to a
commission-based compensation plan. The Company determined the new plan was a
reasonable management incentive that allowed the Company to retain the services
of the Chairman, CEO and President in 1996.
Based upon the foregoing and the other information disclosed in this Report, the
Company believes its cash flows are sufficient to meet its short-term cash
requirements. During the past two fiscal years, the Company has satisfied some
cash requirements through the issuance of the registrants common stock in
accordance with SEC regulations. Cash flows from operations were supplemented in
fiscal 1996 through the issuance of 857,053 shares of common stock, relieving
the obligations of approximately $1,200,000. The Company continued to grow
through the issuance of restricted stock as evidenced by the Portland Stark
Street acquisition (See note 3).
Results of Operations
The Company's revenues have grown substantially over the past two fiscal years
through the acquisition of existing health clubs and the expansion of operations
into medical services. Primary earnings per share increased from ($0.66) in 1995
to $0.10 in 1996.
The Company has recognized the continuing trend in the health and wellness
industry to alternative outpatient clinics away from traditional acute care
hospital settings. The Company's plan to capitalize on this trend is to add
outpatient medical services clinics to the four health clubs the Company
acquired in 1995 and 1996. The Company believes the two lines of operations
combined in a single facility enhance and compliment each other's profit
potential more so then if each operation were stand alone. In 1996 the addition
of medical clinic operations in the clubs positively impacted Company revenue.
<PAGE>
Starting in 1997, revenues generated through the clinic operations in the clubs
will be significantly reserved based on industry guidelines until the Company
has historical information with which to make adjustments. These reserves will
enable the Company to recognize adequate income from the medical operations
without the uncertainty of future write-downs. The Company has recorded gross
revenues from the operation of the clinic in Midland of approximately $700,000
in the first two and one half months of its operation. The addition of clinical
facilities in the remaining clubs are expected to have similar results and
expected to dramatically increase the revenues of the Company.
As of the date of this report, the Company has two clinics in operation and has
two concurrent plans for clinic expansion. The first plan is to build and equip
five additional clinics through the use of cash generated strictly from clinic
operations. The second plan is the acquisition of Primus (see Item 1) and other
companies which provide similar type services. The Company intends to continue
to fund its acquisitions through the use of Registrant's restricted common
stock.
Note - Debt to equity ratio is computed above by the formula - Debt to Equity
Ratio = Debt / Equity. Current ration is computed above by the formula - Current
Ratio = Current Assets / Current Liabilities.
<PAGE>
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders
HealthTech International, Inc.:
We have audited the accompanying consolidated balance sheet of HealthTech
International, Inc. (a Nevada corporation) and subsidiaries as detailed in Note
2 in the accompanying notes as of September 30, 1996 and 1995, and the related
consolidated statements of operations, cash flows and changes in shareholders'
equity for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of HealthTech International, Inc. and
subsidiaries as of September 30, 1994, and for the periods ended September 30,
1994, was audited by other auditors, whose report dated November 14, 1994 (who
has ceased operations), on those statements included explanatory paragraphs
describing conditions that raised substantial doubt about the Company's ability
to continue as a going concern and whose reports expressed an unqualified
opinion on these statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 HealthTech
International, Inc. and subsidiaries as of September 30, 1996 and 1995,
respectively, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3, the Company completed a statutory merger and
affected a name change from USA Health Technologies, Inc. (a Colorado
corporation) to HealthTech International, Inc. (a Nevada corporation) for the
purpose of changing the Company's domicile from Colorado to Nevada in fiscal
year ended September 30, 1995. In addition, in each period reported in the
consolidated financial statements, the subsidiaries and the related business
enterprises being consolidated have changed. Accordingly, the consolidated
financial statements presented are not comparable between years.
As discussed in Note 5 to the consolidated financial statements, the Company has
committed a significant portion of its assets to prepaid advertising credits.
Management intends to utilize these credits as barter trade dollars to be
exchanged for other assets or goods and services, and a portion for advertising
during the normal course of business. However, the ultimate realization of these
assets cannot presently be determined. Accordingly, no provision for impairment
to these assets has been made in the accompanying consolidated financial
statements.
As discussed in Note 12 to the financial statements, certain errors resulting in
understatement of previously reported accumulated deficit as of September 30,
1994, were discovered by management of the Company during the current year.
Accordingly, the 1994 financial statements have been restated to correct the
error.
Smith, Dance & Co.
Irving, Texas
February 11, 1997
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
ASSETS
1996 1995
---- ----
Current assets:
Cash and cash equivalents
(Note 1) .................................. 9,018 372,836
Accounts receivable - net of
allowance for doubtful accounts ........... 1,176,244 532,861
Inventories ................................. -- 100,930
Prepaid expenses ............................ 133,573 72,833
----------- -----------
Total current assets ...................... 1,318,835 1,079,460
Property, plant and equipment at cost,
net of accumulated depreciation of
$736,527 and $184,893 in 1996 and 1995,
respectively ................................ 13,023,246 12,142,750
Land held for resale .......................... 60,000 60,000
Prepaid advertising expenses and barter credits 7,320,597 7,394,948
Costs in excess of net assets acquired, net of
accumulated amortization of $196,167 and
$51,396 in 1996 and 1995, respectively ...... 1,385,932 1,435,954
Long-term certificate of deposit .............. 100,000 --
Non-current marketable equity securities
(Note 1) ..................................... -- --
Deferred tax asset ............................ 336,584 528,956
Note receivable related party ................. -- 184,000
Notes receivable - long-term (Note 6) ......... 750,000 50,000
Other assets, at cost, net .................... 219,696 14,036
----------- -----------
Total Assets .............................. $24,514,890 $22,890,104
=========== ===========
The accompanying notes are an integral part of thesefinancial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
---- ----
Current liabilities:
Current portion of notes payable
and capitalized lease obligations
(Note 9) ............................ $ 1,526,017 $ 3,869,299
Accounts payable trade ...................... 769,573 437,742
Accounts payable - related parties (Note 18) 259,981 302,343
Accrued expenses - other .................... 135,089 261,019
Deferred revenues ........................... 871,755 47,885
Other current liabilities ................... 429,299 138,010
------------ ------------
Total current liabilities ................. 3,991,714 5,056,298
Notes payable and capitalized lease
obligations less current maturities (Note 9) 1,686,330 600,058
------------ ------------
Total liabilities ......................... $ 5,678,044 $ 5,656,356
Commitments and contingencies (Note 16)
------------ ------------
Shareholders' equity (Note 11)
Series D Preferred stock, $.001 par value,
10,000,000 shares authorized, 21,200 shares
issued and 19,200 shares outstanding ...... $ 19 $ 19
Common Stock, $.001 par value, 500,000,000
shares authorized, 4,023,751 and 3,166,698
issued and outstanding for 1996 and 1995,
respectively .............................. 4,024 3,167
Additional paid-in capital .................. 25,860,070 24,630,838
Common stock subscribed ..................... -- 418
Net unrealized loss on non-current marketable
equity securities (Note 1) ................ (625,000) (625,000)
Accumulated deficit ......................... (6,402,267) (6,775,694)
------------ ------------
Total shareholders' equity ................ 18,836,846 17,233,748
------------ ------------
$ 24,514,890 $ 22,890,104
============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three-year Period ended September 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Revenues
Product sales, net ........... $ 1,647,109 $ 1,356,564 $ 666,348
Club revenues, net ........... 3,201,021 1,313,485 --
Operating rights (Note 6) .... 750,000 -- --
----------- ----------- -----------
Total revenues ............. 5,598,130 2,670,049 666,348
Operating expenses:
Direct ....................... 1,298,596 1,085,769 453,168
Selling, general and
administrative ............. 3,875,483 2,891,541 2,512,421
Depreciation and amortization 587,745 76,464 2,366
----------- ----------- -----------
Total operating expenses ... 5,761,824 4,053,774 2,967,955
Loss from operations ..... (163,694) (1,383,725) (2,301,607)
Other income (expenses):
Interest expense ............. (374,946) (199,724) (48,105)
Interest Income .............. -- -- 48,076
Loss on sale of interest
in affiliate ............... -- -- (261,887)
Other income ................. -- 27,696 --
Loss on repossession ......... -- -- (500,000)
----------- ----------- -----------
Total other income (expense) (374,946) (172,028) (761,916)
Loss before income taxes and
extraordinary items .......... (538,640) (1,555,753) (3,063,523)
Provision for income taxes ..... (183,137) (528,956) --
----------- ----------- -----------
Loss before extraordinary items,
net of tax ................... (355,503) (1,026,797) (3,063,523)
Debt forgiveness- related party
(Note 13) .................... 728,930 -- --
Gain on sale of assets ......... -- -- 1,243,358
Loss on discontinued operations -- (806,849) --
Gain on disposal of segment .... -- 962,398 --
----------- ----------- -----------
Net gain (loss) ................ $ 373,427 $ (871,248) $(1,820,165)
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
Three-year Period ended September 30, 1996, 1995 and 1994
Primary earnings per common share and common share equivalents (Note 1):
1996 1995 1994
---- ---- ----
Loss from continuing operations ... $(0.09) $(0.78) $(11.28)
Net Income from extraordinary items $0.19 $0.12 $4.58
Net Income ........................ $0.10 $(0.66) $(6.70)
Weighted average number of
common shares outstanding ....... 3,811,068 1,317,000 271,676
Fully diluted earnings per common share and common share equivalents (Note 1):
1996 1995 1994
---- ---- ----
Loss from continuing operations $(0.06) - -
Net Income from extraordinary items $0.13 - -
Net income $0.07 - -
Weighted average number of fully
diluted common shares outstanding 5,731,068 - -
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three-year Period ended September 30, 1996, 1995 and 1994
<TABLE>
Common Stock Preferred Stock Additional Net unrealized Deficit Total
Paid in loss on equity Retained Shareholders'
Shares Value Shares Value Capital securities Loses Equity
Subscriptions
<S> <C> <C> <C> <C> <C> <C> <C><C> <C>
Balance at October 1, 1993 7,058,063 $70,581 1,960,000 $19,600 5,513,959 - - $(4,084,281) $1,519,859
Stock issued for acquisitions:
Alpine 3,000,000 30,000 - - 4,470,000 - - - 4,500,000
National Health Network, Inc. 1,000,000 10,000 - - 990,000 - - - 1,000,000
MLS acquisition 3,750,000 37,500 - - 1,296,000 - - - 1,333,500
Four Star - - 200,000 2,000 - - - - 2,000
Less recissions:
MLS (3,750,000) (37,500) - - (1,296,000) - - - (1,333,500)
Four Star - - (200,000) (2,000) - - - - (2,000)
Alpine (300,000) (3,000) - - (3,889,400) - - - (3,892,400)
Stock for employees
& other services 5,040,000 50,400 - - 1,296,000 - - - 1,346,400
Sale of stock for cash 300,000 3,000 - - - - - - 3,000
Net Loss - - - - - - - (912,612) (912,612)
-----------------------------------------------------------------------------------------------
Shareholders' equity as stated
at September 30, 1994 16,098,063 160,981 1,960,000 19,600 8,380,559 - - (4,996,893) 3,564,247
Corrections of errors in prior
periods ( Note 12)
Revaluation of partnership - - - - - - - (261,887) (261,887)
Variance attributed to correction
of prior year issued and
outstanding stock (1,163,250) (11,633) - - 11,633 - - - -
Deferred tax asset - - - - - - - (645,666) (645,666)
----------------------------------------------------------------------------------------------
Adjusted balance of shareholders'
equity at September 30, 1994 14,934,813 149,348 1,960,000 19,600 8,392,192 - - (5,904,446) 2,656,694
Reverse stock split, 50 to 1, par (14,636,117) (146,361)(1,920,800)(19,208) 165,569 - - - -
-----------------------------------------------------------------------------------------------
Restated shareholders' equity
at October 1, 1994 298,696 2,987 39,200 392 8,557,761 - - (5,904,446) 2,656,694
Value change from $.01 to $.001 - (2,688) - (353) 3,041 - - - -
-----------------------------------------------------------------------------------------------
298,696 299 39,200 39 8,560,802 - - (5,904,446) 2,656,694
Cancellation of preferred stock - - (39,200) (39) 39 - - - -
-----------------------------------------------------------------------------------------------
Totals at September 30, 1994 298,696 299 - - 8,560,841 - - (5,904,446) 2,656,694
</TABLE>
The accompanying notes are an intergral part of these financial statements
<PAGE>
INTERNATIONAL, INCORPORATED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY Three-year Period ended September
30, 1996, 1995 and 1994
<TABLE>
Common Stock Preferred Stock Additional Net unrealized Deficit Total
Paid in loss on equity Retained Shareholders'
Shares Value Shares Value Capital securities Loses Equity
Subscriptions
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Totals at September 30, 1994 298,696 299 - - 8,560,841 - - (5,904,446) 2,656,694
Stock issued for acquisitions:
FWY 405 180,000 180 21,200 21 1,124,799 - - - 1,125,000
Holland 144,000 144 - - - - - - -
Equitas 1,150,000 1,150 - - 3,319,221 - - - 3,320,371
IFM 408,870 409 - - 4,210,933 - - - 4,211,342
Riverbend 650,000 650 - - 4,305,600 - - - 4,306,250
Less recission of
Holland acquisition (144,000) (144) - - - - - - -
Series D preferred stock
conversion (Note 11) 200,000 200 (2,000) (2) (198) - - - -
Issuance of stock for:
Consulting and management 104,992 105 - - 626,545 - - - 626,650
Acquire barter credits 17,308 17 - - 111,653 - - - 111,670
Settlements and debt payments 25,358 25 - - 173,492 - - - 173,517
Cash & other current assets 127,500 128 - - 598,613 - - - 598,741
Other services 3,974 4 - - 30,901 - - - 30,905
Stock subscribed for
Riverbend acquisition - - - - 1,568,438 418 - - 1,568,856
Unrealized loss on non-current
marketable equity securities - - - - - - (625,000) - (625,000)
Net Loss - - - - - - - (871,248) (871,248)
---------------------------------------------------------------------------------------------
Total Shareholders' equity at
September 30, 1995 3,166,698 3,167 19,200 19 24,630,838 418 (625,000) (6,775,694) 17,233,748
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
INTERNATIONAL, INCORPORATED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY
Three-year Period ended September 30, 1996, 1995 and 1994
<TABLE>
Common Stock Preferred Stock Additional Net unrealized Deficit Total
Paid in loss on equity Retained Shareholders'
Shares Value Shares Value Capital securities Loses Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Shareholders' equity at
September 30, 1995 3,166,698 $3,167 19,200 $19 $24,630,838 $418 $(625,000) $(6,775,694) $17,233,748
Stock issued for acquisitions:
Stark Street 69,018 69 - - 284,631 - - - 284,700
Issuance of stock for:
Consulting and management 42,047 42 - - 128,029 - - - 128,070
Settlements and debt payments 93,087 93 - - 227,272 - - - 227,364
Cash & other current assets 236,368 236 - - 589,301 - - - 589,536
Subscriptions 416,533 418 - - - (418) - - -
Net income - - - - - - - 373,428 373,428
---------------------------------------------------------------------------------------------
Total Shareholders' equity at
September 30, 1996 4,023,751 $4,024 19,200 $19 $25,860,070 $- $(625,000) $(6,402,266) $18,836,846
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income (loss) ......................... 373,427 871,248) (1,820,165)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ........ 587,745 76,464 12,666
Debt forgiveness (Note 13) ........... (1,104,439) -- --
Gain from sale of affiliate .......... -- -- (895,186)
Provision for doubtful accounts ...... 152,851 22,730 --
Sale of operating rights for note
(Note 6) ......................... (750,000) -- --
Issuance of common stock for
consulting fees .................... 79,329 626,650 --
Issuance of common stock
for services ....................... 48,742 30,896 --
Organization costs ................... -- -- 296
Gain from disposal of
discontinued operations ............ -- 962,398 --
Write-down of inventory .............. 100,930 -- --
Change in operating assets and liabilities:
(Decrease) in deferred tax asset ........ (192,372) (528,956) (104,710)
(Increase) in accounts receivable ....... (700,955) (73,596) (175,916)
Decrease in related party receivables ... -- 102,365 --
(Increase) decrease in prepaid expense
and other ............................ (27,706) 20,670 --
(Increase) in deposits .................. (30,770) -- (7,686)
Decrease in inventory ................... -- 79,913 298,030
Increase (decrease) in accounts payable . 331,831 (631,283) (71,279)
Increase (decrease) in accrued expenses . (21,491) (41,955) 180,623
Increase (decrease) in other current
liabilities ........................... 291,289 (264,902) --
Increase in deferred revenues ........... 823,869 47,886 --
Increase (decrease) in advance
vendor deposits ....................... (133,573) 17,684 341,618
---------- ---------- ----------
Net cash (used in) operating activities .... (171,293) (424,284) (2,241,709)
Cash flows from investing activities:
Acquisitions and dispositions of
consolidated and unconsolidated
subsidiaries - stock issuance .......... -- (367,485) 261,886
Acquisition of long-term certificate
of deposit ............................. (100,000) -- --
Decrease (increase) in other
long-term assets ....................... -- (35,140) 547,125
Acquisition of tradename ................. -- 58,526 (25,597)
Costs in excess of net
assets acquired ........................ -- 96,183 (66,468)
Acquisition of property, plant
and equipment .......................... (1,432,130) (109,656) --
Retirement of property, plant
and equipment, net ..................... 13,907 -- --
Acquisition of royalty ................... -- -- (17,458)
---------- --------- ---------
Net cash provided by (used in)
investing activities ..................... (1,518,223) (357,572) 699,488
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the Years ended September 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from financing activities:
Retirements of long-term receivables $50,000 $ -- # --
Retirements and payments of debt ... (1,714,335) (314,813) --
Proceeds from debt ................. 1,650,254 331,929 960,446
Proceeds from related party debt ... 841,772 297,556 --
Retirements of related party debt .. (319,311) (184,000) --
Issuance of common stock for cash .. 589,953 598,750 617,600
Issuance of common stock for
settlements & debt payments ...... 227,365 173,508 --
Deferred stock offering cost ....... -- -- (48,000)
---------- ----------- -----------
Net cash provided by
financing activities ............... 1,325,698 902,930 1,530,046
Net increase (decrease) in cash ...... (363,818) 121,074 (12,175)
---------- ----------- -----------
Cash and cash equivalents
at beginning of year ............... 372,836 251,762 263,937
---------- ----------- -----------
Cash and cash equivalents
at end of year ..................... $ 9,018 $ 372,836 $ 251,762
========= ========== ==========
Supplemental disclosure of cash flow information: Cash paid for:
Interest 487,876 71,865
Income tax -- --
The accompanying notes are an integral part of thesefinancial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the Year ended September 30, 1996, 1995 and 1994
1996
Supplemental schedule of non-cash and financing activities:
Purchase of 100% of the assets of Stark Street
Athletic Club in Portland, Oregon in exchange
for 69,018 shares of restricted (R-144) common stock $284,700
Issuance of 45,915 shares of free-trading common
stock in exchange for services ...................... $128,071
Issuance of 25,783 shares of restricted (R-144) common
stock in settlement of accounts payable ............. $117,518
Issuance of 67,037 shares of restricted (R-144) common
stock in partial settlement of senior debentures .... $109,847
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the Year ended September 30, 1996, 1995 and 1994
1995
Supplemental schedule of non-cash and financing activities:
Acquired $2,000,000 of assets of Freeway 405 encumbered by note payable of
$1,500,000 in exchange for 180,000 shares of restricted (R-144) common stock
warrants and 21,200 shares of Preferred Series D Cumulative, Convertible Stock
... $1,125,000
Purchase of 100% of the assets of Results Sports and Fitness in Tucson, Arizona
through the issuance of 260,569 shares of restricted (R-144) common stock
and 260,569 common stock warrants ..................... $ 752,335
Purchase Equitas assets including $2,500,000 in AIN air time and 12 acres of
land in Oklahoma City through the issuance of 886,648 shares of restricted
(R-144) common stock and 886,648 common stock warrants $ 560,000
Purchase of 100% of the outstanding shares of Fitness Performance, Incorporated
through the issuance of 2,783 shares of restricted (R-144) common stock and
2,783 common stock warrants ........................... $ 8,035
Purchase of 100% of the outstanding shares of IFM Investments, Incorporated to
obtain 100% ownership interest in the Midlander Athletic Club in Midland,
Texas through the issuance of 408,870 shares of restricted (R-144) common
stock and 408,870 common
stock warrants ........................................ $4,211,342
Purchase of Riverbend Sports Club in Ft. Worth, Texas
through the issuance of 1,067,800 shares of restricted
(R-144) common stock and 1,067,800 common stock
warrants. At the balance sheet date 418,000 shares
are presented as subscriptions ........................ $5,875,106
Conversion of Riatta Corporation debt to 2,000 shares of restricted (R-144)
common stock and 2,000 common
stock warrants ........................................ $ 10,114
Conversion of ITEX barter credits to 16,308 shares of restricted (R-144) common
stock and 16,308 common
stock warrants ........................................ $ 107,045
Conversion of barter credits to 1,000 shares of
restricted (R-144) common stock and 1,000 common
stock warrants ........................................ $ 4,625
Conversion of Pacific Coast Publishing Yellow Pages
advertisement to 3,840 shares of restricted (R-144)
common stock and 3,840 common stock warrants .......... $ 30,000
Issuance of 113,448 shares of free-trading common stock (S-8) and 113,448 common
stock warrants in exchange for services and payment of officers'
salaries .............................................. $ 626,650
The assets of the limited partnership were liquidated
on or about April 5, 1995, by the general partner .....
The Company received the bicycle inventory for the
Company's 20% interest in the partnership ............. $ 116,558
Unrealized loss on non-current non-marketable equity
securities ............................................ $ 625,000
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
For the Year ended September 30, 1994
1994
Supplemental schedule of non-cash and financing activities:
Common stock issued in exchange for services $ 400
Repossession of affiliate .................. $ 510,000
Common stock used for bonus plan ........... $1,346,000
Gain on sale of bicycle operation .......... $ 895,214
Trade note receivable for subsidiary ....... $2,250,000
Issue common stock for subsidiary .......... $1,000,000
Trade air time for product rights .......... $ 250,000
Trade barter dollars for air time .......... $1,000,000
The accompanying notes are an integral part of these financial statements.
<PAGE>
HEALTHTECH INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
---------------------------------------------
NOTE 1. BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Organization -
HealthTech International, Inc. (the Company), a Nevada corporation, was formed
February 8, 1995, for the purpose of being a holding company for subsidiaries
engaged in fitness, pre-employment testing, physical therapy and rehabilitation
businesses.
On March 10, 1995, the Company completed a merger with USA Health Technologies,
Inc. (USAHT), a Colorado corporation, for the purpose of changing the Company's
domicile from Colorado to Nevada. USAHT, the predecessor holding company, owned
certain subsidiaries which were engaged in manufacturing, marketing and sales of
physical therapy, pre-employment testing, rehabilitation and physical fitness
equipment (Healthcare, USA), had investments in commercial television air time
(National Health Network, Inc.) and investments in entities which had a special
line of bicycles (2 BI 2, L.P., (a Texas limited partnership)).
In December 1994, a new management team assumed control of the Company and
redirected the focus of the Company toward vertically integrating within the
health and fitness industry. The Company is no longer conducting certain lines
of businesses pursued by the previous management team due to the subsequent sale
of Healthcare, USA and Inch-by-Inch International, Inc. (Note 7).
Currently HealthTech International, Inc. and its wholly owned subsidiaries;
Results Sports and Fitness, Inc., IFM Investments, Inc., Fitness Performance,
Inc., Results Riverbend, Inc. and Results Stark Street, Inc. (collectively "the
Company") develop and operate health and fitness clubs and market and sell
fitness equipment.
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company, all
material wholly-owned and majority-owned subsidiaries. Investments in companies
in which ownership interests range from 20 to 50 percent, and in which the
Company exercises significant influence over operating and financial policies,
are accounted for using the equity method. Other investments are accounted for
using the cost method. All significant inter-company accounts and transactions
have been eliminated.
Cash Equivalents -
Cash equivalents include cash on hand, cash on deposit and all highly liquid
debt instruments with a maturity of less than ninety (90) days. The fair value
of cash and cash equivalents approximates their carrying amount.
Fair Value of Financial Instruments -
The carrying value of cash, receivables and accounts payable approximates fair
value due to the short maturity of these instruments. The carrying value of
short and long-term debt approximates fair value based on discounting the
projected cash flows using market rates available for similar maturities. None
of the financial instruments are held for trading purposes.
<PAGE>
Revenue Recognition -
The Company maintains its books and records on the accrual basis of accounting;
accordingly, revenues are recognized when earned and expenses are recorded when
incurred.
Certificates of Deposits -
Included in long term assets are certificates of deposits with maturities
greater than one year. On September 30, 1996, the Company had a $100,000
certificate of deposit which matures October 1, 1999, is pledged as collateral
on a note used to refinance the Midland club and is subject to restrictions on
withdrawal until the loan is repaid.
Property and Equipment and Depreciation -
Property and equipment are stated at cost. Depreciation and amortization is
computed primarily using the straight-line method over the following estimated
useful lives of the assets:
Buildings ............. 40 years
Machinery and equipment 5-7 years
Furniture and fixtures 5 years
Building improvements . 10 years
Capitalized leases .... 5 years
Leasehold improvements shorter of 10 years or
remaining term of lease
Expenditures for repairs and maintenance are charged to expense as incurred.
Expenditures for major renewals and betterments, which significantly extend the
useful lives of existing plant and equipment, are capitalized and depreciated.
Upon retirement or disposition of assets, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in income.
Depreciation and amortization expense in 1996, 1995, and 1994 was $587,745, and
$76,464 and $12,666, respectively.
Intangible Assets -
The purchase price in excess of the fair value of the net assets of the acquired
entities is being amortized on a straight-line basis over the period of expected
benefit of forty years. Total amortization recorded for fiscal years 1996, 1995
and 1994 was $35,561, $1,151 and $1,481, respectively. The Company periodically
evaluates the carrying value of its intangible assets and, accordingly,
considers the ability to generate positive cash flow through undiscounted future
operating cash flows of the acquired operation as the key factor in determining
whether the assets have been impaired. Should this review indicate that its
intangible assets will not be recoverable, the Company's carrying value of the
intangible assets will be reduced by the estimated shortfall of undiscounted
cash flows. The Company has not experienced an impairment of value of any of its
intangible assets as of September 30, 1996 and 1995, respectively.
Per Share Information -
Primary loss per common share has been computed based upon the weighted average
number of common equivalent shares outstanding. Primary and fully diluted
earnings per share have been presented separately for the period ended September
30, 1996, whereas for prior years presented, primary and fully diluted earnings
per share are the same since the Company has experienced losses for those
periods; dilutive common stock equivalents are excluded from the calculation of
loss per share as the effect would be antidilutive. The number of common and
common equivalent shares utilized in the per share computations were 3,811,068,
and 1,317,000, and 271,676 in fiscal 1996, 1995, and 1994, respectively.
<PAGE>
Basis of Presentation -
Certain financial statement items in prior years have been reclassified to
conform to the current year's format.
Inventories -
The Company accounted for its inventory by using the lower of cost or market
determined on a first in - first out method. All of the Company's inventory at
September 30, 1995, represented bicycles received as a liquidating distribution
from 2 BI 2, L.P. (Note 3). During fiscal year ended September 30, 1996 the
Company wrote off any remaining value of the bicycle inventory as worthless.
Accounting Estimates -
The preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Income Taxes -
The Company adopted the provisions of Financial Accounting Standards Board No.
109 (FAS 109) effective as of October 1, 1994. Under FAS 109, deferred income
taxes are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date. The application of FAS
109 did not have a material effect on the Company's consolidated financial
statements.
Non-current Marketable Equity Securities -
The non-current portfolio of marketable securities is stated at the lower of
aggregate cost or market at the balance sheet date and consists of common
stocks.
Realized gains or losses are determined on the specific identification method
and are reflected in income. Net unrealized losses on non-current marketable
securities are recorded directly in a separate shareholders' equity account
except those unrealized losses that are deemed to be other than temporary, which
losses are reflected in income.
On December 2, 1994, the Company acquired 5,000,000 shares of common stock of
the Equitas Group, a related party controlled by the Chairman of the Board.
Due to the restrictive nature of these securities and unavailability of market
quotes to determine the present market value, the Company has reflected the
total carrying value of $625,000 as unrealized loss on non-current marketable
equity securities as a separate component in shareholders' equity.
<PAGE>
NOTE 2. CHANGES IN SUBSIDIARIES BEING CONSOLIDATED
The consolidated financial statements presented for the periods ended September
30, 1994, 1995, and 1996, included the results of operations of the Company and
its wholly owned subsidiaries. The following indicates which subsidiaries were
consolidated for the appropriate periods:
September 30, 1994
Subsidiaries: Healthcare USA, Inc.
National Health Network, Inc.
Inch by Inch, Inc.
Healthcare USA, Inc. and Inch by Inch, Inc. were disposed of on May 3, 1995.
National Health Network, Inc. was liquidated and its assets distributed to the
Company in 1995.
September 30, 1995
Subsidiaries: Results Sports and Fitness, Inc.
Fitness Performance, Inc.
IFM Investments, Inc.
USPORTmex, Inc.
September 30, 1996
Subsidiaries: Results Sports and Fitness, Inc. (Tucson, Arizona club)
Fitness Performance, Inc. (seller of fitness equipment)
IFM Investments, Inc. (Midland, Texas club)
Results Riverbend, Inc. (Ft. Worth, Texas club)
Results Stark Street, Inc. (Portland, Oregon club)
Due to a changes in consolidated subsidiaries and their respective activities
for each of the periods reported, the consolidated financial statements are not
comparable between periods.
NOTE 3. MERGERS, ACQUISITIONS AND STRATEGIC INVESTMENTS
Exchange Agreement with Freeway 405, Inc. -
On December 2, 1994, an exchange agreement ("Exchange Agreement") was entered by
and between the Company and Freeway 405, Inc. ("FWY"), a privately held Wyoming
Corporation wherein FWY agreed to transfer to the Company certain assets
including: (i) $2,000,000 of television air time with American Independent
Network and (ii) 5,000,000 shares of common stock of the Equitas Group, a Nevada
Corporation, in exchange for (a) 140,000 units and (b) 21,200 shares of
restricted Series D cumulative convertible voting preferred stock of the Company
(each share convertible into 100 of the Company's units). The purchaser acquired
approximately 26% of the issued and outstanding common stock, and all of the
Series D cumulative convertible preferred stock of the Company. The closing of
the transaction occurred December 15, 1994.
The assets acquired were encumbered pursuant to security interests in the total
amount of $1,500,000 which bears interest at 9%. During fiscal year ended
September 30, 1996, $1,000,000 of this note was forgiven. In addition, all
accrued and unpaid interest totaling $104,439 was forgiven.
At the time of this exchange agreement, FWY and Equitas were unrelated to the
Company. Subsequent to the exchange, the Company, FWY and Equitas are considered
commonly controlled entities of Gordon Hall, Chairman of the Board; accordingly,
all subsequent transactions are considered related party transactions (Note 18).
<PAGE>
USA Health Technologies, Inc. Merger -
In March 1995, the Company completed a merger with USA Health Technologies, Inc.
(USAHT), (the Colorado corporation), whereby USAHT was merged directly into
HealthTech International, Inc. for the purpose of changing the domicile of the
corporation from Colorado to Nevada. Approximately 397,020 (reverse split
adjusted) shares of HealthTech were exchanged for all the outstanding common and
preferred stock of USAHT. Upon presentation to the transfer agent of the Nevada
corporation the existing certificates representing shares of common or preferred
stock or any other security of the Colorado corporation which was issued and
outstanding on the effective date of the merger will be overstamped to reflect
the merger. The merger has been accounted for as a pooling of interests. Since
the Company was organized for the purpose of effecting the merger, prior period
financial statements were not impacted, except that the number of shares
authorized was increased from 400,000 to 510,000,000 for all classes of stock
and par value of the stock was changed from $.01 to $.001. These changes have
been appropriately reflected in the accompanying financial statements.
Acquisition of Certain Equitas' Assets -
On April 15, 1995, the Equitas Group, Inc. a Nevada corporation, Perron Styles,
Inc., a Wyoming corporation and subsidiary of the Equitas Group, Inc.,
(collectively referred herein as Equitas) entered into an asset purchase
agreement whereby the Company acquired the following assets from Equitas: the
goodwill and all other valuable rights, title and interest to the business
commonly known as "Results Sports & Fitness" Health Club (Results) located in
Tucson, Arizona, including all of the buildings, leasehold improvements, leases,
fixtures, personal property and equipment which was held, owned, or leased by,
said business; a 12 acre parcel of raw undeveloped land near Oklahoma City,
Oklahoma; two million five hundred thousand dollars ($2,500,000) of television
air time credits with the American Independent Network; and a one hundred
percent ownership interest in all of the issued and outstanding common stock of
Fitness Performance Systems, Inc. (Fitness), a distributor of popular fitness
and exercise equipment manufactured by Flex Equipment of Corona, California.
(the aforementioned assets shall collectively be referred to herein as the
"Equitas assets"). The Equitas assets were purchased by the Company for
(1,150,000) of Rule 144 restricted units. At the time of the acquisition, the
market price per unit of free trading units of the Company was $5.50. Mr. Gordon
Hall, Chairman of the Company, is also the Chairman of the Board and has a
controlling interest, in Equitas Group, Inc. This transaction was between
related parties and was recorded at Equitas' historical cost and not at the fair
market value of the underlying assets acquired.
The net purchase price was allocated as follows:
Results Fitness Other Assets Total
------- ------- ------------ -----
Property and equipment, net . 1,671,093 $17,171 $ -- $1,688,264
Other assets ................ 81,123 361,241 442,364 --
Oklahoma property ........... -- -- 60,000 60,000
Prepaid advertising due bills -- -- 2,500,000 2,500,000
Notes and capitalized lease
payables .................. (788,067) (94,203) -- (882,270)
Other liabilities ........... (211,814) (276,173) -- (487,987)
---------- ---------- --------- ----------
$752,335 $8,036 $2,560,000 $3,320,371
========== ========== ========== ===========
The operating results of Results and Fitness have been included in the
consolidated statement of income from the date of acquisition.
<PAGE>
IFM Investments, Inc. Acquisition -
On June 5, 1995, the Company acquired all of the issued and outstanding shares
of IFM Investments, Inc. ("IFM") in exchange for 340,000 shares of the Company's
restricted units and the assumption of certain liabilities. The acquisition
consisted of the following:
Common stock issued to IFM stockholder .......................... $3,655,000
Common stock issued to satisfy debts ............................ 92,869
Direct costs of acquisition ..................................... 403,700
----------------------------------------------------------------- ----------
$4,151,569
In addition to the above, the Company is subject to an additional contingent
consideration based upon the realization of certain amounts by the former
stockholder of IFM. If total consideration of at least $900,000 is not realized
within two years from the stock received pursuant to share sales and an
associated consulting agreement, which calls for a $10,000 per month fee, up to
an additional 340,000 shares of the Company's common stock is issueable to the
former stockholder of IFM to satisfy the additional consideration. The
contingent consideration is not included in the acquisition cost total above but
will be recorded if the minimum of $900,000 has not been realized. Based upon
the stock price as of September 30, 1995, the contingent consideration is
estimated to be zero.
The acquisition has been accounted for using the purchase method of accounting,
and, accordingly, the purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair values at the date of
acquisition. The excess of the purchase price over the fair value of the net
assets acquired was $138,122 and has been recorded as an intangible asset, which
is being amortized on a straight-line basis over 40 years. The amount of
intangible asset amortization for this acquisition for period ended September
30, 1996 and 1995 was $2,302 and $1,151, respectively.
The net purchase price was allocated as follows:
Property and equipment ................. $ 5,334,758
Other assets ........................... 1,586
Costs in excess of net assets acquired . 138,122
Negative working capital other than cash (31,047)
Other liabilities and a note payable ... (1,291,850)
-----------
$ 4,151,569
The operating results of this acquired business has been included in the
consolidated statement of operations from the date of acquisition.
USPORTmex Acquisition -
On September 25, 1995, the company acquired all of the issued and outstanding
stock of USPORTmex, (a Mexican company,) in exchange for 2,833 shares of
restricted units of the Company. At the acquisition date, there were no
identifiable assets or liabilities of USPORTmex. Accordingly the entire
acquisition value of $14,459 was allocated to costs in excess of net assets
acquired and will be amortized on a straight-line basis over 40 years.
During 1996, USPORTmex would not voluntarily report operating results or other
appropriate financial information to the company. As a result, no financial
information has been included in these financial statements. During the second
quarter, the acquisition was rescinded by mutual agreement. All of the shares
the company issued relative to this transaction were returned to the Company and
canceled. The acquisition value was reversed in the Company's financial
statements as through the acquisition had not occurred.
<PAGE>
Riverbend Sports Club Acquisition -
On September 30, 1995, the Company entered into an agreement to purchase the
buildings, improvements, equipment, and the associated real property of the
Riverbend Sports Club (Riverbend) located in Ft. Worth, Texas. The acquisition
consisted of the following consideration:
Common units issued to Mar Court Investments, Inc.
650,000 units valued at $6.625 per unit $4,306,250
Common units issued subsequent to year end,
200,000 units to Mar Court valued at $3.625 per unit 725,000
Direct costs of acquisition issued subsequent to
year end, 217,800 units valued at the closing
bid price on date of issuance 843,856
-------------------------------------------------------------------------
$5,875,106
The acquisition has been recorded using the purchase method of accounting, the
excess of the aggregate purchase price over the fair value of the net assets
acquired was $1,284,526, and has been recorded as an intangible asset, which
will be amortized on a straight-line basis over 40 years. The amount of
intangible asset amortization for this acquisition for the period ended
September 30, 1996 and 1995 was $32,113 and $0, respectively.
In addition to the units issued, the Company executed a note payable to the
seller for $500,000 secured by the assets of Riverbend, which is due in monthly
interest payments of $3,958 per month at 9.5%. The entire unpaid principle and
any accrued interest was due October 1, 1996 (Note 9).
The net purchase price was allocated as follows:
Property and equipment ............... $ 3,977,063
Land and improvements ................ 1,129,199
Costs in excess of net assets acquired 1,284,526
Note payable due seller .............. (500,000)
Capitalize lease obligations assumed . (15,682)
-----------
$ 5,875,106
===========
Effective October 1, 1995, all of the assets and liabilities were exchanged for
the issued and outstanding stock of a newly formed corporation organized for the
specific purpose of owning the net assets and operating the Riverbend Athletic
Club.
<PAGE>
Stark Street Sports Club Acquisition -
On July 15, 1996, the Company purchased the building, improvements, equipment
and real property of the Stark Street Athletic Club located in Portland, Oregon.
The acquisition consisted of the following consideration:
Common units issued to seller - 69,018
valued at $4.125 $284,700
Debt and capitalized lease
obligations assumed 457,238
-------
$741,938
The acquisition was recorded using the purchase method of accounting and was
allocated to the assets acquired as follows:
Land $199,000
Building 507,012
Furniture, fixtures and equipment 26,981
Capital lease equipment 8,945
----------
$741,938
Effective as of the date of acquisition, all of the assets and liabilities were
exchanged for 100% of the issued and outstanding stock of a newly formed
subsidiary of the company, Results - Stark Street, Inc. (a Delaware
corporation).
The following pro forma financial data presents the Company's unaudited, pro
forma statements of operations for the year ended September 30, 1996, giving
effect to the consummation of the Stark Street, Inc. as if such transactions had
occurred on October 1, 1995. The unaudited pro forma condensed statements of
operations do not purport to represent what the Company's actual results of
operations would have been had such transactions in fact occurred on such date.
The unaudited pro forma condensed statements of operations also do not purport
to project the results of operations of the Company for any future period.
Period ended
September 30, 1996
Revenues $ 325,000
Operating expenses 230,000
-------
Income from operations 95,000
Other expenses 23,288
-------
Income before provision for income taxes 71,712
Provision for income taxes 0
-------
Net income $ 71,712
======
Net income per share $ .02
======
Weighted average number of common shares outstanding 3,811,068
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at September 30:
1996 1995
---- ----
Land ............................ $ 2,356,779 $ 2,007,778
Buildings and improvements ...... 10,143,167 9,636,155
Furniture, fixtures and equipment 1,259,827 683,710
Less accumulated depreciation
and amortization .............. (736,527) (184,893)
------------ ------------
Net property and equipment $ 13,023,246 $ 12,142,750
============ ============
Equipment under capital leases was $761,124, and $361,873 and accumulated
amortization was $196,167, and $51,396 at September 30, 1996 and 1995,
respectively.
NOTE 5. PREPAID ADVERTISING CREDITS
The Company acquired deferred advertising and broadcast airtime credits,
primarily in exchange for common stock, from related parties aggregating
$7,300,000. The advertising and broadcast credits were recorded at net
realizable value, based upon the seller's published rate cards at the date of
acquisition or the historical founder's cost as it relates to related party
transactions, whichever was lower. These credits have expirations ranging from 5
to 10 years from date of issuance of September 29, 1995, and January 1, 1994,
respectively.
These credits can be traded for various goods and services and they can be
assigned, sold or transferred. However, they are not recognized as currency in
the United States although they can be traded as such. The credits will be
amortized at the time the advertising is utilized or the exchange for goods or
services received will be recorded at the lower of fair market value of the
goods or services received.
Management also intends to enter into joint venture arrangements to market
various products. It is their intention to market these products over various
television/radio networks by utilizing a portion of these airtime credits.
However, if management is not successful in implementing the above strategies to
realize the recorded values of the credits and impairment of these assets are
realized, the Company will realize a significant and material reduction in its
overall equity.
NOTE 6. NOTE RECEIVABLE
During the period ended September 30, 1996, the Company entered into an
agreement with an unrelated third party to sell the rights to operate general
medical diagnostic, chiropractic, therapeutic, and post surgical rehabilitation
health care centers in each of its clubs up to a maximum of seven total
locations. Total consideration received in exchange for these rights was a
$750,000 non-refundable fee for the right to establish and operate the medical
centers. The fee is payable in the form of a collateralized note receivable
bearing interest at 9%, due September 29, 2001. The first year's interest was
prepaid and income recognition been deferred until earned. Interest for years 2
through 5 is due quarterly.
The fair value of this note approximates its face amount and is estimated based
on discounted cash flows using the Company's current risk-weighted interest
rate.
<PAGE>
NOTE 7. DISCONTINUED OPERATIONS
In the prior fiscal year, the Company sold two of its subsidiaries, Healthcare
USA, Inc. (HUSA) and Inch by Inch, International, Ltd. (IBI), which corporations
hold the trademark, patent application and other proprietary rights to the
Evaluator (TM) and to the continuing passive motion units ("CPM" units also
known as "toning tables"). At the date of disposition, IBI had filed a petition
for Chapter 11 bankruptcy protection and the purchaser agreed to assume the
assets and liabilities of both companies. The purchaser also received 2,000,000
shares of Bora Capital Corporation stock and $200,000 in prepaid advertising due
bills to be redeemed as air time credits upon the American Independent Network.
The Company realized a $962,398 gain on the sale. All taxes will be offset by
prior loss carry forwards that lapse upon the sale.
Summary operating results of discontinued operations, excluding the above gain,
for periods ending September 30, 1995, were as follows:
1995
Net sales ........................... $ 285,688
Cost of sales ....................... (216,175)
Operating expense ................... (876,362)
Income tax (Note 12) ................ --
---------
Net loss from discontinued operations $(806,849)
=========
NOTE 8. INCENTIVE COMPENSATION PLANS
The Company has an Incentive Compensation Plan which provides awards to
officers, employees and consultants of the Company, who, individually or as a
group, contribute in a substantial degree to the success of the Company. The S-8
registration dated June 1, 1996, allowed for the designation of 1,000,000 units
for awards pursuant to this plan. During the fiscal years ended September 30,
1996, and 1995, the Company issued 354,253 and 306,208 shares under this plan
for a value of $762,293 and $1,816,080, respectively.
NOTE 9. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as follows at
September 30,:
1996 1995
---- ----
Senior debentures (a) ............................ $ 63,500 $ 360,000
Results Sports & Fitness, Inc. (b) ............... 485,401 498,193
Freeway 405, Inc. note (c) ....................... 500,000 1,500,000
IFM note (d) ..................................... 791,000 1,228,784
Results Riverbend, Inc. note (e) ................. 500,000 500,000
Results Stark Street, Inc. note (f) .............. 399,792 0
Capitalized lease obligations (Note 10) .......... 418,254 281,952
Other notes payable .............................. 54,400 100,428
- -------------------------------------------------- ---------- ----------
3,212,347 4,469,357
Less current maturities ....................... (1,526,017) (3,869,299)
--------- ----------
$ 1,686,330 $ 600,058
=========== ==========
(a) In September 1994, the Company issued senior debentures, collateralized
by all of the assets of the Company, due in six months with an option
to extend maturity an additional six months as part of a private
placement of common stock. These notes originally bore interest at the
rate of 12% and at the holders option could be converted into common
stock. The Company exercised its option to extend payment until
September 1, 1995. Prior to maturity the debentures were re-negotiated
to mature on September 30, 1995, and the interest was increased from
12% to 17%.
<PAGE>
In February 1996, the Company and the debenture holders reached
agreements wherein the holders agreed to a cash and stock payment. Cash
of $194,000 was paid and 79,084 shares were issued. Most of the
debenture holders agreed to multiple cash payments, but the only
payment made by the Company was the first. As of September 30, 1996,
the Company still owed $63,500 on these agreements. No provision was
agreed upon for interest on the unpaid balance.
(b) The Results Sports & Fitness, Inc. note was assumed from the seller as
part of the Results acquisition. The note is secured by the club's
building and improvements. It bears interest at the rate of prime plus
2% and requires monthly payments of $6,065 with a balloon payment of
approximately $426,000 due on November 23, 1998. In addition to the
balloon payment due on November 23, 1998, the Company is also required
to make an additional payment of 14% of the outstanding principle which
approximates $59,920.
(c) The Freeway 405, Inc. (a related party) note was issued to facilitate
the Company's exchange of assets. The note was due on January 15, 1995,
and has a stated interest rate of 9% and is secured by certain assets
(Note 3). As of September 30, 1996, Freeway 405 forgave the Company of
all accrued interest and did not charge interest during 1996.
(d) For the period ended September 30, 1996, the IFM note was payable to a
bank in monthly installments of $9,416.00, including principal and
interest, at the bank's stated prime rate which approximated 9.25%.
The note matures September 27, 1999 and is secured by (1)50,000 shares
of the Company's common stock, (2) a $100,000 CD placed with the bank,
and (3) the real property owned by IFM. The loan is subject to a loan
agreement which contains several negative covenants, one of which
requires IFM to limit capital expenditures and the incurring of lease
obligations in any fiscal year to $25,000 and $10,000, respectively.
As of September 30, 1996, IFM was in substantial compliance with the
terms of this agreement. The prior year's note was assumed in
conjunction with the acquisition of the Midlander. The note was
secured by the land, building and improvements of the Midlander, and
bore interest at 14% and required monthly payments of $14,806. This
note was retired in full during fiscal year 1996.
(e) The Riverbend note was issued by a Corporation to facilitate the
Company's acquisition of the club. The note is secured by land,
building and improvements of Riverbend. The note bears interest at the
rate of 9.50%, and requires monthly interest payments of $3,958 with
the entire unpaid principal balance due, after extensions and
modifications, April 1, 1998. Principal installments of $250,000 are
due at various times during fiscal year ending 1997.
(f) The Stark Street note was assumed in conjunction with the purchase of
the Stark Street club. The note is payable to a bank in monthly
installments of $4,082 including variable interest ranging from 5 3/4 %
to 12 3/4 %. At September 30, 1996, the rate being charged was 11%.
Unless accelerated, subject to loan agreements, the note matures July
8, 2117. The note is secured by land, building and improvements of the
Stark Street club. This note was originated as an SBA loan and, among
other things, is subject to the rules and regulations of the SBA.
Except as stated in Note 16, the Company was in substantial compliance
with all of the provisions of the loan agreements.
<PAGE>
Aggregate maturities on long-term debt as of September 30, 1996 are as
follows:
Period Ending
September 30, Amount
------------- ------
1997 $1,526,017
1998 409,990
1999 1,237,508
2000 37,232
2001 1,600
Thereafter 0
----------
$3,212,347
Interest costs incurred for period 1996 1995
ended September 30, ---- ----
$ 358,704 $ 199,724
========= =========
The weighted average interest rate on short-term borrowings outstanding as of
September 30, 1996 and 1995 was 11.9% and 12.25%, respectively.
See Note 16 for additional commitments and contingencies.
NOTE 10. CAPITAL LEASE OBLIGATIONS
The Company leases various equipment under capital leases. The capital leases in
effect as of September 30, 1996, are scheduled to expire between the years 1997
and 2001. At the expiration of the lease terms, the Company may exercise options
to purchase the equipment for fair market value or a bargain value. Amortization
is computed by the straight-line method and has been included in depreciation.
Based on items leased as of September 30, 1996, monthly lease payments are
approximately $27,583. As of September 30, 1996 and 1995, the gross amount of
assets recorded under capital leases totaled $399,251 and 361,873, respectively.
Accumulated amortization related to those assets totaled $196,167 and $51,396 as
of September 30, 1996 and 1995, respectively.
<PAGE>
The total minimum future lease payments under these leases at September 30, 1996
are as follows:
Period ending
September 30,
1997 282,190
1998 113,659
1999 55,430
2000 35,401
2001 1,630
-----
Total minimum lease payments 488,310
Less amounts representing interest (70,056)
Present value of minimum lease payments $ 418,254
=========
In addition to the minimum lease payments, the Company is responsible for
insurance, taxes and maintenance of the equipment.
NOTE 11. EQUITY
Preferred Stock
Series A,B & C -
Shares of the Series A and B preferred stock was convertible into shares of
common stock upon the occurrence of certain events. Each share of Series A
convertible preferred stock was convertible into one share of common stock in
the event that the Company had a net income after taxes of at least $900,000 for
the year ended September 30, 1993. Each share of Series B convertible preferred
stock could have been converted into one share of common stock in the event that
the Company has a net income after taxes of at least $1,500,000 for the year
ended September 30, 1994. Two thousand (2,000) shares of Series C convertible
preferred stock were issued to the former shareholders of HUSA in the pooling
transaction. The Series C convertible preferred stock was convertible into such
number of shares which, when added to the eighty thousand (80,000) common shares
issued in the pooling transaction, would equal 80% of the total shares of the
Company's common stock issued and outstanding in the event that HUSA has a net
income before taxes of at least $1,000,000 during the fiscal ended September 30,
1994. To the extent that HUSA's net income before taxes is less than $1,000,000
a proportionate number of shares was to be issued. Each share of Series C
convertible preferred stock would have one vote per share and vote together with
the Company's common stock as a single class, and have a liquidation preference
of $.01 per share ($1,000 in the aggregate).
In conjunction with the exchange agreement between Freeway 405 and the Company,
the above preferred stock series were retired to the treasury and subsequently
canceled.
<PAGE>
Series D -
On December 15, 1994, a new series of preferred stock was authorized and issued
to Freeway 405 for 21,200 shares. The Series D cumulative convertible voting
preferred stock have preferential rights as to dividends declared or paid and
any possible voluntary or involuntary liquidation or winding up of the affairs
of the Company over all other classes of stock of the Company and are cumulative
in nature. The liquidation preference is at par.
Each share of Series D preferred stock is convertible into 100 fully paid and
non assessable units. Additionally, the holder of the Series D stock has voting
rights equal to 100 shares of the Company's common stock, together with the
Company's common stock as a single class of stock.
On December 29, 1994, the holder of the Series D stock converted 2,000 shares
into 200,000 of common.
Reverse Stock Split -
On March 10, 1995, the Company's board of directors authorized a fifty-for-one
(50:1) reverse stock split for all classes and series of the Company's issued
and outstanding stock and warrants.
On the same day, the Company's domicile was changed from Colorado to Nevada
(Note 2) and the par value of all classes and series of the Company's stock was
changed from $.01 to $.001. Shareholders' equity has been restated to give
retroactive recognition to the reverse stock split in prior periods by
reclassifying from the appropriate stock accounts to additional paid-in-capital
the par value of the reduction in the amount of the shares outstanding as a
result of the reverse split. In addition, all references in the financial
statements to number of shares, per share amounts, warrants and option data, and
market prices of the Company's common stock have been restated.
Warrants -
The Company issues its common stock as a unit of one (1) common share and one
(1) Class A purchase warrant. The strike price on the Class A warrant is $15.00
plus one warrant per share.
As of September 30, 1996, 1995, and 1994, the Company had outstanding warrants
of approximately 4,410,000, and 3,166,698, and 298,696, respectively.
To date the Company has not issued any stock due to an exercise of warrants.
Restricted securities -
In the prior two periods the Company has utilized a significant amount of
restricted Rule 144 stock to conduct its business expansion through
acquisitions, compensate employees and consultants, and pay for other business
transactions. Rule 144 stock is restricted for a 2 year period from the date of
issuance, at which time the security, under certain conditions, can be freely
traded. The following is a schedule of when previously restricted stock will be
eligible to become free trading during the periods ending September 30, 1997 and
1998:
1997 1998
Unrelated parties 1,407,967 -
Related parties (Note 16) 1,139,061 518,143
--------- -------
Total Shares 2,547,028 518,143
========= =======
The Company's float as of September 30, 1996 and 1995, was approximately
1,421,000 and 623,000 shares, respectively.
<PAGE>
Additional paid-in capital -
The additional paid-in-capital of the Company principally represents the excess
of fair market value of acquisitions made, assets purchased and services
received over par value of units issued for these transactions.
NOTE 12. PRIOR PERIOD ADJUSTMENTS AND ERROR CORRECTIONS
The accumulated deficit balance at September 30, 1995, has been restated from
the amount previously reported to reflect a correction of an amount reported as
deferred tax assets of $645,666. In accordance with FAS 109 relating to income
taxes, and based on the financial difficulties that the Company was experiencing
at the end of the last fiscal year, it was more likely than not that the tax
benefits generated would be utilized. FAS 109 requires a valuation allowance to
reflect the impairment of the tax benefit in such cases. Therefore the
accumulated deficit was adjusted by $645,666 to reflect the write-down of the
deferred tax asset.
In addition to the above, the accumulated deficit balance at period ending
September 30, 1995, has been restated from the amount previously reported to
reflect a correction in the amount reported as Investment in 2 bi 2, L.P. of
$378,445. Pursuant to a review of the balance sheets of this partnership for the
prior fiscal year and an analysis of the amount received as a liquidating
distribution from the partnership during the current fiscal year, the Company
has determined that this investment was overstated by $261,886. Accumulated
deficit for the prior period will be adjusted by this amount to reflect the
write-down of this investment account.
The balance of common stock and the number of shares outstanding at September
30, 1994, has been restated to account for a variance in the number of shares
issued and outstanding at the end of the year per previous 10K filings and the
number of shares outstanding per the transfer agents' report. The number of
shares issued and outstanding was stated at 321,961 versus the correct issuance
of 298,696 (split adjusted).
The accumulated deficit as previously reported at September 30, 1994, and as it
would have appeared at September 30, 1995, if no adjustments were made is as
follows:
1994 1995
---- ----
Accumulated deficit at October 1 .. $(4,996,893) $(4,084,281)
Net loss .......................... (871,248) (912,612)
---------- ----------
Accumulated deficit at September 30 $(5,868,141) $(4,996,893)
========== ==========
NOTE 13. EXTRAORDINARY INCOME (LOSS)
During September 1996, the Company received formal notice from Freeway 405,
Inc., a major shareholder of the Company and an entity controlled by Gordon
Hall, Chairman of the Board, that it would cancel $1,000,000 of the $1,500,000
note payable due to Freeway 405, Inc. Additionally, interest accrued during the
year ended September 30, 1995 totaling $104,439 was forgiven and no interest was
charged during any part of the year ended September 30, 1996. In accordance with
the "Statement on Financial Accounting Standards 4" (FAS 4), the Company has
reported this gain on the extinguishment of debt as extraordinary income, net of
the tax provision of $375,509.
During the year ended September 30, 1995, the Company discontinued operation of
its subsidiaries National Healthcare, Inc., Inch By Inch, Inc. and Healthcare
USA, Inc. and for the year ended December 31, 1994, the Company recognized a
significant gain on the disposal of assets (see Note , Discontinued Operations).
For both years, the gains and losses as outlined are reported as extraordinary
income.
<PAGE>
NOTE 14. INCOME TAXES
The net deferred tax asset (liability) consisted of the following components as
of September 30, 1996 and 1995:
1996 1995
---- ----
Deferred taxes relating to:
Timing differences:
Net operating loss carry forward $336,584 $528,956
Deferred tax liabilities ....... -- --
-------- --------
Net deferred asset .................. $336,584 $528,956
======== ========
The components giving rise to the net deferred tax asset described above have
been included in the accompanying balance sheets as of September 30, 1996 and
1995 are as follows:
1996 1995
---- ----
Deferred tax benefits $336,584 $528,956
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the period that deductible temporary differences are expected to
be available to reduce taxable income.
The provision for income taxes for the years ended September 30, 1996, 1995 and
1994, consisted of the following:
1996 1995
---- ----
Provision for income taxes
before extraordinary items ....... $(183,137) $ 528,956
Provision for extraordinary items .. 375,509 --
Deferred for income taxes (benefits) $ 192,372 $ 528,956
There have been no taxes paid during any of the years stated due to the
operating losses generated in 1995 and the subsequent utilization in 1996. All
deferred assets generated during the year ended September 30, 1994 and all years
prior were charged to income during fiscal year September 30, 1995 since they
relate to subsidiaries that were sold during the year. Internal Revenue
Regulations require a continuity of similar business operations in order to
maintain the tax benefits associated with net operating losses when subsidiaries
are disposed of. This continuity was not maintained when the former subsidiaries
were disposed and new ones acquired during the year ended September 30, 1995.
Federal tax regulations allow a fifteen year carry-forward of net operating
losses. Accordingly the deferred tax benefits listed above are set to expire in
the year 2011.
NOTE 15. CONCENTRATION OF CREDIT RISK
The Company markets its products principally to customers in the respective
markets where the Company's clubs are located. Management performs regular
evaluations concerning the ability of its customers to satisfy their obligations
and records a provision for doubtful accounts based upon these evaluations. The
Company's credit losses for the periods presented are insignificant and have not
exceeded management's estimates.
<PAGE>
NOTE 16. COMMITMENTS AND CONTINGENCIES
Contingent liabilities -
IFM acquisition contingency -
On June 5, 1995, the Company entered into a purchase agreement for all of the
issued and outstanding stock of IFM, Inc. Pursuant to this agreement and a
related consulting agreement, the Company agreed to pay the former stockholder
of IFM a consulting fee of $10,000 per month and guaranteed that in conjunction
with the consulting fees and sale of the stock, after the restriction period of
24 months, he would realize a minimum of $900,000. It is estimated that the
Company's stock would have to decrease to $1.94 per unit before additional
shares and/or consulting fees are due.
As of September 30, 1996, the Company ceased payments relative to the consulting
agreement due to nonperformance of the former shareholder under the terms of the
agreement.
Notes payable stock commitment -
Under terms of the loan agreement refinancing the Midland club, the Company
pledged, among other things, 50,000 fully paid and unrestricted shares of common
stock of HealthTech. If the value of these shares become less than $150,000 at
the end of any given calendar quarter, the Company is obligated to deposit with
the bank within 10 business days, additional fully paid and unrestricted shares
of common stock of HealthTech such that the value of all shares pledged is a
minimum of $150,000. As of yearend no additional share were required to be
pledged. The Company is also a primary guarantor under terms of the note which
at year end was $791,000.
Leases -
The Company has entered into a non-cancelable operating lease for land at its
Tucson club (Results). The term of the lease is for fifty years with the option
of three 10 year extensions. Future minimum payments are as follows at September
30, 1995:
Period Ending
September 30, Amount
------------- ------
1997 $ 48,672
1998 48,672
1999 48,672
2000 48,672
2001 48,672
Thereafter 2,348,424
Litigation -
A claim by the Comptroller of Public Accounts for the State of Texas against IFM
Investments, Inc., a wholly owned subsidiary of the Company, for $463,147 in
unpaid sales taxes, was made in the last quarter of calendar year 1996.
Management believes that this is an erroneous claim in that the unpaid sales
taxes relate to a period prior to their acquisition of IFM Investments, Inc.,
and that the liability is attributable to another entity which the Company does
not now, nor has at any time in the past, had any relationship to or affiliation
with. IFM is currently appealing this claim and management strongly believes it
will prevail in this case.
In June, 1996, a lawsuit was filed against the Company in the 201st District
court of Travis County, Texas, under Cause No. 96-03174, with such suit being
styled Stephen E. Chapman v. HealthTech International, Inc., et al. In the
lawsuit, the Plaintiff asserted stock fraud claims against the Company and other
parties that were formerly the management of the Company (no present management
personnel were sued). The Plaintiff claimed damages of between $1,000,000 and
$3,000,000. This lawsuit was settled on January 30, 1997. Pursuant to the terms
of the Settlement Agreement, the Company is not directly obligated to
<PAGE>
pay any sum to the Plaintiff. However, per the Settlement Agreement, the Company
has issued a contingent guarantee to the Plaintiff in the amount of $700,000 if
the Plaintiff does not realize at least this much out of future sale proceeds
from the company stock issued to him directly by the Company or by Gordon Hall,
Chairman. Based upon the number of shares available to the Plaintiff, management
believes it is remote that the Company will ever be required to pay any amount
under the terms of the guarantee. Accordingly, no reserve for this contingent
liability has been recorded.
Results Sports & Fitness, Inc. -
On February 1, 1996, the Pima County Treasurer obtained a lien against the real
property owned by the Company in Tucson, Arizona for nonpayment of property
taxes for 1994. On October 8, 1996, subsequent to year-end, the Treasurer
obtained an additional lien for 1995. The total lien amount, including interest
and penalties is $74,907.
Employment Agreements -
The Company has employment agreements with its executive officers, the terms of
which expired in December, 1995. Such agreements, provide for minimum salary
levels, as well as, compensation in the form of free trading Company units per
month. The aggregate commitment for future salaries at September 30, 1995, was
approximately $112,500. Also noted in Note 18, Related Party Transactions, the
Company owed the executive officers $262,269 in compensation as of September 30,
1995. Pursuant to agreements entered into by and between the Company and its two
highest ranking executive officers elected to forego the remaining amounts due
under these contracts in the period ended September 30, 1996.
Results - Stark Street, Inc. Loan -
As part of the acquisition of the Stark Street Club, the Company assumed a loan
originated through a local bank and the Small Business Administration. The loan
agreements contain a "due on sale" clause if the property is transferred without
prior written approval of the lending institution. Such approval was not
obtained in conjunction with the acquisition of the club. While the Company is
currently in substantial performance with other provisions and covenants
contained in the loan agreements, should the lending institution discover the
property was transferred without approval, the remaining unpaid balance could be
accelerated and become immediately due and payable. The remaining balance at
September 30, 1996, was approximately $399,792.
Going Concern and Management Plans -
The auditor's reports dated November 14, 1994, (who has since ceased operations)
for the period ended September 30, 1994, raised substantial doubt about the
Company's ability to continue as a going concern. This concern was raised due to
continuing losses and substantial doubts as to the realization of material
assets that, should the Company not realize such assets, the Company would be
insolvent.
The Company's consolidated financial statements for the period ended September
30, 1996 and 1995, respectively have been prepared on a going concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred a net
loss of $871,248 for the year ended September 30, 1995, and as of this same date
had a accumulated deficit of $6,775,694. Due to the change in controlling
ownership and management during that year, the Company has undertaken an
aggressive growth plan to vertically integrate in the health and fitness
industry.
Management recognizes that the Company must refinance most of its short-term
debt to improve its working capital which is a negative $2,672,879 and
$3,976,839 at September 30, 1996 and 1995, respectively. Management's plans
include consideration of the sale of additional equity securities under
appropriate market conditions, alliances or other joint venture agreements with
entities interested in and resources to support the Company's aggressive
expansion programs or other business transactions which would generate
sufficient resources to assure continuation of the Company's operations.
<PAGE>
The Company has retained investment banking counsel and advisors to advise it on
the possible sale of equity securities as well as to assist in the evaluation of
potential partnering opportunities. Management expects that these efforts will
result in a significant interest and opportunity to enhance its operations and
profit potential. However, no assurance can be given that the Company will be
successful in raising additional capital or entering into a business alliance.
Further, there can be no assurance, assuming the Company successfully raised
additional funds or enters into a business alliance, that the Company will
achieve profitability or positive cash flow.
NOTE 17. SUBSEQUENT EVENTS
Acquisition of West Hollywood Club -
On October 15, 1996, CGH Inc. (CGH), a newly formed, wholly-owned subsidiary of
the Company, entered into an agreement to purchase a club located in West
Hollywood, California for approximately $1,220,000. Prior to closing the
transaction, CGH discovered material operating requirements were not disclosed.
CGH elected not to close the transaction and canceled any shares which were
exchanged as part of the purchase agreement. The Company does not expect any
material, adverse ramifications relating to this transaction.
Exchange of stock for debt -
On December 4, 1996, FWY 405, Inc., the controlling entity of the Company,
forgave the remaining balance owed to it of $500,000 and any accrued interest in
exchange for 2,731,982 shares of the common stock of the Company. Subsequent to
this transaction, FWY 405 held 2,747,795 shares of common stock, representing
approximately 38% of the total issued and outstanding shares. After giving
effect to the conversion features of the Series D preferred stock, FWY 405 would
hold approximately 51% of the total issued and outstanding shares.
NOTE 18. RELATED PARTY TRANSACTIONS
The Company transacts business with several corporations that are owned or
controlled by the chairman of the board.
In conjunction with the exchange agreement with Freeway 405, the Company became
a controlled entity of Freeway 405, when considering the conversion features of
the Series D convertible preferred stock (convertible at 100:1) and the 180,000
shares received (Notes 2 and 10).
The Equitas Group, Inc. (Equitas), which is majority owned or controlled by the
chairman of the board, purchased 100% of the stock of 2 BI 2, Inc. from the
Company and contributed the assets to 2 BI 2, Ltd., a partnership which was 80%
owned by 2 BI 2, Inc. and 20% by the Company. The bicycle inventory of the
partnership was distributed to the Company as a result of the partnership
liquidation (Notes 1 and 11).
On April 5, 1995, the Company purchased certain assets from Equitas (Note 3).
During fiscal year ended September 30, 1995, Equitas and Seven H provided funds
to pay certain operating expenses of the Company. All of the Seven H funds were
repaid during fiscal 1995. The Equitas loans are detailed below.
Essex Park, Inc. (Essex), another corporation controlled by the Chairman of the
Board, entered in an agreement to purchase the assets of Riverbend from Whitman
Dome Energy Corporation (a debtor in possession) on August 15, 1995. Essex
subsequently assigned this contract to Mar Court Investments, Inc. (Mar Court),
a corporation located in Claveria, Azcapotzalco, Mexico, that is unrelated to
the Chairman, but for which the Chairman signed as an agent. On September 30,
1995, MarCourt sold Riverbend to HealthTech in exchange for stock and a note in
the amount of $500,000 (Note 3).
<PAGE>
At September 30, 1995, the Company had a note receivable due from a former
officer and stockholder of the Company for $184,000. During the period ended
September 30, 1996, a controlled entity of the Chairman of the Board of Rimpac
Inc. purchased this note at full face value. In addition, the Chairman also
purchased, for full face value, a note receivable of $50,000 from an unrelated
party but for which the Company was having difficulty collecting the balance
under terms of the note. Both purchases were used to offset amounts previously
advanced to the Company by these related parties.
In addition to the above, the following related party balances existed at
September 30, 1996:
Notes and accounts payable and accrued expenses -
Advances made to the Company by officers and controlled entities -
Tim Williams, President - advances made to
the Company or its subsidiaries $68,000
Gordon Hall, Chairman - advances to the Company, net 71,150
Equitas, Inc., controlled entity of Gordon Hall - advances, net 39,075
RimPac, Inc., controlled entity of Gordon Hall - advances, net 34,089
Essex Park, Inc., controlled entity of Gordon Hall, advances, net 47,667
-------
$259,981
The officers and controlled entities have not set repayment terms for these
advances as of year end.
Office lease -
The Company leases office space, furniture, fixtures and equipment from RimPac
for its corporate administrative offices. Total lease payments for the period
ending September 30, 1996 and 1995, was $0 and $44,590 respectively. Management
believes that this amount does not exceed fair market lease rates in the local
area.
<PAGE>
NOTE 19. INDUSTRY SEGMENTS
The Company classifies its products into two products: Health & Fitness centers
and Fitness Equipment Sales. Information about those segments for the year ended
September 30, 1996 and 1995 are shown below: No information is shown for 1994
since all current operating facilities in both segments were acquired during the
year ended September 30, 1995.
Health & Fitness
Fitness Equipment Consolidated
Centers Sales Total
------- ----- -----
Net sales to unaffiliated customers ...... %3,951,021 $1,647,109 $5,598,130
========== ========== ===========
Operating profit (loss) pretax ........... $(556,795) $18,155 $(538,640)
========== =========== ===========
Identifiable assets at September 30, 1996 $23,959,684 $555,206 $24,707,890
========== =========== ===========
Depreciation and amortization expense ... $582,321 $5,424 $587,745
=========== =========== ===========
Capital expenditures ..................... -- -- --
Interest expense ......................... $374,927 $19 $374,976
=========== =========== ===========
Operating profit is total revenue less operating expenses, other expenses and
interest. All general corporate overhead has been allocated to the health and
fitness centers since the fitness equipment sales segment operates entirely
autonomously from the other segment.
Identifiable assets are those used by each segment of the Company's operation
and corporate assets consisting mostly of cash which have been allocated
entirely to health & fitness centers because of the autonomous nature of the
fitness equipment sales segment.
Item 10. Directors and Executive Officers of the Registrant.
Directors of Registrant
Tim Williams, President
Term of Office as Director: December 5, 1994 to present.
Age: 42
For a more detailed discussion of Mr. William's background see Item 1. of this
Report
Gordon L. Hall, Chairman of the Board of Directors and Chief Executive Officer.
Term of Office as Director: December 5, 1994 to present.
Age: 43
In addition to Mr. Hall's experience discussed in Item 1. of this Report, Mr.
Hall has served in the capacity of Director, Chief Executive Officer, Chief
Operating Officer and/or President of the following corporations: (i) Eagle
Holdings, Inc., a Nevada public corporation, unaffiliated with the registrant;
(ii) September, 1992 to present: Equitas Group, Inc., a Nevada public
corporation, affiliated by way of Mr. Hall's controlling interest and currently
serving as a Director. (iii) FWY 405, Inc., a private Wyoming corporation, which
is a 5% beneficial owner of the registrant, per section 13(d) of the Securities
and Exchange Act of 1934 and affiliated to the registrant by way of Mr. Hall's
controlling interest and currently serving as a Director.
<PAGE>
On September 26, 1996, the Securities and Exchange Commission filed a civil
complaint against Mr. Hall and others in the U.S. District Court, Arizona. The
complaint and the SEC's allegations do not have anything to do with HealthTech
but arise from a non-affiliated company that Mr. Hall was the Chairman of from
September 1992 to October 1993 (and only maintained an office at the company for
approximately six of those months) prior to joining HealthTech. The issues
raised by the SEC revolve around the valuation of certain assets, the disclosure
of the value of assets and the alienation of the non-affiliated company's
restricted stock. The SEC is seeking to have any improper gains given up as well
as injunctive relief to limit the business activities of the defendants in the
action. Mr. Hall believes that the SEC's complaint is based upon misinformation
and believes that once the SEC and court have been supplied correct and good
information (including appraisals, internal documentation and other data) in and
during the course of the proceedings the matter will be settled. Mr. Hall has
properly responded to the SEC's complaint and will vigorously defend the action.
Perry Dusch, Director of Health & Fitness Operations and Secretary Term of
Office as Director: December 5, 1994 to present.
Age: 36
See Item 1. of this Report for a more detailed discussion of Mr. Dusch's
experience.
Executive Officers of Registrant
Gordon L. Hall
See Directors of Registrant, above, and Item 1. of this Report.
Tim Williams
See Directors of Registrant, above, and Item 1. of this Report.
Perry Dusch
See Directors of Registrant, above, and Item 1. of this Report.
Stephen Smith, Vice President and Chief Financial Officer
See Item 1. Of this Report
Nominees For Director
Gordon L. Hall
December 4, 1995 to present.
Additional information for Gordon L. Hall can be found in the section describing
directors of the registrant.
Perry Dusch
December 5, 1995 to present
Additional information for Perry Dusch can be found in the section describing
directors of the registrant.
Tim Williams December 5, 1995 to present.
Additional information for Tim Williams can be found in the section describing
directors of the registrant.
See Item 4. of this report for additional information.
<PAGE>
Significant Employees
Larry Brown was the Founder and President of the Hong Kong based International
Fitness Associates, Ltd. From 1980 to 1992. It was under his leadership that
International Fitness Association facilitated in the development, design,
management, consulting and/or FF&E procurement for over 130 clubs worldwide.
Among these clubs are the distinguished Royal Hong Kong Jockey Club, in which
modern American facilities and service standards were introduced into an old
colonial establishment. The Aberdeen Marina Club, a 3-year construction project
resulting in the consulting and management of a 300,000 square foot luxury
health and leisure center, Questo, one of Japan's largest and most comprehensive
suburban clubs; and most recently, the 6-year undertaking of consulting and
management of The Pacific Club, a I 10,000 square foot example of 5-Star
excellence
Doug Marquette has a comprehensive knowledge of operational, management and
sales philosophies, drawing on over 16 years of experience in the fitness
industry. As General Manager of Racquetball World & Aerobic Health Centers of
California (a chain of clubs up to 280,000 square feet and with construction
costs as high as $30 million per facility) he was responsible for the successful
operational planning and sales of each club. Under his management, Racquetball
World Fullerton was able to obtain 5,000 members prior to opening and achieved
an annual revenue of $4,200,000 by the second year. In addition, Sequoia
Athletic Club grossed in excess of $290,000 in one month, the most successful
sales campaign ever implemented in the chain. As the Assistant National Sales
Manager of Unisen, Inc. he innovated a team sales approach which resulted in an
annual sales increase from $800,000 to $1,500,000.
Monte Kleinmeyer has field extensive management positions with notable
organizations for 10 years. Among those positions were General Manager of New
Lire World, where he organized the development and pre-sales of 6 fitness
centers across the United States; Senior Sales Manager for The Los Caballeros
Sports Village, one of the top ten grossing clubs in the United States, where he
was directly responsible for the two highest sales years in the club's history;
and Sales Manager for Unisen, Inc., a $30 million annual cardiovascular
manufacturing and supply company prior to becoming affiliated with HealthTech.
Section 16(a)Beneficial Ownership Reporting Compliance
(The following people are directors, officers, beneficial owners of 10% or more
registered securities under section 12 of the Exchange Act or any other person
subject to section 16 of the Exchange Act that failed to file on a timely basis
Forms 3, 4 and/or 5 as required under section 16(a) of the Exchange Act)
Gordon L. Hall, Tim Williams and Perry Dusch all have transactions in fiscal
1996 which require the filing of Forms 4 and 5 and all contemplate that such
Forms will be filed subsequent to the filing of this Report.
Item 11. Executive Compensation.
SUMMARY COMPENSATION TABLE
Not applicable
Incorporated by reference to Part II, Item 11. Note (1) of Summary Compensation
Table to Registrant's Annual Report on Form 10-K dated March 1, 1996. (the
"Executive Compensation Plan") Messrs. Williams and Hall waived their right to
base salary (including the annual retainer fee) for fiscal 1996.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
Amount and
Name and Address Nature of Percent
Title of Class of Beneficial Owner Beneficial Owner of Class
Common Stock The Equitas Group, Inc. 659,158 17
1237 S. Val Vista Dr.
Mesa, AZ 85204
Preferred Series D FWY 405, Inc. 19,200 100
1237 S. Val Vista Dr.
Mesa, AZ 85204
Common Stock Marcourt Investments 850,000 22
Tebas 49, Col. Claveria
Azcapotzalco, Mexico D.F.
Common Stock International Financial Management 340,000 9
Estafeta El Dorado
Apartado 6-1097, Panama
The notes to the financial statements presented in Item 8 of this report and the
narrative in Item 13 of this report are both incorporated by this reference.
Item 13 Certain Relationships and related transactions
Gordon Hall, Chairman and CEO of the Company is also a director and officer of
FWY 405, Inc. ("FWY") a Wyoming corporation and the Equitas Group, Inc.
("Equitas") a Nevada corporation. Mr. Hall's status with FWY and Equitas may
give rise to him having a direct or indirect material beneficial ownership
and/or increased pecuniary interest in the Company by way of a December 5, 1995
stock exchange agreement by and between HealthTech and FWY, and a April 5, 1995
asset purchase agreement by and between HealthTech and Equitas. Mr. Halls
interests and status with the respective companies may also give rise to a
controlling interest in the Registrant. Whereas, prior to FWY's purchase of
Company stock there was no connection between the two entities, it is Mr. Hall's
belief and position that the FWY - HealthTech stock exchange agreement was an
arms length transaction. Whereas, the Equitas-HealthTech agreement was
subsequent to the FWY - HealthTech agreement it could be construed not to be an
arms length transaction, however, it is Mr. Hall's belief and position that the
transaction was fair and equitable. In addition to the foregoing, the RimPac
company and the Essex Park company have both made loans to the Company and
received loan payments from the Company. Mr. Hall is a director and/or officer
and/or shareholder or beneficial shareholder of both the RimPac and Essex Park
companies. Based upon the stock price at the time of the transaction and
subsequent to fiscal 1996, the Company exchanged 2.7 million shares of
restricted (under Rule-144) shares of Company stock for the cancellation of a
$500,000 note payable to FWY 405, Inc. As discussed in Item 2. of this Report,
the Company leases its headquarters office space from RimPac.
Prior to joining the Company Mr. Williams was a partner in the entity which
owned the Company's Tucson, Arizona club prior to it being sold to Equitas which
in turn sold the club to the Company under the terms of the April 5, 1995 asset
purchase agreement between the Company and Equitas. By way of the foregoing
transactions Mr. Williams received certain benefits including stock of the
registrant and money. In addition because of Mr. Williams relationships with the
different entities the forgoing transactions my not be construed to be at arms
length. Mr. Williams is also a vice president of Equitas.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on From 8-K.
(a) 1. Financial Statements
The consolidated financial statements to be included in Part II, Item 8, appear
at pages 15 to 24 of this report.
2. Financial Statement Schedules
All other schedules and Condensed financial Statements of Registrant are omitted
because they are not applicable, not required or because the required
information is included in the financial statements or notes thereto.
3.Exhibits
Exhibit 1. (3)(i) Articles of Incorporation
Incorporated by reference to Part IV, Item 14. of the Registrant's Annual Report
on Form 10-k for the fiscal year 1995 dated March 1, 1996.
(3)(ii) By-Laws
Incorporated by reference to Part IV, Item 14. of the Registrant's Annual Report
on Form 10-k for the fiscal year 1995 dated March 1, 1996.
Exhibit 2. (4) Instruments defining the rights of security
holders, including indentures
Incorporated by reference to Part IV, Item 14. of the Registrant's Annual Report
on Form 10-k for the fiscal year 1995 dated March 1, 1996.
See Material Contracts (10) below
Exhibit 3. (10) Material Contracts
Exhibit 3(a): Portland, Oregon Club Obligation, at page 52.
Exhibit 3(b): Midland, Texas Club Obligation, at page 70.
Exhibit 3(c): Fort Worth, Texas Club Obligation, at page 127.
Exhibit 3(d): Primus Acquisition Agreement, at page 139.
<PAGE>
Other material contracts are incorporated by reference to Part IV, Item 14. of
the Registrant's Annual Report on Form 10-k for the fiscal year 1995 dated March
1, 1996.
Exhibit 4. (11) Statement re computation of per share earnings:
See Item 7 of this Report
Exhibit 5. (12) Statements re computation of ratios See Item 7 of this
Report.
Exhibit 6. (21) Subsidiaries of the Registrant at page 141.
Exhibit 7. (23) Consents of experts and counsel at page 143.
Exhibit 8. (27) Financial Data Schedule
(b) Reports on Form 8-K
HealthTech filed no reports on Form 8-K during the last quarter of fiscal 1996
or as of the date of this Report.
<PAGE>
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.
HEALTHTECH INTERNATIONAL, INC.
By: /s/ Gordon L. Hall Date: February 11, 1997
------------------
Gordon L. Hall Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ Tim Williams Date: February 11, 1997
----------------
Tim Williams, President
By: /s/ Perry Dusch Date: February 11, 1997
---------------
Perry Dusch, Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: Gordon L. Hall Date: February 11, 1997
--------------
Gordon L. Hall, Chairman
By: /s/Tim Williams Date: February 11, 1997
---------------
Tim Williams, Director
By: /s/Perry Dusch Date: February 11, 1997
--------------
Perry Dusch, Director
Supplemental Information to he Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act
(c) No annual report or proxy material has been sent to the security holders. If
such report or proxy material is furnished to security holders subsequent to the
filing of the annual report on this Form, the Registrant shall furnish copies of
such material to the Commission when it is sent to security holders.
<PAGE>
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