AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 2006
REGISTRATION NO. 333-131045
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEALTH FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 8090 41-1580506
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
3600 AMERICAN BLVD W., SUITE 560
BLOOMINGTON, MN 55431
(952) 831-6830
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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JERRY V. NOYCE
CHIEF EXECUTIVE OFFICER AND PRESIDENT
HEALTH FITNESS CORPORATION
3600 AMERICAN BLVD W., SUITE 560
BLOOMINGTON, MN 55431
(952) 831-6830
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPY TO:
JOHN A. SATORIUS, ESQ.
JEFFREY C. ERB, ESQ.
FREDRIKSON & BYRON, P.A.
4000 PILLSBURY CENTER
200 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
(612) 492-7000
(612) 492-7077 (FAX)
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after
the effective date of this Post-Effective Amendment No. 1 to the Registration
Statement based upon market conditions and other factors.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE SHARE PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE OFFERING PRICE(2) REGISTRATION FEE
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Common stock, $0.01 par value per share...... 6,630,000 $2.67(2) $17,702,100 $1,894.12(3)
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Common stock, $0.01 par value per share...... 51,000 $2.41(4) $122,910 $13.15(5)
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(1) In accordance with Rule 416(a), the registrant is also registering hereunder
an indeterminate number of shares that may be issued and resold resulting
from stock splits, stock dividends or similar transactions.
(2) Estimated pursuant to Rule 457(c) under the Securities Act, solely for the
purposes of calculating the registration fee, upon the basis of the average
high and low bid and ask prices of our common stock as quoted on the
Over-the-Counter Bulletin Board on January 12, 2006.
(3) Paid January 13, 2006.
(4) Estimated pursuant to Rule 457(c) under the Securities Act, solely for the
purposes of calculating the registration fee, upon the basis of the average
high and low bid and ask prices of our common as quoted on the
Over-the-Counter Bulletin Board on February 28, 2006.
(5) Paid March 7, 2006.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell the common stock covered by this prospectus
until the registration statement to which this prospectus relates is declared
effective by the securities and exchange commission. This prospectus is not an
offer to sell the common stock, and it is not soliciting an offer to buy the
common stock, in any jurisdiction where the offer and sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 3, 2006
PROSPECTUS
HEALTH FITNESS CORPORATION
6,681,000 SHARES OF COMMON STOCK
With this prospectus, the persons named in this prospectus or in prospectus
supplements (collectively, the "Selling Stockholders") may offer and sell up to
6,681,000 shares of our common stock in the manner described under "Plan of
Distribution." The shares of common stock covered by this prospectus include:
- 5,100,000 shares of common stock issued on March 10, 2006 upon conversion
of 1,000 shares of Series B Convertible Preferred Stock ("Series B
Stock") we issued on November 14, 2005 in a private placement to a
limited number of accredited investors;
- up to 1,530,000 shares of common stock, equal to 30% of the number of
shares of common stock issuable upon conversion of the Series B Stock, we
may be required to issue from time to time upon exercise, for cash, of
warrants we issued on November 14, 2005 to the original purchasers of the
Series B Stock; and
- up to 51,000 shares of common stock we may be required to issue from time
to time upon exercise of warrants we issued on November 14, 2005 to the
placement agents (or their affiliates) for the Series B Stock.
All 1,000 shares of Series B Stock, which are not covered by this
prospectus, were automatically converted into an aggregate 5,100,000 shares of
our common stock on March 10, 2006, the date the SEC first declared effective
the registration statement to which this prospectus relates.
We are required to maintain the effectiveness of the registration statement
to which this prospectus relates until the earlier of the date all shares of
common stock covered by this prospectus have been sold using this prospectus or
pursuant to Rule 144 (or other similar rule then in effect) under the Securities
Act of 1933, or such date as all shares of common stock covered by this
prospectus may be sold without volume restrictions pursuant to Rule 144(k).
Although we might receive cash proceeds from the exercise of the warrants
referenced above, we will not receive any proceeds from the sales, if any, of
the common stock covered by this prospectus. We will pay the expenses related to
the registration of the common stock covered by this prospectus. The Selling
Stockholders will pay commissions and selling expenses, if any, incurred by
them.
Our common stock is listed on the OTCBB under the symbol "HFIT." The low
and high sale prices for our common stock on March 30, 2006 on the OTCBB was
$2.25 and $2.44 per share, respectively.
INVESTING IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is April , 2006.
TABLE OF CONTENTS
PAGE
----
ABOUT THIS PROSPECTUS....................................... i
INCORPORATION BY REFERENCE OF CERTAIN DOCUMENTS............. ii
CAUTION REGARDING FORWARD-LOOKING STATEMENTS................ ii
PROSPECTUS SUMMARY.......................................... 1
THE OFFERING................................................ 3
RISK FACTORS................................................ 7
USE OF PROCEEDS............................................. 10
PRICE RANGE OF COMMON STOCK................................. 10
DIVIDEND POLICY............................................. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 12
PRINCIPAL SHAREHOLDERS...................................... 36
SELLING STOCKHOLDERS........................................ 39
PLAN OF DISTRIBUTION........................................ 42
DESCRIPTION OF CAPITAL STOCK................................ 44
LEGAL MATTERS............................................... 46
EXPERTS..................................................... 46
WHERE YOU CAN FIND MORE INFORMATION......................... 46
INDEX TO FINANCIAL STATEMENTS............................... F-1
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You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in or incorporated by reference in
this prospectus. The information contained in or incorporated by reference in
this prospectus is accurate only as of the date of this prospectus or as of the
earlier date or later date (in the case of information in a prospectus
supplement) stated with respect to such specific information, as applicable,
regardless of the time of any sale of the common stock. This document may be
used only where it is legal to sell these securities.
Other than in the United States, we have not taken any action or otherwise
authorized any action that would permit this offering, or possession or
distribution of this prospectus, in any jurisdiction where action for those
purposes is required. You are required to inform yourselves about and to observe
any restrictions relating to this offering and the distribution of this
prospectus in the United States.
In this prospectus, unless otherwise stated or the context otherwise
requires, reference to "the Company," "Health Fitness," "HFC," "we," "us," "our"
and similar references refer to Health Fitness Corporation and its consolidated
subsidiaries.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC using the SEC's shelf registration rules. Under the shelf registration
rules, using this prospectus and, if required, one or more prospectus
supplements, the Selling Stockholders from time to time may sell the common
stock covered by this prospectus in the manner described in "Plan of
Distribution." The shares covered by this prospectus include 5,100,000 shares of
common stock issuable upon the automatic conversion of all shares of Series B
Stock on the date the SEC first declares effective the registration statement to
which this prospectus relates, 1,530,000 shares of common stock, equal to 30% of
the number of shares of common stock issuable upon conversion of the Series B
Stock, issuable upon the exercise, for cash, of outstanding warrants we issued
to the original purchasers of the Series B Stock and 51,000 shares of common
stock
issuable upon the exercise, for cash, of warrants we issued to certain of the
placement agents (or their affiliates) for the Series B Stock.
A prospectus supplement may include additional risk factors or other
special considerations applicable to our business or common stock. Any
prospectus supplement may also add, update, or change information in this
prospectus. We recommend that you carefully read this entire prospectus, and all
information incorporated by reference in this prospectus, together with any
supplements before making a decision to invest in our common stock.
INCORPORATION BY REFERENCE OF CERTAIN DOCUMENTS
This prospectus incorporates documents by reference that are not presented
in or delivered with it. This means that we have disclosed important business,
financial, and other information by referring you to the publicly filed
documents containing this information. All information incorporated by reference
is part of this prospectus. The information incorporated by reference in this
prospectus is accurate only as of the date of the information on the front cover
of the applicable document, or such earlier date as is expressly stated or
otherwise apparent with respect to such incorporated information in the
applicable document, regardless of the time of delivery of this prospectus or
any sale of the common stock.
This prospectus incorporates by reference the documents listed below, which
we have filed with the SEC under SEC File No. 0-25064:
- Annual Report on Form 10-K for the year ended December 31, 2005 filed
March 30, 2006;
- Current Report on Form 8-K/A filed March 2, 2006 containing certain pro
forma and historical financial statement information in connection with
our acquisition of HealthCalc.Net, Inc. effective as of December 23,
2005; and
- Current Report on Form 8-K filed December 29, 2005 with respect to our
acquisition of HealthCalc.Net, Inc. effective as December 23, 2005.
All of the above filings are readily available on our website at
www.hfit.com, or you may request a copy of these filings at no cost by making a
written or telephone request to:
Wesley W. Winnekins
Chief Financial Officer
Health Fitness Corporation
3600 American Blvd W, Suite 560
Bloomington, MN 55431
Telephone: (952) 831-6830
(Fax) 952-897-5173
wes.winnekins@hfit.com
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, and information incorporated by reference in this
prospectus, contain, and supplements to this prospectus might contain,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Essentially all statements, other than statements of historical
facts, included in or incorporated by reference in this prospectus and in any
prospectus supplements are forward-looking statements. Forward-looking
statements involve substantial risks and uncertainties, and our actual results
may be significantly different than those expressed in our forward-looking
statements. Our forward-looking statements relate primarily to our growth
strategies, assessments of trends in our industry, our competitive strengths,
adequacy of our financial resources, future revenues, projected costs and
prospects. The words "anticipates," "believes," "estimates," "expects,"
"intends," "may," "plans," "projects," "will," "would"
ii
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
You are cautioned not to place undue reliance upon our forward-looking
statements. Our actual results, and the outcome of other events identified in
forward-looking statements, could differ materially from the expectations
disclosed in our forward-looking statements. Although it is not possible to
foresee all of the risks we may face and the other factors that may cause actual
results to be materially different than those expressed in our forward-looking
statements, we have described in "Risk Factors" the risks and factors we believe
are most likely to cause our actual results or events to differ materially from
the forward-looking statements that we make. Other risks, uncertainties and
factors, both known and unknown, could cause our actual results to differ
materially from those described in our forward-looking statements.
Our forward-looking statements do not reflect all potential effects of any
future acquisitions, mergers, dispositions, joint ventures or strategic
investments we may make, which are difficult to predict and assess. We do not
assume any obligation to update or revise any forward-looking statements, or to
update the reasons actual results could differ materially from those anticipated
in these forward-looking statements, even if new information becomes available
in the future.
iii
PROSPECTUS SUMMARY
This summary does not contain all of the information you should consider
before buying shares of our common stock. You should read the entire prospectus
(including information incorporated by reference herein) and any prospectus
supplements carefully, especially the sections titled "Caution Regarding
Forward-looking Statements," "Risk Factors" and "Managements' Discussion and
Analysis of Financial Condition and Results of Operations," together with our
financial statements and the related notes included elsewhere in this prospectus
and in prospectus supplements, before deciding to invest in shares of our common
stock.
OUR BUSINESS
As a leading provider of fitness center management and health management
programs to corporations, hospitals, communities and universities located in the
United States and Canada, we currently have agreements with approximately 150
customers to staff and manage more than 400 fitness and wellness centers,
including 224 corporate fitness centers, 55 corporate wellness programs, 13
corporate occupational health programs, 17 hospital, commercial and
university-based fitness centers and wellness programs, and 95 corporate sites
that do not have full-time staff. Approximately 70 of our customers are Fortune
1000 companies.
Major corporations, hospitals and universities invest in fitness centers
and health improvement programs for several reasons. We believe it is becoming
widely accepted that healthier employees are more productive, experience reduced
levels of stress and are absent from work less often due to illness.
Additionally, companies are struggling to deal with the escalating cost of
providing employee healthcare benefits, which have been and are expected to
continue increasing at double-digit rates. Many companies are beginning to
recognize that employees are their most important asset, and consider employee
health improvement initiatives a top priority.
In March 2005, we reorganized our operations to focus more clearly on the
two areas of our business: fitness management services and health management
services. Within each area, we provide three types of services: (i) staffing
services, which generally include on-site staff at our customer's site to manage
daily operations, (ii) program services, which generally include personal
training, weight loss programs, seminars, specialty fitness classes, massage
therapy, paper and web-based health risk assessments, biometric screenings to
assess blood profiles, data collection, management and reporting and educational
literature and programs, and (iii) consulting services, which typically include
fitness center floor plan designs, interior design plans, selection and sourcing
of fitness equipment, fitness program design and analysis of the effectiveness
of employee health improvement programs. As of December 31, 2005 and 2004,
staffing services accounted for approximately 91.9% and 95.2%, respectively, of
total revenue and program and consulting services accounted for approximately
8.1% and 4.8%, respectively, of total revenue.
Key elements of our growth strategy include: (i) further developing fitness
and health management programs and services through internal expertise,
partnerships and potential mergers or acquisitions; (ii) expanding existing
fitness management relationships to include comprehensive health management
services; (iii) pursuing customer opportunities with mid-sized companies and
other smaller organizations, who are generally underserved and in need of
employee health management services because of rising healthcare costs; (iv)
continuing to pursue opportunities to offer on-site fitness management services
to large organizations; and (v) exploring international growth opportunities as
large companies begin to broaden their scope of participation in employee health
management programs.
RECENT DEVELOPMENTS
PRIVATE PLACEMENT OF SECURITIES; REDEMPTION OF SERIES A CONVERTIBLE PREFERRED
STOCK
On November 14, 2005, we issued an aggregate of 1,000 shares of Series B
Convertible Preferred Stock (the "Series B Stock") to a limited number of
accredited investors for an aggregate purchase price of $10.2 million. After
selling commissions and expenses, we received net proceeds of approximately
1
$9.4 million. The Series B Stock automatically converted into 5,100,000 shares
of common stock effective on March 10, 2006, the date the SEC first declared
effective the registration statement to which this prospectus relates. We also
issued the same investors 5-year warrants (the "Warrants") to purchase 1,530,000
shares of common stock, equal to 30% of the number of shares of common stock
issuable upon conversion of the Series B Stock, for $2.40 per share, subject to
weighted-average anti-dilution adjustments for certain issuances or deemed
issuances of equity securities for less than $2.40 per share which may reduce
the stated exercise price of $2.40 per share. We issued the placement agents (or
their affiliates) for the Series B Stock warrants to acquire 102,000 shares of
our common stock on substantially the same terms as the Warrants, except the
exercise price of such warrants is $2.00 per share. The shares of common stock
issuable upon the automatic conversion of the Series B Stock, upon the exercise
of the Warrants and upon exercise of placement agent warrants to purchase 51,000
shares of common stock represent all of the securities covered by this
prospectus.
We used approximately $5.1 million of the net proceeds from the issuance of
the Series B Stock to redeem, effective November 15, 2005: (i) all of the
outstanding shares of Series A Convertible Preferred Stock, which were
convertible into 2,222,210 shares of common stock, and (ii) warrants to purchase
1,275,463 shares of common stock if exercised for cash, or 916,458 shares of
common stock if exercised on a "cash-less" exercise basis, which warrants were
issued to original purchaser of the Series A Convertible Preferred Stock. We
used substantially all of the remainder of the net proceeds to acquire
HealthCalc.Net, Inc.
ACQUISITION OF HEALTHCALC.NET, INC.
On December 23, 2005, we acquired all of the capital stock of
HealthCalc.Net, Inc. ("HealthCalc"), a leading provider of web-based fitness,
health management and wellness programs to corporations, health care
organizations, physicians and athletic/fitness centers. We paid $4 million in
cash and issued 847,281 shares of our common stock to HealthCalc's shareholders
at the closing of the acquisition on December 23, 2005. We may become obligated
to pay or issue, as the case may be, an additional amount of up to $2 million in
cash, common stock, or a combination thereof, to HealthCalc's shareholders under
a 12-month, earn-out formula based upon HealthCalc achieving certain revenue
objectives for fiscal year 2006.
Founded in 1997, and headquartered in Dallas, Texas, HealthCalc's web-based
platform provides customers with a variety of tools and resources to identify
opportunities to impact health care costs through lifestyle improvement programs
for individuals. In addition to other services, the HealthCalc platform allows
individuals to take periodic online health assessments, track their daily
exercise, receive online health coaching, and provide access to the latest
health education and information in an internet-based environment.
HealthCalc has been one of our technology providers for approximately ten
years. Management believes that owning HealthCalc's proven technology platform
is an important element of our overall strategy of growing our health management
services. Prior to the acquisition, we used HealthCalc's web-based system in
many of our fitness centers to track member usage and perform health
assessments. The HFC version of the HealthCalc platform (Live for Life-e) become
a foundation of our health management services, and was used by over 500,000
individual registered users from our various institutional customers during
2005.
We have incorporated by reference in this prospectus our unaudited pro
forma combined financial statements giving effect to our acquisition of
HealthCalc as of September 30, 2005 and for the nine months ended September 30,
2005 and year ended December 31, 2004. You are encouraged to read our unaudited
pro forma financial statements carefully.
POTENTIAL FOR DIRECTOR TO NOT STAND FOR REELECTION
Mr. Cary Musech has served on our Board of Directors since December 2003.
Mr. Musech joined the Board of Directors in connection with an investment
agreement between us and Bayview Capital Partners
2
LP (See "Related Party Transactions" elsewhere in the prospectus for a more
complete description of this transaction). Bayview's investment was fully
redeemed (except for an insignificant number of warrants) and Bayview's
investment agreement was terminated effective as of November 15, 2005. Mr.
Musech has indicated that he will continue to serve as a director until our next
annual meeting (typically held in May of each year) but that, as a result of our
redemption of substantially all of Bayview Partner's investment, he likely will
not seek another term as a director at that time.
COMPANY INFORMATION
We are a Minnesota corporation with executive offices at 3600 American Blvd
W., Suite 560, Bloomington, Minnesota 55431. Our telephone number is (952)
831-6830. We were incorporated on March 31, 1987.
THE OFFERING
Common Stock Covered by this
Prospectus.................... 6,681,000 shares, including 5,100,000 shares
that were issued and outstanding as of March
10, 2006, and up to 1,581,000 shares that may
be issued upon exercise, for cash, of warrants
held by Selling Stockholders.
Common Stock Outstanding
Assuming the Sale of all
Common Stock Covered by this
Prospectus(1)................. 20,511,368.
Use of Proceeds............... We will not receive any proceeds from the sale
of the common stock covered by this prospectus.
To the extent all of the warrants to purchase
the 1,581,000 shares of common stock covered by
this prospectus are exercised for cash, we
would receive approximately $3.8 million in the
aggregate from such exercises. All of the
warrants may be exercised on a "cash-less"
basis, in which case we would not receive any
cash proceeds.
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(1) The number of shares of our common stock to be outstanding after this
offering is based on 18,930,368 shares outstanding as of March 31, 2006
(including all 5,100,000 shares we issued on March 10, 2006 upon conversion
of the Series B Stock and excluding all 1,581,000 shares covered by this
prospectus issuable upon exercise of warrants) and excludes:
- 2,504,175 shares of common stock issuable as of March 31, 2006 upon the
exercise of outstanding stock options under our 2005 Stock Option Plan at
exercise prices between $0.30 and $3.00 per share;
- an aggregate of 811,350 shares of common stock reserved for future
issuance under our 2005 Stock Option Plan at the market value of our
common stock at the date of grant and an aggregate of 141,615 shares of
common stock reserved for future issuance under our employee stock
purchase plan; and
- 51,000 shares of common stock issuable as of March 31, 2006 upon the
exercise of warrants issued to certain of the placement agents (or their
affiliates) of the Series B Stock (the underlying shares of which are not
covered by this prospectus) at an exercise price of $2.00 per share, and
62,431 shares of common stock issuable as of December 31, 2005 upon the
exercise of warrants at exercise prices between $2.24 and $2.70 per
share.
3
Risk Factors.................. An investment in our common stock is
speculative and involves risks. You should read
the "Risk Factors" section of this prospectus
for a discussion of certain factors to consider
carefully before deciding to invest in shares
of our common stock.
Plan of Distribution.......... The shares of common stock covered by this
prospectus may be sold by the Selling
Stockholders in the manner described under
"Plan of Distribution."
OTCBB Symbol.................. "HFIT."
SELECTED FINANCIAL DATA AND SUPPLEMENTARY FINANCIAL INFORMATION
You should read the following selected financial data and supplementary
financial information together with our complete financial statements and the
related notes, and our "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all of which is included herein or
incorporated by reference in this prospectus. We derived the following annual
information from our audited consolidated financial statements as of December
31, 2005, 2004, 2003, 2002 and 2001. We derived the following quarterly
financial information from our unaudited consolidated financial statements for
each quarter indicated. All unaudited consolidated financial statements contain,
in our opinion, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the financial information set forth herein.
Historical results of operations may not be indicative of results to be expected
for any future period.
The selected financial data and supplementary financial information as of
and for all periods ended December 31, 2005 reflects our acquisition of
HealtCalc.Net, Inc. on December 23, 2005, our redemption of all Series A
Convertible Preferred Stock and certain warrants to purchase common stock on
November 15, 2005 and our issuance of 1,000 shares of Series B Convertible
Preferred Stock and warrants to purchase common stock on November 14, 2005, all
as described in more detail in the "Recent Developments" section of this
prospectus, from and after the effective date of each such transaction. We have
incorporated by reference in this prospectus our unaudited pro forma combined
financial statements giving effect to our acquisition of HealthCalc as of
September 30, 2005 and for the nine months ended September 30, 2005 (giving
effect to the transaction as if it occurred January 1, 2005) and year ended
December 31, 2004 (giving effect to the transaction as if it occurred January 1,
2004). You are encouraged to read our pro forma financial statements carefully.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenue................................................ $54,942 $52,455 $31,479 $27,865 $25,910
------- ------- ------- ------- -------
Net earnings (loss) applicable to common
shareholders......................................... $ 1,204 $ 1,588 $ (27) $ 3,001 $ 1,806
======= ======= ======= ======= =======
Net earnings per common share:
Basic................................................ $ 0.09 $ 0.13 $ 0.00 $ 0.24 $ 0.15
======= ======= ======= ======= =======
Diluted.............................................. $ 0.08 $ 0.10 $ 0.00 $ 0.24 $ 0.15
======= ======= ======= ======= =======
4
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2005 2004 2003 2002 2001
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total Assets........................................... $27,585 $20,934 $19,808 $12,956 $10,199
Long-Term Debt......................................... -- 1,613 4,350 -- --
Shareholders' Equity................................... 10,488 11,484 9,732 9,079 6,063
SUPPLEMENTARY FINANCIAL INFORMATION
FISCAL YEAR 2005
--------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
Revenue.......................... $13,465,101 $13,678,615 $13,464,278 $14,334,211
Gross profit..................... 3,441,802 3,450,616 3,498,814 3,425,942
Net earnings (loss) applicable to
common shareholders............ 627,934 498,183 506,488 (428,204)
Net earnings (loss) per share
Basic.......................... $ 0.05 $ 0.04 $ 0.04 $ (0.03)
Diluted........................ 0.04 0.03 0.03 (0.03)
Weighted average common shares
outstanding
Basic....................... 12,619,603 12,652,370 12,863,971 13,008,291
Diluted..................... 16,614,522 16,618,997 16,662,753 13,008,291
FISCAL YEAR 2004
--------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
Revenue.......................... $12,666,374 $13,129,715 $13,154,340 $13,504,239
Gross profit..................... 3,086,937 3,442,358 3,347,083 3,582,839
Net earnings applicable to common
shareholders................... 336,707 470,754 465,164 314,995
Net earnings per share
Basic.......................... $ 0.03 $ 0.04 $ 0.04 $ 0.03
Diluted........................ 0.02 0.03 0.03 0.02
Weighted average common shares
outstanding
Basic....................... 12,409,619 12,483,979 12,550,679 12,566,735
Diluted..................... 16,038,913 16,066,003 16,122,175 16,349,043
5
FISCAL YEAR 2003
--------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
Revenue.......................... $ 7,518,205 $ 7,732,626 $ 7,445,094 $ 8,782,897
Gross profit..................... 1,654,399 1,581,142 1,465,768 1,833,888
Net earnings (loss) applicable to
common shareholders............ 267,980 217,333 87,786 (600,353)
Net earnings (loss) per share
Basic.......................... $ 0.02 $ 0.02 $ 0.01 $ (0.05)
Diluted........................ 0.02 0.02 0.01 (0.05)
Weighted average common shares
outstanding
Basic....................... 12,308,321 12,322,908 12,341,284 12,356,315
Diluted..................... 12,404,312 12,467,821 12,743,441 12,356,315
6
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
consider carefully the risks and uncertainties described below and the other
information included in or incorporated by reference in this prospectus and
prospectus supplements, including our annual and interim financial statements,
before deciding to invest in shares of our common stock. If any one of the
following risks or uncertainties actually occurs, any combination thereof
occurs, our business, prospects, financial condition and operating results would
likely suffer, possibly materially. In that event, the market price of our
common stock could decline and you could lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS
The timing of new and lost management service contracts may not be
indicative of trends in our business or of future quarterly financial
results. We evaluate our business, in part, by reviewing trends in our
financial performance. Management believes an important indicator of our outlook
is revenue to be derived from fitness and health management service contracts we
enter into with customers. Fitness and health management service contracts are
often long-term contracts (i.e., 3-5 years), contain annual, automatic renewals
and generally require 30 to 60 days notice to terminate, or to avoid the
automatic annual renewal feature. Revenue from new contracts often is not
recognized for a period of 90 to 180 days after proposal acceptance due to lead
times necessary to execute a contract and hire staff to begin providing
services. Since termination notice periods are considerably less than the time
it takes to begin servicing new contracts, the revenue lost in a reporting
period may significantly exceed the revenue gained from new contracts.
Because of these timing differences, management generally does not view
changes in quarterly revenue, whether sequential or comparable prior quarter
changes, to be indicative of our outlook or trends in our business or to be
reflective of revenue expected in succeeding quarters. Rather, management
generally evaluates revenue trends in our fitness and health management services
business based upon 12-to 18-month periods since we believe this helps minimize
the timing impact from new and terminated contracts. Management cautions
investors not to place undue reliance upon fluctuations in quarterly revenue
viewed in isolation from revenue information over longer periods of time (e.g.,
comparative trailing 12-month information), and to not view quarterly revenue as
necessarily being indicative of our outlook or results to be expected in future
quarters.
Failure to identify acquisition opportunities may limit our growth. An
important part of our growth has been the acquisition of complementary
businesses. We may choose to continue this strategy in the future. Management's
identification of suitable acquisition candidates involves risks inherent in
assessing the value, strengths, weaknesses, overall risks and profitability of
acquisition candidates. Management may be unable to identify suitable
acquisition candidates. If we do not make suitable acquisitions, we may find it
more difficult to realize growth objectives and to enhance shareholder value.
In addition, future acquisitions may be dilutive to shareholders, cause us
to incur additional indebtedness and large one-time expenses or create
intangible assets that could result in significant amortization expense. If we
spend significant funds or incurs additional debt, our ability to obtain
necessary financing may decline and we may be more vulnerable to economic
downturns and competitive pressures. Management cannot guarantee that we will be
able to successfully complete any future acquisitions, or that we will be able
to finance such acquisitions.
We may not realize the anticipated benefits of acquisitions we
complete. On December 23, 2005, we acquired HealthCalc.Net, Inc. In the future,
we may acquire other businesses. The process of integrating new businesses into
our operations poses numerous risks, including:
- an inability to assimilate acquired operations, information systems and
technology platforms, and internal control systems and products;
- diversion of management's attention;
7
- difficulties and uncertainties in transitioning business relationships
from the acquired entity to us; and
- the loss of key employees of acquired companies.
If we are unsuccessful in integrating HealthCalc, or any other future
acquisitions, into our operations, we might not realize all of the anticipated
benefits of such acquisitions. In such instances, our acquisitions might not be
accretive to our earnings, the costs of such acquisitions may otherwise outweigh
the benefits of such acquisitions and the market price of our common stock might
decline.
We may not be able to successfully cross-sell our health management
programs to our fitness management customers. A part of our growth strategy
involves continuing and expanding our efforts to sell health management services
to our fitness management customers. Our cross-selling efforts may not be
successful since our experience indicates that some current customers have
different internal departments involved with procuring fitness management
services, on the one hand, and health management services on the other hand. As
a result, we may be required to establish new relationships with personnel
within our customers, which will limit the potential benefit of established
relationships we have developed. We may also be required to overcome different
purchasing requirements and standards to the extent they vary within internal
departments of our customers. We may experience similar difficulties in
cross-selling all of our services to foreign operations of our domestic
customers. If we experience significant limitations as a result of the foregoing
circumstances, or any other circumstances, we may not be able to increase our
revenues or profitability to the extent we anticipate.
We may experience difficulty managing growth, including attracting
qualified staff. We have experienced growth during the past few years, both
organically and by acquisition. Our ability to grow in the future will depend on
a number of factors, including the ability to obtain new customers, expand
existing customer relationships, develop additional fitness and health
improvement programs and services and hire and train qualified staff. We may
experience difficulty in attracting and retaining qualified staff in various
markets to meet growth opportunities. Further, in order to attract qualified
staff, we may be required to pay higher salaries and enhance benefits in more
competitive markets, which may result in a material adverse effect on our
results of operation and financial condition. Sustaining growth may require us
to sell our services at lower prices to remain competitive, which may result in
a material adverse effect on our results of operation and financial condition.
There can be no assurance that we will be able to manage expanding operations
effectively or that we will be able to maintain or accelerate our growth, and
any failure to do so may result in a material adverse effect on our results of
operation and financial condition.
Failure to renew existing customer contracts could have a negative effect
on our financial condition and results of operations. Our growth strategy
depends in part upon continuous development and improvement of attractive and
effective health management programs and services. Our failure to anticipate
trends or to successfully develop, improve or implement such programs or
services may have a material adverse effect on our results of operation and
financial condition. We currently contract with third party partners to provide
a portion of such programs and services and anticipates that this will continue
to be the case. If any of such third party partners no longer made these
programs and services available to us, there is no assurance that we would be
able to replace such third-party partner programs and services, and if we could
not do so, our ability to pursue growth strategies would be seriously
compromised.
We are dependent on maintaining our corporate relationships. The majority
of our contracts are with large corporations regarding the management of on-site
fitness centers. While the specific terms of such agreements vary, some
contracts are subject to early termination by the corporate customer without
cause. Although we have a history of consistent contract renewals, there can be
no assurance that future renewals will be secured. The early termination or
non-renewal of corporate contracts may have a material adverse effect on our
results of operation and financial condition.
Our financial results are subject to discretionary spending of our
customers. Our revenue, expenses and net income are subject to general economic
conditions. A significant portion of our revenue is derived
8
from companies who historically have reduced their expenditures for on-site
fitness management services during economic downturns. Should the economy
weaken, or experience more significant recessionary pressures, corporate
customers may reduce or eliminate their expenditures for on-site fitness center
management services, and prospective customers may not commit resources to such
services. Also, should the size of a customer's workforce be reduced, we may
have to reduce the number of staff assigned to manage a customer's fitness
center. Additionally, our operations in Canada are subject to foreign currency
risk, although these operations currently represent less than 5% of our overall
revenues. These factors may have a material adverse effect on our results of
operation and financial condition.
The loss of any of our key employees could have a material adverse effect
on our performance and results of operations. Our success is highly dependent
on the efforts, abilities and continued services of our executive officers and
other key employees. The loss of any of the executive officers or key employees
may have a material adverse effect on our results of operation and financial
condition. We believe that our future success will depend on our ability to
attract, motivate and retain highly-skilled corporate, divisional, regional and
site-based personnel. Although historically we have been successful in retaining
the services of our senior management, there can be no assurance that we will be
able to do so in the future.
We operate within a highly competitive market against formidable
companies. We compete for new and existing corporate customers in a highly
fragmented and competitive market. Management believes that our ability to
compete successfully depends on a number of factors, including quality and depth
of service, locational convenience and cost. The market for on-site fitness
center management services is price-sensitive. From time to time, we may be at a
price disadvantage with respect to the competition, as such competition may
offer competing services at substantially lower prices than ours. There can be
no assurance that we will be able to compete successfully against current and
future competitors, or that competitive pressures we face will not have a
material adverse effect on our results of operation and financial condition.
Our results of operations could be adversely impacted by
litigation. Because of the nature of our business, we expect that the Company
may be subject to claims and litigation alleging negligence or other grounds for
liability arising from injuries or other harm to the customers we serve. We have
occasionally been named a defendant in claims relating to accidents that
occurred in the fitness centers we manage. There can be no assurance that
additional claims will not be filed, and that our insurance will be adequate to
cover liabilities resulting from any claim.
We could experience a potential depressive effect on the price of our
common stock following the exercise and sale of existing convertible
securities. At March 31, 2006, we had outstanding stock options and warrants to
purchase an aggregate of 4,198,606 shares of common stock. The exercise of such
outstanding stock options and warrants and the sale of the common stock acquired
thereby, may have a material adverse effect on the price of our common stock. In
addition, the exercise of such outstanding stock options and warrants and sale
of such shares of our common stock could occur at a time when we might otherwise
be able to obtain additional equity capital on terms and conditions more
favorable to us.
We have implemented, on a limited basis, a business model for managing
corporate fitness centers on a cost-neutral or for-profit basis. We have, on a
limited basis, implemented a model of managing corporate fitness centers on a
cost-neutral or for-profit basis without receiving a management fee from the
corporate owner of such centers. Corporate-owned centers are resistant to
significant membership fees and fee increases, and we may not be successful in
sufficiently managing costs and/or in raising service levels and associated
revenues, as required to achieve profit objectives.
Our common stock is thinly traded, and subject to volatility. Our common
stock is traded on the Over the Counter Bulletin Board. Investing in OTC
securities is speculative and carries a high degree of risk. Many OTC securities
are relatively illiquid, or "thinly traded," which can enhance volatility in the
share price and make it difficult for investors to buy or sell without
dramatically affecting the quoted price or may be unable to sell a position at a
later date. As a result, you may find it more difficult to dispose of or obtain
accurate quotations as to the price of our shares of the common stock. If
limited trading in our
9
stock continues, it may be difficult for you to sell their shares in the public
market at any given time at prevailing prices.
If there are substantial sales of our common stock, our stock price could
decline. If our existing shareholders sell a large number of shares of our
common stock, if holders of options and warrants exercise and sell a large
number of shares of our common stock, or the public market perceives that
existing securityholders might sell a large number of shares of common stock,
the market price of our common stock could decline significantly. All of the
shares being sold in this offering will be freely tradable without restriction
or further registration under the federal securities laws, unless purchased by
our "affiliates" as that term is defined in Rule 144 under the Securities Act.
Adverse effect of undesignated stock and anti-takeover provisions. Our
authorized capital includes 8,499,000 shares of undesignated stock. Our board of
directors has the power to issue any or all of the shares of undesignated stock,
including the authority to establish one or more series and to fix the powers,
preferences, rights and limitations of such class or series, without seeking
shareholder approval. Further, as a Minnesota corporation, we are subject to
provisions of the Minnesota Business Corporations Act, or MBCA, regarding
"control share acquisitions" and "business combinations." We may, in the future,
consider adopting additional anti-takeover measures. The authority of our board
to issue undesignated stock and the anti-takeover provisions of the MBCA, as
well as any future anti-takeover measures adopted by us, may, in certain
circumstances, delay, deter or prevent takeover attempts and other changes in
control of the company not approved by our board of directors. As a result, our
shareholders may lose opportunities to dispose of their shares at favorable
prices generally available in takeover attempts or that may be available under a
merger proposal and the market price, voting and other rights of the holders of
common stock may also be affected. See "Description of Capital Stock."
USE OF PROCEEDS
Although we may receive cash proceeds from the exercise of warrants related
to the issuance of common stock covered by this prospectus, we will not receive
any proceeds from the periodic sales, if any, of the common stock covered by
this prospectus.
PRICE RANGE OF COMMON STOCK
Trading of our common stock is conducted in the over-the-counter markets
(often referred to as "pink sheets") or on the OTC Bulletin Board.
The following table sets forth, for the periods indicated, the range of low
and high bid prices for our common stock.
LOW HIGH
----- -----
FISCAL YEAR 2005:
Fourth quarter............................................ $1.89 $2.63
Third quarter............................................. 2.10 2.65
Second quarter............................................ 2.25 2.65
First quarter............................................. 2.33 2.90
LOW HIGH
----- -----
FISCAL YEAR 2004:
Fourth quarter............................................ $1.52 $2.95
Third quarter............................................. 1.37 1.75
Second quarter............................................ 1.40 1.90
First quarter............................................. 1.21 2.15
At March 30, 2006, the low and high sale price was $2.25 and $2.44,
respectively.
10
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not intend to pay cash dividends on our common stock in the foreseeable
future. We presently expect to retain any earnings to finance the development
and expansion of our business. The payment of dividends, if any, is subject to
the discretion of the Board of Directors, and will depend on our earnings,
financial condition, capital requirements and other relevant factors. Our credit
facility with Wells Fargo Bank restricts our ability to declare or pay dividend
on any class of our capital stock or to redeem any shares of capital stock.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with our annual financial
statements and the related notes incorporated by reference in this prospectus.
Some of the information contained in this discussion includes forward-looking
statements that involve risks and uncertainties. You should review the "Risk
Factors" section of this prospectus and in prospectus supplements for a
discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis and in any similar
discussions or analyses contained in prospectus supplements.
OVERVIEW
We provide fitness center and health management services and programs to
corporations, hospitals, communities and universities located in the United
States and Canada.
On December 8, 2003, we purchased the business assets of the Health &
Fitness Management Services Division of Johnson & Johnson Health Care Systems
Inc., or as referred to herein JJHCS. Prior to the acquisition, we were the
largest provider of corporate fitness center management services, while JJHCS
was a leading provider of employee health and wellness management services,
although JJHCS also managed corporate fitness centers. We completed the
acquisition in order to broaden our platform of fitness center management
contracts, as well as to obtain additional expertise in the area of employee
health promotion and management services.
On December 23, 2005, we acquired all of the capital stock of
HealthCalc.Net, Inc. (HealthCalc), a leading provider of web-based fitness,
health management and wellness programs to corporations, health care
organizations, physicians and athletic/fitness centers. Management believes that
owning HealthCalc's proven technology platform is an important element of our
overall strategy of growing our health management services. HealthCalc has been
one our technology providers for approximately ten years. HealthCalc's web-based
platform provides customers with a variety of tools and resources to identify
opportunities to impact health care costs through lifestyle improvement programs
for individuals. In addition to other services, the HealthCalc platform allows
individuals to take periodic online health assessments, track their daily
exercise, receive online health coaching, and provide access to the latest
health education and information in an internet-based environment.
The discussion in this section includes the effects of the JJHCS
acquisition on December 8, 2003, includes the effects of the HealthCalc
transaction on December 23, 2005, if material to the discussion, includes the
effects of our redemption of all Series A Convertible Preferred Stock and
certain warrants to purchase common stock on November 15, 2005, if material to
the discussion, and our issuance of 1,000 shares of Series B Convertible
Preferred Stock and certain warrants to acquire common stock on November 14,
2005, if material to the discussion, from and after the date of each such
transaction.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. Preparation of the consolidated financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures. On
an on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, trade and other accounts receivable,
goodwill, and stock-based compensation. By their nature, these estimates and
judgments are subject to an inherent degree of uncertainty. Management bases its
estimates and judgments on historical experience, observation of trends in the
industry, information provided by customers and other outside sources and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the
12
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition -- Revenue is recognized at the time the service is
provided to the customer. For annual contracts, monthly amounts are recognized
ratably over the term of the contract. Certain services provided to the customer
may vary on a periodic basis. The revenues relating to these services are
estimated in the month that the service is performed. Amounts received from
customers in advance of providing services are treated as deferred revenue and
recognized when the services are provided. We have contracts with third-parties
to provide ancillary services in connection with their fitness and wellness
management services and programs. Under such arrangements, the third-parties
invoice and receive payments from us based on transactions with the ultimate
customer. We do not recognize revenues related to such transactions as the
ultimate customer assumes the risk and rewards of the contract and the amounts
billed to the customer are either at cost or with a fixed markup.
Trade and Other Accounts Receivable -- Trade and other accounts receivable
represent amounts due from companies and individuals for services and products.
We grant credit to customers in the ordinary course of business. We generally do
not require collateral or any other security to support amounts due. Management
performs ongoing credit evaluations of customers. We maintain allowances for
potential credit losses which, when realized, have been within management's
expectations. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers and their geographic
dispersion.
Goodwill -- Goodwill represents the excess of the purchase price and
related costs over the fair value of net assets of businesses acquired. The
carrying value of goodwill and other intangible assets is tested for impairment
on an annual basis or when factors indicating impairment are present. Projected
discounted cash flows are used in assessing these assets.
Stock-Based Compensation -- We utilize the intrinsic value method of
accounting for our stock-based employee compensation plans. All options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant and accordingly, no compensation cost is reflected in net
earnings for the years ended December 31, 2005, 2004, and 2003.
Valuation of Derivative Instruments -- In accordance with the interpretive
guidance in EITF Issue No. 05-4, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", we value warrants we issued in November 2005 in our
financing transaction as a derivative liability. We must make certain periodic
assumptions and estimates to value the derivative liability. Factors affecting
the amount of this liability include changes in our stock price, the computed
volatility of our stock price and other assumptions. The change in value is
reflected in our statements of operations as non-cash income or expense, and the
changes in the carrying value of derivatives can have a material impact on our
financial statements. For the year ended December 31, 2005, we recognized a
non-cash charge of $634,435 upon revaluation of certain warrants that are
subject to this accounting treatment. The derivative liability associated with
these warrants is reflected on our balance sheets as a long-term liability. This
warrant liability will remain until the warrants are exercised, expire, or other
events occur to cause the termination of the derivative accounting, the timing
of which may be outside our control.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
Revenue. Revenue increased $2,487,000 or 4.7%, to $54,942,000 for 2005,
from $52,455,000 for 2004. Of this increase, $1,917,000 is attributable to an
increase in sales of our fitness and health program
13
and consulting services, and $570,000 is attributable to an increase in staffing
revenue from health management contracts.
Gross Profit. Gross profit increased $358,000, or 2.7%, to $13,817,000 for
2005, from $13,459,000 for 2004. Of this increase, $582,000 is attributable to
growth in our fitness and health program and consulting services. This increase
was offset by a $224,000 decrease in gross profit due primarily to higher costs
for employee medical benefits compared to 2004.
Operating Expenses and Operating Income. Operating expenses increased
$384,000, or 3.9%, to $10,303,000 for 2005, from $9,919,000 for 2004. This
increase is primarily attributed to anticipated increases in salaries and other
operating expenses in our contract administration, programs management, sales
and corporate administration areas.
As a result of the previously discussed changes in gross profit and
operating expenses, operating income decreased $27,000, or 0.8%, to $3,514,000
for 2005, from $3,541,000 for 2004.
Other Income and Expense. Interest expense decreased $440,000 to $26,000
for 2005, from $466,000 for 2004. This decrease is primarily due to the December
2004 repayment of our $2,000,000 Senior Subordinated Note held by Bayview
Capital Partners LP. In addition, we incurred a $475,000 one-time charge in
December 2004, of which $395,000 was non-cash, in connection with the early
repayment of the $2,000,000 Senior Secured Subordinated Note.
In December 2005, we incurred a $634,000 non-cash charge related to a
change in fair value for 1,530,000 warrants we issued in connection with the
sale of $10.2 million of our Series B Convertible Preferred Stock in November
2005. Refer to "Critical Accounting Policies", Valuation of Derivative
Instrument, and the section titled "Liquidity and Capital Resources" contained
elsewhere in this document for further discussion of the accounting we will
follow for this equity transaction.
Income Taxes. Current income tax expense increased $591,000 to $1,519,000
for 2005, from $928,000 for 2004. This increase is primarily attributable to the
disallowance of a tax deduction for the $634,000 non-cash charge we incurred due
to the change in fair value of warrants discussed above.
The changes in income tax expense between 2005 and 2004 had no material
effect on our cash position for 2005 due to available net operating loss
carryforwards and non-cash adjustments to tax assets.
Our effective tax rate increased to 53.0% for 2005, compared to 35.7% for
2004. This increase is primarily attributable to the disallowance of a tax
deduction for the non-cash charge attributable to the revaluation of warrants.
Net Earnings. As a result of the above, net earnings for 2005 decreased
$329,000 to $1,345,000, compared to net earnings of $1,674,000 for 2004.
Dividends to Preferred Shareholders. Dividend to preferred shareholders
increased $55,000 to $141,000 for 2005, from $86,000 for 2004. This increase is
entirely attributable to a dividend of 5% that we accrued on the $10.2 million
gross proceeds from the issuance of the Series B Convertible Preferred Stock on
November 14, 2005.
YEARS ENDED DECEMBER 31, 2004 AND 2003
Revenue. Revenue increased $20,976,000, or 66.6%, to $52,455,000 for 2004,
from $31,479,000 for 2003. Of this increase, $18,761,000 is attributable to the
acquisition of JJHCS, and $641,000 is attributable to revenue from new
management contracts secured in 2004. Also contributing to this increase is a
$92,000 increase in consulting revenue. The remaining increase of $1,482,000 is
attributable to an increase in sales of our fitness and health improvement
program services.
Gross Profit. Gross profit increased $6,924,000, or 105.9%, to $13,459,000
for 2004, from $6,535,000 for 2003. Of this increase, $6,298,000 is attributable
to growth of management and program services related to the acquisition of
JJHCS. The remaining increase of $626,000 is attributable to new
14
management contracts secured in 2004, as well as growth in our fitness and
health improvement program services.
Operating Expenses and Operating Income. Operating expenses increased
$4,752,000, or 92.0%, to $9,919,000 for 2004, from $5,167,000 for 2003. Of this
increase, $805,000 represents a non-cash expense related to the amortization of
acquired intangible assets. The remaining increase of $3,947,000 is primarily
attributed to the cost of salaries, benefits and other expenses of the JJHCS
management team.
As a result of the previously discussed changes in gross profit and
operating expenses, operating income increased $2,173,000, or 158.8%, to
$3,541,000 for 2004, from $1,368,000 for 2003.
Other Income and Expense. Interest expense increased $261,000 to $466,000
for 2004, from $204,000 for 2003. This increase is primarily due to the debt
facilities the Company secured to finance the JJHCS acquisition. In addition, we
incurred a $475,000 one-time charge in December 2004, of which $395,000 was
non-cash, in connection with the early repayment of a $2,000,000 Senior Secured
Subordinated Note.
Income Taxes. Current income tax expense increased $399,000 to $928,000
for 2004, from $529,000 for 2003. This increase is attributable to the increase
in earnings before income taxes.
The changes in income tax expense between 2004 and 2003 had no material
effect on our cash position for 2004 due to available net operating loss
carryforwards.
Our effective tax rate decreased to 35.7% for 2004, compared to 45.5% for
2003. This decrease is primarily attributable to an adjustment to deferred tax
assets relating to a change in our computation of state net operating loss
utilization.
Net Earnings. As a result of the above, net earnings for 2004 increased
$1,041,000 to $1,674,000, compared to net earnings of $633,000 for 2003.
Dividends to Preferred Shareholders. To finance our acquisition of JJHCS,
the Company sold $1,000,000 in Series A Convertible Preferred Stock, or as
referred to herein as the Preferred Stock, to Bayview Capital Partners LP, or as
referred to herein as Bayview. The Preferred Stock was issued to Bayview at a
price of $1.00 per share, resulting in the issuance of 1,000,000 shares. The
Preferred Stock has a stated dividend rate of 6% per year, computed on a simple
interest basis, paid in kind in the form of additional shares of Preferred Stock
using a price of $1.00 per share, or as referred to herein as the PIK Dividends.
We accrued dividends of $86,400 and $3,834 for the years ended December 31, 2004
and 2003.
When Bayview made its commitment to invest in the Company on August 25,
2003, the fair value of our common stock to be received upon conversion of the
Preferred Stock was greater than the conversion price of the preferred stock,
which resulted in a beneficial conversion feature. Accordingly, the Company
calculated a $656,096 beneficial conversion feature which has been recorded as a
deemed dividend in the consolidated statement of operations for the year ended
December 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement 123R, Share-Based Payment. Statement 123R is a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supercedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Statement 123R covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans, and
provides that the fair value of such share-based compensation be expensed in a
company's financial statements. We expect that the adoption of Statement 123R
will result in a decrease of net income in future periods due to additional
compensation expense attributed to employee stock options. We do not expect the
expense related to employee stock options to be materially different from
amounts previously disclosed on a proforma basis. We will be required to
implement Statement 123R in connection with our Quarterly Report on For 10-Q for
the period ended Mar 31, 2006.
15
In May 2005, the FASB issued Statement 154, Accounting Changes and Error
Corrections. Statement 154 replaces APB Opinion No. 20, Accounting Changes,and
FASB Statement 3, Reporting Accounting Changes in Interim Financial Statements.
Statement 154 is for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Adoption of Statement 154 is not
anticipated to have an impact on our financial position or results of operation.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital increased $939,000 to $4,895,000 for 2005, from
$3,956,000 for 2004. This increase is largely attributable to increases in cash,
accounts receivable and prepaid expenses, which were offset by a decrease in
deferred tax assets.
In addition to cash flows generated from operating activities, our other
source of liquidity and working capital is provided by a $7,500,000 Credit
Agreement with Wells Fargo Bank, N.A. (the "Wells Loan"). At our option, the
Wells Loan bears interest at prime, or the one-month LIBOR plus a margin of
2.25% to 2.75% based upon our Senior Leverage Ratio (effective rate of 7.25% and
5.25% at December 31, 2005 and 2004). The availability of the Wells Loan
decreases $250,000 on the last day of each calendar quarter, beginning September
30, 2003, and matures on June 30, 2007. Working capital advances from the Wells
Loan are based upon a percentage of our eligible accounts receivable, less any
amounts previously drawn. The facility provided maximum borrowing capacity of
$5,000,000 and $6,000,000 at December 31, 2005 and 2004. Excluding current
outstanding balances, and based upon eligible accounts receivable, $5,000,000
and $3,758,851 was available for borrowing on such respective dates. All
borrowings are collateralized by substantially all of our assets. At December
31, 2005, we were in compliance with all of our financial covenants.
On November 14, 2005 (the "Effective Date"), we issued an aggregate of
1,000 shares of Series B Convertible Preferred Stock (the "Series B Stock") in
an equity financing transaction (the "Transaction"), together with warrants to
purchase 1,530,000 shares of common stock at $2.40 per share, to a limited
number of accredited investors for aggregate gross proceeds of $10.2 million.
After selling commissions and expenses, we received net proceeds of
approximately $9.4 million. We used the proceeds from the Transaction to redeem
our Series A Convertible Preferred Stock and to fund the acquisition of
HealthCalc.Net, Inc.
In accordance with the terms of the Transaction, we were required to file
with the SEC, within sixty (60) days from the Effective Date, a registration
statement covering the common shares issued and issuable in the Transaction. We
were also required to cause the registration statement to be declared effective
on or before the expiration of one hundred twenty (120) days from the Effective
Date. We would have been subject to liquidated damages of one percent (1%) per
month of the aggregate gross proceeds ($10,200,000), if we failed to meet these
date requirements. On March 10, 2006, the SEC declared effective our
registration statement and, as a result, we did not pay any liquidated damages
for failure to meet the filing and effectiveness date requirements. We could
nevertheless be subject to the foregoing liquidated damages if we fail to
maintain the effectiveness of the registration statement.
The warrants, which were issued together with the Series B Stock, have a
term of five years, and gives the investors the option to require us to
repurchase the warrants for a purchase price, payable in cash within five (5)
business days after such request, equal to the Black Scholes value of any
unexercised warrant shares, only if, while the warrants are outstanding, any of
the following change in control transactions occur: (i) we effect any merger or
consolidation, (ii) we effect any sale of all or substantially all of our
assets, (iii) any tender offer or exchange offer is completed whereby holders of
our common stock are permitted to tender or exchange their shares for other
securities, cash or property, or (iv) we effect any reclassification of our
common stock whereby it is effectively converted into or exchanged for other
securities, cash or property.
Under EITF 00-19 "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock" (EITF 00-19"), the fair
value of the warrants issued under the
16
Transaction have been reported as a liability due to the requirement to net-cash
settle the transaction. There are two reasons for this treatment: (i) there are
liquidated damages, payable in cash, of 1% of the gross proceeds per month
($102,000) should we fail to maintain effectiveness of the registration
statement in accordance with the Transaction; and (ii) our investors may put
their warrants back to us for cash if we initiate a change in control that meets
the definition previously discussed. On the Effective Date, the warrants had a
value of approximately $1.6 million, which was determined using the
Black-Scholes valuation method. The assumptions utilized in computing the fair
value of the warrants were as follows: expected life of 5 years, estimated
volatility of 61% and a risk free interest rate of 4.54%. On the Effective Date,
the Series B Stock was valued at approximately $8.6 million, or the difference
between the gross proceeds and the value of the warrants. The warrants are
considered a derivative financial instrument and will be marked to fair value on
a quarterly basis. Any changes in fair value of the warrants will be recorded
through the Consolidated Statement of Operations as Other Income (Expense). For
the three months ended December 31, 2005, we expensed $634,000 associated with
the fair value adjustment of the warrants. There was no fair value adjustment in
any other periods presented.
As of December 31, 2005, we believe that sources of capital to meet our
obligations will be provided by cash generated through operations and our Wells
Loan for at least the next twelve months.
As of December 31, 2005, we did not have any off-balance sheet arrangements
or transactions with unconsolidated, limited purpose entities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our long-term obligations bear interest at a variable rate. As a
result, we may from time to time be exposed to market risks related to changes
in interest rates. However, at December 31, 2005, we did not have any
outstanding long-term obligations with variable rates. Based upon historical
borrowing levels, we believe future exposure to interest rate risk is
immaterial.
We have no history of, and do 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.
17
OUR BUSINESS
OVERVIEW
As a leading provider of fitness center management and health management
programs to corporations, hospitals, communities and universities located in the
United States and Canada, we currently have agreements with approximately 157
customers to staff and manage more than 400 fitness and wellness centers,
including 233 corporate fitness centers, 61 corporate wellness programs, 12
corporate occupational health programs, 15 hospital, commercial and
university-based fitness centers and wellness programs, and 74 corporate sites
that do not have full-time staff. Approximately 70 of our customers are Fortune
1000 companies.
Major corporations, hospitals and universities invest in fitness centers
and health improvement programs for several reasons. We believe it is becoming
widely accepted that healthier employees are more productive, experience reduced
levels of stress and are absent from work less often due to illness.
Additionally, companies are struggling to deal with the escalating cost of
providing employee healthcare benefits, which have been and are expected to
continue increasing at double-digit rates. Many companies are beginning to
recognize that employees are their most important asset, and consider employee
health improvement initiatives a top priority.
On December 8, 2003, we purchased the business assets of the Health &
Fitness Management Services Division of Johnson & Johnson Health Care Systems
Inc. ("JJHCS"). We completed the JJHCS acquisition primarily to obtain
additional expertise in the area of employee health management services, but
also to broaden our platform of fitness center management contracts.
On December 23, 2005, we acquired all of the capital stock of
HealthCalc.Net, Inc. ("HealthCalc"), a leading provider of web-based fitness,
health management and wellness programs to corporations, health care
organizations, physicians and athletic/fitness centers. We believe owning the
technology platform developed by HealthCalc is an important element of our
overall strategy of growing our health management services. HealthCalc had been
one our technology providers for approximately ten years prior to the
acquisition. Our new web-based platform provides customers with a variety of
tools and resources to identify opportunities to impact health care costs
through lifestyle improvement programs for individuals. In addition to other
services, the our new technology platform allows individuals to take periodic
online health assessments, track their daily exercise, receive online health
coaching, and provide access to the latest health education and information in
an internet-based environment.
OUR BUSINESS MODEL
Major corporations, hospitals and universities invest in fitness centers
and health improvement programs for several reasons. First, it is widely
understood that healthier employees are more productive, experience reduced
levels of stress and are absent from work less often due to illness.
Additionally, companies are struggling to deal with the escalating cost of
providing employee healthcare benefits, which has increased at double-digit
rates due to technological advancements and the decreasing overall health of
employees within the labor market. Many companies are beginning to recognize
that employees are their most important asset, and consider employee health
improvement initiatives a top priority.
In March 2005, we reorganized our operations to focus more clearly on the
two areas of our business: fitness management services and health management
services. Within each area, we provide three types of services: (i) staffing
services, which generally include on-site staff at our customer's site to manage
daily operations, (ii) program services, which generally include personal
training, weight loss programs, seminars, specialty fitness classes, massage
therapy, paper and web-based health risk assessments, biometric screenings to
assess blood profiles, data collection, management and reporting and educational
literature and programs, and (iii) consulting services, which typically include
fitness center floor plan designs, interior design plans, selection and sourcing
of fitness equipment, fitness program design and analysis of the effectiveness
of employee health improvement programs. For the years ended December 31,
18
2005 and 2004, staffing services accounted for approximately 91.9% and 95.2% of
total revenue and program and consulting services accounted for approximately
8.1% and 4.8% of total revenue.
Key elements of our growth strategy include efforts to: (i) further develop
fitness and health management programs and services through internal expertise,
partnerships and potential mergers or acquisitions; (ii) expand existing fitness
management relationships to include comprehensive health management services;
(iii) pursue customer opportunities with mid-sized companies and other smaller
organizations, who are generally underserved and in need of employee health
management services because of rising healthcare costs; (iv) continue to pursue
opportunities to offer on-site fitness management services to large
organizations; and (v) explore international growth opportunities as large
companies begin to broaden their scope of participation in employee health
management programs.
FITNESS MANAGEMENT SERVICES
Staffing Services. We have agreements with corporations to staff and
manage fitness centers that have been developed by these companies for use by
employees. Our customers invest the resources to develop and equip these fitness
centers, and generally pay for all operating expenses. We derive revenue from
these services through the reimbursement of staff costs, including wages, taxes
and benefits, reimbursement of the cost of liability insurance. We also receive
a management fee to cover the cost of regional and corporate support services.
Program and Consulting Services. Services in this category are generally
provided at our managed fitness centers and include personal training, weight
loss programs, seminars, specialty fitness classes and massage therapy. We
derive revenue from these programs, typically from the individual fitness center
member, on a fee-for-service basis.
Within our fitness management consulting practice, companies that are
planning new fitness centers employ us to develop floor plan designs, interior
design plans, selection and sourcing of fitness equipment and fitness program
design. For companies that desire to develop a commercial fitness center, we can
perform a comprehensive analysis of market potential for the center. Services
can include demographic analysis, market analysis, and multiple-year financial
business plan development.
HEALTH MANAGEMENT SERVICES
Staffing Services. We have agreements with corporations to staff and
manage the delivery of health promotion programs, lifestyle counseling services
for onsite and remote customer employees and injury prevention and treatment
services. These relationships may or may not involve the management of an
on-site fitness center. We derive revenue from these services through the
reimbursement of staff costs, including wages, taxes and benefits, reimbursement
of the cost of liability insurance. We also receive a management fee to cover
the cost of regional and corporate support services.
Program and Consulting Services. We offer a comprehensive menu of products
and services to assess the health risks of customer employees, as well as
lifestyle programs that target specific health risks. Such services are either
internally developed by us or are made available through third-party partners,
and include paper and web-based health risk assessments, biometric screenings to
assess blood profiles, data collection, management and reporting and educational
literature and programs. We also offer our customers access to the HFC e-Health
Platform, an electronic health education and service platform that we acquired
from HealthCalc.
We also offer health advisory services to customer employees. Such services
can range from interpretation of health risk assessment and screening results,
to individualized health improvement coaching support. These services can be
delivered face-to-face using our trained staff, or telephonically through
qualified partners.
Through our Occupational Health practice, we offer on-site programs to
prevent, manage and treat musculo-skeletal disorders in the work environment.
Services include ergonomic injury prevention, discomfort management and physical
therapy treatment.
19
Revenue from these program services are generally paid by the corporate
customer, although such customer may ask its employees to share in the cost.
Within our health management consulting practice, we provide our customers
with a comprehensive analysis of the effectiveness of employee health
improvement programs, with a focus on improving return on investment. This
service also creates a road map for companies that are looking to invest in an
employee health and wellness initiative. We also provide a suite of occupational
health consulting services, including injury prevention program design,
work-hardening programs, injury treatment and return-to-work programs and
regulatory compliance consulting.
Within these two areas of business, the duration of our management services
agreements vary widely, from those that are month-to-month, to those that have a
term of up to 5 years. A typical management services contract carries a term of
three years, with revenue recognized upon delivery of service. Contract duration
for Program and Consulting Services generally ranges from month-to-month to
twelve months, depending on the scope of services to be delivered. Revenues for
these services are recognized upon delivery of service.
We manage our business primarily by looking at the component service
revenue derived from our fitness and health management services areas of
business.
The following table provides a breakout of revenue and gross profit for our
two business segments for each of the years ending December 31, 2005, 2004 and
2003. You should read this financial information together with our complete
financial statements and the related notes incorporated by reference in the
prospectus, and our "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
(UNAUDITED)
Fitness Management Services
Staffing Services..................................... $38,226,444 $38,601,282 $28,330,612
Program and Consulting Services....................... 2,392,272 1,762,756 866,440
----------- ----------- -----------
40,618,716 40,364,038 29,197,052
----------- ----------- -----------
Health Management Services
Staffing Services..................................... 12,267,973 11,323,162 2,192,085
Program and Consulting Services....................... 2,055,516 767,468 89,685
----------- ----------- -----------
14,323,489 12,090,630 2,281,770
----------- ----------- -----------
Total Revenue
Staffing Services..................................... 50,494,417 49,924,444 30,522,697
Program and Consulting Services....................... 4,447,788 2,530,224 956,125
----------- ----------- -----------
$54,942,205 $52,454,668 $31,478,822
----------- ----------- -----------
GROWTH STRATEGY
Our growth strategy is to continue expanding our fitness and health
management staffing services, along with continuing to grow our program and
consulting services revenue from existing and prospective customers. In the
long-term, management believes that we can be a leading integrator of fitness
and health services for corporations and other large organizations. Key elements
of our growth strategy include:
- further developing our health improvement programs and services through
internal expertise, partnerships and potential acquisitions;
- leveraging existing site-based customer relationships into higher margin
fitness and health improvement programs and services;
20
- pursuing customer opportunities with mid-sized companies and other
organizations;
- continuing to pursue opportunities to offer on-site management services
for large organizations; and
- exploring international growth opportunities.
OPERATIONS
Effective March 2005, we reorganized into two operational areas, fitness
management and health management. This reorganization both reflected and
formalized our focus on these two core areas of operation over the past two
years. In fitness management, we have two National Vice Presidents, each of whom
manage a number of regions. In health management, we have one National Vice
President, who manages all of our health management customers. Each region,
which is generally organized along geographic lines, is headed by a Regional
Vice President who is responsible for fitness center and wellness program
staffing, as well as managing service quality, financial performance and client
relationships. A typical fitness center is managed by a team of degreed fitness
professionals under the leadership of the center's Program Manager. The Program
Manager has day-to-day operating responsibility for the center, including staff
management, customer relations, membership sales, implementation and promotion
of fitness and health programs and the financial performance of the center.
Our corporate office provides centralized administrative support, including
accounting and finance, human resources and payroll, information and technology
systems, sales and marketing, as well as general management for the development
and delivery of our program services.
PROPERTIES
We lease approximately 10,000 square feet of commercial office space in
Bloomington, Minnesota, under a lease that expires in October 2007. Our monthly
base rent for this office space is approximately $13,600, plus taxes, insurance
and other related operating costs. We lease approximately 1,200 square feet of
office space in Dallas, Texas under a lease that expires June 2008. Our minimum
monthly base rent for this space is $6,222. Additionally, we lease approximately
1,500 square feet of commercial office space in Piscataway, New Jersey, under a
lease that expires on December 31, 2006. Our monthly rent for this office space
is $1500.
SALES AND MARKETING
We market our services to both corporations and members of the fitness
centers it manages. Our sales force actively pursues new corporate customers
across a wide variety of industries. Our sales force is primarily responsible
for identifying potential corporate customers and sales lead partners, and
managing the overall sales process.
We have a corporate marketing department that supports our managed fitness
centers through the development of marketing programs and promotional materials.
OUTLOOK AND TRENDS
The high cost of employee health care has become a key concern for many
corporations. According to published reports, annual health care costs are
expected to continue to increase at double digit rates for the next several
years due to a number of factors, including an aging workforce, unhealthy
populations entering the workforce and obesity-related medical conditions due to
poor nutrition and inactivity. Management believes that many companies will be
interested in addressing the health needs of employees, their dependents and
retirees, including implementation of specific strategies to help "at-risk"
individuals, as part of a broader strategy to reduce health care costs. We
believe we have the products, services, expertise and personnel to meet this
objective.
The U.S. economy has experienced recessionary pressures in recent years,
which has negatively affected the corporate landscape. We continue to feel the
effect of these economic changes in the form of
21
competitive prices we must offer for our services in order to renew our customer
agreements, or to obtain new customers. Although we believe that price
competition will not materially affect results of operations, we believe that
price competition will continue for the foreseeable future.
A trend that may further develop within our fitness center management
business relates to companies asking service providers to operate their fitness
centers on a cost-neutral or for-profit basis. These cost-conscious companies
desire to minimize or eliminate the subsidization of fitness center operating
costs by keeping costs within the revenues being realized from employee
memberships and other sources of revenue. In connection with this form of
business model, we would derive our management fee revenue not from our
corporate client, but from the profits of the fitness center. The application of
this business model may require us to fund operating losses until enough
memberships are sold to realize profitability. We believe we may have to fund
operating losses for such centers up to twenty-four months before profitability
could be reached. However, we believe this model will enable us\ to leverage our
experience managing for-profit fitness centers, and may result in higher gross
margins and profitability. Currently, existing contracts representing this
business model do not present a material risk or represent a material
contribution to our results of operation. However, there can be no assurance
that the number and scope of such contracts will not become material in the
future or that we will be able to manage such centers profitably or to fund
losses for these centers until profitability is achieved.
SIGNIFICANT CUSTOMER RELATIONSHIP
At December 31, 2005, we had one customer relationship that provided 11.9%
of our total revenue. For this customer, we provide fitness center management
and wellness program administration services for approximately 53 locations. The
agreement expires December 31, 2006, and will automatically renew for successive
one-year periods unless either party delivers written notice at least 90 days
prior to termination. We believe that our relationship with this customer is
good.
COMPETITION
Within the business-to-business fitness and health management services
industry, there are relatively few national competitors. However, virtually all
markets are home to regional providers that manage several sites within their
geographic areas. With our national presence and almost 30 years of history,
management believes that we are recognized as a leading provider of corporate
fitness and health management services, and is well positioned to compete in
this industry.
PROPRIETARY RIGHTS
We have three registered trademarks, "Insight"(R), "It Pays To Be
Healthy"(R) and "Live For Life"(R). We do not have any other significant
proprietary rights.
GOVERNMENT REGULATION
Management believes that there currently is no significant government
regulation which materially limits our ability to provide fitness and health
management and consulting services to our corporate, hospital, community and
university-based clients.
EMPLOYEES
At December 31, 2005, we had 783 full-time and 2,559 part-time and on-call
employees, of which approximately 85 were employed at our corporate, divisional
and regional offices, with the remainder primarily engaged in the staffing of
fitness, wellness and occupational health centers and programs. We have an
agreement with the United Auto Workers Union regarding approximately 54 of our
employees that work at fitness centers owned by Ford Motor Company and
DaimlerChrysler Corporation. Management believes our relationship with employees
is good.
22
INDEMNIFICATION OBLIGATIONS
A majority of our management agreements include a provision that obligate
us to indemnify and hold harmless the customer and their employees, officers and
directors from any and all claims, actions and/or suits (including attorneys'
fees) arising directly or indirectly from any act or omission of the Company or
our employees, officers or directors in connection with the operation of our
business. A majority of these management contracts also include a provision that
obligates the customer to indemnify and hold us harmless against all liabilities
arising out of the acts or omissions of the customer, their employees and
agents. We can make no assurance that claims by our customers, or their
employees, officers or directors, will not be made in the course of operating
our business.
INSURANCE
We maintain the following types of insurance policies: commercial general
liability, professional liability, automobile liability, commercial property,
employee dishonesty, employment practices, directors and officers liability,
workers compensation and excess umbrella liability. The policies provide for a
variety of coverages and are subject to various limitations, exclusions and
deductibles. While we believe our insurance policies are sufficient in amount
and coverage for our 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.
LEGAL PROCEEDINGS
We may be, from time to time, subject to claims and suits arising in the
ordinary course of our business. Claims have, in the past, generally been
covered by insurance. Management does not believe the resolution of any such
legal matters will have a material effect on our financial condition or results
of operations, although no assurance can be given with respect to the ultimate
outcome of any such actions. Furthermore, there can be no assurance that our
insurance will be adequate to cover all liabilities that may arise out of claims
brought against the Company.
23
MANAGEMENT
NAME AGE POSITION
---- --- --------
James A. Bernards(1),(3).................. 59 Director
K. James Ehlen, M.D.(1)................... 61 Director
Robert J. Marzec(2),(4)................... 61 Director
Cary Musech(3)............................ 48 Director
Jerry V. Noyce............................ 61 President, CEO and Director
John C. Penn(2),(4)....................... 66 Chairman
Mark W. Sheffert(2),(3),(4)............... 58 Director
Linda Hall Whitman(1),(2)................. 57 Director
Rodney A. Young(1)........................ 51 Director
Wesley W. Winnekins....................... 44 Chief Financial Officer and Treasurer
James A. Narum............................ 49 National Vice President of Account
Services -- Fitness Management
Jeanne C. Crawford........................ 48 Vice President-Human Resources and
Secretary
David T. Hurt............................. 40 National Vice President of Account
Services -- Fitness Management
Katherine M. Hamlin....................... 39 National Vice President of Account
Services -- Health Management
Brian Gagne............................... 43 Vice President -- Programs and Partnerships
Michael R. Seethaler...................... 51 National Vice President -- Business
Development
Ralph T. Colao............................ 51 Vice President -- Consulting and Best
Practices
Michael Zdychnec.......................... 49 Vice President -- Marketing
John Ellis................................ 46 Chief Information Officer
Pete Egan................................. 44 Chief Science Officer
---------------
(1) Member of Compensation and Human Capital Committee
(2) Member of Nominating/Governance Committee
(3) Member of Finance Committee
(4) Member of Audit Committee
James Bernards, a director of the Company since March 1999, serving as
Chairman of the Board from 1999 through 2003. In addition, Mr. Bernards served
as a director of the Company from 1993 to 1998. Mr. Bernards has served as
President of Brightstone Capital, LLC, a venture capital firm, since 1985 and
President of Facilitation Incorporated, a consulting firm since founding it in
July 1993. Prior to that time he was President of Stirtz Bernards & Co., a CPA
firm he founded and with which he had been a partner for more than 12 years. Mr.
Bernards is also a director of three public companies, FSI International, Inc.,
August Technology Corporation and Entegris, Inc., and several private companies.
Jim Ehlen, M.D., a director of the Company since April 2001, currently
serves as Chief Executive Officer of the Halleland Health Consulting Group, a
Minneapolis-based health consulting firm. From February 2001 to February 2003,
Dr. Ehlen served as Chief, Clinical Leadership for Humana Inc., a national
managed care organization. He was Executive Leader of Health Care Practice for
Halleland Health Consulting Group from May 2000 to February 2001 and was a
self-employed health care consultant from June 1999 to May 2000. From October
1988 to June 1999, Dr. Ehlen served as Chief Executive Officer of Allina Health
System, an integrated health care organization. Dr. Ehlen currently provides
medical advisory consulting services to the Company as a representative of
Halleland Health Consulting. See "Certain Transactions" contained within this
Proxy Statement. Dr. Ehlen is also a director
24
of Transoma Medical, Inc., IZEX Technologies, Inc., Cardtronic Technology, Inc.,
privately- held companies, and GelStat Corporation, a publicly-held company.
Robert Marzec, a director of the Company since May 2004, retired from
PricewaterhouseCoopers in 2002, where he was an audit partner and a public
accountant for 35 years. Mr. Marzec is also a director of Medtox Scientific,
Inc., and Apogee Enterprises, Inc., both of which are publicly-held companies.
Cary Musech, a director of the Company since December 2003, serves as Chief
Executive Officer of Bayview Capital Management LLC ("Bayview Management"), the
general partner of Bayview Capital Partners LP ("Bayview Partners"), a private
equity investment firm. Pursuant to the terms of a stock purchase agreement
entered into in December 2003, Bayview Partners had the right to designate an
individual for one directorship on the Company's Board of Directors. Mr. Musech
was designated as the Bayview Partners nominee. Mr. Musech co-founded Bayview
Management and Bayview Partners in June 1998. Since November 2004, he has also
served as Chief Executive Officer of Tonka Bay Equity Partners LLC, the
investment advisor for Bayview Partners. From October 1993 to November 1997, Mr.
Musech was the Chief Financial Officer of Wright Products Corporation, a
privately-held manufacturer and distributor of storm and screen door hardware.
From February 1984 to September 1993, Mr. Musech was a corporate finance
specialist for US Bank (formerly First Bank System) and Wells Fargo Bank, N.A.
(formerly Norwest Corporation) where he developed expertise in financing
complex, highly leveraged transactions including buyouts, acquisitions,
recapitalizations and growth financings. From January 1981 to January 1984, Mr.
Musech was an auditor with Ernst & Young.
Jerry Noyce has been President and Chief Executive Officer of the Company
since November 2000 and a director since February 2001. From October 1973 to
March 1997, he was Chief Executive Officer and Executive Vice President of
Northwest Racquet, Swim & Health Clubs. From March 1997 to November 1999, Mr.
Noyce served as Regional Chief Executive Officer of CSI/Wellbridge Company, the
successor to Northwest Racquet, where he was responsible for all operations at
the Norwest Clubs and the Flagship Athletic Club.
John Penn, a director of the Company since April 2001 and Chairman of the
Board since January 2004, currently serves as President, CEO and Chairman of
Intek Plastics, Inc., a custom extruder of plastic products for the window and
door industries. From 1999 to 2003, he served as Vice Chairman and Chief
Executive Officer of Satellite Companies, a family-owned group of three
companies engaged in the manufacture and international sales of portable
restroom equipment, distribution and rental of relocateable buildings, and sales
and maintenance of private aircraft. He served for 21 years as an outside board
member of those companies before joining them as an employee in 1999. For 25
years prior to joining Satellite Companies, Mr. Penn served as chief executive
officer of several companies in the manufacturing and medical industries,
including Center for Diagnostic Imaging, Benson Optical and Arctic Enterprises.
Mr. Penn is also a director of Angeion Corporation, a publicly-held company.
Mark Sheffert, a director of the Company since January 2001, has served as
Chairman and Chief Executive Officer of Manchester Companies, Inc., an
investment banking and business advisory firm, since December 1989. Prior to
that, he was President of First Bank System, Inc. (now U.S. Bank) a $28 billion
bank holding company headquartered in Minneapolis, Minnesota. He also served as
Chairman and CEO for First Trust, a $20 billion trust company based in St. Paul,
Minnesota. For 10 years prior to First Bank, Mr. Sheffert served as President
and Chief Operating Officer of North Central Insurance Company. Mr. Sheffert has
served on the Board of Directors for over thirty companies, including NYSE,
NASDAQ and private companies, and he currently serves on the Board of BNCCORP,
Inc., a publicly-held company.
Linda Hall Whitman, PhD, a director of the Company since April 2001, was
Chief Executive Officer of MinuteClinic, a healthcare services company, from
2002-2005, and is currently serving as consultant to the company. Prior to that,
she was President of Ceridian Performance Partners (an employee benefits
provider), Ceridian Corporation from 1996 through 2000 and Vice President,
Business Integration at Ceridian from 1995 to 1996. From 1980 to 1995 she served
in various management and executive positions with Honeywell, Inc., including
Vice President, Consumer Business Group from 1993 to 1995.
25
Ms. Whitman has been a director of MTS Systems Incorporation since 1985 and
August Technology Corporation from 2001-2006. She served on the Ninth District
Federal Reserve Bank Board as a Class C Director from 1999-2005, and served as
its Chair from 2004-2005.
Rodney Young, a director of the Company since April 2001, has served as
President, Chief Executive Officer and director of Angeion Corporation, a
medical company, since November 2004, joining Angeion as its Executive Vice
President in July 2004. Mr. Young was Chief Executive Officer and President of
LecTec Corporation, a developer, manufacturer and marketer of healthcare
consumer and over-the-counter pharmaceutical products, from August 1996 to July
2003, also serving as its Chairman of the Board of LecTec from November 1996 to
July 2003. Prior to that, Mr. Young served Baxter International, Inc. for five
years in various management roles, most recently as Vice President and General
Manager of the Specialized Distribution Division. Mr. Young also serves as a
director of Possis Medical, Inc., a publicly-held company, and Delta Dental Plan
of Minnesota.
Wesley Winnekins has been Chief Financial Officer and Treasurer of the
Company since February 2001. Prior to joining the Company, Mr. Winnekins served
as CFO (from January 2000 to February 2001) of University.com, Inc., a privately
held provider of on-line learning solutions for corporations. From June 1995 to
April 1999 he served as CFO and vice president of operations for Reality
Interactive, a publicly held developer of CD-ROMs and online training for the
corporate market. From June 1993 to May 1995 he served as controller and
director of operations for The Marsh, a Minneapolis-based health club, and was
controller of the Greenwood Athletic Club in Denver from October 1987 to January
1989.
James Narum has been the Company's National Vice President of Account
Services -- Fitness Management since December 2003, Senior Vice
President-Corporate Business Development from December 2001 to December 2003,
and served as Corporate Vice President of Operations-Corporate Health and
Fitness Division from November 2000 to December 2001. From 1995 until November
2000, Mr. Narum was responsible for national operations in the Company's
Corporate Health and Fitness Division. From 1983 to 1995, Mr. Narum was
responsible for regional operations, sales, consulting, and client account
management for Fitness Systems Inc., a provider of fitness center management
services the Company acquired in 1995.
Jeanne Crawford has been the Company's Vice President of Human Resources
since July 1998 and Secretary of the Company since February 2001. From July 1996
through July 1998, Ms. Crawford served as a Human Resource consultant to the
Company. From October 1991 through September 1993, Ms. Crawford served as Vice
President of Human Resources for RehabClinics, Inc. a publicly held outpatient
rehabilitation company. From May 1989 through October 1991, Ms. Crawford served
as Director of Human Resources for Greater Atlantic Health Service, an HMO and
physicians medical group. From 1979 through 1989, Ms. Crawford served in various
human resources management positions in both the retail and publishing
industries.
David Hurt serves as National Vice President of Account Services-Fitness
Management, where he is responsible for the operation of accounts within the
Company's Fitness Management business area. He directs the overall development
and management of corporate hospital, community, and university fitness center
operations. Mr. Hurt has been active in the industry for more than 16 years. His
experience in health and fitness management began in 1988 with the Valley
Wellness Center in Harrisonburg, Virginia. In recent years, he has been involved
in the successful development and management of several start-up fitness center
projects ranging in size from 45,000-150,000 square feet.
Katherine Hamlin was appointed as the Company's National Vice President of
Account Services-Health Management, in March 2005. In this role, she directs the
overall development and management of the Company's Health Management accounts.
From December 2003 to March 2005, she served as the Company's Vice President of
Marketing. Previously, Ms. Hamlin spent 15 years with the Health & Fitness
Division of Johnson & Johnson Health Care Systems Inc., a subsidiary of Johnson
& Johnson, a business acquired by the Company. Ms. Hamlin was the Director of
Marketing Services and National Sales leading business expansion in the United
States and internationally, while exploring new markets. Ms. Hamlin serves on
the board for International Council on Active Aging (ICAA), and American
Marketing
26
Association (AMA). She is a member of the Alliance for Work Life Progress
(AWLP), National Business Group on Health (NBGH) and Wellness Councils of
America (WELCOA).
Brian Gagne has served as the Company's Vice President, Programs and
Partnerships, since December 2003. In this role, he is responsible for
establishing the direction and managing the resources that develop and deliver
the Company's branded fitness and health management programs and services. Mr.
Gagne brings more than 16 years of health, fitness and wellness experience in
the corporate, commercial and medical fitness markets. Mr. Gagne joined the
Company after the acquisition of Johnson & Johnson Health Care Systems in
December 2003. Prior to Health Fitness, he was the Director of Integrated
Behavioral Solutions and was responsible for the strategic design and
development of patient education programs and tools for the Johnson & Johnson
Family of Companies. Mr. Gagne started his career in 1987 as an Exercise
Physiologist at Gottlieb Health & Fitness Center (GHFC).
Mike Seethaler joined the Company as National Vice President of Business
Development in December 2003. In this role, Mr. Seethaler directs all new client
and prospective client relationships. Mr. Seethaler was formerly Sales Director,
Global Account Sales for Rockwell Automation, where he had responsibility for a
$400 million business line. During his 20 years at Rockwell, he held various
positions in training, performance, marketing, and customer support. He has been
a proven visionary with a consistent record of sales and sales management
experience in all aspects of value-added consultative selling. He also received
more than 13 awards and professional recognition for public speaking, sales
training, team building and financial performance from Rockwell.
Ralph Colao has been the Company's Vice President of Consulting and Best
Practices since December 2003. Mr. Colao leads the Company's initiatives to
expand its Health Management consulting businesses. Prior to joining the
Company, he was National Director of Operations for the Health & Fitness
Services Division of Johnson & Johnson Health Care Systems, a business acquired
by the Company. Mr. Colao has in excess of 24 years of related experience, and
is an active member of the American College of Sports Medicine and National
Business Group on Health.
Michael Zdychnec serves as the Company's Vice President of Marketing, and
has over 26 years of experience in the health care industry working directly
with consumers, health plans, employers, and health care providers. Most
recently, Zdychnec was Senior Vice President of marketing and product
development for ACN Group, a business unit within United HealthGroup. In this
capacity, he was responsible for the planning, development, and launch of a
consumer health and wellness product line for the organization. Prior to joining
ACN Group in 1996, Zdychnec held a variety of senior management positions in
marketing, operations, product development, and consulting with health care
organizations throughout the United States. He is a graduate of Iowa State
University with his B.S. in economics and marketing research.
John F. Ellis Serves as the Company's Chief Information Officer. John is
formerly the Founder and Chief Executive officer of HealthCalc.Net, Inc., which
we acquired in December 2005. From January 1995 to August 1999, Mr. Ellis held a
position of Senior Specialist with Perot Systems, an Information Technology
consulting group. From November 1989 to January 1995, Mr. Ellis held a position
of Vice President of Information Technology at People Karch International, a
health and fitness software development and services firm. Mr. Ellis holds a
B.S. in Physical Education from The Citadel.
Peter A. Egan serves as the Company's Chief Science Officer. Mr. Egan is
formerly the Founder of HealthCalc.Net, Inc., which we acquired in December
2005. Immediately prior to that, from April 1994 to July 1996, Mr. Egan served
as a Database Systems Developer for Berger & Co., Dallas, Texas. From November
1993 to July 1995, Mr. Egan served as a Database Systems Developer for
Wellington Consulting, Fort Lee, New Jersey, and from March 1992 to November
1993 Mr. Egan was Director of Development for People Karch International, Ltd.,
Dallas, Texas and Chantilly, Virginia. From June 1985 to March 1992, Mr. Egan
was Manager of Preventative Medicine at Sandia National Laboratories,
Albuquerque, New Mexico. Mr. Egan holds a Ph.D in Exercise Physiology from the
University of New Mexico and a B.U.S. from the University of New Mexico in
University Studies/Exercise Science.
27
DIRECTOR ARRANGEMENTS
Other than with respect to Mr. Musech, as nominee of Bayview Partners
pursuant to an investment agreement entered into in December 2003, there is no
other arrangement or understanding with pursuant to which any person was
selected as a director. On November 15, 2005, Bayview Partners's investment was
fully redeemed (except for an insignificant number of warrants) and Bayview
Partner's investment agreement was terminated. Mr. Musech has indicated that he
will continue to serve as a director until our next annual meeting (typically
held in May of each year) but that, as a result of our redemption of
substantially all of Bayview Partner's investment, he likely will not seek
reelection as a director. There are no family relationships among the Company's
directors.
BOARD COMMITTEES
AUDIT COMMITTEE
The Audit Committee is comprised of directors Robert J. Marzec (Chair),
Mark W. Sheffert and John C. Penn. Messrs. Marzec, Sheffert and Penn are, in the
judgment of the Board of Directors, "independent" directors. The Board also
believes that each member of the Audit Committee satisfies the independence
criteria of Nasdaq Rule 4200(a)(15) (though not required to comply with such
provision) and the criteria of Section 10A(m)(3) of the Securities Exchange Act
of 1934. The Audit Committee is responsible for the oversight relating to our
systems of internal and disclosure controls and our financial accounting and
reporting matters. The Committee is also responsible for the appointment,
compensation, retention and oversight of the work of any publicly registered
accounting firm, including our independent registered public accountants. The
Charter for the Audit Committee is attached as Exhibit A to the Proxy Statement
for the 2004 Annual Meeting of Shareholders. The Audit Committee met 7 times
during fiscal 2005.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that Robert J. Marzec is the "audit committee
financial expert" as defined by Item 401(h)(2) of Regulation S-K under the
Securities Act of 1933. The designation of Mr. Marzec as the audit committee
financial expert does not impose on Mr. Marzec any duties, obligations or
liability that are greater than the duties, obligations and liability imposed on
Mr. Marzec as a member of the Audit Committee and the Board of Directors in the
absence of such designation or identification.
COMPENSATION AND HUMAN CAPITAL COMMITTEE
The Compensation and Human Capital Committee consists of Linda Hall Whitman
(Chair), James A. Bernards, K. James Ehlen, M.D., and Rodney A. Young. Though
not required to comply with such provision, the Board believes that each of the
foregoing members (other than Dr. Ehlen) of the Compensation and Human Capital
Committee satisfies the independence requirements of Nasdaq Rule 4200(a)(15).
The Compensation and Human Capital Committee is charged with oversight
responsibility for management's performance and the adequacy and effectiveness
of compensation and benefit plans. In addition, the Compensation and Human
Capital Committee makes recommendations to the Board of Directors regarding
remuneration arrangements for senior management, and adoption of employee
compensation and benefit plans. The Compensation and Human Capital Committee met
3 times during fiscal 2005.
Effective March 1, 2006, K. James Ehlen, M.D. was appointed to the
Compensation and Human Capital Committee as a non-voting member. Mr. Ehlen's
appointment as a non-voting member is subject to the continuing condition that
he not receive more than $30,000 in consulting fees from the Company in any
12-month period. Dr. Ehlen does not satisfy the independence requirements of
Nasdaq Rule 4200(a)(15) since he received more than $60,000 in annual
consideration from the Company within the past three years for serving as a
consultant to the Company. Dr. Ehlen will not be present or otherwise
participate in any matters related to fixing the compensation of the Company's
Chief Executive Officer so
28
long as he is a consultant to the Company. Dr. Ehlen will be entitled to
participate in all other discussions and matters before the Compensation
Committee. The Company believes that Dr. Ehlen will be particularly valuable in
discussions regarding the performance and adequacy of the Company's personnel,
including its executive officers, and in all other personnel policy matters. The
Company expects that Dr. Ehlen will qualify as an independent director under
Nasdaq Rule 4200(a)(15) on February 1, 2008.
FINANCE COMMITTEE
The Finance Committee, which consists of Mark W. Sheffert (Chair), James A.
Bernards, and Cary Musech, and is charged with exploring strategic opportunities
and the methods that might be available for financing such opportunities. The
Finance Committee met 17 during fiscal 2005.
NOMINATING/GOVERNANCE COMMITTEE
Our Nominating/Governance Committee consists of the Chairman of the Board
(John C. Penn), the Chairman of the Audit Committee (Robert J. Marzec), the
Chairman of the Compensation Committee (Linda Hall Whitman) and the Chairman of
the Finance Committee (Mark W. Sheffert). Though not required to comply with
such provision, the Board believes that each member of the Nominating/Governance
Committee satisfies the independence criteria of Nasdaq Rule 4200(a)(15). The
Nominating/Governance Committee met once during fiscal 2005.
The Nominating/Governance Committee has not adopted a charter. We have not
yet adopted a nominating policy regarding director nominee proposals by
shareholders and does not believe such a policy is needed because shareholders
are free at any time to recommend a nominee to be considered by the Board by
submitting a written proposal to the Chairman of the Board of Directors, at
Health Fitness Corporation, 3600 American Boulevard West, Suite 560,
Bloomington, Minnesota 55431. A consent signed by the proposed nominee agreeing
to be considered as a director should accompany the written proposal. The
proposal should include the name and address of the nominee, in addition to the
qualifications and experience of said nominee.
The independent directors will consider the attributes of the candidates
and the needs of the Board and will review all candidates in the same manner,
regardless of the source of the recommendation. In evaluating director nominees,
a candidate should have certain minimum qualifications, including being able to
read and understand basic financial statements, be familiar with our business
and industry, have high moral character and mature judgment, and be able to work
collegially with others. In addition, factors such as the following shall be
considered:
- appropriate size and diversity of the Board;
- needs of the Board with respect to particular talent and experience;
- knowledge, skills and experience of nominee;
- familiarity with domestic and international business affairs;
- legal and regulatory requirements;
- appreciation of the relationship of our business to the changing needs of
society; and
- desire to balance the benefit of continuity with the periodic injection
of the fresh perspective provided by a new member.
DIRECTOR COMPENSATION
Under a compensation plan for outside directors, directors who are not
employees of the Company receive the following compensation:
1. Each director receives an annual cash retainer of $12,000 payable
quarterly at a rate of $3,000 in advance of each quarter.
29
2. The chairperson of the board receives an additional annual cash
retainer of $6,000 payable quarterly at a rate of $1,500 in advance of each
quarter.
3. The chairperson of the audit committee receives an additional
annual cash retainer of $5,000 payable quarterly at a rate of $1,250 in
advance of each quarter.
4. The chairperson of the compensation committee receives an
additional annual cash retainer of $2,500 payable quarterly at a rate of
$625 in advance of each quarter.
5. The chairperson of the finance and nominating committees receives a
$250 committee meeting fee (in addition to fees paid to all committee
members for their attendance at such committee meetings).
6. Each director receives a cash payment of $1,000 for attending each
regular and special board meeting. Telephonic board meetings, or a
director's telephonic attendance at a board meeting, are compensated at 75%
of the full payment.
7. Committee members receive a cash payment of $500 for attending each
regular and special committee meeting up to the following annual limit:
Compensation Committee -- eight meetings; and Audit Committee -- eight
meetings. The Finance Committee and Nominating Committee do not have an
annual limit on the number of meetings. Telephonic committee meetings, or
the director's telephonic attendance at a committee meeting, will be
compensated at 75% of the full payment.
8. Upon the initial election to the Board of Directors, a director
receives a grant of 20,000 shares of common stock.
9. Upon the initial election to the Board of Directors and annually
thereafter, a director will receive a six-year fully vested option to
purchase 15,000 shares of common stock. The option will have an exercise
price equal to the fair market value of the common stock on the date of
grant.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Chief Executive
Officer and to the Company's other four most highly compensated executive
officers who received compensation in excess of $100,000 during fiscal 2005
(such individuals referred to as the "named executive officers").
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS
-------------------------------------
AWARDS PAYOUTS
----------------------- -----------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL ---------------------------------- STOCK UNDERLYING LTIP
POSITION YEAR SALARY($) BONUS($) OTHER($) AWARDS($) OPTIONS PAYOUTS($)
------------------ ------ ---------- --------- --------- ---------- ---------- -----------
Jerry V. Noyce............. 2005 249,134 73,558 8,400(2) -- 40,000 --
President and 2004 243,269 -- 8,400 -- 80,000 --
Chief Executive Officer 2003 238,050 10,000 8,400 -- 102,000 --
Wesley W. Winnekins,....... 2005 159,193 33,000 -- -- 10,000 --
Chief Financial 2004 143,780 -- -- -- 17,000 --
Officer 2003 131,159 15,000 -- -- 27,000 --
Jeanne C. Crawford,........ 2005 135,115 24,747 -- -- 7,500 --
Vice President -- Human 2004 128,895 8,766 -- -- 35,000 --
Resources 2003 123,311 20,230 -- -- 25,000 --
Brian Gagne................ 2005 130,437 21,456 -- -- 15,000 --
Vice President-- 2004 125,221 8,658 27,489(3) -- -- --
Program Services(1)
Michael Seethaler,......... 2005 123,146 29,260 -- -- 15,000 --
National Vice President-- 2004 120,101 10,000 -- -- -- --
Business Development(1)
NAME AND PRINCIPAL ALL OTHER
POSITION COMPENSATION($)
------------------ ----------------
Jerry V. Noyce............. --
President and --
Chief Executive Officer --
Wesley W. Winnekins,....... --
Chief Financial --
Officer --
Jeanne C. Crawford,........ --
Vice President -- Human --
Resources --
Brian Gagne................ --
Vice President-- --
Program Services(1)
Michael Seethaler,......... --
National Vice President-- --
Business Development(1)
30
---------------
(1) Such persons first became executive officers during fiscal 2004.
(2) Amount represents payments for a car allowance and country club membership.
See "Employment Agreements -- Jerry V. Noyce."
(3) Amount represents payments for relocation expenses.
STOCK OPTIONS GRANTED IN FISCAL 2005
The following table sets forth information regarding stock options granted
to the named executive officers during the fiscal year ended December 31, 2005.
We have not granted stock appreciation rights.
Amounts in the following table represent potential realizable gains that
could be achieved for the options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
calculated based on the requirements of the Securities and Exchange Commission
and do not represent an estimate or projection of our future common stock
prices. These amounts represent certain assumed rates of appreciation in the
value of our common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises depend on the future performance
of the common stock and overall stock market conditions. The amounts reflected
in the following table may not necessarily be achieved.
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR
OPTIONS GRANTED TO PRICE PER OPTION TERM
GRANTED (#) EMPLOYEES IN SHARE EXPIRATION --------------------
NAME (1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- -------------- ------------ --------- ---------- -------- ---------
Jerry V. Noyce....... 40,000(1) 16% $2.62 2/24/11 35,642 80,860
Wesley W. Winnekins.. 10,000(1) 4% $2.62 2/24/11 8,911 20,215
Jeanne C. Crawford... 7,500(1) 3% $2.62 2/24/11 6,683 15,161
Brian Gagne.......... 7,500(1) 3% $2.81 2/4/11 7,168 16,261
7,500(1) 3% $2.62 2/24/11 6,683 15,161
Michael Seethaler.... 7,500(1) 3% $2.81 2/4/11 7,168 16,261
7,500(1) 3% $2.62 2/24/11 6,683 15,161
---------------
(1) Exercisable in four annual increments, each in the amount of 25% of the
number of shares granted, commencing on the first anniversary of the date of
grant.
AGGREGATED OPTION EXERCISES IN 2005 AND YEAR END OPTION VALUES
The following table provides information related to the number of options
exercised during the last fiscal year and the number and value of options held
at fiscal year end by the named executive officers.
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ON EXERCISE VALUE OPTIONS AT 12/31/05 12/31/05(1)
NAME (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
Jerry V. Noyce........ -- -- 422,500/161,500 $897,155/$170,120
Wesley W. Winnekins... -- -- 117,000/51,500 $ 222,080/$66,540
Jeanne C. Crawford.... -- -- 77,500/45,000 $ 147,600/$36,675
Brian Gagne........... -- -- 20,000/35,000 $ 27,600/$27,675
Michael Seethaler..... -- -- 20,000/35,000 $ 28,800/$28,875
---------------
(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the market price of the common stock at fiscal year end
and the option exercise price per share multiplied by the
31
number of shares subject to options. The closing price as of December 30,
2005 on the OTC Bulletin Board was $2.63.
EQUITY COMPENSATION PLANS
2005 STOCK OPTION PLAN
A general description of the basic features of the 2005 Plan is presented
below, but such description is qualified in its entirety by reference to the
full text of the 2005 Plan.
Purpose. The purpose of the 2005 Plan is to advance the interests of the
Company and our shareholders by enabling us to attract and retain qualified
persons as employees, directors and consultants, by providing an incentive to
such individuals through equity participation in the Company.
Term. Options may be granted under the 2005 Plan until December 15, 2014,
or until such earlier date as the 2005 Plan is discontinued or terminated by the
Board.
Administration. The 2005 Plan is administered by the Board of Directors or
by a Committee of the Board of Directors (the "Administrator"). The 2005 Plan
gives broad powers to the Administrator to administer and interpret the 2005
Plan, including the authority to select the individuals to be granted options
and to prescribe the particular form and conditions of each option granted.
Eligibility. All of our salaried employees (including of any or our
subsidiaries) are eligible to receive incentive stock options pursuant to the
2005 Plan. All salaried employees, non-employee directors and officers of, and
consultants to, the Company or any subsidiary are eligible to receive
nonqualified stock options. As of December 31, 2005, the Company had
approximately 559 salaried employees (of which 12 are executive officers) and
eight directors who are not employees.
Options. When an option is granted under the 2005 Plan, the Administrator
at its discretion specifies the option price, the type of option (either
"incentive" or "nonqualified") to be granted, and the number of shares of common
stock which may be purchased upon exercise of the option. The exercise price of
an incentive stock option may not be less than 100% of the fair market value of
the Company's common stock and the option price of a nonqualified option may not
be less than 85% of the fair market value of the Company's common stock on the
date of grant. The closing price of our common stock (i.e., the fair market
value) on December 30, 2005 was $2.63 per share. The term during which the
option may be exercised and whether the option will be exercisable immediately,
in stages or otherwise are set by the Administrator, but the term of an
incentive stock option may not exceed ten years from the date of grant.
Optionees may pay for shares upon exercise of options with cash, certified check
or common stock of the Company valued at the stock's then fair market value.
Each stock option granted under the 2005 Plan is nontransferable during the
lifetime of the optionee. Each outstanding option under the 2005 Plan may
terminate earlier than its stated expiration date in the event of the optionee's
termination of employment, directorship or other relationship with the Company.
Amendment. The Board of Directors may from time to time suspend or
discontinue the 2005 Plan or revise or amend it in any respect; provided, the
2005 Plan may not, without the approval of the shareholders, be amended in any
manner that will (a) materially increase the number of shares subject to the
2005 Plan except as provided in the case of stock splits, consolidations, stock
dividends or similar events; (b) materially modify the requirements for
eligibility for participation in the 2005 Plan; (c) materially increase the
benefits accruing to optionees under the 2005 Plan or (d) cause incentive stock
options to fail to meet the requirements of the Internal Revenue Code.
Federal Income Tax Consequences of the 2005 Plan. Under present law, an
optionee will not realize any taxable income on the date a nonqualified option
is granted pursuant to the 2005 Plan. Upon exercise of the option, however, the
optionee must recognize, in the year of exercise, ordinary income equal to the
difference between the option price and the fair market value of the Company's
common stock on the date of exercise. Upon the sale of the shares, any resulting
gain or loss will be treated as capital gain or loss. The Company will receive
an income tax deduction in its fiscal year in which options are exercised, equal
32
to the amount of ordinary income recognized by those optionees exercising
options, and must withhold income and other employment-related taxes on such
ordinary income.
Incentive stock options granted under the 2005 Plan are intended to qualify
for favorable tax treatment under Code Section 422. Under Section 422, an
optionee recognizes no taxable income when the option is granted. Further, the
optionee generally will not recognize any taxable income when the option is
exercised if he or she has at all times from the date of the option's grant
until three months before the date of exercise been an employee of the Company.
The Company ordinarily is not entitled to any income tax deductions upon the
grant or exercise of an incentive stock option. Certain other favorable tax
consequences may be available to the optionee if he or she does not dispose of
the shares acquired upon the exercise of an incentive stock option for a period
of two years from the granting of the option and one year from the receipt of
the shares.
EMPLOYMENT AGREEMENTS
Jerry V. Noyce. In November 2000, the Company entered into an employment
agreement with Jerry Noyce, the Company's President and Chief Executive Officer.
Salary increases under the agreement are determined by the Compensation and
Human Capital Committee and the Board. Mr. Noyce's current annual base salary
under the agreement is $275,000. Mr. Noyce is also eligible to earn an annual
bonus based on criteria set by the Board. Mr. Noyce also receives normal and
customary employee benefits and fringe benefits, including a $500 per month car
allowance and up to $200 per month for a country club membership. The agreement
may be terminated by either party upon written notice to the other party. If Mr.
Noyce is terminated without "cause," he will continue to receive his base salary
for a period of 12 months following such termination. If the agreement is
terminated by the Company because of a change of control, Mr. Noyce will receive
his base salary for a period of 24 months following termination. If Mr. Noyce
resigns as a result of a change of control because he will not be named chief
executive officer of the new controlling entity, he will receive his base salary
for a period of 12 months following termination.
Wesley W. Winnekins. The Company has an employment agreement with Wes
Winnekins, the Company's Chief Financial Officer, which agreement was effective
as of February 9, 2001 and continues for an indefinite term until terminated in
accordance with the agreement. Mr. Winnekins' current annual base salary under
his employment agreement is $180,000. Mr. Winnekins is also eligible to earn an
annual bonus based on criteria set by the Company's CEO and approved by the
Compensation and Human Capital Committee. The agreement may be terminated by
either party upon written notice to the other party. If Mr. Winnekins is
terminated without "cause," he will continue to receive his base salary for a
period of three months following such termination.
Jeanne C. Crawford. The Company has an employment agreement with Jeanne
Crawford, Vice President -- Human Resources, which agreement was effective as of
March 1, 2003 and continues for an indefinite term until terminated in
accordance with its terms. Ms. Crawford's current annual base salary under the
agreement is $145,000. Ms. Crawford is also eligible to earn an annual bonus
based on criteria set by the Company's CEO and approved by the Compensation and
Human Capital Committee. The agreement may be terminated by either party upon
written notice to the other party. If Ms. Crawford is terminated without
"cause," she will continue to receive her base salary for a period of three
months following such termination.
Brian Gagne. The Company has an employment agreement with Brian Gagne,
Vice President -- Program Services, which agreement was effective as of December
8, 2003 and continues for an indefinite term until terminated in accordance with
its terms. Mr. Gagne's current annual base salary under the agreement is
$142,000. Mr. Gagne is also eligible to earn an annual bonus based on criteria
set by the Company's CEO and approved by the Compensation and Human Capital
Committee. The agreement may be terminated by either party upon written notice
to the other party. If Mr. Gagne is terminated without "cause," he will continue
to receive his base salary for a period of three months following such
termination.
33
Michael Seethaler. The Company has an employment agreement with Michael
Seethaler, National Vice President -- Business Development, which agreement was
effective as of December 22, 2003 and continues for an indefinite term until
terminated in accordance with its terms. Mr. Seethaler's current annual base
salary under his employment agreement is $140,000. Mr. Seethaler is also
eligible to earn an annual bonus based on criteria set by the Company's CEO and
approved by the Compensation and Human Capital Committee. The agreement may be
terminated by either party upon written notice to the other party. If Mr.
Seethaler is terminated without "cause," he will continue to receive his base
salary for a period of three months following such termination.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521 of the Minnesota Business Corporation Act provides that
unless prohibited or limited by a corporation's articles of incorporation or
bylaws, a corporation must indemnify its current and former officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
penalties, fines and amounts paid in settlement which, in each case, were
incurred in connection with actions, suits or proceedings in which such person
is a party by reason of the fact that he or she was an officer, director,
employee or agent of the corporation, if such person i) has not been indemnified
by another organization or employee benefit plan for the same judgments,
penalties, fines, including without limitation, excise taxes assessed against
the person with respect to an employee benefit plan, settlements and reasonable
expenses, including attorneys' fees and disbursements, incurred by the person in
connection with the proceeding with respect to the same acts or omissions, ii)
acted in good faith, iii) received no improper personal benefit and statutory
procedure has been followed in the case of any conflict of interest by a
director, iv) in the case of any criminal proceedings, had no reasonable cause
to believe the conduct was unlawful, and v) in the case of acts or omissions
occurring in the person's performance in the official capacity of director or,
for a person not a director, in the official capacity of officer, committee
member, employee or agent, reasonably believed that the conduct was in the best
interests of the corporation, or, in the case of performance by a director,
officer, employee or agent of the corporation as a director, officer, partner,
trustee, employee or agent of another organization or employee benefit plan,
reasonably believed that the conduct was not opposed to the best interests of
the corporation. Section 302A.521 requires the corporation to advance, in
certain circumstances and upon written request, reasonable expenses prior to
final disposition. Section 302A.521 also permits a corporation to purchase and
maintain insurance on behalf of its officers, directors, employees and agents
against any liability which may be asserted against, or incurred by, such
persons in their capacities as officers, directors, employees and agents of the
corporation, whether or not the corporation would have been required to
indemnify the person against the liability under the provisions of such section.
Our articles of incorporation limit personal liability for breach of the
fiduciary duty of our directors to the fullest extent provided by the Minnesota
Business Corporation Act. Our articles of incorporation eliminate the personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on i) the director's duty of loyalty to us, ii) acts
or omissions not made in good faith, iii) acts or omissions involving
intentional misconduct, iv) payments of improper dividends, v) violations of
state securities laws and vi) acts occurring prior to the date such provision
was added. Any amendment to or repeal of such provision shall not adversely
affect any right or protection of a director of ours for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
Our bylaws provide that each director and officer, past or present, and each
person who serves or may have served at our request as a director, officer,
employee or agent of another corporation or employee benefit plan and their
respective heirs, administrators and executors, will be indemnified by us to
such extent as permitted by Minnesota Statutes, Section 302A.521, as now enacted
or hereafter amended.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
34
RELATED PARTY TRANSACTIONS
On December 1, 2003, the Company entered into a Professional Services
Agreement with K. James Ehlen, M.D., representing Halleland Health Consulting.
The scope of services provided by Dr. Ehlen primarily included serving as the
Company's Medical Advisor, representing the Company as its lead clinical
representative with clients, and supporting the Company's enhancement of its
corporate health and wellness services strategy. The agreement stated that Dr.
Ehlen would receive a monthly retainer of $10,000 and expire after 120 days. On
April 1, 2004, the Company renewed the agreement with Dr. Ehlen. The new
agreement stated that Dr. Ehlen would receive a monthly retainer of $7,500 and
expired on December 31, 2004. Currently, Dr. Ehlen continues to provide
substantially the same services to the Company on a month-to-month basis. For
fiscal year 2005, the Company paid Dr. Ehlen $66,336 for his services.
Pursuant to an investment by Bayview Capital Partners LP ("Bayview
Partners") on December 8, 2003, a $2,000,000 term note (the "Term Note") was
issued to Bayview Partners, along with 1,000,000 shares of Series A Convertible
Preferred Stock (the "Preferred Stock") and a ten-year warrant to purchase
1,210,320 shares of Common Stock of the Company at $0.50 per share (the
"Warrants"). The Preferred Stock has a stated dividend rate of 6% per year,
computed on a simple interest basis, paid in kind in the form of additional
shares of Preferred Stock using a price of $1.00 per share ("PIK Dividends").
Between December 31, 2003 and November 14, 2005, an aggregate of 111,105 shares
of Preferred Stock were issued to Bayview Partners in payment of the dividends.
At the option of Bayview Partners, the Preferred Stock, including any PIK
Dividends, may be converted into the Company's common stock at a price of $0.50
per share. On December 29, 2004, the Company repaid the Term Note to Bayview
Partners. On November 15, 2005, the Company redeemed all of the outstanding
shares of the Preferred Stock, which were convertible into 2,222,210 shares of
common stock, and also redeemed 916,458 shares subject to Warrants, which were
exercised by Bayview Partners on a cashless basis from a total of 1,213,032
shares subject to Warrants. Currently, Bayview Partners has warrants to purchase
an additional 62,431 shares of common stock, which were obtained in connection
with anti-dilution rights, with exercise prices ranging from $2.24 to $2.70 per
share. Cary Musech, a director of the Company since December 2003, is the Chief
Executive Officer of Tonka Bay Equity Partners LLC, which is the general partner
of Bayview Partners.
35
PRINCIPAL SHAREHOLDERS AND MANAGEMENT SHAREHOLDINGS
The following table sets forth as of March 31, 2006 certain information
regarding beneficial ownership of our common stock by:
- Each person known to us to beneficially own 5% or more of our common
stock;
- Each named executive officer;
- Each of our directors; and
- All of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934. Beneficial ownership generally means having
sole or shared voting or investment power with respect to securities. Unless
otherwise indicated in the footnotes to the table, each person named in the
table has sole voting and investment power with respect to the shares of common
stock set forth opposite the shareholder's name. We have based our calculation
of the percentage of beneficial ownership on 18,930,368 shares of common stock
outstanding on March 31, 2006. Unless otherwise noted below, the address of each
beneficial owner listed on the table is c/o Health Fitness Corporation, 3600
American Blvd. W., Suite 560, Bloomington, MN 55431.
PERCENT OF
NAME OF BENEFICIAL OWNER NUMBER CLASS (1)
------------------------ --------- ----------
5% BENEFICIAL OWNERS:
Pequot Capital Management, Inc. ............................ 3,898,440(2) 19.7%
500 Nyala Farm Road
Westport, CT 06680
Perkins Capital Management, Inc. ........................... 2,709,267(3) 14.3%
730 East Lake Street
Wayzata, MN 55391
Magnetar Capital Master Fund, Ltd. ......................... 1,624,350(4) 8.4%
c/o Magnetar Financial LLC
1603 Orrington Ave., 13th Floor
Evanston, IL 60201
Gruber & McBaine Capital Management......................... 1,097,890(5) 5.7%
50 Osgood Place -- Penthouse
San Francisco, CA 94133
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jerry V. Noyce.............................................. 535,251(6) 2.8%
Jeanne C. Crawford.......................................... 170,295(7) *
Wesley W. Winnekins......................................... 148,250(8) *
Brian Gagne................................................. 32,159(9) *
Michael Seethaler........................................... 23,750(10) *
James A. Bernards........................................... 176,000(11) *
Mark W. Sheffert............................................ 141,722(12) *
Cary Musech................................................. 127,431(13) *
John C. Penn................................................ 86,000(14) *
Linda Hall Whitman.......................................... 86,000(14) *
Rodney A. Young............................................. 86,000(14) *
K. James Ehlen, M.D. ....................................... 78,500(15) *
Robert J. Marzec............................................ 50,000(16) *
All executive officers and directors as a group (20
persons).................................................. 2,122,164(17) 10.4%
36
---------------
* Less than one percent.
(1) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person to acquire them as of March 31, 2006, or within sixty days of
such date, are treated as outstanding only when determining the percent
owned by such individual and when determining the percent owned by a group.
(2) Shares beneficially owned by Pequot Capital Management, Inc. represent
2,998,800 shares of common stock and 899,640 shares of common stock
issuable pursuant to currently exercisable warrants.
Shares beneficially owned by Pequot Capital Management are held of record
by the following investment funds in the following amounts: Pequot Scout
Fund, L.P., 1,306,110 shares; Pequot Mariner Master Fund, L.P., 676,260
shares; Premium Series PCC Limited -- Cell 33, 53,040 shares; Pequot
Diversified Master Fund, Ltd., 86,190 shares; Pequot Navigator Offshore
Fund, Inc., 530,400 shares; Premium Series PCC Limited -- Cell 32, 92,820
shares; Pequot Healthcare Fund, L.P., 497,250 shares; Pequot Healthcare
Institutional Fund, L.P., 99,450 shares; and Pequot Healthcare Offshore
Fund, Inc., 556,920 shares.
Pequot Capital Management, who is the Investment Manager/Advisor (as
applicable) to the above named funds, exercises sole voting and investment
power for all the shares, except that Pequot Capital Management does not
hold voting power over 53,040 and 92,820 shares held of record by Premium
Series PCC Limited Cell 33 and Cell 32, respectively. Arthur J. Samberg is
the controlling shareholder of Pequot Capital Management, and disclaims
beneficial ownership of the shares except for his pecuniary interest in the
above-named investment funds.
(3) In its most recent Schedule 13G/A filing with the Securities and Exchange
Commission on January 27, 2006, Perkins Capital Management, Inc. represents
that it has sole voting power over 946,000 of the shares, no voting power
over the remaining 1,763,267 shares and sole dispositive power over all
such shares.
(4) Represents 1,249,500 shares of common stock and 374,850 shares issuable
pursuant to currently exercisable warrants. Mr. Alec Litowitz possesses
voting and/or dispositive power over shares held by Magnetar Capital Master
Fund, Ltd. Mr. Litowitz disclaims any beneficial ownership of the shares
beneficially held by Magnetar Capital Master Fund, Ltd.
(5) Includes 601,800 shares of common stock and 180,540 shares issuable
pursuant to currently exercisable warrants. All shares are held in varying
amounts by Lagunitas Partners, LP, Gruber & McBaine International, Jon D.
and Linda W. Gruber Trust and J. Patterson McBaine. Jon D. Gruber and J.
Patterson McBaine, through Gruber & McBaine Capital Management, possess
shared voting and/or investment power over shares held by Lagunitas
Partners LP and Gruber & McBaine International. Messrs. Gruber and
Patterson disclaim any beneficial ownership over the shares held by
Lagunitas Partners LP and Gruber & McBaine International. Jon D. Gruber
possesses sole voting and/or investment power over shares held by Jon D.
and Linda W. Gruber Trust. J. Patterson McBaine possesses sole voting and
investment power over shares held in his name.
(6) Includes 493,500 shares which may be purchased upon exercise of options
that were exercisable by Mr. Noyce as of March 31, 2006, or within 60 days
of such date.
(7) Includes 90,625 shares which may be purchased upon exercise of options by
Ms. Crawford that were exercisable as of March 31, 2006, or within 60 days
of such date. Also includes 39,000 shares held by Ms. Crawford's spouse.
(8) Represents shares which may be purchased upon exercise of options by Mr.
Winnekins that were exercisable as of March 31, 2006, or within 60 days of
such date.
(9) Includes 23,750 shares which may be purchased upon exercise of options by
Mr. Gagne that were exercisable as of March 31, 2006, or within 60 days of
such date.
(10) Represents shares which may be purchased upon exercise of options by Mr.
Seethaler that were exercisable as of March 31, 2006, or within 60 days of
such date.
37
(11) Includes 10,000 shares held by an employee benefit plan over which Mr.
Bernards has voting and investment power, and 80,000 shares which may be
purchased upon exercise of options that were exercisable by Mr. Bernards as
of March 31, 2006, or within 60 days of such date. Also includes 50,000
shares held by Brightstone Capital, LLC ("Brightstone"). As President of
Brightstone, Mr. Bernards may be deemed to share voting and/or investment
power over the shares. Mr. Bernards disclaims any beneficial ownership of
the shares held by Brightstone.
(12) Includes 66,000 shares which may be purchased upon exercise of options by
Mr. Sheffert that were exercisable as of March 31, 2006, or within 60 days
of such date.
(13) Includes 20,000 shares beneficially owned by Bayview Capital Partners LP
("Bayview Partners"), 62,431 shares that may be purchased upon exercise of
warrants that were exercisable as of March 31, 2006, or within 60 days of
such date, and 45,000 shares that may be purchased upon exercise of options
that were exercisable by Mr. Musech as of March 31, 2006, or within 60 days
of such date. Mr. Musech is the Chief Executive Officer of Tonka Bay Equity
Partners LLC ("Tonka Bay"), which is the general partner of Bayview
Partners. Mr. Musech serves as one of five members of the Board of
Governors of Tonka Bay, and the Board of Governors makes all investment
decisions on behalf of Bayview Partners, including any decisions regarding
acquisition or disposition of securities of the Company. As a result, Mr.
Musech may be deemed to share voting and/or investment power over the
shares held by Bayview Partners. Mr. Musech disclaims any beneficial
ownership of the shares held by Bayview Partners.
(14) Includes 66,000 shares which may be purchased upon exercise of options by
each of Mr. Penn, Ms. Whitman and Mr. Young that were exercisable as of
March 31, 2006, or within 60 days of such date.
(15) Includes 58,500 shares which may be purchased upon exercise of options by
Mr. Ehlen that were exercisable as of March 31, 2006, or within 60 days of
such date.
(16) Includes 30,000 shares which may be purchased upon exercise of options by
Mr. Marzec that were exercisable as of March 31, 2006, or within 60 days of
such date.
(17) Includes 1,468,556 shares which may be purchased upon exercise of options
and warrants that were exercisable as of March 31, 2006, or within 60 days
of such date. Excludes 553,882 shares held of record by two officers, but
held in escrow at Wells Fargo Bank, National Association, and subject to
forfeiture on or prior to approximately June 30, 2007 in accordance with
the terms of that certain Escrow Agreement dated December 23, 2005 to which
such officers, Wells Fargo and the Company are parties.
38
SELLING STOCKHOLDERS
The shares of common stock covered by this prospectus include an aggregate
of 6,681,000 shares. The common stock covered by this prospectus includes:
- 5,100,000 shares of common stock issued on March 10, 2006 upon conversion
of 1,000 shares of Series B Convertible Preferred Stock ("Series B
Stock") we issued on November 14, 2005 in a private placement to a
limited number of accredited investors;
- up to 1,530,000 shares of common stock, equal to 30% of the number of
shares of common stock issuable upon conversion of the Series B Stock, we
may be required to issue from time to time upon exercise, for cash, of
warrants we issued on November 14, 2005 to the original purchasers of the
Series B Stock; and
- up to 51,000 shares of common stock we may be required to issue from time
to time upon exercise of warrants we issued on November 14, 2005 to the
placement agents (or their affiliates) for the Series B Stock.
All 1,000 shares of Series B Stock, which are not covered by this
prospectus, were automatically converted into an aggregate 5,100,000 shares of
our common stock on March 10, 2006, the date the Securities and Exchange
Commission first declared effective the registration statement to which this
prospectus relates. The Series B stock and the warrants were issued in reliance
upon exemptions from registration under the Securities Act of 1933, as amended,
afforded by Section 4(2) and Rule 506 of Regulation D thereunder.
Set forth below are the names of the Selling Stockholders, the number of
shares of our common stock beneficially owned by each Selling Stockholder as of
the date of this prospectus and the number of shares that may be offered or sold
hereby. Beneficial ownership is determined under the rules of the SEC, and
generally includes having sole or shared voting or investment power with respect
to securities. To our knowledge, except as indicated in the footnotes to this
table, each person named in the table has sole voting and investment power with
respect to all shares of common stock shown in the table. Because the Selling
Stockholders may offer all or some portion of the shares, we have assumed for
purposes of the table below that all securities covered by this prospectus will
be sold.
Since the Selling Stockholders provided this information, each of them may
have sold, transferred or otherwise disposed of all or a portion of their common
stock in a transaction exempt from the registration requirements of the
Securities Act or otherwise. Information concerning additional Selling
Stockholders not identified in this prospectus shall be set forth in
post-effective amendments. Transferees, successors and donees of Selling
Stockholders identified in this prospectus may be named in supplements to this
prospectus.
Except as otherwise expressly stated, to our knowledge none of the Selling
Stockholders has, or within the past three years has had, any position, office
or other material relationship with us or any of our affiliates.
COMMON STOCK OWNED
NUMBER OF NUMBER OF AFTER OFFERING*
SHARES SHARES ----------------------
BENEFICIALLY OFFERED NUMBER OF
NAME OWNED HEREBY SHARES PERCENTAGE
---- ------------ --------- --------- ----------
Pequot Capital Management, Inc.(1)........ 3,898,440 3,898,440 -- --
Magnetar Capital Master Fund, Ltd.(2)..... 1,624,350 1,624,350 -- --
Lagunitas Partners LP(3).................. 739,420 490,620 248,800** 1.2%***
CAMOFI Master LDC(4)...................... 291,720 291,720 -- --
Gruber & McBaine International(5)......... 199,350 132,600 66,750** ****
39
COMMON STOCK OWNED
NUMBER OF NUMBER OF AFTER OFFERING*
SHARES SHARES ----------------------
BENEFICIALLY OFFERED NUMBER OF
NAME OWNED HEREBY SHARES PERCENTAGE
---- ------------ --------- --------- ----------
Jon D. and Linda W. Gruber Trust(6)....... 79,560 79,560 -- --
J. Patterson McBaine(7)................... 79,560 79,560 -- --
Cherry Tree Core Growth Fund, LLLP(8)..... 33,150 33,150 -- --
Daniel Yamron(9).......................... 24,225 24,225 -- --
Patrick A. O'Shea(9)...................... 24,225 24,225 -- --
Brown Advisory Securities, LLC(10)........ 2,550 2,550 -- --
--------- --------- -------
6,996,550 6,681,000 315,550
========= ========= =======
---------------
* Assumes the sale of all shares of common stock covered by this prospectus.
** These shares of common stock were purchased in the open market, and are not
covered by this prospectus.
*** Calculated based upon 18,930,368 shares outstanding as of March 31, 2006,
(including all 5,100,000 shares we issued on March 10, 2006 upon conversion
of the Series B Stock) and assuming the issuance of all 1,581,000 shares
covered by this prospectus that are issuable upon exercise of the warrants.
**** Less than 1.0%.
(1) Shares beneficially owned by Pequot Capital Management, Inc. represent: (i)
2,998,800 shares of common stock and (ii) 899,640 shares of common stock
issuable pursuant to currently exercisable warrants.
Shares beneficially owned by Pequot Capital Management are held of record
by the following investment funds in the following amounts: Pequot Scout
Fund, L.P., 1,306,110 shares; Pequot Mariner Master Fund, L.P., 676,260
shares; Premium Series PCC Limited -- Cell 33, 53,040 shares; Pequot
Diversified Master Fund, Ltd., 86,190 shares; Pequot Navigator Offshore
Fund, Inc., 530,400 shares; Premium Series PCC Limited -- Cell 32, 92,820
shares; Pequot Healthcare Fund, L.P., 497,250 shares; Pequot Healthcare
Institutional Fund, L.P., 99,450 shares; and Pequot Healthcare Offshore
Fund, Inc., 556,920 shares.
Pequot Capital Management, which is the Investment Manager/Advisor (as
applicable) to the above named funds, exercises sole voting and investment
power for all the shares, except that Pequot Capital Management does not
hold voting power over 53,040 and 92,820 shares held of record by Premium
Series PCC Limited Cell 33 and Cell 32, respectively. Arthur J. Samberg is
the controlling shareholder of Pequot Capital Management, and disclaims
beneficial ownership of the shares except for his pecuniary interest in
the above-named investment funds.
Pequot Capital Management has identified itself as an affiliate of a
registered broker-dealer and, accordingly, may be deemed an underwriter of
these securities. See "Plan of Distribution" for required disclosure on
this Selling Stockholder.
(2) Represents 1,249,500 shares of common stock, and 374,850 shares issuable
pursuant to currently exercisable warrants. Mr. Alec Litowitz possesses
voting and/or dispositive power over shares beneficially owned by Magnetar
Capital Master Fund, Ltd. Mr. Litowitz disclaims any beneficial ownership
of the shares beneficially held by Magnetar Capital Master Fund, Ltd.
(3) Includes 377,400 shares of common stock, and 113,220 shares issuable
pursuant to currently exercisable warrants. Jon D. Gruber and J. Patterson
McBaine, through Gruber & McBaine Capital Management, possess shared voting
and/or investment power over shares held by Lagunitas Partners LP. Messrs.
Gruber and Patterson disclaim any beneficial ownership over the shares held
by Lagunitas Partners LP. Pursuant to Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended, and Rule 13d-5(b) thereunder, this
Selling Stockholder may also be deemed to be the
40
beneficial owner of all or a portion of securities that are beneficially
owned by other Selling Stockholders denoted by footnotes (5) -- (7).
(4) Includes 224,400 shares of common stock and 67,320 shares issuable pursuant
to currently exercisable warrants. Mr. Richard Smithline possesses sole
voting and/or investment power over shares held by CAMOFI Master LDC. Mr.
Smithline disclaims any beneficial ownership over the shares held by CAMOFI
Master LDC.
(5) Includes 102,000 shares of common stock and 30,600 shares issuable pursuant
to currently exercisable warrants. Jon D. Gruber and J. Patterson McBaine,
through Gruber & McBaine Capital Management, possess shared voting and/or
investment power over shares held by Gruber & McBaine International.
Messrs. Gruber and Patterson disclaim any beneficial ownership over the
shares held by Gruber & McBaine International. Pursuant to Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended, and Rule 13d-5(b)
thereunder, this Selling Stockholder may also be deemed to be the
beneficial owner of all or a portion of securities that are beneficially
owned by other Selling Stockholders denoted by footnotes (3) and
(6) -- (7).
(6) Represents 61,200 shares of common stock and 18,360 shares issuable
pursuant to currently exercisable warrants. Jon D. Gruber possesses sole
voting and/or investment power over shares held by Jon D. and Linda W.
Gruber Trust. Pursuant to Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended, and Rule 13d-5(b) thereunder, this Selling Stockholder
may also be deemed to be the beneficial owner of all or a portion of
securities that are beneficially owned by other Selling Stockholders
denoted by footnotes (3), (5) and (7).
(7) Represents 61,200 shares of common stock and 18,360 shares issuable
pursuant to currently exercisable warrants. J. Patterson McBaine possesses
sole voting and/or investment power over shares held in his name. Pursuant
to Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and
Rule 13d-5(b) thereunder, this Selling Stockholder may also be deemed to be
the beneficial owner of all or a portion of securities that are
beneficially owned by other Selling Stockholders denoted by footnotes (3)
and (5) -- (6).
(8) Represents 25,500 shares of common stock and 7,650 shares issuable pursuant
to currently exercisable warrants. Mr. Gordon Stoffer possesses sole voting
and/or investment power over all of the shares. This Selling Stockholder
has identified itself as an affiliate of a registered broker-dealer and,
accordingly, may be deemed an underwriter of these securities. See "Plan of
Distribution" for required disclosure on this Selling Stockholder.
(9) Represents 24,225 shares issuable pursuant to currently exercisable
warrants. This Selling Stockholder has identified himself as an affiliate
of a registered broker-dealer and, accordingly, may be deemed an
underwriter of this common stock. See "Plan of Distribution" for required
disclosure on this Selling Stockholder. This Selling Stockholder received
compensation from us for acting as an affiliate of a placement agent for
the Series B Stock, and as such may be deemed to have had a material
relationship with us in the past three years.
(10) Represents 2,550 shares issuable pursuant to currently exercisable
warrants. This Selling Stockholder has identified itself as a registered
broker-dealer and, accordingly, is deemed to be an underwriter with respect
to its common stock. Mr. Thomas Schweizer, Jr. possesses sole voting and/or
investment power over shares held by Brown Advisory Securities, LLC. Mr.
Schweizer, Jr. disclaims beneficial ownership over the shares held by Brown
Advisory Securities, LLC. See "Plan of Distribution" for required
disclosure on this Selling Stockholder. This Selling Stockholder received
compensation from us for acting as a placement agent for the Series B
Stock, and as such may be deemed to have had a material relationship with
us in the past three years.
41
PLAN OF DISTRIBUTION
The Selling Stockholders may, from time to time, sell any or all of their
shares of common stock covered by this prospectus on any stock exchange, market
or trading facility on which the shares are traded or in private transactions.
These sales may be at prevailing market prices or at other negotiated prices.
The Selling Stockholders may use any one or more of the following methods when
selling shares covered by this prospectus:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
- an exchange distribution in accordance with the rules of the applicable
exchange;
- privately negotiated transactions;
- to cover short sales;
- broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
- any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares covered by this prospectus
under Rule 144 under the Securities Act, if available, rather than under this
prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell shares of common stock from time to time under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amending the list of
Selling Stockholders to include the pledgee, transferee or other successors in
interest as Selling Stockholders under this prospectus. The Selling Stockholders
also may transfer the shares of common stock in other circumstances, in which
case the transferees or other successors in interest identified in a prospectus
supplement, if required, will be Selling Stockholders for purposes of this
prospectus.
In connection with the sale of common stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
Upon the Company being notified in writing by a Selling Stockholder that
any material arrangement has been entered into with a broker-dealer for the sale
of common stock through a block trade, special
42
offering, exchange distribution or secondary distribution or a purchase by a
broker or dealer, a supplement to this prospectus will be filed, if required,
pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of
each such Selling Stockholder and of the participating broker-dealer(s), (ii)
the number of shares involved, (iii) the price at which such the shares of
common stock were sold, (iv)the commissions paid or discounts or concessions
allowed to such broker-dealer(s), where applicable, (v) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out in this prospectus, and (vi) other facts material to the transaction. In
addition, upon the Company being notified in writing by a Selling Stockholder
that a donee or pledge intends to sell more than 500 shares of common stock, a
supplement to this prospectus will be filed if then required in accordance with
applicable securities law.
To our knowledge, based upon information provided to us by Selling
Stockholders, the only Selling Stockholder who is a registered broker-dealer is
Brown Advisory Securities, LLC. As such, they are deemed to be underwriters of
the common stock underlying their warrants within the meaning of the Securities
Act. We are not aware of any underwriting plan or agreement, underwriter's or
dealer's compensation, or passive market-making or stabilization transactions
involving the purchase or distribution of its common stock.
Each Selling Stockholder who is an affiliate of a registered broker-dealer
has represented to us that it purchased the securities in the ordinary course of
business and that at the time of such purchase, the Selling Stockholder had no
agreements or understandings, directly or indirectly, with any person to
distribute such securities.
The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
Securities will be paid by the Selling Stockholder and/or the purchasers.
The Selling Stockholders will be responsible to comply with the applicable
provisions of the Securities Act and Exchange Act, and the rules and regulations
thereunder promulgated, including, without limitation, Regulation M, as
applicable to such Selling Stockholders in connection with resales of their
respective shares under this Registration Statement.
The Company is required to pay all fees and expenses (but not selling
commissions) incident to the registration of the shares, but the Company will
not receive any proceeds from the sale of the common stock. The Company has
agreed to indemnify the Selling Stockholders against certain losses, claims,
damages and liabilities, including liabilities under the Securities Act. If the
Selling Stockholders use this prospectus for any sale of the common stock, they
will be subject to the prospectus delivery requirements of the Securities Act.
The Selling Stockholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M of the Exchange Act, which may limit the timing of purchases and sales of any
of the shares of common stock by the Selling Stockholders and any other
participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to engage in
market-making activities with respect to the shares of common stock. All of the
foregoing may affect the marketability of the shares of common stock and the
ability of any person or entity to engage in market-making activities with
respect to the shares of common stock.
43
DESCRIPTION OF CAPITAL STOCK
GENERAL
Pursuant to our Amended and Restated Articles of Incorporation, we have
60,000,000 shares of authorized capital stock, which consists of 50,000,000
shares of common stock, 1,500,000 shares of Series A Convertible Preferred Stock
(the "Series A Stock"), 1,000 shares of Series B Convertible Preferred Stock
(the "Series B Stock") and 8,499,000 shares of undesignated stock.
COMMON STOCK
Holders of common stock are entitled to receive such dividends as are
declared by the Board of Directors, out of funds legally available for the
payment of dividends. We expect to retain any earnings to finance development of
our business. Accordingly, we do not anticipate payment of any dividends on our
common stock for the foreseeable future.
In the event of any liquidation, dissolution or winding up, the holders of
each share of common stock are entitled to share equally in any balance of our
assets available for distribution.
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the shareholders. There is no cumulative voting for election
of directors, which means that a majority of the shareholders may elect all of
the members of the Board of Directors. Holders of common stock have no
preemptive rights to subscribe for or to purchase any additional shares of
common stock or other obligations convertible into shares of common stock or
Preferred Stock which we may, hereafter, issue.
All of the outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock are not liable for further calls or
assessments.
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "HFIT." On December 31, 2005, we had issued and outstanding 13,787,349
shares of common stock (excluding all 6,681,000 shares covered by this
prospectus). According to the records of our transfer agent, as of December 31,
2005, there were 494 holders of record of our common stock.
SERIES A CONVERTIBLE PREFERRED STOCK
Our Amended and Rested Articles of Incorporation designate 1,500,000 shares
of Series A Convertible Preferred Stock (the "Series A Stock"). Effective
November 15, 2005, we redeemed all issued and outstanding shares of Series A
Stock, which are not available for reissuance. As of the date of this
prospectus, no shares of Series A Stock were outstanding. Although future
issuance of shares of Series A Stock is unlikely, 391,178 shares of Series A
Stock are available for original issuances after the date of this prospectus.
The rights and preferences of the Series A Stock include:
- Each share of Series A Stock is entitled to a number of votes equal to
the number of shares of common stock into which it is then convertible.
Holders of Series A Stock vote together as one class together with
holders of common stock, except in certain limited circumstances.
- Each share of Series A Stock is convertible at the option of the holder
into two shares of common stock (or such greater number as may result
from weighted average anti-dilution adjustments that reduce the
conversion price).
- Holders of Series A Stock are entitled to certain pre-emptive rights in
connection with future direct or indirect issuances of equity securities.
- Each share of Series A Stock has a stated dividend rate of 6% per year
calculated based upon the initial per share issuance price of $1.00.
Dividends are payable in-kind in the form of additional shares of Series
A Stock using a price of $1.00 per share.
44
- In the event of a liquidation, dissolution or winding up, holders of
Series A Stock are entitled to a liquidation preference of $1 per share
plus a decreasing liquidation premium of 3% prior to December 8, 2006, 2%
prior to December 8, 2007 and 1% prior to December 8, 2007.
- Each share of Series A Stock contains redemption provisions upon a change
of control, among other events. The redemption price is the greater of
the liquidation value (described above) or the fair market value of the
Series A Stock on an as-converted basis.
SERIES B CONVERTIBLE PREFERRED STOCK
Effective November 14, 2005, our Board of Directors authorized the
designation of 1,000 shares of Series B Convertible Preferred Stock (the "Series
B Stock"). Effective November 14, 2005, we issued 1,000 shares of Series B
Stock. As of December 31, 2005, all 1,000 shares of Series B Stock we issued on
November 14, 2005 remained outstanding. Effective March 10, 2006, the date that
the SEC first declared effective the registration statement to which this
prospectus relates, all shares of Series B Stock were automatically converted
into an aggregate of 5,100,000 shares of common stock (i.e., a conversion rate
of 5,100 for each share of Series B Stock).
Each share of Series B Stock was entitled to a number of votes equal to the
number of shares of common stock into which it is then convertible (i.e., 5,100
votes). Except as required by law, holders of Series B Stock would have voted
together as one class together with holders of common stock. Each share of
Series B Stock had a stated dividend rate of 5% per year calculated based upon
the initial per share issuance price of $10,200.
UNDESIGNATED SHARES
Our Amended and Restated Articles of Incorporation authorize the Board of
Directors to establish more than one class or series of shares. As of the date
of this prospectus, we had 8,499,000 undesignated shares available for the Board
of Directors to establish additional classes or series. In establishing a class
or series, the Board is authorized to set the voting rights, liquidation
preferences, dividend rights, conversion rights, redemption rights, and certain
other rights and preferences. Although there is no current intention to do so,
the Board of Directors may issue shares of a class or series of Preferred Stock
with rights which could adversely affect the voting power of the holders of
common stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of Minnesota law described below could have an
anti-takeover effect. These provisions are intended to provide management
flexibility and to enhance the likelihood of continuity and stability in the
composition of our Board of Directors and in the policies formulated by our
Board and to discourage an unsolicited takeover of the Company, if the Board
determines that such a takeover is not in the best interests of the Company and
our shareholders. However, these provisions could have the effect of
discouraging certain attempts to acquire us which could deprive our shareholders
of opportunities to sell their shares of common stock at prices higher than
prevailing market prices.
Section 302A.671 of the Minnesota Business Corporation Act applies, with
certain exceptions, to any acquisition of our voting stock (from a person other
than the company and other than in connection with certain mergers and exchanges
to which the company is a party) resulting in the acquiring person owning 20% or
more of our voting stock then outstanding. Section 302A.671 requires approval of
any such acquisitions by a majority vote of our shareholders prior to its
consummation. In general, shares acquired in the absence of such approval are
denied voting rights and are redeemable at their then fair market value by the
company within 30 days after the acquiring person has failed to give a timely
information statement to us or the date the shareholders voted not to grant
voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits us or any of our subsidiaries from entering into any transaction with
a shareholder under which the shareholder purchases 10% or more of our voting
shares (an "interested shareholder") within four years following the
45
date the person became an interested shareholder, unless the transaction is
approved by a committee of all of the disinterested members of our board of
directors serving before the interested shareholder acquires the shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Wells Fargo Bank,
N.A. Its address is P.O. Box 64854, St. Paul, Minnesota 55164.
LISTING
Our common stock is listed on the Over-the-Counter Bulletin Board under the
symbol "HFIT."
LEGAL MATTERS
The validity of the Shares being offered hereby is being passed upon for us
by Fredrikson & Byron, P.A. Such legal advice is solely for our benefit and not
for any shareholder or prospective investor.
EXPERTS
The financial statements of Health Fitness Corporation incorporated by
reference in this prospectus for the years ended December 31, 2005 and 2004,
were audited by Grant Thornton LLP, independent registered public accounting
firm, as set forth in its report thereon incorporated by reference herein, given
on the authority of such firm as experts in accounting and auditing.
The financial statements of HealthCalcNet, Inc. incorporated by reference
in this prospectus for the year ended December 31, 2004, were audited by Weaver
and Tidwell, L.L.P., independent registered public accounting firm, as set forth
in its report thereon incorporated by reference herein, given on the authority
of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file periodic reports, proxy statements and other information with the
SEC. Copies of the reports, proxy statements and other information may be
examined without charge at the Public Reference Section of the SEC, 450 Fifth
Street, N.W. Room 1024, Washington, D.C. 20549 or on the Internet at
http://www.sec.gov. Copies of all or a portion of such materials can be obtained
from the Public Reference Section of the SEC upon payment of prescribed fees.
Please call the SEC at: (800) SEC-0330 for further information about the Public
Reference Room.
We also make most of our filings available on our website at www.hfit.com.
We are not including the information on our website as part of this prospectus
or any prospectus supplements.
46
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following expenses will be paid by the Company in connection with the
registration for resale of the common stock covered by this registration
statement. All of such expenses, except for the SEC registration fee, are
estimated.
SEC Registration Fee........................................ $ 1,894
Legal Fees.................................................. 20,000
Accountants Fees and Expenses............................... 30,000
Printing Expenses........................................... 1,000
Blue Sky Fees and Expenses.................................. 2,000
Transfer Agent Fees and Expenses............................ 1,106
-------
Miscellaneous............................................... $56,000
=======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 302A.521, subd. 2, of the Minnesota Statutes requires the Company
to indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Company, against judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgments, penalties or fines; (2) acted in good faith; (3) received no improper
personal benefit, and statutory procedure has been followed in the case of any
conflict of interest by a director; (4) in the case of a criminal proceeding,
had no reasonable cause to believe the conduct was unlawful; and (5) in the case
of acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, board committee member or employee, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of performance
by a director, officer or employee of the Company involving service as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3,
requires payment by the Company, upon written request, of reasonable expenses in
advance of final disposition of the proceeding in certain instances. A decision
as to required indemnification is made by a disinterested majority of the Board
of Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
shareholders, or by a court.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the securities listed
below pursuant to exemptions from registration under the Securities Act.
On August 25, 2003, we entered into a $3,000,000 Securities Purchase
Agreement with Bayview Capital Partners LP to provide us with acquisition
financing and general working capital (the "Bayview Investment"). The Bayview
Investment was initially structured as a bridge note (the "Bridge Note"), the
proceeds of which we placed into escrow to fund a portion of an asset purchase.
Upon closing of the asset purchase in December 2003, the $3,000,000 Bridge Note
was converted into a $2,000,000 term note, $1,000,000 in Series A Convertible
Preferred Stock and a warrant to purchase 1,210,320 shares of common stock. In
December 2003, a warrant to purchase 100,000 shares of common stock was issued
to
II-1
Goldsmith, Agio, Helms Securities, Inc. for broker services provided to us in
connection with the asset purchase. All of the foregoing issuances were made in
reliance upon Section 4(2).
Effective November 14, 2005, we entered into a Securities Purchase
Agreement with five accredited investors for the sale of an aggregate of 1,000
shares of its Series B Convertible Preferred Stock (the "Series B Stock"), at an
aggregate purchase price of $10.2 million. After selling commissions and
expenses, we received net proceeds of approximately $9.4 million. The Series B
Stock automatically converted into 5,100,000 shares of common stock effective on
March 10, 2006, the date the SEC declared effective this registration statement.
We also issued the original purchasers of the Series B Stock 5-year warrants to
purchase 1,530,000 shares of common stock, equal to 30% of the number of shares
of common stock issuable upon conversion of the Series B Stock, for $2.40 per
share. We also issued the placement agents (or their affiliates) of the Series B
Stock warrants to acquire 102,000 shares of common stock on substantially the
same terms as the Warrants issued to the original purchasers of the Series B
Stock, except the exercise price of such warrants is $2.00 per share. Such
securities were offered and issued in reliance on the exemption from
registration provided by Section 4(2). We used approximately $5.1 million of the
net proceeds from the issuance of the Series B Stock to redeem, effective
November 15, 2005: (i) all of the outstanding shares of Series A Convertible
Preferred Stock, which were convertible into 2,222,210 shares of common stock,
and (ii) warrants to purchase 1,275,463 shares of common stock if exercised for
cash, or 916,458 shares of common stock if exercised on a "cash-less" exercise
basis, which warrants were issued to original purchaser of the Series A
Convertible Preferred Stock. We used substantially all of the remainder of the
net proceeds for our acquisition of HealthCalc.Net, Inc. on December 23, 2005.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. See the Exhibit Index following the Power of Attorney at the
end of this registration statement.
(b) Financial Statement Schedule.
Schedules have been omitted because they are not applicable or not required
because the information is included elsewhere in the financial statements or the
related notes.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant further undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the
II-2
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this post-effective amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Minneapolis, State of Minnesota, on April 3, 2006.
HEALTH FITNESS CORPORATION
By /s/ Jerry V. Noyce
------------------------------------
Jerry V. Noyce,
Chief Executive Officer and
President
POWER OF ATTORNEY
In accordance with the requirement of the securities Act of 1933, this
post-effective amendment to the registration statement was signed by the
following persons in the capacities and on the date indicated.
SIGNATURES TITLE
---------- -----
/s/ Jerry V. Noyce* Chief Executive Officer, President
------------------------------------------------ (principal executive officer) and
Jerry V. Noyce Director
/s/ Wesley W. Winnekins* Chief Financial Officer
------------------------------------------------ (principal financial and
Wesley W. Winnekins accounting officer)
/s/ James A. Bernards* Director
------------------------------------------------
James A. Bernards
/s/ K. James Ehlen, M.D.* Director
------------------------------------------------
K. James Ehlen, M.D.
/s/ Robert J. Marzec* Director
------------------------------------------------
Robert J. Marzec
/s/ Cary Musech* Director
------------------------------------------------
Cary Musech
/s/ John C. Penn* Director
------------------------------------------------
John C. Penn
/s/ Mark W. Sheffert* Director
------------------------------------------------
Mark W. Sheffert
/s/ Linda Hall Whitman* Director
------------------------------------------------
Linda Hall Whitman
/s/ Rodney A. Young* Director
------------------------------------------------
Rodney A. Young
*By /s/ Jerry V. Noyce
------------------------------------------
Jerry V. Noyce
As attorney-in-fact pursuant to powers of
attorney previously filed
Date: April 3, 2006
II-4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
HEALTH FITNESS CORPORATION
EXHIBIT INDEX TO FORM S-1
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Articles of Incorporation, as amended on September 20,
2004 -- incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004
3.2 Certificate of Designation, Preferences and Rights of Series
A Convertible Preferred Stock(1)
3.3 Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock -- incorporated by reference
to the Company's Form 8-K filed November 16, 2005(1)
3.3 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
5.1 Opinion of Fredrikson & Byron, P.A.(1)
10.1 Standard Office Lease Agreement (Net) dated as of June 13,
1996 covering a portion of the Company's
headquarters -- incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31,
1996
10.2 Amendment dated March 1, 2001 to Standard Office Lease
Agreement (Net) dated as of June 13, 1996 covering a portion
of the Company's headquarters -- incorporated by reference
to the Company's Form 10K for the year ended December 31,
2000
10.3 Second Amendment, dated June 12, 2002, to Standard Office
Lease Agreement dated as of June 13, 1996 -- incorporated by
reference to the Company's Form 10-Q for the quarter ended
June 30, 2002
*10.4 Company's 2005 Stock Option Plan -- incorporated by
reference to the Company's Form 8-K dated June 7, 2005
*10.5 Forms of Incentive Stock Option Agreement and Form of
Non-Qualified Stock Option Agreement under the 2005 Stock
Option Plan -- incorporated by reference to the Company's
Form 8-K dated June 7, 2005
*10.6 Employment agreement dated November 30, 2000 between the
Company and Jerry V. Noyce -- incorporated by reference to
the Company's Form 10-K for the year ended December 31, 2000
*10.7 Employment agreement dated February 9, 2001 between Company
and Wesley W. Winnekins -- incorporated by reference to the
Company's Form 10-K for the year ended December 31, 2000
*10.8 Employment agreement dated March 1, 2003 between Company and
Jeanne Crawford -- incorporated by reference to the
Company's Form 10-K for the year ended December 31, 2002
*10.9 Employment agreement dated April 21, 1995 between the
Company and James A. Narum, as amended October 19, 1999,
November 2, 2000 and March 25, 2003 -- incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 2002
*10.10 Employment agreement dated December 8, 2003 between the
Company and Brian Gagne -- incorporated by reference to the
Company's Form 10-Q for the quarter ended March 31, 2005
*10.11 Employment agreement dated December 22, 2003 between the
Company and Michael Seethaler, -- incorporated by reference
to the Company's Form 10-Q for the fiscal quarter ended
March 31, 2005
*10.12 Employment agreement dated August 13, 2001 between the
Company and Dave Hurt -- incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
2005
*10.13 Employment agreement dated December 8, 2003 between the
Company and Katherine Hamlin -- incorporated by reference to
the Company's Form 10-K for the fiscal year ended December
31, 2005
*10.14 Employment agreement dated December 8, 2003 between the
Company and Ralph Colao -- incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
2005
EXHIBIT
NO. DESCRIPTION
------- -----------
*10.15 Employment agreement dated May 4, 2005 between the Company
and Michael Zdychnec -- incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
2005
*10.16 Employment agreement dated December 23, 2005 between the
Company and John F. Ellis -- incorporated by reference to
the Company's Form 10-K for the fiscal year ended December
31, 2005
*10.17 Employment agreement dated December 23, 2005 between the
Company and Peter A. Egan -- incorporated by reference to
the Company's Form 10-K for the fiscal year ended December
31, 2005
10.18 Credit Agreement, dated August 22, 2003, between the Company
and Wells Fargo Bank, National Association -- incorporated
by reference to the Company's Quarterly Report on form
10-QSB for the quarter ended September 30, 2003
10.19 Third Amendment, dated August 25, 2003, to Standard Office
Lease Agreement dated as of June 13, 1996, between the
Company and NEOC Holdings LLC -- incorporated by reference
to the Company's Quarterly Report on form 10-QSB for the
quarter ended September 30, 2003
10.20 Second Amendment to Credit Agreement and Waiver of Defaults
between the Company and Wells Fargo Bank, N.A., dated May
14, 2004 -- incorporated by reference to the Company's
Quarterly Report on form 10-Q for the quarter ended March
31, 2004
10.21 Third Amendment to Credit Agreement and Consent between the
Company and Wells Fargo Bank, N.A., dated December 29,
2004 -- incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2004
10.22 Securities Purchase Agreement dated November 14, 2005
between the Company and the Purchasers listed on Exhibit
A-1 -- incorporated by reference to the Company's Form 8-K
filed November 16, 2005
10.23 Registration Rights Agreement dated November 14, 2005
between the Company and the Purchasers listed on Exhibit
A-1 -- incorporated by reference to the Company's Form 8-K
filed November 16, 2005
10.24 Form of Warrant issued pursuant to the Securities Purchase
Agreement dated November 14, 2005 -- incorporated by
reference to the Company's Form 8-K filed November 16, 2005
10.25 Stock Purchase Agreement dated December 23, 2005 between the
Company, HealthCalc.Net, Inc., Peter A. Egan and John F.
Ellis, among others -- incorporated by reference to the
Company's Form 8-K filed December 29, 2005
10.26 Escrow Agreement dated December 23, 2005 between the
Company, Wells Fargo Bank, National Association, Peter A.
Egan and John F. Ellis, among others -- incorporated by
reference to the Company's Form 8-K filed December 29, 2005
10.27 Shareholders' Agreement dated December 23, 2005 between the
Company, Peter A. Egan and John F. Ellis -- incorporated by
reference to the Company's Form 8-K filed December 29, 2005
*10.28 Director Compensation Arrangements -- incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 2005
*10.29 2006 Executive Bonus Plan -- incorporated by reference to
the Company's Form 10-K for the fiscal year ended December
31, 2005
*10.30 Compensation Arrangements for Executive Officer for Fiscal
Year 2006 -- incorporated by reference to the Company's Form
10-K for the fiscal year ended December 31, 2005
21.1 Subsidiaries -- incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004
23.1 Consent of Grant Thornton LLP
23.2 Consent of Weaver and Tidwell, L.L.P.
23.3 Consent of Fredrikson & Byron, P.A. (included in Exhibit
5.1)
24.1 Power of Attorney(1)
---------------
* Indicates management contract or compensatory plan or arrangement
(1) Previously Filed