SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File Number: 0-25064
HEALTH FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
3500 W. 80th Street, Suite 130, Bloomington, Minnesota, 55431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (612) 831-6830
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 18, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the last
quoted price at which such stock was sold on such date as reported by the Nasdaq
SmallCap Market, was $3,411,877.
As of March 18, 1999, 11,870,987 shares of the registrant's common
stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions
of the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders, to be filed within 120 days after the end of the fiscal year
covered by this report, are incorporated by reference into Items 10, 11, 12 and
13 of Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
Overview
Health Fitness Corporation and its wholly-owned direct and indirect
subsidiaries (collectively, the "Company") offers preventive health care
services and products to employers and insurers, including:
o The Company develops, markets and manages corporate and hospital-based
fitness centers;
o The Company's Preferred Therapy Providers of America (PTPA) business
operates a national network of independent physical therapy clinics,
representing network members in connection with marketing to and
negotiating with managed care companies, other third-party payors, and
corporations;
o The Company's Isernhagen business offers a comprehensive line of
occupational health, work injury prevention, and rehabilitation
programs and services; and
o The Company's International Fitness Club Network (IFCN) business
organizes and maintains a network of commercial fitness and health
clubs and markets memberships in such clubs to employers and insurance
companies.
The Company intends in 1999 to introduce a line of various health and
wellness products marketed under license from Bladerunner U.K. Ltd. The Company
is in the process of selling its 15 outpatient physical therapy clinics, and has
reported the results of these clinics as discontinued operations since September
1998. The Company is also in the process of selling its ProSource fitness
equipment business, and has reported the results of this business as
discontinued operations since December 1998.
The Company's executive offices are located at 3500 W. 80th Street,
Suite 130, Bloomington, Minnesota 55431 and its telephone number is (612)
831-6830.
Preventive Health Care Services and Products
Fitness Center Management. Corporate and hospital-based fitness centers
are emerging as important components of the preventive health care industry.
Many employers are undertaking fitness programs in an effort to reduce health
care costs, increase employee productivity and assist employees in managing
stress. In addition, fitness centers have become an important new source of
revenue for hospitals by providing significant inpatient and outpatient
services.
The Company provides a full range of development, management and
marketing services for corporate and hospital-owned fitness centers. The Company
generally manages all aspects of fitness center development, including fitness
center design and equipment selection and acquisition. All set-up costs,
including costs related to leasing and improving the site and acquiring the
equipment, are generally borne by the client. The Company also provides
consulting services, for which it receives consulting fees, for design and
consulting work with clients prior to the decision to establish a fitness
center. Once a fitness center is established, the Company generally manages all
aspects of fitness center operation and provides staffing services and exercise
programs and instruction. For its services, the Company receives a management
fee which is normally unrelated to fitness center membership. The Company
intends to offer its fitness center management clients certain fitness center
management software programs under an exclusive license from Bladerunner U.K.
Ltd. ("Bladerunner"), for which the Company will pay Bladerunner of royalty
equal to a percentage of the Company's gross profit on such sales.
<PAGE>
The Company's fitness center sales staff markets to corporations and
hospitals primarily through direct mail, telephone follow-ups and on-site
presentations to secure additional consulting and management contracts for the
Company. The Company currently utilizes a database with potential corporate and
hospital leads which meet criteria regarding the development of a center.
The Company currently is under contract to manage approximately 135
corporate and 8 hospital fitness centers located in 38 states. The Company also
provides "on-site" physical therapy services (i.e. treatment for musculoskeletal
(orthopedic) injuries or rehabilitation after surgery) at 10 fitness centers and
work sites in California, Georgia and Kentucky.
PTPA Network. The Company's subsidiary, The Preferred Companies,
negotiates managed care and other third-party payor contracts for a nationwide
network of over 825 independent physical, occupational and speech therapy
clinics throughout the United States. The Preferred Companies also provides
consulting and group purchasing services to its network members. Network members
generally pay a fixed annual fee.
Isernhagen Business. The Company's Isernhagen business is
internationally recognized in the field of comprehensive occupational health and
rehabilitative programs and services, including injury prevention education,
pre-employment screening, ergonomic analysis, risk control management, and
"safe" early return to work programs.
IFCN Network. The Company's IFCN is in the business of organizing and
maintaining a network of commercial fitness and health clubs and marketing
memberships in such clubs to employers and insurance companies.
Bladerunner Products. The Company expects to enter into a license
agreement with Bladerunner pursuant to which the Company will be exclusively
licensed to offer Bladerunner's line of health and wellness programs in North
America. These programs will be marketed to the Company's fitness center
clients, and include programs for stress management, smoking cessation, and low
back care. Each program includes the sale of printed materials and the provision
of training and consulting services. The Company will pay Bladerunner a royalty
equal to a percentage of the Company's gross profit from such programs.
Discontinued Operations
The Company continues to operate 15 outpatient physical therapy clinics
in Minnesota, Iowa and Nebraska, which the Company is in the process of selling
and which have been reported as discontinued operations since September 1998.
These clinics provide facilities, equipment and staff to patients who require
treatment for musculoskeletal (orthopedic) injuries or rehabilitation after
surgery. Patients are generally referred by physicians or third party payors.
Physical therapy offered at the Company's clinics includes a combination of
treatments including massage, exercise and aquatic therapy and the application
of heat, cold, ultrasound and electrostimulation. The Company employs licensed
physical therapists, assisted by aides and technicians, to provide physical
therapy services to individuals with musculoskeletal (orthopedic) injuries. The
Company has terminated its agreement with Practice Management Consultants, Inc.
regarding the acquisition of additional physical therapy clinics.
The Company is in the process of selling its ProSource fitness
equipment business. ProSource sells fitness equipment and repair and maintenance
services to the health clubs, fitness centers (including Company-managed fitness
<PAGE>
centers) and the public through two retail locations in the Minneapolis area.
The Company has reported its ProSource business as discontinued operations since
December 1998.
Competition
The preventive health care industry is highly competitive. Several
competitors providing fitness center management services have much greater
financial resources, operational experience, marketing abilities and name
recognition than the Company. The Company also competes on a regional level with
numerous independent operators of one or two corporate fitness centers. At the
present time, management of the Company does not believe that any significant,
formal or organized competition exists for the staffing, managing and
supervision of hospital fitness center facilities.
Proprietary Rights
Except for (1) certain copyrighted publications acquired by the Company
in its acquisition of the Isernhagen business, and (2) the fitness center
management software and health and wellness programs offered by the Company
under license from Bladerunner, the Company does not believe that there are any
significant proprietary rights or interests of the Company that would present
significant barriers to entry with respect to competitors in the marketplace or
competition for the business and clients of the Company's preventive health care
business.
Government Regulation
Although the Company believes that it will be subject to substantially
less governmental regulation after the Company sells its physical therapy
clinics, it is possible that government regulation will continue to have a
significant role on the Company's operations.
Statutes and regulations affecting the fitness industry generally have
been enacted or proposed to regulate the industry. Typically, these statutes and
regulations prescribe certain forms and provisions of membership contracts,
including provisions respecting the right of the member to cancel the contract
within, in most cases, three business days after signing, require an escrow of
funds received from pre-opening sales or the posting of a bond, or both, and
establish maximum prices for membership contracts and limitations on the term of
contracts. The Company believes that these statutes and regulations have little,
if any, application to the Company since it does not sell membership contracts.
The Company maintains internal review procedures intended to keep it in
compliance and it believes that its activities are at all times in substantial
compliance with all applicable statutes, rules and decisions.
Management of the Company believes that there currently is no
significant government regulation which materially limits the Company's ability
to provide management and consulting services to its corporate and
hospital-based clients. With increased state, federal and local regulation, no
assurance can be given that any governmental statutes or regulations will not be
proposed or adopted that would limit the Company's ability to compete in the
marketplace successfully or at all.
The Commission on Accreditation of Rehabilitation Facilities ("CARF")
is an independent organization that reviews rehabilitation facilities and
accredits facilities that meet its guidelines. CARF accreditation guidelines
require extensive quality assurance and treatment outcome analysis. To date,
CARF accreditation in most states is voluntary and is not required to perform
the rehabilitative services provided by the Company. There can be no assurance
that CARF accreditation will not be required in the future in states in which
the Company does business, and, if required, that the Company will be able to
meet CARF guidelines in such states.
<PAGE>
Employees
At December 31, 1998, the Company had 592 full-time and 1,636 part-time
employees engaged in the Company's continuing operations. Of the full-time
employees, 43 were engaged in general management and sales, 11 were Regional
Managers and 498 were fitness center or physical therapy clinic staff. The
Company's part-time employees are primarily engaged in the staffing of the
fitness centers that the Company operates for its clients. At December 31, 1998,
the Company also had 88 full-time and 25 part-time employees engaged in the
Company's discontinued operations. None of Company's employees are subject to
any collective bargaining agreements and the Company believes that its relations
with its employees are good.
Indemnification Obligations
A majority of the Company's management contracts with its fitness
center clients include a provision that obligates the Company to indemnify and
hold harmless its fitness center clients and their employees, officers and
directors from any and all claims, actions and/or suits (including attorneys'
fees) arising directly or indirectly from any act or omission of the Company or
its employees, officers or directors in connection with the operation of the
Company's business. A majority of these management contracts also include a
provision that obligates the clients to indemnify and hold the Company harmless
against all liabilities arising out of the acts or omissions of the clients,
their employees and agents. The Company can make no assurance that any such
claims by its fitness center clients, or their employees, officers or directors,
will not be made in the course of operating the Company's business.
Insurance
The Company maintains professional malpractice liability coverage on
its professional and technical employees in the amount of $1,000,000 per
occurrence and $2,000,000 in the aggregate per location. The Company also
maintains general premises liability insurance of $1,000,000 per occurrence and
$2,000,000 in the aggregate per location for each of its fitness centers and its
executive offices. While the Company believes its insurance policies to be
sufficient in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or at
a reasonable cost, and there can be no assurance that the insurance proceeds, if
any, will cover the full extent of loss resulting from any claims.
ITEM 2. PROPERTIES
The Company leases approximately 6,826, 2,003 and 1,138 square feet of
commercial office space in suites 130, 50 and 35, respectively, at 3500 W. 80th
Street, Bloomington, Minnesota 55431, under leases expiring July 31, 2001. The
Company's monthly base rental expense for these office spaces is approximately
$10,581, plus taxes, insurance and other related operating costs. Other
locations involved in the Company's continuing operations are leased for terms
of one to four years with an aggregate monthly base rent of approximately
$11,575. The Company believes that its facilities are adequate for its
foreseeable needs. The Company's discontinued operations are conducted in
locations under leases having terms of one to five years with an aggregate
monthly base rent of approximately $45,662; the Company anticipates assigning
its rights and obligations under these leases to the purchasers of the Company's
discontinued operations.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in various claims
and lawsuits incident to the operation of its business, including claims arising
from accidents or from the negligent provision of physical therapy services.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market
with prices currently quoted on the Nasdaq SmallCap Market under the symbol
"HFIT." The Company has been notified by Nasdaq that the Company fails to meet
the $1.00 minimum bid price and the $2 million minimum net tangible assets
criteria for continued listing on Nasdaq. In March 1999, the Company appeared
before a Nasdaq hearing panel to request additional time in which to achieve
such criteria. The Company is unable to predict the decision of such panel, and
the Company has been advised that the panel's decision could result in immediate
deletion of the Company's common stock from the Nasdaq SmallCap Market, without
further advance notice to the Company. The following table sets forth, for the
periods indicated, the range of low and high sale prices for the Company's
common stock as reported on the Nasdaq SmallCap Market.
Calendar Year 1998: Low High
Fourth quarter $.25 $1.00
Third quarter .38 1.25
Second quarter 1.00 2.00
First quarter 1.25 2.44
Calendar Year 1997:
Fourth quarter $1.50 $3.50
Third quarter 2.31 3.88
Second quarter 2.00 2.88
First quarter 2.38 3.13
At March 18, 1999, the published high and low sale prices for the
Company's common stock were $0.46875 and $0.375 per share respectively. At March
18, 1999, there were issued and outstanding 11,870,987 shares of common stock of
the Company held by 472 shareholders of record. Record ownership includes
ownership by nominees who may hold for multiple owners.
The Company has never declared or paid any cash dividends on its common
stock and does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company presently expects to retain any earnings to
finance the development and expansion of its business. The payment by the
Company of dividends, if any, on its common stock in the future is subject to
<PAGE>
the discretion of the Board of Directors, will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors. The
Company's current credit facility prohibits the payment of dividends.
During the quarter ended December 31, 1998, the Company did not sell or issue
any equity securities with or without registration under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected historical financial data with
respect to the Company and its subsidiaries. The data given below as of and for
the five years ended December 31, 1998 has been derived from the Company's
Audited Consolidated Financial Statements. Data for 1994, 1995, 1996, and 1997
has been restated to reflect discontinued operations as presented in 1998. Such
data should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto included elsewhere herein and with the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
------------- ------------- ------------- ----------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA:
REVENUE $25,643,000 $21,480,000 $16,500,000 $12,635,000 $ 3,876,000
INCOME (LOSS) FROM CONTINUING OPERATIONS (941,000) (943,000) 146,000 (254,000) (1,226,000)
INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Basic (0.08) (0.12) 0.02 (0.05) (0.40)
Diluted (0.08) (0.12) 0.02 (0.05) (0.40)
CASH DIVIDENDS PAID PER SHARE - - - - -
BALANCE SHEET DATA (AT DECEMBER 31):
TOTAL ASSETS 20,615,000 23,732,000 18,179,000 14,284,000 6,629,000
LONG-TERM DEBT 900,000 5,785,000 657,000 598,000 718,000
SHAREHOLDERS' EQUITY 5,844,000 10,148,000 9,892,000 7,399,000 4,082,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
Results of Operations
Years Ended December 31,
1998 % 1997 % 1996 %
--------------- ---------- --------------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE $ 25,643,000 100.0% $ 21,480,000 100.0% $ 16,500,000 100.0%
COSTS OF REVENUE 19,609,000 76.5% 16,580,000 77.2% 12,460,000 75.5%
------------ ----- ------------ ----- ------------ -----
GROSS PROFIT 6,034,000 23.5% 4,900,000 22.8% 4,040,000 24.5%
OPERATING EXPENSES:
Salaries 1,985,000 7.7% 1,799,000 8.4% 1,290,000 7.8%
Selling, general, and administrative 4,383,000 17.1% 3,789,000 17.6% 2,405,000 14.6%
------------ ----- ------------ ----- ------------ -----
Total operating expenses 6,368,000 24.8% 5,588,000 26.0% 3,695,000 22.4%
------------ ----- ------------ ----- ------------ -----
OPERATING INCOME (LOSS) (334,000) -1.3% (688,000) -3.2% 345,000 2.1%
INTEREST EXPENSE (667,000) -2.6% (277,000) -1.3% (185,000) -1.1%
OTHER INCOME (EXPENSE) 110,000 0.4% 67,000 0.3% 24,000 0.1%
------------ ----- ------------ ----- ------------ -----
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (891,000) -3.5% (898,000) -4.2% 184,000 1.1%
INCOME TAX EXPENSE 50,000 0.2% 45,000 0.2% 38,000 0.2%
------------ ----- ------------ ----- ------------ -----
INCOME (LOSS) FROM CONTINUING OPERATIONS $ (941,000) -3.7% $ (943,000) -4.4% $ 146,000 0.9%
============ ===== ============ ===== ============ =====
</TABLE>
<PAGE>
General. The Company is in the business of providing preventive health care
services and products to corporations and health care organizations. Preventive
health care services are integrated health management services that include the
development, marketing and management of corporate and hospital-based fitness
centers, injury prevention and work-injury management consulting and on-site
physical therapy.
The Company's revenues come from fitness center management and consulting
contracts, fees paid by employers, insurers and others for injury prevention and
work-injury management consulting and physical therapy services provided to
patients at corporate locations. The fitness center management and consulting
contracts provide for specific management, consulting, and program fees and
contain provisions for modification, termination, and non-renewal.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
Revenue. For the year ended December 31, 1998, total revenues increased
$4,163,000, or 19%, from the year ended December 31, 1997. The increase was
primarily due to the growth in new fitness center management contracts. The
Company added a net 20 corporate and hospital fitness center sites during 1998.
Gross Profit. Gross profit as a percentage of revenue for the year ended
December 31, 1998 increased .7 percentage points when compared to the same
period in the prior year. Gross profit dollars for the year ended December 31,
1998 increased $1,134,000, or 23%, from the year ended December 31, 1997. The
increase in gross profit dollars was primarily due to the increase in fitness
center contracts. The increase in gross profit percentage was primarily due to
more profitable hospital fitness center contracts being added during 1998.
Operating Expenses. Operating expenses for the year ended December 31, 1998
increased $780,000, or 14% from the prior year. Operating expenses, as a
percentage of revenue, for the year ended December 31, 1998 decreased 1.2
percentage points from 1997. The dollar increase was due to two non-cash
adjustments that occurred in September and December required to recognize bad
debt expense ($900,000) and reflect the net realizable value of certain assets
($415,000). Management believes that the adjusted asset amounts reflect the net
realizable value of these assets. Other operating expenses decreased $535,000,
or 10%.
Operating Loss. The Company had an operating loss of $334,000 for the year ended
December 31, 1998, a decrease in operating loss of $354,000 over the prior year.
The decrease was due to the sales and gross margin improvements in 1998 over
1997. The Company generated just under $1 million in operating income before the
one-time adjustments mentioned above in the Operating Expenses section.
Interest Expense. Interest expense for the year ended December 31, 1998
increased $390,000 from the prior year due to higher average borrowings and a
higher effective interest rate in 1998 versus 1997.
Income Taxes. Income taxes were calculated based on management's estimate of the
Company's effective tax rate and represent primarily state income taxes in 1998.
Deferred income tax benefit for the years ended December 31, 1998 and 1997 has
been offset by a valuation allowance.
<PAGE>
Loss From Continuing Operations. For the year ended December 31, 1998, the
Company had a loss from continuing operations of $941,000, a $2,000 decrease
from the prior year. The Company generated approximately $375,000 in income from
continuing operations before the adjustments mentioned above in the Operating
Expenses section.
Discontinued Operations. In August 1998, the Company formally adopted a plan to
dispose of its freestanding physical therapy clinics business segment ("the PT
clinic division"). The plan of disposal specifically targets a sale of
substantially all the assets of the PT clinic division to a major provider of
outpatient physical therapy services. The Company is in the process of
negotiating with potential buyers and estimates that a transaction will be
completed by June 30, 1999.
The PT clinic division loss from operations for the year ended December 31, 1998
includes only the results of operations for the PT clinic division for the eight
months ended August 31, 1998, the date the Company formally adopted a plan to
dispose of the PT clinic division. The loss from operations for the eight months
ended August 31,1998 was $1,461,000 and included revenues of $4,064,000.
Interest expense was $755,000 for the eight months ended August 31, 1998. A tax
benefit was recorded and has been offset by a valuation allowance for the eight
months ended August 31, 1998.
The PT clinic division incurred losses from operations of $363,000 for the year
ended December 31, 1997. The losses included revenues of $5,380,000 for the year
ended December 31, 1997. Interest expense included in the year ended December
31, 1997 was $313,000. A tax benefit was recorded and has been offset by a
valuation allowance for the year ended December 31, 1997.
The PT clinic division loss on disposal for the year ended December 31, 1998
includes a provision for operating losses during the phase-out period, September
1, 1998 to June 30, 1999, any projected shutdown costs and the expected net
realizable value from the sale of the division. The Company projects revenues of
$4,454,000 and operating losses of $2,561,000 during the phase-out period.
Interest expense included in the projected operating loss is $854,000. A tax
benefit was included in the projected operating loss and has been offset by a
valuation allowance. Potential shutdown costs are estimated at $561,000. The
Company expects a loss from the sale of the PT clinic division, including
shutdown costs of $2,091,000. Actual operating results through the date of
disposal and gain or loss on sale of the division may change from these
estimates.
In November 1998, the Company formally adopted a plan to dispose of its fitness
equipment business segment ("the equipment division"). The plan of disposal
specifically targets a sale of substantially all the assets of the equipment
division to a major supplier and retailer of fitness equipment. The Company is
in the process of negotiating with potential buyers and estimates that a
transaction will be completed by June 30, 1999.
The equipment division loss from operations for the year ended December 31, 1998
includes the results of operations for the equipment division for the eleven
months ended November 30, 1998, the date the Company formally adopted a plan to
dispose of the equipment division. The loss from operations for the eleven
months ended November 30, 1998 was $433,000 and included revenues of $6,674,000.
Interest expense was $182,000 for the eleven months ended November 30, 1998. A
tax benefit was recorded and has been offset by a valuation allowance for the
eleven months ended November 30, 1998.
The equipment division had income from operations of $259,000 for the year ended
December 31, 1997. The income from operations included revenues of $6,810,000
for the year ended December 31, 1997. Interest expense included in the year
ended December 31, 1997 was $61,000. Tax expense was recorded and has been
offset by a reduction in the valuation allowance for the year ended December 31,
1997.
<PAGE>
The equipment division loss on disposal for the year ended December 31, 1998
includes a provision for operating losses during the phase-out period, December
1, 1998 to June 30, 1999, any projected shutdown costs and the expected net
realizable value from the sale of the equipment division. The Company projects
revenues of $2,996,000 and operating losses of $622,000 during the phase-out
period. Interest expense included in the projected operating loss is $134,000. A
tax benefit was included in the projected operating loss and has been offset by
a valuation allowance. The Company expects the net realizable value from the
sale of the equipment division's net assets to approximate their book value.
Years Ended December 31, 1997 and 1996
Revenue. Revenue increased $4,980,000, or 30%, to $21,480,000 in 1997 from
$16,500,000 in 1996. The increase was primarily due to the annualized effect of
adding a net of ten corporate fitness center management contracts and three
hospital fitness center management contracts in 1996.
Gross Profit. Gross profit as a percentage of revenue for the year ended
December 31, 1997 decreased 1.7 percentage points when compared to the same
period in the prior year. Gross profit dollars for the year ended December 31,
1997 increased $860,000, or 21%, from the year ended December 31, 1996. The
increase in gross profit dollars was due to the increase in fitness center
contracts. The decrease in gross profit percentage was primarily due to the
addition of less profitable fitness center contracts in 1997.
Operating Expenses. Operating expenses for the year ended December 31, 1997
increased $1,893,000, or 51% from the prior year. Operating expenses, as a
percentage of revenue, for the year ended December 31, 1997 increased 3.6
percentage points over the same period in 1996. The dollar increase was due to
costs associated with the Company's growth strategy that required increased
personnel ($509,000), additional travel costs ($253,000), corporate name change
costs ($190,000), new acquisitions amortization costs ($210,000) and other costs
($165,000). Also included in the increase were professional and consulting fees
of $566,000 incurred to assist the Company in preparing its plan for future
growth.
Operating Income (Loss). The Company incurred an operating loss of $688,000 in
1997 compared to operating income of $345,000 in 1996. The decrease of
$1,033,000 from 1997 to 1996 was due to the increase in operating expenses.
Interest Expense. Interest expense increased from $184,000 in 1996 to $277,000
in 1997. The increase in interest expense was due to the higher average
borrowings and interest rates in 1997 when compared to 1996.
Income Taxes. Income taxes were calculated based on management's estimate of the
Company's effective tax rate and represent primarily state income taxes in 1997.
Deferred income tax benefit for the years ended December 31, 1997 and 1996 has
been offset by a valuation allowance.
Income (Loss) From Continuing Operations. The Company's loss from continuing
operations of $943,000 in 1997 was a decrease of $1,089,000 from the Company's
income from continuing operations of $146,000 in 1996. This decrease was due to
increased operating expenses as discussed above.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $843,000 to ($1,457,000) at December 31,
1998 from the prior year-end, excluding $6.9 million under the Company's
revolving credit facility that is now classified as a current liability. For the
year ended December 31, 1998, the Company used $1,667,000 of cash in operating
activities as compared to $838,000 for the same period in 1997. The increase
in usage was primarily due to the increase in net loss in 1998 from 1997.
On June 4, 1998, the Company completed the acquisition of all the issued and
outstanding stock of closely held David W. Pickering, Inc. (DWP), a Rhode Island
corporation doing business as International Fitness Club Network (IFCN). IFCN is
in the business of organizing and maintaining a network of commercial fitness
and health clubs and marketing memberships in such clubs to employers and
insurance companies. The purchase agreement contained a non-compete provision
that covers a period of five years and prohibits the former owner from directly
or indirectly competing with the Company. In connection with the acquisition of
DWP, the Company issued 30,000 shares of common stock valued at $45,000 and paid
cash consideration of $210,000 and an automobile valued at approximately
$30,000.
On February 27, 1998, the Company completed the acquisition of all the issued
and outstanding stock of closely held Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. The purchase
agreement contained a noncompete provision that covers a period of five years
and prohibits the former owners from directly or indirectly competing with the
Company. In connection with the acquisition of Midlands, the Company issued
200,000 shares of common stock valued at $362,500 and cash consideration of
$585,000.
The Company has a revolving credit facility with Abelco Finance L.L.C. and other
affiliates of Cerberus Partners, L.P. (the "Lender"). The Company's ability to
draw down on the facility is tied to the Borrowing Base formula which is based
upon the Company's EBITDA (defined as earnings before interest, taxes,
depreciation and amortization), revenues, or collections, whichever is less. The
credit facility is secured by all of the Company's assets, including its
accounts receivable, inventory, equipment, and general intangibles and is
guaranteed in part by the Company's President and Chief Executive Officer. The
Company paid the Lender a commitment fee equal to 1.5% of the total credit
facility, and a closing fee equal to 1.0% of the total credit facility. The
Company also issued to the Lender 312,497 shares of common stock. The Company
pays the Lender a loan servicing fee of $5,000 per month. The advances under the
credit facility accrue interest at a rate equal to 7.0% in excess of Chase
Manhattan's prime rate , with a minimum rate of 15.5%. The Company is required
to pay monthly interest payments on outstanding borrowings at the prime rate
plus 4.5%, with a minimum rate of 13%. The unpaid interest (2.5%) is added to
the principal balance of the facility, and will accrue interest until paid. The
credit facility is due July 1999. The credit facility is subject to various
affirmative and negative covenants customary in transactions of this type,
including a requirement to maintain certain financial ratios and limitations on
the Company's ability to incur additional indebtedness, to make acquisitions
outside of certain established parameters, or to make dividend distributions. As
of December 31, 1998, the Company had $260,000 of availability under its
revolving credit facility with Abelco Finance L.L.C.
On June 26, 1998, the Company and the Lender amended the Credit Agreement. The
amendment waived certain covenants and requires the Company to maintain a
"Special Availability Reserve" in an amount equal to the Borrowing Base minus
$8,000,000.
<PAGE>
On September 10, 1998, the Company and the Lender further amended the Credit
Agreement. The amendment waived certain covenants as of July 31, 1998 and
requires the Company to maintain a "Special Availability Reserve" in an amount
equal to the Borrowing Base minus $8,000,000 minus the amount equal to $200,000
plus an additional $100,000 each week, commencing September 15, 1998, for four
consecutive weeks, until the amount calculated equals $7,400,000. In the event
that the borrowing base is greater than $7,700,000, the Lender may, at its
option, elect to decrease the Special Availability Reserve by up to $300,000
(see Exhibit 10.16).
On November 2, 1998, the Company and the Lender further amended the Credit
Agreement. The amendment waived certain covenants as of September 30, 1998 and
provides that the maximum loans in excess of the Borrowing Base is $149,000. The
amendment also required such excess amount to be repaid in eight consecutive
weekly installments of $20,000 commencing November 3, 1998 (see Exhibit 10.17).
On January 8, 1999, the Company and the Lender further amended the Credit
Agreement. The amendment waived certain covenants as of November 30, 1998 and
permits Lender to make "Supplemental Loans", defined as loans in excess of the
Borrowing Base. The amendment amended the definition of the Borrowing Base to
not exceed $7,200,000 as reduced by $20,000 per week commencing February 16,
1999, and deleted the "Special Availability Reserve". The amendment also deleted
certain permitted acquisitions by the Company (see Exhibit 10.18).
On February 26, 1999, the Company and the Lender further amended the Credit
Agreement. The amendment reflects the assignment by Madeleine L.L.C. of its
interest in the Credit Agreement to Ableco Finance L.L.C., and other affiliates
of the Cerberus Partners group. The amendment permits the Company to issue
certain secured subordinated debentures (see Exhibit 10.19).
On March 12, 1999, the Company and the Lender further amended the Credit
Agreement to waive certain covenants as of December 31, 1998.
In February 1998, the Company also completed the private sale of 3,000,000 Units
at an aggregate offering price of $3,300,000. Each Unit consisted of one share
of common stock and a warrant to purchase one-fourth (.25) of one share of
common stock at $2.25 per whole share.
Sources of capital to meet future obligations in 1999 are anticipated to be cash
provided by operations, cash from the sale of discontinued operations and the
Company's revolving credit facility. The Company expects to renegotiate its
revolving credit facility prior to its due date of July 1999. In order to
conserve capital resources, the Company's policy is to lease its physical
facilities. The Company does not believe that inflation has had a significant
impact on the results of its operations.
Outlook
Over the past year a number of factors in the rehabilitation marketplace have
led the Company to conclude that the opportunity in the freestanding physical
therapy clinic business may be diminishing. These factors include increased
penetration of managed care health plans, the increasing complexity of Medicare
reimbursement and increased competition for clinic acquisition by large,
well-financed competitors. Consequently, in August 1998, the Company formally
adopted a plan to dispose of its freestanding physical therapy clinics division.
The plan of disposal specifically targets a sale of substantially all the assets
of the freestanding physical therapy clinics division to a major provider of
outpatient physical therapy services. The Company is in the process of
negotiating with potential buyers and estimates that a transaction will be
completed by June 30, 1999.
<PAGE>
In December 1998, the Company made the decision that its equipment dealership
and equipment retail operations did not fit the Company's long term strategy of
focusing on its preventive health care services business. The plan of disposal
specifically targets a sale of substantially all the assets of the equipment
division to a major supplier and retailer of fitness equipment. The Company is
in the process of negotiating with potential buyers and estimates that a
transaction will be completed by June 30, 1999.
The Company believes the outlook for its preventive health care services
business has improved dramatically as a result of increased corporate health
care costs and the wellness and fitness trend gaining momentum. Going forward,
the Company has shifted its strategy to focus its growth efforts solely on its
preventive health care services business for corporations and health care
organizations.
In its preventive health care services business, the Company's strategy is to
expand through the addition of new management contracts, products and services
and selective acquisitions. It is anticipated that funds required for future
acquisitions and the integration of acquired businesses with the Company will be
provided from operating cash flow, the Company's revolving credit facility and
the proceeds from potential future equity financings. Future equity financings,
if any, may result in dilution to holders of the Company's common stock.
However, there can be no assurance that suitable acquisition candidates will be
identified by the Company in the future, that suitable financing for any such
acquisitions can be obtained by the Company, or that any such acquisitions will
occur.
Operating income, as a percentage of revenues, is expected to increase compared
with that experienced for the year ended December 31, 1998 as the Company
expects to control site costs and maintain operating expenses, as a percentage
of revenues, at levels consistent with 1998.
Year 2000 Compliance
The Company has initiated a project to prepare its products and computer systems
for the year 2000 impact on its business operations, product offerings,
customers and suppliers. The Company has completed the awareness phase of the
project and is currently in various stages of the assessment, remediation and
internal testing phases. The project is expected to completed be by the end of
the third quarter of calendar year 1999. Accordingly, management believes the
year 2000 issue will not have a significant impact on its business. If necessary
modification and conversions are not completed on a timely basis, the year 2000
issue could have an adverse effect on the Company's business. At this time, the
Company believes it is unnecessary to adopt a contingency plan covering the
possibility that the project will not be completed in a timely manner, but as
part of the overall project, the Company will continue to assess the need for a
contingency plan.
The Company is also communicating and working with its significant vendors,
customers and other business partners to minimize year 2000 risks and protect
the Company and its customers from potential service interruptions. However, the
Company could be adversely affected by the failure of third parties to become
year 2000 compliant, including the risk of operational outages due to
disruptions in communications or electrical service. Although the Company
believes the effect of such disruptions would be localized and temporary, there
is no assurance that these or other year 2000 risks will not have a material
financial impact in any future period.
The costs associated with the year 2000 issues are being expensed during the
period in which they are incurred. The financial impact to the Company of
implementing any necessary changes to become year 2000 compliant has not and is
not anticipated to be material to the Company's business. However, uncertainties
that could impact actual costs and timing of becoming year 2000 compliant do
<PAGE>
exist. Factors that could affect the Company's estimates include, but are not
limited to, the availability and cost of trained personnel, the ability to
identify all systems and programs that are not year 2000 compliant, the nature
and amount of programming necessary to replace or upgrade affected programs or
systems, and the success of the Company's suppliers and customers to address
these issues. The Company will continue to assess and evaluate cost estimates
and target completion dates of the project on a periodic basis.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-K
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as statements relating to plans for future expansion,
product development, market acceptance of new products, and other business
development activities as well as other capital spending, financing sources and
the effects of regulation and competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, those
relating to product development and market acceptance of new products,
dependence on existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), domestic or global economic
conditions, changes in federal or state tax laws or the administration of such
laws.
Portions of the Form 10-K, including Management's Discussion and Analysis of
Financial Condition and Results of Operations, contain numerous forward-looking
statements that involve a number of risks and uncertainties. Factors that could
cause actual results to differ materially from such forward-looking statements
include but are not limited to the following:
Sufficiency of working capital:
The Company's ability to fund its working capital requirements in the
future is materially dependent upon its ability to generate cash flow from its
existing and future management contracts, consulting fees, sales of health and
wellness programs, sales of PTPA and IFCN network memberships, fees generated
from its on-site physical therapy operations and future debt and/or equity
financings. Additionally, the Company is materially dependent on its ability to
sell its discontinued operations and to restructure its current line of credit.
Future potential acquisitions, and the costs associated with the successful
integration of such acquisitions, could adversely affect Company cash flows from
operating activities. If the Company's existing operations would require more
capital than currently anticipated, or if revenues or expenses are greater than
what are currently anticipated, the Company may need additional financing in
order to maintain its operations. Such sources of additional financing could
include, but may not be limited to, sales of the Company's debt or equity
securities. No assurance can be given that the Company will be able to secure
any such financing when needed, or that such financing, if obtained, would be on
terms favorable or acceptable to the Company.
Material dependence upon existing management:
The success of the Company is highly dependent on the services of Mr.
Loren S. Brink, its President and Chief Executive Officer. The loss of Mr.
Brink's services would have a material adverse effect on the Company's business.
In January 1997, the Company entered into an "evergreen" three year employment
<PAGE>
agreement with Mr. Brink. The Company owns and maintains a key-man life
insurance policy on Mr. Brink's life in the amount of $3.5 million.
Potential changes in workers' compensation laws:
Workers' compensation coverage is a creation of state law, and thus, is
subject to material change by state legislatures and is materially influenced by
the political process in each state. Several states have mandated that employers
receive coverage only from funds operated by the state. New laws affecting the
workers' compensation system in Minnesota and any other state where the Company
may do business in the future (including laws that require all employers to
participate in state-sponsored funds or that mandate premium reductions) could
have a material adverse effect on the Company and its financial position,
results of operations and cash flows.
Balanced Budget Act of 1997:
It is believed that the Federal Balanced Budget Act of 1997 has had and
will continue to have an adverse effect on the financial condition and operating
results of hospitals throughout the country. Such adverse effects could cause
cancellations or non-renewals of the Company's hospital-based fitness center
management contracts, and/or limit the opportunities for new contracts in such
area. Such adverse effects on hospitals could have a material adverse effect on
the Company and its financial position, results of operations and cash flows.
Competition:
The preventive health care business is very competitive. The Company
competes for management contracts for corporate and hospital-based fitness
centers with other health and fitness management companies. There can be no
assurance that the Company will be able to compete successfully with these
management and physical therapy companies.
Nasdaq SmallCap Market(TM) ("SmallCap Market") Maintenance Requirements:
The requirements for continued listing of the Company's common stock on
the Nasdaq SmallCap Market(TM) include a requirement that the Company have
either (1) net tangible assets of at least $2 million, (2) $500,000 of net
income in the most recent fiscal year or in two of the last three fiscal years,
or (3) a market capitalization of at least $35 million. The Company did not meet
this requirement as of September 30, 1998 or December 31, 1998. An additional
requirement for continued listing is a minimum bid price of $1.00 for the
Company's Common Stock, which requirement has not been met since August 4, 1998.
Although the Company appeared in March 1999 before a Nasdaq hearing panel to
request additional time in which to meet these requirements, the Company is
unable to predict the decision of such panel, and the Company has been advised
that the panel's decision could result in immediate deletion of the Company's
common stock from the Nasdaq SmallCap Market, without further advance notice to
the Company. If the Company's common stock is de-listed from Nasdaq, trading, if
any, in the Company's common stock would thereafter be conducted in the
over-the-counter markets or in the so called "pink sheets" or on Nasdaq's
electronic bulletin board. Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought or sold, but also through delays and timing of transactions,
reductions in security analysts' and the news media's coverage of the Company,
and possibly, lower prices for the Company's securities than might otherwise be
attained.
<PAGE>
Possible dilution and depressive effect on price of the Company's common stock
from common stock issued in connection with acquisitions:
If the Company pursues further acquisitions, the Company may issue
shares of its common stock in such acquisitions, as well as grant certain
earn-out provisions that may include the future issuance of the Company's common
stock. Such issuances of the Company's common stock in connection with
acquisitions may be dilutive to existing shareholders of the Company and sales
of such securities into the public market could have a depressive effect on the
price of the Company's common stock. No assurance can be given that such future
issuances of the Company's securities in connection with future acquisitions
will not have a materially dilutive effect on existing Company shareholders, nor
that sales of shares issued in such acquisitions will not materially adversely
affect the price of the Company's common stock.
Risk of litigation and insufficiency of liability insurance:
Although the Company has had no history of material legal claims, the
Company may be subject to claims and lawsuits from time to time arising from the
operation of its business, including claims arising from accidents or from the
negligent provision of physical therapy services. Damages resulting from and the
costs of defending any such actions could be substantial. In the opinion of
management, the Company is adequately insured against personal injury claims,
professional liability claims and other business-related claims including, but
not limited to, claims related to the negligent provision of physical therapy
services. Nevertheless, there can be no assurance the Company will be able to
maintain such coverage, or that it will be adequate.
Restrictions and affirmative and negative covenants imposed by senior credit
facility:
Certain of the affirmative and negative covenants imposed upon the
Company by its senior secured lending facility restrict the Company's ability to
incur additional senior and subordinated debt. Furthermore, upon certain events
of default, such senior secured lender is entitled to demand immediate repayment
of their outstanding loans. In such circumstances, the Company may not be able
to access other sources of capital, on a timely basis, or on terms and
conditions favorable to the Company, or at all, with sufficient speed or
sufficient size to avoid the Company's senior secured lender from taking
material adverse action against the Company and its collateral.
Lack of proprietary protection; lack of barriers to entry:
Although the Company holds certain trademarks, tradenames and
intellectual property associated with its operations, the Company is primarily a
health care service business where patents or other intellectual property are
not applicable, or if applicable, do not provide material barriers to entry for
third parties or competitors to enter the Company's existing business and
compete with the Company. Therefore, no assurance can be given that other
existing competitors, or health care companies seeking to gain access to the
Company's market or limit the Company's market share, may not devote resources
to effectively compete with the Company in the future. No assurance can be given
that if such competition occurs in the future that the Company's financial
position, results of operations or cash flows will not be materially adversely
affected.
<PAGE>
Potential depressive effect on price of common stock arising from exercise and
sale of existing convertible securities:
At December 31, 1998, the Company had outstanding stock options and
warrants (not including the shares issuable under any contingent grants,
earn-out agreements or any future acquisition) to purchase an aggregate
3,595,711 shares of common stock. The exercise and sale of such outstanding
stock options and stock purchase warrants and sale of stock acquired thereby may
have a material adverse effect on the price of the Company's common stock. In
addition, the exercise and sale of such Company's common stock could occur at a
time when the Company would otherwise be able to obtain additional equity
capital on terms and conditions more favorable to the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Transactions with international customers
are entered into in U.S. dollars, precluding the need for foreign currency
hedges. Additionally, the Company invests in money market funds and fixed rate
U.S. government and corporate obligations, which experience minimal volatility.
Thus, the exposure to market risk is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Balance Sheet of the Company as of December 31, 1998,
and related Consolidated Statements of Operations, Shareholders' Equity, and
Cash Flows for the year then ended December 31, 1998, the notes thereto have
been audited by Grant Thornton LLP, independent certified public accountants.
The Consolidated Balance Sheet of the Company as of December 31, 1997, and the
Consolidated Statements of Operations, Shareholders' Equity, and Cash Flows for
each of the two years then ended and notes thereto have been audited by Deloitte
& Touche LLP, independent auditors.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of Health Fitness
Corporation and subsidiaries (the Company) as of December 31, 1998 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Fitness
Corporation and subsidiaries as of December 31, 1998 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
February 26, 1999 (except for Note 5, as to which the date is March 12, 1999)
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
Health Fitness Corporation
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Health Fitness
Corporation as of December 31, 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1997. 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 audits.
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Health Fitness Corporation as of
December 31, 1997 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 8, 1998
(April 12, 1999 as to Note 3)
<PAGE>
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash $ 29,598 $ 81,639
Trade accounts and notes receivable, less allowance for doubtful
accounts of $1,293,000 and $200,000, respectively 5,356,884 4,866,617
Inventories 26,459 23,456
Prepaid expenses and other 61,145 495,699
------------ ------------
Total current assets 5,474,086 5,467,411
PROPERTY AND EQUIPMENT, net (Note 4) 1,049,624 974,508
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,580,098 and
$1,098,719, respectively (Notes 1 and 2) 7,568,810 7,642,203
Noncompete agreements, less accumulated amortization of $374,478
and $214,889, respectively (Notes 1 and 2) 592,373 611,961
Copyrights, less accumulated amortization of $85,608 and $40,944,
respectively (Notes 1 and 2) 584,391 629,056
Trade names, less accumulated amortization of $20,613 and $8,556,
respectively (Notes 1 and 2) 189,387 131,444
Contracts, less accumulated amortization of $23,334 and $0,
respectively (Notes 1 and 2) 56,666 --
Trade accounts and notes receivable (Note 1) 922,966 639,376
Deferred financing costs, less accumulated amortization of
$836,082 at December 31, 1998 585,260 85,001
Other 65,983 407,259
Net assets of discontinued operations (Note 3) 3,525,272 7,144,063
============ ============
$ 20,614,818 $ 23,732,282
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 6,939,692 $ --
Current maturities of long-term debt (Note 5) 572,227 503,540
Trade accounts payable 2,335,509 1,873,472
Accrued salaries, wages, and payroll taxes 1,405,382 1,779,200
Accrued earn-out 309,962 533,444
Other accrued liabilities 678,624 1,233,538
Deferred revenue 1,629,192 1,844,460
------------ ------------
Total current liabilities 13,870,588 7,767,654
LONG-TERM DEBT, less current maturities (Note 5) 900,148 5,785,018
DEFERRED LEASE OBLIGATION -- 31,170
COMMITMENTS AND CONTINGENCIES (Note 6) -- --
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $.01 par value; authorized 5,000,000 shares, none
issued or outstanding -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
11,884,413 and 8,136,828 shares issued and outstanding,
respectively 118,844 81,368
Additional paid-in capital 16,725,126 12,976,680
Accumulated deficit (10,951,526) (2,842,379)
------------ ------------
5,892,444 10,215,669
Stockholder note and interest receivable (48,362) (67,229)
------------ ------------
5,844,082 10,148,440
============ ============
$ 20,614,818 $ 23,732,282
============ ============
</TABLE>
See notes to consolidated financial statements
<PAGE>
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE $ 25,642,995 $ 21,480,454 $ 16,499,847
COSTS OF REVENUE 19,608,792 16,580,601 12,459,777
------------ ------------ ------------
GROSS PROFIT 6,034,203 4,899,853 4,040,070
OPERATING EXPENSES:
Salaries 1,985,495 1,798,728 1,290,182
Selling, general, and administrative 4,382,991 3,789,051 2,404,471
------------ ------------ ------------
Total operating expenses 6,368,486 5,587,779 3,694,653
------------ ------------ ------------
OPERATING INCOME (LOSS) (334,283) (687,926) 345,417
INTEREST EXPENSE (666,935) (277,286) (185,253)
OTHER INCOME 109,904 67,258 24,029
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (891,314) (897,954) 184,193
INCOME TAXES 50,000 45,000 38,000
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (941,314) (942,954) 146,193
------------ ------------ ------------
DISCONTINUED OPERATIONS (Note 3):
Income (loss) from operations of Physical
Therapy Clinic segment and Equipment
segment (less applicable taxes of
$49,000 in 1996) (1,893,921) (103,736) 859,388
Loss on disposal of Physical Therapy Clinic
segment and Equipment segment (less
applicable taxes) (5,273,912) -- --
------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (7,167,833) (103,736) 859,388
------------ ------------ ------------
NET INCOME (LOSS) $ (8,109,147) $ (1,046,690) $ 1,005,581
============ ============ ============
INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Basic $ (0.08) $ (0.12) $ 0.02
Diluted (0.08) (0.12) 0.02
INCOME (LOSS) PER SHARE FROM DISCONTINUED OPERATIONS:
Basic $ (0.63) $ (0.01) $ 0.13
Diluted (0.63) (0.01) 0.11
NET INCOME (LOSS) PER SHARE:
Basic $ (0.72) $ (0.13) $ 0.15
Diluted (0.72) (0.13) 0.13
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 11,319,295 7,884,088 6,894,022
Diluted 11,319,295 7,884,088 7,581,844
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholder
Common Stock Additional Note and Total
----------------------- Paid-in Accumulated Interest Stockholders'
Shares Amount Capital Deficit Receivable Equity
---------- --------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 6,457,429 $ 64,574 $10,200,033 $(2,801,270) $ (64,403) $ 7,398,934
Issuance of common stock in
connection with 1996 acquisition 40,000 400 221,914 -- -- 222,314
Issuance of common stock
purchase warrants -- -- 40,000 -- -- 40,000
Conversion of convertible notes
and interest 456,955 4,570 1,049,875 -- -- 1,054,445
Warrants exercised 86,592 866 52,662 -- -- 53,528
Stock options exercised 135,000 1,350 88,080 -- -- 89,430
Issuance of common stock
in connection with a software
license agreement 10,000 100 26,150 -- -- 26,250
Issuance of common stock through
Employee Stock Purchase Plan 7,317 73 14,703 -- -- 14,776
Advances on notes receivable -- -- -- -- (17,970) (17,970)
Payments received on notes receivable -- -- -- -- 4,800 4,800
Net income -- -- -- 1,005,581 -- 1,005,581
---------- ------- ---------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1996 7,193,293 71,933 11,693,417 (1,795,689) (77,573) 9,892,088
Issuance of common stock in
connection with 1995 acquisition 292,829 2,928 (2,928) -- -- --
Issuance of common stock in
connection with 1997 acquisitions 153,911 1,539 414,086 -- -- 415,625
Issuance of common stock
purchase warrants -- -- 92,431 -- -- 92,431
Issuance of note payable with
conversion option -- -- 44,118 -- -- 44,118
Conversion of convertible notes
and interest 130,358 1,304 313,452 -- -- 314,756
Warrants exercised 86,800 868 129,882 -- -- 130,750
Stock options exercised 223,000 2,230 158,520 -- -- 160,750
Issuance of common stock
for services 35,500 355 83,239 -- -- 83,594
Issuance of common stock through
Employee Stock Purchase Plan 21,137 211 50,463 -- -- 50,674
Advances on notes receivable -- -- -- -- (9,656) (9,656)
Payments received on notes receivable -- -- -- -- 20,000 20,000
Net loss -- -- -- (1,046,690) -- (1,046,690)
---------- ------- ---------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1997 8,136,828 81,368 12,976,680 (2,842,379) (67,229) 10,148,440
Issuance of common stock in
connection with acquisition 230,000 2,300 405,200 -- -- 407,500
Issuance of common stock
in connection with credit facility 312,497 3,125 340,622 -- -- 343,747
Stock options exercised 32,000 320 39,680 -- -- 40,000
Warrants exercised 80,000 800 99,200 -- -- 100,000
Issuance of common stock in connection
with private placement 3,000,000 30,000 2,755,074 -- -- 2,785,074
Issuance of common stock through
Employee Stock Purchase Plan 93,088 931 108,670 -- -- 109,601
Advances on notes receivable -- -- -- -- (3,533) (3,533)
Payments received on notes
receivable -- -- -- -- 22,400 22,400
Net loss -- -- -- (8,109,147) -- (8,109,147)
---------- ------- ---------- ----------- ------- ----------
BALANCE AT DECEMBER 31, 1998 11,884,413 $118,844 $16,725,126 $(10,951,526) $(48,362) $ 5,844,082
========== ======= ========== =========== ======= ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ (8,109,147) $ (1,046,690) $ 1,005,581
Adjustment to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Common stock issued for services - 134,268 14,776
Depreciation and amortization 1,766,654 893,801 687,148
Loss on disposal of assets 332,060 - -
Discontinued operations 4,708,720 (81,294) (187,051)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (354,368) (1,538,397) (755,472)
Inventories (3,003) (23,456) 367,901
Prepaid expenses and other 444,624 (155,755) (14,893)
Other assets 301,276 (254,853) (37,209)
Trade accounts payable 408,487 112,764 534,087
Accrued liabilities and other (904,957) 854,363 (456,286)
Deferred revenue (257,733) 267,274 36,200
------------------- ------------------ ------------------
Net cash provided by (used in)
operating activities (1,667,387) (837,975) 1,194,782
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (94,413) (496,190) (84,459)
Payments for acquisitions, net of liabilities
assumed and cash acquired (196,263) (1,000,000) (444,068)
Payments in connection with earn-out provisions (644,933) (485,115) (124,924)
Advances made for notes receivable (1,170,398) - -
Net change in notes receivable 418,675 220,008 -
Discontinued operations (658,941) (1,057,615) (1,236,490)
------------------- ------------------ ------------------
Net cash used in investing activities (2,346,273) (2,818,912) (1,889,941)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and notes payable 40,626,690 3,435,500 5,300,938
Repayments of line of credit and notes payable (33,686,998) (2,197,500) (4,912,880)
Proceeds from long term debt 1,456,384 2,712,128 113,000
Repayment of long term debt (6,437,726) (440,803) (662,683)
Payment of financing costs (1,394,020) - -
Proceeds from the issuance of common stock 3,378,422 291,500 268,659
Proceeds from the issuance of warrants to
purchase common stock - 22,000 -
Other 18,867 (84,299) 81,473
------------------- ------------------ ------------------
Net cash provided by financing activities 3,961,619 3,738,526 188,507
------------------- ------------------ ------------------
NET INCREASE (DECREASE) IN CASH (52,041) 81,639 (506,652)
CASH AT BEGINNING OF YEAR 81,639 - 506,652
=================== ================== ==================
CASH AT END OF PERIOD $ 29,598 $ 81,639 $ -
=================== ================== ==================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and subsidiaries (the Company)
provides integrated health management services to corporations and
health care organizations. Health management services include the
development, marketing and management of corporate and hospital based
fitness centers, injury prevention and work-injury management
consulting and on-site physical therapy.
Consolidation - The consolidated financial statements include the
accounts of Health Fitness Corporation and its wholly owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Trade Accounts and Notes Receivable - The Company grants credit to
customers in the ordinary course of business. Trade accounts and notes
receivable represent amounts due from companies and individuals for
services and products. The notes receivable are typically due in 60
monthly installments and have interest rates from 8.8% to 16.4%.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers and their geographic
dispersion.
Deferred Revenue - Deferred revenue represents billings in advance for
the management of corporate and hospital-based fitness centers and
amounts received in excess of revenues recognized to date on
contracting third-party payor contracts.
Revenue Recognition - Revenue, except from contracting third-party
payor contracts, is recognized at the time the service is provided.
Revenue from contracting third-party payor contracts is recognized over
the contract period.
Property and Equipment - Property and equipment is stated at cost.
Depreciation and amortization are computed using both straight-line and
accelerated methods over the useful lives of the assets or the terms of
the capital leases.
Goodwill - Goodwill represents the excess of the purchase price and
related costs over the fair value of the net assets of businesses
acquired and is amortized on a straight-line basis over 15 or 20 years.
Subsequent payments of earn-out provisions associated with acquisitions
are accounted for as adjustments to goodwill and amortized on a
straight-line basis over the remaining life of the goodwill. The
carrying value of goodwill and other intangible assets is assessed
periodically or when factors indicating an impairment are present.
Projected undiscounted cash flows are used in assessing these assets.
Noncompete Agreements - The Company has entered into noncompete and
separation agreements with certain individuals which cover periods of
five to seven years and prohibit the individuals from directly or
indirectly competing with the Company. The payments associated with
these agreements are amortized over the term of the noncompete
agreement.
<PAGE>
Other Intangible Assets - The Company's other intangible assets consist
of copyrights, trade names, and contracts related to businesses
acquired. Contracts consist of agreements to provide rehabilitative
services on behalf of other health care providers for terms of two to
three years. The values assigned by the Company to copyrights, trade
names and contracts are based on independent appraisals and are
amortized on a straight-line basis over 15 years for copyrights and
trademarks and 2 or 3 years for contracts.
Net Income (Loss) Per Common Share - Basic net income (loss) per share
is computed by dividing net income (loss) by the weighted average
number of common shares outstanding and contingently issuable shares
consisting of 0, 24,068 and 10,601 shares in 1998, 1997 and 1996,
respectively. Diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common
shares outstanding and common share equivalents relating to
contingently issuable shares of stock options, stock warrants, and
convertible subordinated notes, when dilutive. Diluted net loss per
share in 1998 and 1997 is the same as basic net loss per share due to
the losses in those years. Diluted net income per share in 1996
includes an additional 395,882 and 291,940 of common share equivalents
due to the dilutive effect of certain stock options and warrants and
contingently issuable shares.
Contingently issuable shares of common stock with a value of $500,000
on February 7, 1999, stock options and warrants to purchase 3,595,711
shares of common stock with a weighted average exercise price of $2.81,
were excluded from the 1998 diluted computation because they are
antidilutive.
Contingently issuable shares of common stock with a value of $500,000
on February 7, 1999, stock options and warrants to purchase 2,685,211
shares of common stock with a weighted average exercise price of $3.19,
and assumed conversion of convertible subordinated notes into 159,522
shares of common stock were excluded from the 1997 diluted computation
because they are antidilutive.
Stock options and warrants to purchase 1,248,428 shares of common stock
with a weighted average exercise price of $3.49, and assumed conversion
of convertible subordinated notes into 189,487 shares of common stock
were excluded from the 1996 diluted computation because they are
antidilutive.
Stock-Based Compensation - The Company utilizes the intrinsic value
method of accounting for its stock based employee compensation plans.
Pro-forma information related to the fair value based method of
accounting is contained in note 7.
Use of Estimates - Preparing consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the
1997 and 1996 balances to conform to the presentation used in 1998.
<PAGE>
2. BUSINESS COMBINATIONS
1998 Acquisitions - On June 4, 1998, the Company completed the
acquisition of all the issued and outstanding stock of David W.
Pickering, Inc. (DWP), a Rhode Island corporation doing business as
International Fitness Club Network (IFCN). IFCN is in the business of
organizing and maintaining a network of commercial fitness and health
clubs and marketing memberships in such clubs to employers and
insurance companies (the IFCN Business). The purchase agreement
contained a noncompete provision that covers a period of five years and
prohibits the former owner from directly of indirectly competing with
the Company. In conjunction with this acquisition, the Company issued
30,000 shares of common stock valued at $45,000, and paid cash
consideration of $210,000 and an automobile valued at approximately
$30,000.
The purchase agreement requires the Company to make annual payments of
up to 45% of DWP's net income from operations, as defined, for each of
the five fiscal years ending May 31, 1999 through 2003. The annual
payment, if any, is due in a combination of 50% in cash and 50% in the
Company's common stock. The number of shares issued in connection with
the annual payment is calculated by dividing the portion of the annual
payment payable in common stock by $3.00.
The Company also entered into a five-year, management agreement with
International Club Network, Inc. (ICN) to manage the IFCN Business on
behalf of the Company. ICN is owned and operated by the former
shareholder of DWP. The management agreement requires the Company to
compensate ICN at the rate of $125,000 per year payable monthly. As
additional compensation, the Company will grant ICN nonqualified stock
options to purchase up to 15,000 shares of the Company's common stock
at an exercise price equal to the fair market value of the Company's
common stock on the last day of each DWP earn-out year provided DWP's
earn-out ratio is at least 20%.
On February 27, 1998, the Company completed the acquisition of all the
issued and outstanding stock of Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. The
purchase agreement contained a non-compete provision that covers a
period of five years and prohibits the former owners from directly or
indirectly competing with the Company. In connection with the
acquisition of Midlands, the Company issued 200,000 shares of common
stock valued at $362,500 and cash consideration of $585,000.
The purchase agreement requires the Company to make annual payments of
up to 35% of Midlands' net income from operations, as defined, for each
of the five fiscal years ending February 28, 1999 through 2003. The
annual payment, if any, is due in a combination of 50% in cash and 50%
in the Company's common stock. The number of shares issued in
connection with the annual payment is calculated by dividing the
portion of the annual payment payable in common stock by $3.00. The
purchase agreement also requires the Company to make an annual payment
of $25,000 for each of the three fiscal years ending February 28, 1999
to 2001 if net income from operations, as defined, exceeds 20%.
The purchase agreement also required the Company to enter into
employment agreements with certain key employees for a term of five
years. These agreements provide for minimum aggregate annual salaries
of $200,000. The Company also granted stock options to purchase up to
50,000 shares of the Company's common stock at $4.00 per share in
connection with the employment agreements.
<PAGE>
In connection with the 1998 acquisitions; assets purchased and
liabilities assumed, common stock issued, and cash consideration paid
were as follows:
IFCN Midlands
-------- ----------
Assets acquired:
Accounts receivable $135,899 $ -
Other current assets 10,070 21,750
Property 14,178 196,789
Noncompete agreements 140,000 490,000
Trade names 70,000 80,000
Contracts 80,000 120,000
Excess of purchase price
over net assets acquired 89,550 335,402
-------- ----------
539,697 1,243,941
Liabilities assumed:
Accounts payable 53,550 120,985
Accrued expenses 92,011 106,968
Deferred revenue 42,465 -
Debt 96,671 68,488
-------- ----------
284,697 296,441
Common stock issued 45,000 362,500
-------- ----------
Cash consideration paid $210,000 $ 585,000
======== ==========
1997 Acquisitions - In August 1997 the Company completed the
acquisition, effective as of July 31, 1997, of all the issued and
outstanding stock of Medlink Management Services, Inc. and Medlink
Corporation (collectively Medlink), two closely held and related
rehabilitation services companies based in Iowa.
On May 16, 1997, the Company acquired all of the issued and outstanding
stock of closely held Duffy and Associates Physical Therapy Corp.
(Duffy) of Des Moines, Iowa. Duffy provides outpatient physical
therapy, sports medicine, and occupational health services at two
clinics in Iowa. It also contracts with area hospitals and corporations
and provides services to a high school's athletic teams.
On April 9, 1997, the Company completed the acquisition of all the
issued and outstanding stock of closely held K.A.M. Physical Therapy
Services, Corp. (K.A.M.), an Iowa-based provider of rehabilitative
services.
On February 7, 1997, the Company completed the acquisition of certain
of the assets and assumed the liabilities of two related and closely
held companies: Isernhagen & Associates, Inc. and Isernhagen, Ltd.
(collectively Isernhagen). Isernhagen, Minnesota-based companies,
provide comprehensive programs and services to professionals who work
in industrial rehabilitation and work injury services.
In connection with the 1997 acquisitions; assets purchased and
liabilities assumed, notes issued, common stock issued, and cash
consideration paid were as follows:
<PAGE>
<TABLE>
<CAPTION>
Medlink Duffy K.A.M. Isernhagen
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Assets acquired:
Cash $ 5,417 $ - $ 3,175 $ -
Accounts receivable 300,776 184,572 24,965 108,900
Other current assets 23,282 2,280 - 13,492
Property 94,518 168,500 30,110 9,159
Noncompete agreements 80,000 120,000 160,000 420,000
Copyrights - - - 670,000
Trade names 30,000 50,000 40,000 140,000
Contracts 50,000 - 170,000 -
Excess of purchase price
over net assets acquired 86,998 110,070 80,760 100,990
----------- ----------- ---------- ----------
670,991 635,422 509,010 1,462,541
Liabilities assumed:
Accounts payable 96,123 97,341 92,407 118,760
Accrued expenses 113,887 24,331 16,603 75,681
Deferred revenue - - - 18,100
Debt 84,606 70,000 - -
----------- ----------- ---------- ----------
294,616 191,672 109,010 212,541
Notes issued - - - 250,000
Common stock issued 71,875 143,750 200,000 -
----------- ----------- ---------- ----------
Cash consideration paid $ 304,500 $ 300,000 $ 200,000 $1,000,000
=========== =========== ========== ==========
</TABLE>
The purchase agreements contained noncompete provisions that cover a
period of five years and prohibit the former owners from directly or
indirectly competing with the Company.
In connection with the Isernhagen acquisition, the Company agreed to
issue common stock with a value of $500,000 on February 7, 1999,
provided the former owners of Isernhagen are employed by the Company on
that date. The common stock has not been issued as of February 26,
1999. The notes issued were convertible, subordinated promissory notes,
had interest at 8%, and have been paid in 1998.
The Isernhagen purchase agreement requires the Company to make annual
cash payments of 50% of net income from operations in excess of 25% of
revenues, as defined, for each of the five fiscal years through 2002.
The other purchase agreements require the Company to make annual
payments up to 39% of net income from operations, as defined, for each
of the five fiscal years through 2002. The annual payment, if any, is
due in cash or a combination of cash and the Company's common stock.
The number of shares issued in connection with the annual payment is
calculated by dividing the portion of the annual payment payable in
common stock by $3.50 or the average closing bid price of the Company's
common stock for ten trading days, as defined.
The purchase agreements also required the Company to enter into
employment agreements with certain key employees for a term of five
years. These agreements provide for minimum aggregate annual salaries
of $524,000. The Company also granted stock options to purchase up to
114,999 shares of the Company's common stock at an average per share
price of $3.93 in connection with the employment agreements.
<PAGE>
The 1998 and 1997 acquisitions have been accounted for using the
purchase method of accounting, and the excess of purchase price over
net assets acquired are being amortized over 15 years using the
straight-line method. The consolidated statements of operations include
the results of operations of the acquired companies since their
respective acquisition dates.
1997 Disposals - In January 1997, the Company sold four physical
therapy clinics. In May 1997, the Company sold seven additional
clinics. The Company received $1,222,500 and notes receivable totaling
$450,000. The notes receivable have interest rates of 6% to 7% and
require annual or quarterly principal payments. The notes receivable
are recorded in Other Assets, except for the current portion of such
notes, which are included in Trade Accounts and Notes Receivable. One
of the acquiring companies also assumed the Company's non-interest
bearing note payable requiring total future payments of $330,000. The
original gain on sale of the clinics, $545,433 is included in the 1997
loss from operations of discontinued operations.
The following unaudited pro forma information reflects the combined
continuing operations of the Company with the 1998 acquisitions as if
these transactions had occurred at the beginning of 1997, and 1997
acquisitions and the 1997 disposals as if these transactions had
occurred at the beginning of 1997:
1998 1997
----------- -----------
Revenues $25,761,600 $21,786,000
The impact of these acquisitions and disposals was not significant on
net income (loss) and net income (loss) per share. The unaudited pro
forma revenues may not necessarily reflect the actual operations of the
Company had the acquisitions occurred as of the date presented. The
unaudited pro forma information is not necessary indicative of future
revenues for the combined companies.
<PAGE>
3. DISCONTINUED OPERATIONS
In August 1998, the Company formally adopted a plan to dispose of its
freestanding physical therapy clinics business segment (the clinics).
The plan of disposal specifically targets a sale of substantially all
the assets of the clinics to a major provider of outpatient physical
therapy services.
The clinics loss from operations for the year ended December 31, 1998
includes only the results of operations for the clinics for the eight
months ended August 31, 1998, the date the Company formally adopted a
plan to dispose of the clinics. The loss from operations for the eight
months ended August 31, 1998 was $1,461,000 and included revenues of
$4,064,000 and interest expense of $755,000. A tax benefit was recorded
and has been partially offset by a valuation allowance.
The clinics incurred losses from operations of $363,000 for the year
ended December 31, 1997 and income from operations of $566,000 for the
year ended December 31, 1996. These operations included revenues of
$5,380,000 and $5,972,000 and interest expense of $313,000 and $82,000
for the years ended December 31, 1997 and 1996. A tax benefit was
recorded and has been offset by a valuation allowance for the year
ended December 31, 1997. Tax expense was recorded and has been
partially offset by a reduction in the valuation allowance for the year
ended December 31, 1996.
The clinics' loss on disposal for the year ended December 31, 1998
includes a provision for operating losses during the phase-out period,
September 1, 1998 to June 30, 1999, projected shutdown costs and the
expected loss from the sale of the clinics. The Company projects
revenues of $4,454,000 and operating losses of $2,561,000, including
interest expense of $854,000 during the phase-out period. A tax benefit
was included in the projected operating loss and has been offset by a
valuation allowance. The Company expects a loss from the sale of the
clinics, including shutdown costs estimated at $561,000, of $2,091,000.
The provisoins for operating losses and loss from the sale of the
clinics have been increased by approximately $2,500,000 during the
fourth quarter of 1998 primarily due to a decrease in the expected
sales price of the clinics.
In November 1998, the Company formally adopted a plan to dispose of its
fitness equipment business segment (the equipment division). The plan
of disposal specifically targets a sale of substantially all the assets
of the division to a major supplier and retailer of fitness equipment.
The equipment division loss from operations for the year ended December
31, 1998 includes the results of operations for the division for the
eleven months ended November 30, 1998, the date the Company formally
adopted a plan to dispose of the equipment division. The loss from
operations for the eleven months ended November 30, 1998 was $433,000
and included revenues of $6,674,000 and interest expense of $182,000. A
tax benefit was recorded and has been offset by a valuation allowance.
The equipment division had income from operations of $259,000 and
$293,000 for the years ended December 31, 1997 and 1996. The income
from operations included revenues of $6,810,000 and $6,043,000 and
interest expense of $61,000 and $25,000 for the years ended December
31, 1997 and 1996. Tax expense was recorded and has been offset by a
reduction in the valuation allowance for the years ended December 31,
1997 and 1996.
<PAGE>
The equipment division loss on disposal for the year ended December 31,
1998 includes a provision for operating losses during the phase-out
period, December 1, 1998 to June 30, 1999, projected shutdown costs and
the expected loss from the sale of the division. The Company projects
revenues of $2,996,000 and operating losses of $622,000 during the
phase-out period including interest expense of $134,000. A tax benefit
was included in the projected operating loss and has been offset by a
valuation allowance.
The Company has restated the 1997 and 1996 financial statements to
present the operating results and net assets of the clinics and the
equipment segments as discontinued operations. The components of net
assets of discontinued operations included in the Company's
consolidated balance sheets as of December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Accounts receivable $ 1,360,416 $ 1,636,346
Inventories 527,585 787,349
Prepaid expenses 19,851 37,622
Property and equipment, net 2,100,421 2,623,680
Goodwill, net 1,648,188 1,347,645
Noncompete agreements, net 650,333 320,250
Trade names, net 182,440 114,889
Contracts, net 160,146 171,806
Accounts receivable - 40,000
Other assets 145,154 64,476
------------- ------------
6,794,534 7,144,063
Accrued expenses and losses related to
discontinued operations 3,269,262 -
------------- ------------
Net assets $ 3,525,272 $ 7,144,063
============= ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Leasehold improvements $ 54,979 $ 54,979
Office equipment 947,730 536,385
Software 382,925 514,985
Preventive health care equipment 293,438 282,198
------------- ------------
1,679,072 1,388,547
Less accumulated depreciation and amortization 629,448 414,039
------------- ------------
$ 1,049,624 $ 974,508
============= ============
</TABLE>
<PAGE>
5. FINANCING
Notes Payable - The Company entered into a credit agreement and
subsequent amendments (the Credit Agreement) that provides for maximum
borrowings of $7.2 million as defined. Interest on outstanding
borrowings is computed at the prime rate plus 7.0% with a minimum rate
of 15.5%. The Company is required to pay monthly interest payments on
outstanding borrowings at the prime rate plus 4.5% with a minimum rate
of 13.0%. The unpaid interest is added to the outstanding borrowings as
of the first of the current month. The Company is also required to pay
a monthly servicing fee of $5,000. At December 31, 1998, the Company
had $260,000 of availability under the Credit Agreement. The Credit
Agreement is due on July 17, 1999.
Borrowings under the Credit Agreement are collateralized by
substantially all of the Company's assets and partially guaranteed by
the Company's President. The Credit Agreement contains various
restrictive covenants relating to changes in accumulated deficit,
maintenance of fixed charge coverage ratio, minimum working capital
requirements, prohibits dividend payments, and other matters. At
December 31, 1998 the Company was in violation of certain covenants for
which the Company obtained a waiver as of March 12, 1999 from the
lender.
Long-Term Debt - Long-term debt at December 31 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Note payable, due in monthly installments of
$11,594 including interest at 10.50%, through 1999,
collateralized by various property and inventory,
personally guaranteed by the Company's President $ 89,204 $ 211,877
Present value of capital lease obligations, interest
from 12.77% to 21.00% due through March 2002,
collateralized by various property and inventory 338,749 483,937
Notes payable, due in various monthly installments up
to $2,828 including interest at 8.76% due through
September 2002, collateralized by inventory 907,126 -
Other notes payable, due in various monthly installments up
to $4,620 including interest from 7.75% to 10.54%,
through October 2000, collateralized by vehicles and inventory 137,296 67,744
Term loan (i) - 3,275,000
Revolving line of credit (i) - 1,500,000
Note payable - related party (i) - 500,000
Convertible, subordinated promissory notes, paid in full in 1998 - 250,000
------------- --------------
1,472,375 6,288,558
Less current maturities 572,227 503,540
------------- --------------
$ 900,148 $ 5,785,018
============= ==============
</TABLE>
(i) As a result of the Company repaying existing debt at December 31,
1997, with a portion of the Credit Agreement entered into in February
1998 and its expectation that future operating results would provide
for available borrowings of at least equal to the debt repaid and
equity offering proceedings from the issuance of common stock in
February 1998, the term loan, revolving line of credit and note
payable-related party that would have been classified current
liabilities have been classified as non-current at December 31, 1997.
<PAGE>
Maturities of long-term debt are as follows:
Years ending December 31:
1999 $ 572,227
2000 415,250
2001 385,022
2002 99,876
--------------
$ 1,472,375
==============
6. COMMITMENTS AND CONTINGENCIES
Leases - The Company leased certain equipment and vehicles under
agreements which substantially cover the estimated useful lives of the
respective assets. These agreements were capitalized at the present
value of the future minimum lease payments.
The Company also leases office space and equipment under operating
leases. In addition to base rental payments, these leases require the
Company to pay its proportionate share of real estate taxes, special
assessments, and maintenance costs. These leases can be renewed for
additional one-year periods.
Costs incurred under operating leases are recorded as rent expense and
aggregated approximately $208,488, $192,469 and $104,619 for the years
ended December 31, 1998, 1997 and 1996.
Minimum rent payments due under operating leases are as follows:
Years ending December 31:
1999 $ 151,445
2000 151,445
2001 98,540
2002 15,473
Employment Agreements - The Company has entered into employment
agreements with certain key employees (including those who were
previously employed by the entities the Company acquired) for terms of
one to five years. The agreements provide for minimum aggregate annual
salaries of approximately $1,287,799 and also provide for incentive
awards based on performance.
An independent contractor, who is an executive officer of the Company
and a member of the Company's Board of Directors, assumed the functions
of its Chief Financial Officer in 1997. Expenses relating to the
services provided totaled $116,745 and $236,426 for the years ended
December 31, 1998 and 1997. No expenses were incurred for the year end
December 31, 1996.
Benefit Plan - The Company has a defined contribution plan which
conforms to IRS provisions for 401(k) plans. Employees are eligible to
participate in the plan providing they have attained the age of 21 and
have completed one year of service. Participants may contribute up to
15% of their earnings, and the Company may make certain matching
contributions. The Company made no matching contributions for the year
ended December 31, 1998 and made matching contributions of $106,000 and
$67,000 for the years ended December 31, 1997 and 1996.
<PAGE>
Legal Proceedings - The Company is involved in various claims and
lawsuits incident to the operation of its business. The Company
believes that the outcome of such claims will not have a material
adverse effect on its financial condition, results of operation, or
cash flows.
Year 2000 - The Year 2000 issue relates to limitations in computer
systems and applications that may prevent proper recognition of the
Year 2000. The potential effect of the Year 2000 issue on the Company
and its business partners will not be fully determinable until the year
2000 and thereafter. If Year 2000 modifications are not properly
completed either by the Company or entities with whom the Company
conducts business, the Company's revenues and financial condition could
be adversely impacted.
7. EQUITY TRANSACTIONS
Issuance of Common Stock - In February 1998, the Company obtained gross
proceeds of $3,300,000 of equity financing through a private placement
of 3,000,000 units, with each unit consisting of one share of common
stock and a detachable warrant to purchase one-fourth of a share of
common stock at $2.25 per share. The warrants are currently exercisable
and expire four years from the date of issuance.
In connection with the private placement, the Company also issued
warrants to purchase 300,000 shares of common stock to the selling
agents. The selling agents' warrants are exercisable from February 18,
1999 through February 18, 2003 at $1.65 per share and contain a net
value exercise provision allowing for the issuance of a lesser number
of shares than provided in the warrant without payment of the cash
exercise price.
During 1998, the Company received proceeds of $140,000 when holders of
stock options and warrants exercised their right to purchase a total of
112,000 shares of common stock at a price of $1.25 per share. The
Company also issued 93,088 shares of common stock in connection with
the Company's employee stock purchase plan.
During 1997, the Company issued 130,358 shares of common stock to
holders of three convertible, subordinated promissory notes electing to
convert their notes with face values of $300,000 and accrued interest
of $14,756 into common stock.
During 1997, the Company also issued 35,500 shares of common stock in
return for services provided. The value of the common stock issued,
$83,594, was based on the market value of the Company's common stock.
On January 30, 1997, the Company issued 292,829 shares of common stock
in connection with the 1995 purchase of a California-based operator of
corporate fitness centers. The 1995 purchase agreement provided that if
the average closing sale price of the Company's common stock during the
fourth quarter of 1996 did not reach at least $6.00 per share, the
Company would issue sufficient additional shares so that the aggregate
value of the stock consideration received by the sellers equaled
$1,200,000 based on the same three month average price calculation.
During 1996, the Company issued 456,955 shares of common stock to
holders of convertible notes electing to convert their notes with a
face value of $1.0 million and accrued interest of $60,135. The Company
also issued 10,000 shares of common stock in connection with a software
license agreement. The value of the common stock, $26,250, was
determined based on the market value of the Company's common stock.
<PAGE>
Stock Options - The Company has 2,000,000 shares of stock reserved for
stock options under a 1995 Stock Option Plan.
Generally, the options outstanding (1) are granted at prices equal to
the market value of the stock on the date of grant, (2) vest
immediately, ratably over a five year vesting period, or one year prior
to expiration, and, (3) expire over a period of five or ten years from
the date of grant. No previously issued options have been repriced.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
<S> <C> <C>
Outstanding at January 1, 1996 729,360 $ 1.57
Granted 427,235 3.07
Exercised (135,000) 0.66
Forfeited (97,748) 1.63
----------
Outstanding at December 31, 1996 923,847 2.38
Granted 837,000 3.06
Exercised (223,000) 0.72
----------
Outstanding at December 31, 1997 1,537,847 3.00
Granted 112,500 2.44
Exercised (32,000) 1.25
Forfeited (117,600) 2.74
----------
Outstanding at December 31, 1998 1,500,747 $ 3.01
==========
Options exercisable at December 31:
1998 835,897 $ 2.85
1997 653,012 $ 2.77
1996 532,909 $ 1.82
</TABLE>
The following table summarizes information about stock options at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
---------------- ---------- ------------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.00 - $2.50 207,900 3.33 $2.16 160,225 $2.20
3.00 - 3.50 1,105,847 4.34 3.01 675,672 3.00
4.00 187,000 8.14 4.00 - -
---------- --------
1,500,747 4.87 3.01 835,897 2.85
========== ========
</TABLE>
Had the fair value method been used for valuing options granted in
1998, 1997 and 1996, the Company's net income (loss) and net income
(loss) per share would have changed to the pro forma amounts indicated
below:
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net Income (Loss) $(8,691,873) $ (1,510,236) $ 822,306
Net Income (Loss) Per Share:
Basic $ (.77) $ (.19) $ .12
Diluted $ (.77) $ (.19) $ .11
</TABLE>
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option-pricing model with the following
assumptions and results for the grants:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Dividend yield None None None
Expected volatility 55.0% 55.62% 53.67%
Expected life of option 4 or 10 years 5 or 10 years 5 or 10 years
Risk-free interest rate 5.73% 6.56% 6.23%
Fair value of options on grant date $0.44 $1.64 $1.49
</TABLE>
Employee Stock Purchase Plan - The Company's Board of Directors and
Stockholders adopted an Employee Stock Purchase Plan (the Stock
Purchase Plan) which allows employees to purchase shares of the
Company's common stock at 90% of the fair market value, as defined. The
aggregate number of shares that could be issued is 200,000 shares of
common stock. During 1998, 1997 and 1996, the Company issued 93,088,
21,137 and 7,317 shares, respectively, under the Stock Purchase Plan.
Fair value disclosures under FAS No. 123 have not been disclosed for
shares under the Employee Stock Purchase Plan as such values are
immaterial.
Warrants - The Company has issued warrants to directors, selling
agents, and consultants in consideration for services performed. The
Company has also issued warrants in connection with the issuance of
debt. The warrants issued in connection with the debt expire at various
dates through 2003.
<PAGE>
A summary of the stock warrants activity is as follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Shares Per Share
---------- --------------
<S> <C> <C>
Outstanding at January 1, 1996 1,228,725 $ 0.59 - 4.00
Granted 322,831 2.63 - 4.00
Exercised (86,592) 0.59 - 2.19
Forfeited (250,000) 2.63 - 4.00
----------
Outstanding at December 31, 1996 1,214,964 1.25 - 4.00
Granted 20,800 3.00
Exercised (86,800) 1.50 - 2.19
Forfeited (1,600) 3.16
----------
Outstanding at December 31, 1997 1,147,364 1.25 - 4.00
Granted 1,050,000 1.65 - 2.25
Exercised (80,000) 1.25
Forfeited (22,400) 1.25 - 3.00
----------
Outstanding at December 31, 1998 2,094,964 $ 1.65 - 4.00
==========
Warrants exercisable at year-end:
1998 2,094,964 $ 1.65 - 4.00
1997 1,147,364 $ 1.25 - 4.00
1996 1,144,533 $ 1.25 - 4.00
</TABLE>
Warrants to purchase 480,000 shares of common stock at a weighted
average exercise price of $2.38 per share contain a net value exercise
provision allowing for the issuance of a lesser number of shares than
provided for in the warrant without payment of the cash exercise price.
Stockholder Note and Interest Receivable - Note and interest receivable
are amounts due from a stockholder and officer of the Company. The
amount due represents receivables relating to transactions with the
stockholder and officer of the Company.
<PAGE>
8. INCOME TAXES
A reconciliation between taxes computed at the expected federal income
tax rate and the effective tax rate for the years ended December 31 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Tax expense (benefit) computed at statutory rates $ (320,000) $(310,000) $ 50,000
State taxes, net of federal effect (10,000) (15,000) 48,000
Nondeductible goodwill amortization 190,000 160,000 120,000
Other 20,000 5,000 (28,000)
Change in valuation allowance 170,000 205,000 (152,000)
----------- --------- ---------
$ 50,000 $ 45,000 $ 38,000
=========== ========= =========
</TABLE>
At December 31, 1998, the Company had approximately $4,500,000 of
federal and state operating loss carryforwards. The carryforwards
expire from 2004 to 2013.
The components of deferred tax assets (liabilities) at December 31
consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Current:
Accounts and notes receivable $ 690,000 $ 570,000 $ 290,000
Accrued employee benefits 160,000 230,000 170,000
Tax accounting change adjustment (120,000) (100,000) (100,000)
Reserve for discontinued operations 1,310,000 - -
Other - - (10,000)
----------- --------- ---------
Net current asset $ 2,040,000 $ 700,000 $ 350,000
=========== ========= =========
Noncurrent:
Tax accounting change adjustment $ (240,000) $(380,000) $(600,000)
Difference between tax and book depreciation
and amortization (150,000) (200,000) (90,000)
Other 30,000 30,000 -
Tax loss carryforwards 1,840,000 330,000 610,000
----------- --------- ---------
Net non-current asset (liability) $ 1,480,000 $(220,000) $ (80,000)
=========== ========= =========
Total net current asset $ 2,040,000 $ 700,000 $ 350,000
Total net non-current asset (liability) 1,480,000 (220,000) (80,000)
----------- --------- ---------
3,520,000 480,000 270,000
Less valuation allowance (3,520,000) (480,000) (270,000)
----------- --------- ---------
$ - $ - $ -
=========== ========= =========
</TABLE>
<PAGE>
9. FOURTH QUARTER ADUSTMENTS
During the fourth quarter of 1998, the Company reported a charge of
$825,000 to selling, general and administrative expenses to increase
its reserve for uncollectible accounts receivables. Additionally,
adjustments were made in the fourth quarter of 1998 related to
discontinued operations, which are described in Note 3.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH FINANCING
ACTIVITIES
Supplemental cash flow information and noncash financing for the years
ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- ---------
<S> <C> <C> <C>
Cash paid for interest (net of capitalized
interest of $129,440 in 1997) $1,205,192 $526,306 $ 225,434
Conversion of notes payable and accrued
interest to equity - 314,756 1,054,445
Issuance of notes payable in connection with
acquisitions - 250,000 300,000
Issuance of common stock in connection with
acquisitions 407,500 415,625 222,314
Issuance of stock warrant in connection with
the design and implementation of management
information and control system agreement - 70,431 -
Line of credit borrowings refinanced with long-
term debt - 750,000 -
Notes payable refinanced with long-term debt - 600,000 -
Debt assumed by company through acquisitions 165,159 315,492 -
Issuance of common stock in connection with
a software license agreement - 26,250 -
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As disclosed in the Company's Current Report on Form 8-K dated October
20, 1998, following the completion of the 1996 and 1997 audits, the Company's
former independent auditors, Deloitte & Touche LLP, provided the Audit Committee
of the Company's Board of Directors with letters noting certain deficiencies in
the design or operation of the Company's internal control which, in Deloitte &
Touche LLP's judgement, could adversely affect the Company's ability to record,
process, summarize and report financial data consistent with the assertions of
the Company's management in the Company's financial statements. The Company
believes that the majority of such deficiencies have been corrected and the
Company is working to resolve any remaining deficiencies.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Registrant and
their positions and offices presently held are as follows:
Name Age Position with Company
- -------------- --- ----------------------
Loren S. Brink 43 President, Chief Executive Officer and
Director
Charles E. Bidwell 54 Chairman, Chief Financial Officer, Treasurer
and Secretary
Charles J. Pappas 49 President, Health & Fitness Services Division
Loren S. Brink has been President and Chief Executive Officer of the
Company since its inception in 1981, and was Chairman of the Board until
December 1998. He holds a Masters Degree in Cardiac Rehabilitation and Adult
Fitness from the University of Wisconsin. He has an extensive clinical
background, has published numerous articles regarding corporate fitness and
speaks frequently at national conferences.
Charles E. Bidwell has been a Director of the Company since 1988 and
has served as a consultant to the Company in the position of Chief Financial
Officer since July 1997 and as Chairman of the Board since December 1998. Mr.
Bidwell is a venture capitalist and has served as a consultant to various
companies. From 1981 through April 1994, Mr. Bidwell was the Chief Financial
Officer of Red Owl Stores, Inc., a Minneapolis-based food retailer. He has a
25-year history of starting and managing new businesses, as well as significant
corporate experience with Tonka, Inc. and Red Owl Stores, Inc. He holds an MBA
in Marketing and Finance from Carnegie-Mellon University in Pittsburgh,
Pennsylvania.
Charles J. Pappas has served as President of the Company's Health &
Fitness Services Division since March 10, 1997. Prior to joining the Company,
from 1995 to 1997 Mr. Pappas was General Manager of Bearpath Golf and Country
Club, a golf course, clubhouse, pool and tennis facility located in Eden
Prairie, Minnesota. From 1995 to 1996, Mr. Pappas was a retail business advisor
to the Shakopee Mdewakanton Dakota Community. From 1994 to 1995, Mr. Pappas was
General Manager of Dakotah! Sport and Fitness, an athletic club operated by the
Shakopee Mdewakanton Dakota Community located near Prior Lake, Minnesota. From
1985 to 1993, Mr. Pappas was Vice President/General Manager of Flagship Athletic
Club located in Eden Prairie, Minnesota.
There are no family relationships among any of the Company's directors
or executive officers.
The information required by Item 10 relating to directors and
compliance with Section 16(a) of the Exchange Act is incorporated herein by
reference to the sections labeled "Election of Directors" and "Section 16(a)
<PAGE>
Beneficial Ownership Reporting Compliance," respectively, which appear in the
Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein reference to
the section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference
to the section labeled "Principal Shareholders and Management Shareholdings"
which appears in the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report.
(1) Financial Statements. The following financial
statements are included in Part II, Item 8 of this
Annual Report on Form 10-K:
Report of Grant Thornton LLP on Consolidated
Financial Statements as of and for the year ended
December 31, 1998
Report of Deloitte & Touche LLP on Consolidated
Financial Statements as of December 31, 1997 and for
the years ended December 31, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998
and 1997.
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
<PAGE>
(2) Financial Statement Schedules. All schedules are
omitted since they are not applicable, not required,
or the information is presented in the consolidated
financial statements or related notes.
(3) Exhibits. The following exhibits are included in this
report: See "Exhibit Index to Form 10-K" immediately
following the signature page of this Form 10-K.
(b) Reports on Form 8-K
On October 27, 1998, the Registrant filed a Form 8-K reporting
that on October 20, 1998, Deloitte & Touche LLP resigned as
the Registrant's principal independent accountant. The
Registrant further stated that there were not, in connection
with the audits of the two most recent fiscal years and from
January 1, 1998 to October 20, 1998, any disagreements with
Deloitte & Touche on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope
or procedure which, if not resolved to Deloitte & Touche's
satisfaction, would have caused it to make reference to the
subject matter of the disagreement in connection with its
report. Deloitte & Touche's report on the financial statements
of the Registrant for 1996 and 1997 did not contain an adverse
opinion or disclaimer of opinion or was not modified as to
uncertainty, audit scope or accounting principles.
On December 15, 1998, the Registrant filed a Form 8-K
reporting that on December 8, 1998, the Registrant had engaged
Grant Thornton LLP as its principal independent accountant.
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 12, 1999 HEALTH FITNESS CORPORATION
By /s/ Loren S. Brink
Loren S. Brink
President and Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Exchange Act, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears above or below constitutes and appoints Loren S. Brink and Charles E.
Bidwell, or either of them, his true and lawful attorneys-in-fact, and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Signature Date
/s/ Loren S. Brink President, CEO and Director
Loren S. Brink (principal executive officer) April 12, 1999
/s/ Charles E. Bidwell Chairman, Secretary, Treasurer,
Charles E. Bidwell CFO and Director (principal
financial and accounting officer) April 12, 1999
/s/ Susan H. DeNuccio
Susan H. DeNuccio Director March 29, 1999
/s/ William T. Simonet
William T. Simonet, M.D. Director March 26, 1999
/s/ Robert K. Spinner
Robert K. Spinner Director April 8, 1999
/s/ James A. Bernards
James A. Bernards Director March 29, 1999
<PAGE>
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-K
Exhibit
No. Description
3.1 Articles of Incorporation, as amended, of the Company - incorporated by
reference to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997
3.2 Restated By-Laws of the Company -- incorporated by reference to the
Company's Registration Statement on Form SB-2 No. 33-83784C
4.1 Specimen of Common Stock Certificate -- incorporated by reference to
the Company's Registration Statement on Form SB-2 No. 33-83784C
10.1 Purchase and Sale Agreement dated April 13, 1994 between the Company
and Mark W. Siewert and Sports and Orthopedic Physical Therapy, Inc. --
incorporated by reference to the Company's Registration Statement on
Form SB-2 No. 33-83784C
*10.2 Executive Employment Agreement dated May 22, 1997 between the Company
and Loren S. Brink - incorporated by reference to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997
10.3 Standard Office Lease Agreement (Net) dated as of June 13, 1995
covering a portion of the Company's headquarters - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1996
10.4 Standard Office Lease Agreement (Net) dated as of September 3, 1997
covering a portion of the Company's headquarters - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997
*10.5 Company's 1995 Stock Option Plan - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995
*10.6 Amendment to Company's 1995 Stock Option Plan - incorporated by
reference to Part II, Item 4 of the Company's Form 10-QSB for the
quarter ended June 30, 1997
*10.7 Consulting Agreement I dated effective as of April 1, 1997 between
Health Fitness Corporation and Charles E. Bidwell - incorporated by
reference to the Company's Form 10-Q for the quarter ended June 30,
1998
*10.8 Consulting Agreement II dated effective as of May 1, 1998 between
Health Fitness Corporation and Charles E. Bidwell - incorporated by
reference to the Company's Form 10-Q for the quarter ended June 30,
1998
10.9 Agreement of Purchase and Sale dated December 23, 1996 by and among The
Preferred Companies, Inc., its shareholders, and Health Fitness Rehab,
Inc. incorporated by reference to the Company's Current Report on Form
8-K filed on January 7, 1997
10.10 Agreement of Purchase and Sale dated February 7, 1997 by and between
Isernhagen & Associates, Inc. and Health Fitness Rehab, Inc. -
incorporated by reference to the Company's Current Report on Form 8-K
filed on February 21, 1997
<PAGE>
10.11 Agreement of Purchase and Sale dated February 7, 1997 by and between
Isernhagen Ltd. and Health Fitness Rehab, Inc. - incorporated by
reference to the Company's Current Report on Form 8-K filed on February
21, 1997
10.14 Loan and Security Agreement dated February 17, 1998 among the Company,
the Company's subsidiaries and Madeleine L.L.C. - incorporated by
reference to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997
10.15 Amendment No. 3 to Loan and Security Agreement dated June 26, 1998
among the Company, the Company's subsidiaries and Madeleine L.L.C. -
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998
10.16 Amendment No. 4 to Loan and Security Agreement dated September 10, 1998
among the Company, the Company's subsidiaries and Madeleine L.L.C. -
incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998
10.17 Amendment No. 5 to Loan and Security Agreement dated November 2, 1998
among the Company, the Company's subsidiaries and Madeleine L.L.C.
10.18 Amendment No. 6 to Loan and Security Agreement dated January 8, 1999
among the Company, the Company's subsidiaries and Madeleine L.L.C.
10.19 Amendment No. 7 to Loan and Security Agreement dated February 26, 1999
among the Company, the Company's subsidiaries and Abelco Finance L.L.C.
as assignee of Madeleine L.L.C.
21.1 Subsidiaries
23.1 Consent of Grant Thornton LLP
23.2 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on Signature Page)
27.1 Financial Data Schedule for year ended December 31, 1998 (in electronic
version only)
*Indicates management contract or compensatory plan or arrangement.
AMENDMENT NO. 5 TO LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of November 2, 1998, by and among Health Fitness
Corporation, a Minnesota corporation ("Borrower"), Health Fitness Rehab, Inc., a
Minnesota corporation ("HF Rehab"), The Preferred Companies, Inc., an Arizona
corporation ("TPC"), Health Fitness Rehab of Iowa, Inc., an Iowa corporation
("HF Rehab Iowa"), Duffy & Associates Physical Therapy Corp., an Iowa
corporation ("Duffy"), Medlink Corporation, an Iowa corporation ("Medlink"),
Medlink Services, Inc., an Iowa corporation ("Medlink Services"), Midlands
Physical Therapy, Inc., a Nebraska corporation ("Midlands"), Fitness Centers of
America, a California corporation ("Fitness Centers"), Sports & Orthopedic
Physical Therapy, Inc., a Minnesota corporation ("Sports Therapy") and
International Fitness Club Network, Inc.. a Rhode Island corporation, formerly
known as David. W. Pickering, Inc. ("IFCN", and together with Sports Therapy, HF
Rehab, TPC, HF Rehab Iowa, Duffy, Medlink, Medlink Services, Midlands and
Fitness Centers, collectively, "Guarantors" and sometimes referred to
individually as a "Guarantor") and Madeleine L.L.C., a New York limited
liability company ("Lender").
W I T N E S S E T H
WHEREAS, Lender and Borrower have entered into financing arrangements
pursuant to which Lender may make loans and advances and provide other financial
accommodations to Borrower as set forth in the Loan and Security Agreement,
dated February 17, 1998, by and among Lender, Borrower and Guarantors, as
amended by Amendment No. 1 to Loan and Security Agreement, dated February 28,
1998, Amendment No. 2 to Loan and Security Agreement, dated June 4, 1998,
Amendment No. 3 to Loan and Security Agreement, dated June 26, 1998, Amendment
No. 4 to Loan and Security Agreement, dated September 10, 1998, (and as amended
hereby and as the same may hereafter be further amended, modified, supplemented,
extended, renewed, restated or replaced, the "Loan Agreement") and the
agreements, documents and instruments at any time executed and/or delivered in
connection therewith or related thereto (collectively, together with the Loan
Agreement, the "Financing Agreements");
WHEREAS, Borrower and Guarantors have requested certain amendments to
the Loan Agreement and Lender is willing to agree to such amendments, subject to
the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Definitions. For purposes of this Amendment, unless otherwise
defined herein, all terms used herein, including, but not limited to, those
terms used and/or defined in the recitals above, shall have the respective
meanings assigned to such terms in the Loan Agreement.
<PAGE>
2. Repayment of Certain Loans. As of the date hereof, the maximum
exposure in excess of the Borrowing Base is $149,000 Without limiting the rights
of Lender with respect to any other Loans at any time outstanding in excess of
the Borrowing Base, such amount shall be repaid in eight (8) consecutive weekly
installments on Tuesday of each week, commencing with Tuesday, November 3, 1998,
with the first seven (7) installments in the amount of $20,000 and the eighth
(8th) and final installment in the amount of $9,000, so long as the Loans
outstanding exceed the then current borrowing base; provided, that, the entire
amount of such Loans shall become immediately due and payable, without notice or
demand, at Lender's option, (a) upon the occurrence of an Event of Default or
upon the termination of the Loan Agreement, or (b) at any time that there are
any other Loans outstanding in excess of the Borrowing Base. The failure of
Borrower to make any of such payments shall constitute an Event of Default.
3. Waivers.
(a) Subject to the terms and conditions contained herein,
Lender hereby waives the Event of Default arising under Section 9.1(b) of the
Loan Agreement as a result of the failure of Borrower to comply with Section
8.10 and Section 8.10A of the Loan Agreement as of September 30, 1998, provided,
that, (i) such waiver shall only apply to the failure of Borrower to comply with
such Sections for the period from January 1, 1998 through and including
September 30, 1998 (and not as of the end of any month thereafter) and (ii) such
waiver shall not be effective unless and until Lender shall have received an
original of this Amendment duly executed and delivered by Borrower and
Guarantors.
(b) Lender has not waived, is not by this Amendment waiving,
and has no intention of waiving any other Event of Default which may have
occurred on or prior to the date hereof, whether or not continuing on the date
hereof, or which may occur after the date hereof (whether the same or similar to
the Events of Default referred to above), other than the Event of Default
specifically referred to in Section 3(a) for the period ending September 30,
1998. Upon the occurrence of any other Event of Default, whether or not
continuing on the date hereof, or which may occur on or after the date hereof
(whether the same or similar to the Event of Default described above, including
an Event of Default pursuant to the failure of Borrower and Guarantors to comply
with Section 8.10 or 8.10A of the Loan Agreement as of the last day of any month
after September 30, 1998), Lender shall have and hereby specifically reserves
the right in its discretion, to exercise any and all of its rights and remedies
under the Loan Agreement, the other Financing Agreements, applicable law or
otherwise.
(c) The foregoing waiver shall not be construed as a bar to or
a waiver of any other or further Event of Default on any future occasion,
whether similar in kind or otherwise and shall not constitute a waiver, express
or implied of any of the rights and remedies of Lender arising under the terms
of the Financing Agreements of any future occasion or otherwise.
4. Fee. As consideration for Lender's entering into this Amendment,
Borrower shall pay to Lender a fee in the amount of $20,000, which shall be
fully earned and payable as of the date hereof, and may be charged by Lender
directly to Borrower's loan account maintained by Lender.
<PAGE>
5. Binding Effect. This Amendment has been duly executed and delivered
by Borrower and Guarantors and is in full force and effect as of the date
hereof, and the agreements and obligations of Borrower and Guarantors contained
herein constitute the legal, valid and binding obligations of Borrower and
Guarantors enforceable against Borrower and Guarantors in accordance with their
respective terms.
6. Conditions Precedent. The effectiveness of the other provisions of
this Amendment shall be subject to the receipt by Lender of an original of this
Amendment, duly authorized, executed and delivered by Borrower and Guarantors.
7. Effect of this Amendment. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreements are intended or
implied and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment shall
control.
8. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Amendment.
9. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
10. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned have caused this agreement
to be duly authorized, executed and delivered as of the day and year first above
written.
HEALTH FITNESS CORPORATION HEALTH FITNESS REHAB, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
DUFFY & ASSOCIATES PHYSICAL THE PREFERRED COMPANIES, INC.
THERAPY SERVICES CORP.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MEDLINK CORPORATION HEALTH FITNESS REHAB OF IOWA, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MEDLINK SERVICES, INC. FITNESS CENTERS OF AMERICA
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
SPORTS & ORTHOPEDIC PHYSICAL INTERNATIONAL FITNESS CLUB
THERAPY, INC. NETWORK, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
[SIGNATURES CONTINUE ON THE NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
MIDLANDS PHYSICAL THERAPY, INC.
By: /s/ Charles E. Bidwell
Title: Chief Financial Officer
MADELEINE L.L.C.
By: /s/ Daniel Wolf
Title: Managing Director
AMENDMENT NO. 6 TO LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of January 8, 1999, by and among Health Fitness
Corporation, a Minnesota corporation ("Borrower"), Health Fitness Rehab, Inc., a
Minnesota corporation ("HF Rehab"), The Preferred Companies, Inc., an Arizona
corporation ("TPC"), Health Fitness Rehab of Iowa, Inc., an Iowa corporation
("HF Rehab Iowa"), Duffy & Associates Physical Therapy Corp., an Iowa
corporation ("Duffy"), Medlink Corporation, an Iowa corporation ("Medlink"),
Medlink Services, Inc., an Iowa corporation ("Medlink Services"), Midlands
Physical Therapy, Inc., a Nebraska corporation ("Midlands"), Fitness Centers of
America, a California corporation ("Fitness Centers"), Sports & Orthopedic
Physical Therapy, Inc., a Minnesota corporation ("Sports Therapy") and
International Fitness Club Network, Inc., a Rhode Island corporation, formerly
known as David W. Pickering, Inc. ("IFCN," and together with Sports Therapy, HF
Rehab, TPC, HF Rehab Iowa, Duffy, Medlink, Medlink Services, Midlands and
Fitness Centers, collectively, "Guarantors" and sometimes referred to
individually as a "Guarantor") and Madeleine L.L.C., a New York limited
liability company ("Lender").
W I T N E S S E T H
WHEREAS, Lender and Borrower have entered into financing arrangements
pursuant to which Lender may make loans and advances and provide other financial
accommodations to Borrower as set forth in the Loan and Security Agreement,
dated February 17, 1998, by and among Lender, Borrower and Guarantors, as
amended by Amendment No. 1 to Loan and Security Agreement, dated February 28,
1998, Amendment No. 2 to Loan and Security Agreement, dated June 4, 1998,
Amendment No. 3 to Loan and Security Agreement, dated June 26, 1998, Amendment
No. 4 to Loan and Security Agreement, dated September 10, 1998, Amendment No. 5
to Loan and Security Agreement, dated November 2, 1998 (and as amended hereby
and as the same may hereafter be further amended, modified, supplemented,
extended, renewed, restated or replaced, the "Loan Agreement") and the
agreements, documents and instruments at any time executed and/or delivered in
connection therewith or related thereto (collectively, together with the Loan
Agreement, the "Financing Agreements");
WHEREAS, Borrower and Guarantors have requested certain amendments to
the Loan Agreement and Lender is willing to agree to such amendments, subject to
the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
1. Definitions.
(a) For purposes of this Amendment, unless otherwise defined
herein, all terms used herein, including, but not limited to, those terms used
and/or defined in the recitals above, shall have the respective meanings
assigned to such terms in the Loan Agreement.
(b) All references to the term "Special Availability Reserve" are
hereby deleted.
(c) The term "Supplemental Loans" as used herein shall mean the
Loans at any time made by Lender to or for the benefit of Borrower on a
revolving basis (involving advances, repayments and readvances) in excess of the
amount of the Borrowing Base as set forth in Section 3 hereof.
(d) All references to the term "Loans" in the Loan Agreement shall
be deemed and each such reference is hereby amended to include, in addition and
not in limitation, the Supplemental Loans.
2. Borrowing Base.
(a) Section 1.8(a)(i) of the Loan Agreement is hereby deleted in
its entirety and the following substituted therefor: "$7,200,000, as reduced by
an amount equal to $20,000 on Tuesday of each week, commencing Tuesday, February
16, 1999,"
(b) Section 1.8(b) of the Loan Agreement is hereby amended by
deleting the following at the end thereof: "and including the Special
Availability Reserve."
3. Supplemental Loans.
(a) In addition to the Loans which may be made by Lender to
Borrower pursuant to Section 2.1 of the Loan Agreement, subject to the other
terms and conditions of the Loan Agreement, Lender may from time to time make
Supplemental Loans to Borrower, provided, that, the aggregate amount of the
Loans up to the amount of the Borrowing Base plus the Supplemental Loans
outstanding at any time shall not exceed the amount equal to $7,200,000 as
reduced by an amount equal to $20,000 on Tuesday of each week, commencing
Tuesday, February 16, 1999.
(b) Borrower acknowledges and agrees that, notwithstanding
anything to the contrary contained in the Loan Agreement or the other Financing
Agreements, the failure of Borrower to pay the Obligations arising pursuant to
the Supplemental Loans on the effective date of any reduction in the limit as
set forth in Section 3(a) above in the amount of the excess, if any, of the
aggregate unpaid principal amount of the Supplemental Loans over the amount of
the limit as so reduced shall constitute an Event of Default.
4. Waivers.
(a) Subject to the terms and conditions contained herein, Lender
hereby waives the Event of Default arising under Section 9.1(b) of the Loan
Agreement as a result of the failure of Borrower to comply with Section 8.10 and
Section 8.10A of the Loan Agreement as of November 30, 1998, provided, that, (i)
such waiver shall only apply to the failure of Borrower to comply with such
Sections for the period from January 1, 1998 through and including November 30,
1998 (and not as of the end of any month thereafter) and (ii) such waiver shall
not be effective unless and until Lender shall have received an original of this
Amendment duly executed and delivered by Borrower and Guarantors.
(b) Lender has not waived, is not by this Amendment waiving, and
has no intention of waiving any other Event of Default which may have occurred
on or prior to the date hereof, whether or not continuing on the date hereof, or
which may occur after the date hereof (whether the same or similar to the Events
of Default referred to above), other than the Event of Default specifically
referred to in Section 4(a) for the period ending November 30, 1998. Upon the
occurrence of any other Event of Default, whether or not continuing on the date
hereof, or which may occur on or after the date hereof (whether the same or
similar to the Event of Default described above, including an Event of Default
pursuant to the failure of Borrower and Guarantors to comply with Section 8.10
or 8.10A of the Loan Agreement as of the last day of any month after November
30, 1998), Lender shall have and hereby specifically reserves the right in its
discretion, to exercise any and all of its rights and remedies under the Loan
Agreement, the other Financing Agreements, applicable law or otherwise.
(c) The foregoing waiver shall not be construed as a bar to or a
waiver of any other or further Event of Default on any future occasion, whether
similar in kind or otherwise and shall not constitute a waiver, express or
implied of any of the rights and remedies of Lender arising under the terms of
the Financing Agreements of any future occasion or otherwise.
5. Indebtedness. Section 8.6(g) of the Loan Agreement is hereby deleted
in its entirety and the following substituted therefor:
"(g) Indebtedness of Borrower or any Guarantor or Subsidiary
arising after the date hereof secured by purchase money liens or
security interests permitted under Section 8.5(h) hereof upon specific
fitness equipment hereafter acquired by Borrower or such Guarantor or
Subsidiary, provided, that, the aggregate amount of such Indebtedness
of Borrower to CFC Funding Corporation (or its assignee) arising under
the Lease Agreement, dated December 22, 1998 between Borrower and CFC
Funding Corporation (or its assignee) shall not exceed $237,739 (as
reduced by all payments in respect thereof) and the aggregate amount of
all other such Indebtedness incurred in any fiscal year of Borrower
shall not exceed $100,000 in such fiscal year of Borrower; and"
6 Fee. In consideration of the terms hereof, Borrower shall pay to
Lender a fee in the amount of $10,000, which fee is fully earned as of the date
hereof and shall be payable upon the earliest of the occurrence of an Event of
Default, or termination or non-renewal of the financing arrangements between
Lender and Borrower under the Loan Agreement or the Final Maturity Date. Lender
may, at its option, charge such fee to the loan account of Borrower maintained
by Lender.
7. Binding Effect. This Amendment has been duly executed and delivered
by Borrower and Guarantors and is in full force and effect as of the date
hereof, and the agreements and obligations of Borrower and Guarantors contained
herein constitute the legal, valid and binding obligations of Borrower and
Guarantors enforceable against Borrower and Guarantors in accordance with their
respective terms.
8. Conditions Precedent. The effectiveness of the other provisions of
this Amendment shall be subject to the receipt by Lender of an original of this
Amendment, duly authorized, executed and delivered by Borrower and Guarantors.
9. Effect of this Amendment. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreements are intended or
implied and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment shall
control. Nothing contained herein shall be construed to limit the right of
Lender at any time and from time to time demanding payment of any Loans (and
related Obligations) outstanding in excess of the Borrowing Base.
10. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Amendment.
11. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
12. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
13. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
IN WITNESS WHEREOF, each of the undersigned have caused this agreement
to be duly authorized, executed and delivered as of the day and year first above
written.
HEALTH FITNESS CORPORATION HEALTH FITNESS REHAB, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
[SIGNATURES CONTINUE ON THE NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
DUFFY & ASSOCIATES PHYSICAL THE PREFERRED COMPANIES, INC.
THERAPY SERVICES CORP.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MEDLINK CORPORATION HEALTH FITNESS REHAB OF IOWA, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MEDLINK SERVICES, INC. FITNESS CENTERS OF AMERICA
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
SPORTS & ORTHOPEDIC PHYSICAL INTERNATIONAL FITNESS CLUB
THERAPY, INC. NETWORK, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MIDLANDS PHYSICAL THERAPY, INC.
By: /s/ Charles E. Bidwell
Title: Chief Financial Officer
[SIGNATURES CONTINUE ON THE NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
MADELEINE L.L.C.
By: /s/ Daniel Wolf
Title: Managing Director
AMENDMENT NO. 7 TO LOAN AND SECURITY AGREEMENT
AMENDMENT dated as of February 26, 1999, by and among Health Fitness
Corporation, a Minnesota corporation ("Borrower"), Health Fitness Rehab, Inc., a
Minnesota corporation ("HF Rehab"), The Preferred Companies, Inc., an Arizona
corporation ("TPC"), Health Fitness Rehab of Iowa, Inc., an Iowa corporation
("HF Rehab Iowa"), Duffy & Associates Physical Therapy Corp., an Iowa
corporation ("Duffy"), Medlink Corporation, an Iowa corporation ("Medlink"),
Medlink Services, Inc., an Iowa corporation ("Medlink Services"), Midlands
Physical Therapy, Inc., a Nebraska corporation ("Midlands"), Fitness Centers of
America, a California corporation ("Fitness Centers"), Sports & Orthopedic
Physical Therapy, Inc., a Minnesota corporation ("Sports Therapy") and
International Fitness Club Network, Inc.. a Rhode Island corporation, formerly
known as David. W. Pickering, Inc. ("IFCN," and together with Sports Therapy, HF
Rehab, TPC, HF Rehab Iowa, Duffy, Medlink, Medlink Services, Midlands and
Fitness Centers, collectively, "Guarantors" and sometimes referred to
individually as a "Guarantor") and Ableco Finance LLC, The Long Horizons
Overseas Fund, Ltd., Styx Partners, L.P. and Styx International, Ltd., as direct
or indirect assignees of Madeleine L.L.C., a New York limited liability company
(individually and collectively, "Lender").
W I T N E S S E T H
WHEREAS, Lender and Borrower have entered into financing arrangements
pursuant to which Lender may make loans and advances and provide other financial
accommodations to Borrower as set forth in the Loan and Security Agreement,
dated February 17, 1998, by and among Lender, Borrower and Guarantors, as
amended by Amendment No. 1 to Loan and Security Agreement, dated February 28,
1998, Amendment No. 2 to Loan and Security Agreement, dated June 4, 1998,
Amendment No. 3 to Loan and Security Agreement, dated June 26, 1998, Amendment
No. 4 to Loan and Security Agreement, dated September 10, 1998, Amendment No. 5
to Loan and Security Agreement, dated November 2, 1998, and Amendment No. 6 to
Loan and Security Agreement, dated as of January 8, 1999 (and as amended hereby
and as the same may hereafter be further amended, modified, supplemented,
extended, renewed, restated or replaced, the "Loan Agreement") and the
agreements, documents and instruments at any time executed and/or delivered in
connection therewith or related thereto (collectively, together with the Loan
Agreement, the "Financing Agreements");
WHEREAS, Borrower and Guarantors have requested certain amendments to
the Loan Agreement and Lender is willing to agree to such amendments, subject to
the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
1. Definitions.
(a) For purposes of this Amendment, unless otherwise defined
herein, all terms used herein, including, but not limited to, those terms used
and/or defined in the recitals above, shall have the respective meanings
assigned to such terms in the Loan Agreement.
(b) The term "Debenture Agent" shall mean Charles E. Bidwell,
in his capacity as agent for any holder of the Subordinated Debentures, and his
successors and assigns and including any other or additional person that may at
any time act for or on behalf of any of the Junior Creditors.
(c) The term "Subordinated Debentures" shall mean,
collectively, the Secured Convertible Subordinated Debentures at any time issued
by Borrower, as the same may be amended, modified, supplemented, extended,
renewed, restated or replaced.
2. Encumbrances. Section 8.5 of the Loan Agreement is hereby amended to
add a new Section 8.5(i) as follows:
"(i) the security interests in and liens upon the
Collateral of Borrower granted to the Debenture Agent in the
Subordinated Debentures to secure the Indebtedness of Borrower
to the holders of the Subordinated Debentures permitted under
Section 8.6 below, which liens and security interests are
subject and subordinate in all respects to the liens and
security interests of Lender."
3. Indebtedness. Section 8.6 of the Loan Agreement is hereby amended to
add a new Section 8.6(i) as follows:
"(i) Indebtedness of Borrower to the holders of the
Subordinated Debentures evidenced by the Subordinated
Debentures, provided, that, (A) the terms and conditions of
such Indebtedness shall be acceptable in all respects to
Lender, (B) the aggregate amount of all such Indebtedness
shall not exceed $400,000 (less the aggregate amount of all
repayments or repurchases of principal in respect thereof)
plus interest thereon at the rate set forth in the
Subordinated Debentures as in effect on the date of the
execution thereof, (C) such Indebtedness is, in all respects,
subject to and subordinate in right of payment to, the right
of Lender to receive the prior final payment and satisfaction
in full of all of the Obligations, (D) Borrower shall not,
directly or indirectly, make any payments in respect of such
Indebtedness, including, but not limited to, any prepayments
or other non-mandatory payments, except, that, Borrower may
make regularly scheduled payments of interest, on an
unaccelerated basis, in respect of such Indebtedness in
accordance with the terms of the Subordinated Debentures as in
effect on the date of the execution thereof, unless and until
Lender sends written notice to Debenture Agent of the
occurrence of an Event of Default, (E) prior to the issuance
of any Subordinated Debenture, Borrower shall notify Lender in
writing of the person to whom such Subordinated Debenture will
be issued and shall deliver to Lender the agreement of such
person, in form and substance satisfactory to Lender, to be
bound by the terms of the Intercreditor and Subordination
Agreement by and among Lender and the holders of the
Subordinated Debentures, (F) Borrower shall not, directly or
indirectly, (1) amend, modify, alter or change any terms of
such Indebtedness or any agreement, document or instrument
related thereto as in effect on the date hereof, except, that,
Borrower may, after prior written notice to Lender, amend,
<PAGE>
modify, alter or change the terms thereof so as to extend the
maturity thereof or defer the timing of any payments in
respect thereof, or to forgive or cancel any portion of such
Indebtedness (other than pursuant to payments thereof), or to
reduce the interest rate or any fees in connection therewith
or to make any covenants contained therein less restrictive or
burdensome as to Borrower or otherwise more favorable to
Borrower, or (2) redeem, retire, defease, purchase or
otherwise acquire such Indebtedness, or set aside or otherwise
deposit or invest any sums for such purpose and (G) Borrower
shall furnish to Lender all notices or demands in connection
with such Indebtedness either received by Borrower or on its
behalf, promptly after the receipt thereof, or sent by
Borrower or on its behalf, concurrently with the sending
thereof, as the case may be."
4. Binding Effect. This Amendment has been duly executed and delivered
by Borrower and Guarantors and is in full force and effect as of the date
hereof, and the agreements and obligations of Borrower and Guarantors contained
herein constitute the legal, valid and binding obligations of Borrower and
Guarantors enforceable against Borrower and Guarantors in accordance with their
respective terms.
5. Conditions Precedent. The effectiveness of the other provisions of
this Amendment shall be subject to the receipt by Lender of an original of this
Amendment, duly authorized, executed and delivered by Borrower and Guarantors.
6. Ableco as Agent. Borrowers and Guarantors are hereby authorized to
deal with Ableco Finance LLC as agent for itself, Long Horizons Overseas Fund,
Ltd., Styx Partners L.P. and Styx International Ltd. for all purposes in
connection with the Loan Agreement and the other Financing Agreements.
7. Effect of this Amendment. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreements are intended or
implied and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment shall
control. Nothing contained herein shall be construed to limit the right of
Lender at any time and from time to time demanding payment of any Loans (and
related Obligations) outstanding in excess of the Borrowing Base and nothing
contained herein should be construed as a waiver of any Event of Default.
<PAGE>
8. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Amendment.
9. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
10. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
11. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
IN WITNESS WHEREOF, each of the undersigned have caused this agreement
to be duly authorized, executed and delivered as of the day and year first above
written.
HEALTH FITNESS CORPORATION HEALTH FITNESS REHAB, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
DUFFY & ASSOCIATES PHYSICAL THE PREFERRED COMPANIES, INC.
THERAPY SERVICES CORP.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MEDLINK CORPORATION HEALTH FITNESS REHAB OF
IOWA, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
[SIGNATURES CONTINUE ON THE NEXT PAGE]
<PAGE>
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
MEDLINK SERVICES, INC. FITNESS CENTERS OF AMERICA
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
SPORTS & ORTHOPEDIC PHYSICAL INTERNATIONAL FITNESS CLUB
THERAPY, INC. NETWORK, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MIDLANDS PHYSICAL THERAPY, INC. ABLECO FINANCE LLC, for itself and
as agent
By: /s/ Charles E. Bidwell
By: /s/ Kevein P. Genda
Title: Chief Financial Officer
Title: Vice President
MADELEINE, L.L.C.
By: /s/ Kevein P. Genda
Title: Vice President
Exhibit 21.1
Subsidiaries (as of 3/25/99)
1. Sports & Orthopedic Physical Therapy, Inc., a Minnesota corporation
2. Fitness Centers of America, Inc. d/b/a Fitness Systems, a California
corporation
3. The Preferred Companies, Inc. d/b/a Preferred Therapy Providers of
America, an Arizona corporation
4. Health Fitness Rehab, Inc., a Minnesota corporation
5. Health Fitness Rehab of Iowa, Inc., an Iowa corporation
6. Duffy and Associates Physical Therapy Corp., an Iowa corporation
7. Medlink Management Services, Inc., an Iowa corporation
8. Medlink Corporation, an Iowa corporation
9. Midlands Physical Therapy, Inc., a Nebraska corporation
10. David W. Pickering, Inc., a Rhode Island corporation
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 26, 1999 (except for Note 5,
as to which the date is March 12, 1999), accompanying the consolidated financial
statements included in the Annual Report of Health Fitness Corporation and
subsidiaries on Form 10-K for the year ended December 31, 1998. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of Health Fitness Corporation on Form S-8 relating to the 1995
Employee Stock Purchase Plan (File No. 333-00876) and the 1995 Employee Stock
Option Plan, 1992 Nonqualified Employee Stock Option Plan, and 1992 Incentive
Employee Stock Option Plan (File No. 333-00874).
/s/ Grant Thornton LLP
Minneapolis, Minnesota
April 12, 1999
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration
Statements of Health Fitness Corporation on Form S-8 relating to the 1995
Employee Stock Purchase Plan, 1995 Employee Stock Option Plan, 1992 Nonqualified
Employee Stock Option Plan and the 1992 Incentive Employee Stock Option Plan of
our report dated April 8, 1998 (April 12, 1999 as to Note 3), appearing in the
Annual Report on Form 10-K of Health Fitness Corporation for the year ended
December 31, 1998.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 12, 1999
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