EXHIBIT 99.2
AUDITED FINANCIAL STATEMENTS OF HEALTHCALC.NET, INC. AS OF DECEMBER 31, 2004 AND
2003, AND FOR THE YEAR ENDED DECEMBER 31, 2004.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Stockholders of Health Fitness Corporation
We have audited the accompanying balance sheets of HealthCalc.Net, Inc.
(Company) as of December 31, 2004 and 2003, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
December 31, 2004. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HealthCalc.Net, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the year ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
/s/ WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
December 23, 2005
F-1
HEALTHCALC.NET, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
--------- ---------
ASSETS
CURRENT ASSETS
Cash $ 234,045 $ 239,290
Trade accounts receivable, less allowances of $0 122,171 138,587
Prepaid expenses and other 2,495 6,316
--------- ---------
Total current assets 358,711 384,193
PROPERTY AND EQUIPMENT, net 38,559 38,833
--------- ---------
$ 397,270 $ 423,026
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Trade accounts payable $ 96,825 $ 304,694
Other accrued liabilities 60,649 29,870
Line of credit 29,452 32,555
Deferred revenue 239,093 57,945
--------- ---------
Total current liabilities 426,019 425,064
COMMITMENTS & CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.01 par value; 1,000,000 shares
authorized; 500,000 shares issued and 450,000
shares outstanding 5,000 5,000
Accumulated deficit (33,249) (6,538)
Treasury stock, 50,000 shares at cost (500) (500)
--------- ---------
(28,749) (2,038)
--------- ---------
$ 397,270 $ 423,026
========= =========
The accompanying notes are an integral part of these financial statements.
F-2
HEALTHCALC.NET, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
2004
----------
REVENUE $1,876,470
COSTS OF REVENUE 538,296
----------
GROSS PROFIT 1,338,174
OPERATING EXPENSES
Salaries 1,091,200
Other selling, general and administrative 275,261
----------
1,366,461
----------
OPERATING LOSS (28,287)
OTHER INCOME (EXPENSE)
Interest expense (4,537)
Other 6,113
----------
LOSS BEFORE INCOME TAXES (26,711)
INCOME TAX EXPENSE (BENEFIT) --
----------
NET LOSS $ (26,711)
==========
The accompanying notes are an integral part of these financial statements.
F-3
HEALTHCALC.NET, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2004
Total
Common Stock Stockholders'
----------------------- Accumulated Treasury Equity
Shares Amount Deficit Stock (Deficit)
------- ------- ----------- -------- -------------
BALANCE AT JANUARY 1, 2004 500,000 $ 5,000 $ (6,538) $ (500) $ (2,038)
Net loss -- -- (26,711) -- (26,711)
------- ------- ----------- -------- -------------
BALANCE AT DECEMBER 31, 2004 500,000 $ 5,000 $ (33,249) $ (500) $ (28,749)
======= ======= =========== ======== =============
The accompanying notes are an integral part of these financial statements.
F-4
HEALTHCALC.NET, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
2004
---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (26,711)
Adjustment to reconcile net loss to net cash provided by operating activities:
Depreciation 11,978
Change in assets and liabilities:
Trade accounts receivable 16,416
Prepaid expenses and other 3,821
Trade accounts payable (207,869)
Other accrued liabilities 30,779
Deferred revenue 181,148
---------
Net cash provided by operating activities 9,562
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (11,704)
---------
Net cash used in investing activities (11,704)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit (3,103)
---------
Net cash used in financing activities (3,103)
---------
NET DECREASE IN CASH (5,245)
CASH AT BEGINNING OF YEAR 239,290
---------
CASH AT END OF YEAR $ 234,045
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,537
The accompanying notes are an integral part of these financial statements.
F-5
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - HealthCalc.Net, Inc. (the "Company"), is a leading provider of
web-based fitness, health management and wellness programs to
corporations, health care organizations, physicians and athletic/fitness
centers. The Company'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. The
web-based platform allows individuals to take periodic online health
assessments, track daily exercise results, receive online health coaching
and obtain access to the latest health information and education in an
internet-based environment.
The Company is a Subchapter S corporation organized under the laws of the
State of Texas.
Cash - The Company maintains its cash account at one financial
institution. The Company has not experienced any losses in such account
and believes it is not exposed to any significant credit risk on cash. The
Company considers all highly liquid instruments with an original maturity
of three months or less to be cash equivalents.
Trade and Other Accounts Receivable - Trade accounts receivable represent
amounts due from companies and individuals for services and products. The
Company grants credit to customers in the ordinary course of business, but
generally does not require collateral or any other security to support
amounts due. Management performs ongoing credit evaluations of customers.
The Company determines its allowance for discounts and doubtful accounts
by considering a number of factors, including the length of time trade
accounts receivable are past due, the Company's previous loss history, the
customer's current ability to pay its obligation to the Company, and the
condition of the general economy and the industry as a whole. The Company
writes off accounts receivable when they become uncollectible, and
payments subsequently received on such receivable are credited to the
allowance.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the useful
lives of the assets.
Revenue Recognition - Revenue is recognized at the time the service is
provided to the customer. The Company determines its allowance for
discounts by considering historical discount history and current payment
practices of its customers. 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 and are invoiced to
the customer in arrears. The revenues relating to theses services are
estimated in the month that the service is performed.
Amounts received from customers in advance of providing the services of
the contract are treated as deferred revenue and recognized when the
services are provided. Amounts received from new customers for website
activation fees are treated as deferred revenue and recognized over a
period of three years, which is the estimated life of a new customer.
Advertising - The Company expenses advertising costs as they are incurred.
Advertising expense for the period ended December 31, 2004 was $20,085.
F-6
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
Fair Values of Financial Instruments - Due to their short-term nature, the
carrying value of the Company's current financial assets and liabilities
approximates their fair values. The fair value of long-term obligations,
if recalculated based on current interest rates, would not significantly
differ from the recorded amounts.
Use of Estimates - Preparing financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation - In December 2002, the Financial Accounting
Standards Board issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS No. 123."
This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company accounts for stock-based compensation using Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and
has not adopted the recognition provisions of SFAS No. 123, as amended by
SFAS No. 148. The exercise price of options granted under the stock option
plan (Note 6) is equal to the market price of the underlying stock on the
date of grant. Therefore, no compensation cost was recorded under APB No.
25.
If the Company had determined compensation cost for the stock-based
compensation plan in accordance with the fair value method prescribed by
SFAS No. 123, proforma net loss for the year ended December 31, 2004 would
have been as follows:
2004
--------
Net loss, as reported $(26,711)
Stock-based employee compensation expense,
net of related tax effects (2,820)
--------
Net loss, proforma $(29,531)
========
The weighted average fair value of options granted during 2004 was $0.05.
The fair of each option on the date of grant was estimated using the
Black-Scholes option pricing model with the following assumptions:
Risk free rate of return 0.93%-1.20%
Expected life of option 6 years
Expected volatility N/A
Dividend yield None
F-7
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
Useful --------------------------------
Life 2004 2003
------- -------- --------
Computer equipment 5 years $ 60,288 $ 48,583
Office furniture 5 years 6,065 6,065
-------- --------
66,353 54,648
Less accumulated depreciation 27,794 15,815
-------- --------
$ 38,559 $ 38,833
======== ========
3. FINANCING
The Company maintains two lines of credit totaling $129,000 with Wells
Fargo Bank N.A to provide the Company with general working capital. The
lines of credit bear interest at 14.50%. The Company is required to make
minimum monthly payments as determined by Wells Fargo.
Line of credit balances are as follows:
December 31,
--------------------------------
2004 2003
-------- --------
Wells Fargo Bank N.A. $ 29,452 $ 32,555
======== ========
4. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases office space under an operating lease that
expires on June 30, 2008. Costs incurred under this operating lease are
recorded as rent expense and totaled approximately $40,500 for the year
ended December 31, 2004.
Minimum rent payments due under operating leases are as follows:
Years ending December 31:
2005 $ 54,655
2006 75,672
2007 82,734
2008 44,394
F-8
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
5. BENEFIT PLAN
The Company maintains a SIMPLE-IRA Plan whereby employees may contribute
pre-tax wages to the Plan up to a maximum of $10,000 for 2005. The Company
matches 100% of an employee's contributions up to a maximum of 3% of the
employee's wages. The Company's contributions totaled $22,217 for the year
ended December 31, 2004.
6. EQUITY
Stock Options - The Company maintains a stock option plan for the benefit
of certain eligible employees of the Company. Generally, the options
outstanding are granted at prices equal to the market value of the stock
on the date of grant, vest on a straight line basis over five years and
expire six years from the date of grant.
A summary of the stock option activity is as follows:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Outstanding at January 1, 2004 62,450 $1.00
Granted 31,500 $1.00
------
Outstanding at December 31, 2004 93,950 $1.00
======
At December 31, 2004, 38,260 option shares were exerciseable at a weighted
average exercise price of $1.00 per share.
7. INCOME TAXES
Since the Company is organized as a Subchapter S corporation, no income
tax provision is maintained in the Company's accounting records. Any
income or loss generated by the Company from operations flows directly to
the owners of the business as ordinary income or loss.
8. SIGNIFICANT CUSTOMER RELATIONSHIP
At December 31, 2004, the Company had three customers that each provided
more than 10% of its total revenue. On a combined basis, these customers
provided approximately 50% of total revenues. The services provided to
these customers include web-based technology services and on-site
biometric screening services.
F-9
HEALTHCALC.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
YEAR ENDED DECEMBER 31, 2004
9. RELATED PARTY TRANSACTION
For the year ended December 31, 2004, the Company recorded management fee
revenue of $17,500 related to payments received from E2 Consulting,
L.L.C., a Texas limited liability company, whose principal business
activities involve the maintenance and support of a desktop version of the
Company's web-based software tools. Such management fee revenue was for
technical consulting and development services provided by the Company. The
principal owners of the Company are also the principal owners of E2
Consulting.
10. SUBSEQUENT EVENTS
On December 23, 2005, Health Fitness Corporation (HFC) acquired all of the
outstanding capital stock of the business of the Company for $6 million in
cash and stock with the potential for additional amounts to be paid under
an earn-out provision based upon the Company achieving certain revenue
objectives for calendar year 2006. Immediately prior to HFC's acquisition
of the Company, E2Consulting, L.L.C. (described more in note 9 above) was
merged with and into the Company for $70,000.
F-10