EXHIBIT 99.4
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements reflect the pro
forma consolidated results of operation of Health Fitness Corporation ("Health
Fitness") for the year ended December 31, 2002, and nine months ended September
30, 2003 with those of the Health & Fitness Services Business (the "Health &
Fitness Business"), a division of Johnson & Johnson Health Care Systems Inc.
("JJHCS") for the year ended December 29, 2002, and nine months ended September
28, 2003, after giving effect to the Asset Purchase Agreement between Health
Fitness and JJHCS, dated as of August 25, 2003, under the assumptions set forth
in the accompanying notes. The unaudited pro forma combined balance sheet
combines the September 30, 2003 unaudited historical consolidated balance sheet
of Health Fitness with the September 28, 2003 unaudited historical balance sheet
of the Health & Fitness Business after giving effect to the Asset Purchase
Agreement, under the assumptions set forth in the notes. The pro forma combined
financial statements should be read in conjunction with the accompanying
explanatory notes, the Asset Purchase Agreement, the historical financial
statements and related notes of Health Fitness previously filed and the
financial statements and related notes of the Health & Fitness Business
appearing elsewhere in this Current Report on Form 8-K.
F5-1
HEALTH FITNESS CORPORATION AND HEALTH & FITNESS SERVICES BUSINESS
PRO FORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)
Health Health &
Fitness Fitness Pro Forma Pro Forma
Corporation Services Adjustments Combined
-------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 744 $ - $ 744
Trade and other accounts receivable, net 3,600 2,327 (2,327) (a) 3,600
Inventory 40 40
Prepaid expenses and other 207 207
Deferred tax assets 732 - 732
----------------------------------------------------------
Total current assets 5,283 2,367 (2,327) 5,323
PROPERTY & EQUIPMENT, net 225 34 259
COMPUTER SOFTWARE, net 850 (240) (b) 610
OTHER ASSETS
Cash held in escrow 5,250 - (4,785) (b) 465
Goodwill 5,309 - 2,686 (b) 7,995
Customer contracts 1,810 (b) 1,810
Trademark - - 350 (b) 350
Deferred tax assets 1,929 - 1,929
Other 610 - (515) (b) 95
----------------------------------------------------------
$ 18,606 $ 3,251 $ (3,021) $18,836
==========================================================
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 289 $ 300 $ (300) (a) $ 519
230 (b)
Accrued salaries, wages and payroll taxes 1,606 706 (706) (a) 1,606
Other accrued liabilities 294 - 294
Accrued self funded insurance 262 - 262
Deferred revenue 1,229 - 1,229
----------------------------------------------------------
Total current liabilities 3,680 1,006 (776) 3,910
LONG-TERM OBLIGATIONS 5,250 - (784) (c) 3,818
(648) (c)
COMMITMENTS & CONTINGENCIES - - -
PREFERRED STOCK - - 784 (c) 1,440
656 (d)
STOCKHOLDERS' EQUITY
Common stock 123 - 123
Additional paid-in capital 17,021 - 648 (c) 17,669
Accumulated (deficit) / division equity (7,468) 2,245 (2,245) (a) (8,124)
(656) (d)
----------------------------------------------------------
9,676 2,245 (2,253) 9,668
----------------------------------------------------------
$ 18,606 $ 3,251 $ (3,021) $18,836
==========================================================
F5-2
HEALTH FITNESS CORPORATION AND HEALTH & FITNESS SERVICES BUSINESS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Health Health &
Fitness Fitness Pro Forma Pro Forma
Corporation Services Adjustments Combined
-------------------------------------------------------------
REVENUE $ 22,696 $ 18,560 41,256
COSTS OF REVENUE 17,995 14,434 32,429
----------------------------------------------------------
GROSS PROFIT 4,701 4,126 8,827
OPERATING EXPENSES
Salaries 2,407 1,934 4,341
Selling, general and administrative 1,224 589 9 (e) 2,467
(60) (f)
652 (g)
53 (h)
Support costs 2,520 2,520
----------------------------------------------------------
Total operating expenses 3,631 5,043 654 9,328
----------------------------------------------------------
OPERATING INCOME (LOSS) 1,070 (917) (654) (501)
OTHER INCOME (EXPENSE)
Interest expense (83) (333) (i) (416)
Other, net (35) (35)
----------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 952 (917) (987) (952)
INCOME TAX EXPENSE (BENEFIT) 379 (761) (j) (382)
----------------------------------------------------------
NET EARNINGS (LOSS) 573 (917) (226) (570)
Dividend to preferred shareholders 45 (c) 45
----------------------------------------------------------
NET EARNINGS (LOSS) TO COMMON
SHAREHOLDERS
$ 573 $ (917) $ (271) $ (615)
==========================================================
NET EARNINGS (LOSS) PER SHARE
Basic $ 0.05 $ (0.05)
Diluted $ 0.05 (k) $ (0.05)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,324 12,324
Diluted 12,542 12,324
F5-3
HEALTH FITNESS CORPORATION AND HEALTH & FITNESS SERVICES BUSINESS
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Health Health &
Fitness Fitness Pro Forma Pro Forma
Corporation Services Adjustments Combined
-------------------------------------------------------------
REVENUE $ 27,865 23,224 51,089
COSTS OF REVENUE 21,939 17,390 39,329
---------------------------------------------------------
GROSS PROFIT 5,926 5,834 11,760
OPERATING EXPENSES
Salaries 2,866 2,207 5,073
Selling, general and administrative 1,751 1,375 11 (e) 3,996
(80) (f)
869 (g)
70 (h)
Support costs 3,414 3,414
Restructuring costs 513 513
---------------------------------------------------------
Total operating expenses 4,617 7,509 870 12,996
---------------------------------------------------------
OPERATING INCOME (LOSS) 1,309 (1,675) (870) (1,236)
OTHER INCOME (EXPENSE)
Interest expense (521) (33) (i) (554)
Other, net 1 167 168
---------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 789 (1,508) (903) (1,622)
INCOME TAX EXPENSE (BENEFIT) (2,212) (964) (j) (3,176)
---------------------------------------------------------
NET EARNINGS (LOSS) 3,001 (1,508) 61 1,554
Deemed dividend to preferred shareholders 656 (d) 656
Dividend to preferred shareholders 60 (c) 60
---------------------------------------------------------
NET EARNINGS (LOSS) TO COMMON SHAREHOLDERS $ 3,001 $ (1,508) $ (655) $ 838
=========================================================
NET EARNINGS PER SHARE
Basic $ 0.24 $ 0.07
Diluted $ 0.24 (k) $ 0.06
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,284 12,284
Diluted 12,428 15,335
F5-4
HEALTH FITNESS CORPORATION AND HEALTH & FITNESS SERVICES BUSINESS
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
UNAUDITED)
NOTE A - BASIS OF PRESENTATION
On December 8, 2003 (the "Effective Date"), Health Fitness Corporation
(HFC) completed its purchase of the business assets of the Health & Fitness
Services Business (HFSB) of Johnson & Johnson Health Care Systems Inc. for
approximately $4,785,000 in cash (subject to upward adjustment based upon
future assigned customer contracts) (the "Transaction"). Assets purchased
consist primarily of customer contracts, proprietary wellness, lifestyle
and health promotion programs, software and other health and wellness
services. As part of the Transaction, HFC entered into a 3-year management
agreement whereby HFC will manage more than 50 Johnson & Johnson affiliate
fitness center sites, making the Johnson & Johnson family of companies
HFC's largest client.
The unaudited pro forma combined financial statements (Pro Forma Financial
Statements) give effect to the asset purchase using the purchase method of
accounting as of September 30, 2003 for the accompanying pro forma combined
balance sheet, and as of the beginning of the periods presented for the
accompanying pro forma combined statement of operations for the nine months
ended September 30, 2003 and for the year ended December 31, 2002,
respectively. These Pro Forma Financial Statements are presented for
illustrative purposes only and should not be construed as indicative of
either how the businesses would have performed had they in fact been
combined during the periods covered in the Pro Forma Financial Statements
or of the future financial results or prospects of the combined businesses.
Certain expenses have been reclassified from HFSB's audited and unaudited
income statements to conform to HFC's statement of operations presentation.
Within the Pro Forma Combined Statement of Operations, support costs
represents shared resource costs allocated to HFSB by Johnson & Johnson
Health Care Systems Inc. and Johnson & Johnson, including costs for
information management, human resources, facilities, finance and general
management services. HFC does not anticipate incurring the same level of
costs going forward. However, the Pro Forma Financial Statements are
presented for illustrative purposes only and therefore are not necessarily
indicative of operating results that may occur in the future. Therefore, we
can give no assurance that we will not incur any such support costs, or
that HFC's current or anticipated support structure will be adequate to
meet the future needs of the combined business. In addition, restructuring
costs represents employee separation costs incurred by HFSB to reorganize
its business operations. HFC does not anticipate incurring such costs going
forward. However, the Pro Forma Financial Statements are presented for
illustrative purposes only and therefore are not necessarily indicative of
operating results that may occur in the future. Therefore, we can give no
assurance that we will not incur any such restructuring costs or that our
results of operation will be similar to those presented in the Pro Forma
Financial Statements.
The Pro Forma Financial Statements should be read in conjunction with the
Consolidated Financial Statements contained in HFC's Annual Report on form
10-K for the year ended December 31, 2002 and Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003, as well as the Financial
Statements and related Notes of HFSB (both December 29, 2002 audited and
September 28, 2003 unaudited) appearing elsewhere in this Current Report on
Form 8-K.
NOTE B - PRO FORMA ADJUSTMENTS
(a) Represents the following assets, liabilities and division equity
balances of HFSB not transferred to HFC:
Accounts receivable $2,327,000
Trade accounts payable 300,000
Accrued salaries, wages and payroll taxes 706,000
Division equity 2,245,000
F5-5
(b) The following purchase price allocation represents a preliminary
estimate of the fair market value of the assets acquired from HFSB.
This preliminary estimate of fair market value, which HFC expects to
finalize in connection with the audit of its December 31, 2003
financial statements, was determined through an independent appraisal
in accordance with Statement of Financial Accounting Standards No. 142:
PURCHASE PRICE
- --------------
Cash price paid for assets $4,785,000
Acquisition costs incurred through September 30, 2003 515,000
Additional acquisition costs accrued through December 31, 2003 230,000
----------
Total purchase price $5,530,000
----------
PURCHASE PRICE ALLOCATION
- -------------------------
Inventory 40,000
Property and equipment 34,000
Computer software 610,000
Customer contracts 1,810,000
Trademark 350,000
----------
Excess of cost over assets acquired $2,686,000
==========
Inventory acquired consists of desktop computers to be sold to
prospective customers to deliver a proprietary health risk assessment
software program.
Property and equipment acquired consists of office furniture and
equipment.
Computer software acquired represents a proprietary software program
developed by HFSB to deliver health risk assessment services via the
Internet and desktop computers.
Customer contracts represents the value of HFSB fitness center
management contracts that were assigned to HFC.
Trademark represents the value assigned to the trademark "Live for
Life(R)" that was acquired from HFSB.
Up to $465,000 of additional purchase price may be paid to Johnson &
Johnson Health Care Systems Inc. as a result of additional customer
contract assignments. This amount has not been reflected in the above
pro forma adjustments.
(c) On August 25, 2003, HFC entered into a $3,000,000 Securities Purchase
Agreement with Bayview Capital Partners LP ("Bayview") to provide HFC
with acquisition financing and general working capital (the "Bayview
Investment"). The Bayview Investment was structured at the closing on
such financing as a bridge note (the "Bridge Note"), the proceeds of
which HFC placed into escrow to fund a portion of the purchase price
that was payable on the Effective Date.
On the Effective Date, the $3,000,000 Bridge Note issued to Bayview was
converted into a $2,000,000 term note (the "Term Note"), $1,000,000 in
Series A Convertible Preferred Stock of HFC (the "Preferred Stock") and
a warrant to purchase common stock of HFC (the "Warrant"). The Term
Note will bear interest at 12% per year, payable monthly, and will
mature on the fifth anniversary of the Effective Date.
The Preferred Stock was issued to Bayview at a price of $1.00 per
share, resulting in 1,000,000 shares issued on the Effective Date. The
Preferred Stock has a stated dividend rate of 6% per year, computed on
a simple interest basis, paid in kind in the form of additional shares
of Preferred Stock using a price of $1.00 per share ("PIK Dividends").
At the option of the holder, the Preferred Stock, including any PIK
Dividends, may be converted, at any time and from time to time, into
common stock of HFC at a price of $0.50 per share. In addition, Bayview
may require redemption of the Preferred Stock and PIK Dividends at a
price of $1.00 per share upon a change of control or default (including
default under the Term Note).
F5-6
The Warrant issued to Bayview on the Effective Date represents the
right to purchase 1,210,320 shares of common stock, which represents 8%
of HFC's common stock outstanding on a fully diluted basis at the
Effective Date, excluding the common stock issuable to Bayview upon
conversion of the Preferred Stock. The Warrant will be exercisable at
any time for a period of ten years at an exercise price equal to $0.50
per share, and the shares obtainable upon exercise of the Warrant may
be put to HFC at fair market value (net of the exercise price) upon a
change of control or default.
On the Effective Date, a warrant to purchase 100,000 shares of common
stock was issued to Goldsmith, Agio, Helms Securities, Inc. for broker
services provided to HFC in connection with the Transaction (the
"Goldsmith Warrant"). The Goldsmith Warrant will be exercisable at any
time for a period of five years at an exercise price equal to $0.50
per share.
The investment proceeds received from Bayview were allocated based upon
the relative fair value of each instrument, which resulted in the
following allocation:
Value assigned to Preferred Stock $ 784,000
Value assigned to Warrants 648,000
Value assigned to Term Note 1,568,000
The $432,000 difference between the $2,000,000 face value of the Term
Note and its assigned relative fair value of $1,568,000 will be
amortized as interest expense over the 5-year term of the Term Note.
The foregoing values are determined in accordance with GAAP and neither
reflect nor affect in any manner the arms-length agreements between
Bayview and HFC as to such values, which may vary significantly from
the above values.
(d) The fair value of HFC's common stock to be received upon conversion of
the Preferred Stock was greater than the conversion price of the
preferred stock on the commitment date, which resulted in a beneficial
conversion feature. In accordance with Emerging Issues Task Force No
98-5 Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios, and Emerging
Issues Task Force No 00-27 Application of Issue No 98-5 to Certain
Convertible Instruments, HFC calculated a $656,000 beneficial
conversion feature which has been recorded as a deemed dividend in the
statement of operations during the year ended December 31, 2002.
(e) Additional depreciation over three years relating to $34,000 of
acquired property and equipment.
(f) Depreciation deduction over three years relating to a $240,000 decrease
in fair value assigned to computer software.
(g) Additional amortization over twenty-five months (average remaining
contract life) relating to $1,810,000 fair value assigned to acquired
customer contracts.
(h) Additional amortization over five years relating to $350,000 fair value
assigned to an acquired trademark.
(i) Additional interest expense due to debt secured to finance the
acquisition. As of September 30, 2003, the pro forma balance sheet
includes approximately $2,250,000 of long-term obligations with a bank
that carries a variable interest rate tied to prime. If HFC's current
rate were to increase by .125%, HFC would expect to pay approximately
$2,800 in additional interest for a year.
(j) Additional tax expense (benefit) related to the sum of the loss before
income taxes for HFSB and pro form adjustments. The tax rate used is
the Federal statutory rate of 34% plus a provision for state and other
income taxes at a rate of 6%
(k) Diluted earnings (loss) per share on a pro forma combined basis is
determined using net earnings (loss) to common shareholders plus the
dividend to preferred shareholders, which assumes that the preferred
shareholders have converted their investment to common stock.
The following table represents the computation of earnings per share
reflecting the assumption that the granted shares under HFC's option
and warrant plans, in addition to equity sold to new investors, which
would be dilutive, will be exercised.
F5-7
Nine Months Ended September 30, 2003
------------------------------------
Health Pro
Fitness Forma
` Corp Combined
-------- ----------
Net earnings (loss) to common shareholders - basic $ 573 $ (615)
Add: dividend to preferred shareholder - 45
-------- -------
Net earnings (loss) - diluted $ 573 $ (570)
======== =======
Weighted average common shares outstanding 12,324 12,324
Common share equivalents relating to stock options and
warrants 218 -
Common share equivalents related to new investors - -
-------- -------
Adjusted common and common equivalent shares for diluted
computation 12,542 12,324
======== =======
Net Earnings Per Share:
Basic $ 0.05 $ (0.05)
Diluted $ 0.05 $ (0.05)
Twelve Months Ended December 31, 2002
-------------------------------------
Health Pro
Fitness Forma
Corp Combined
-------------- --------
Net earnings to common shareholders - basic $ 3,001 $ 838
Add: dividend to preferred shareholder - 60
-------------- --------
Net earnings - diluted $ 3,001 $ 898
============== ========
Weighted average common shares outstanding 12,284 12,284
Common share equivalents relating to stock options and
warrants 144 144
Common share equivalents related to new investors - 2,907
-------------- --------
Adjusted common and common equivalent shares for diluted
computation 12,428 15,335
============== ========
Net Earnings Per Share:
Basic $ 0.24 $ 0.07
Diluted $ 0.24 $ 0.06
F5-8