Merger
On February 13, 2006, Health Partnership Inc., a Colorado corporation (the
"Company") acquired all of the outstanding common stock of Capital Partners For
Health & Fitness, Inc., a North Carolina corporation ("Capital Partners"). The
aggregate consideration to the Capital Partners shareholders is comprised of (a)
$6,992,859 in cash ("cash consideration); (b) 3,495,430 shares of the Company's
restricted common stock with a fair value of $4,369,300; and (c) the Earnout
Consideration, if earned. The fair value of the Company's shares was based upon
the January 31, 2006 Private Placement Offering.
As part of the Merger, it was agreed that no portion of the Cash Consideration
would be paid at the closing of the Merger. Instead, the Company delivered to
each of Capital Partners' shareholders, promissory notes in the aggregate
principal amount of $6,992,859 due on the earlier of June 30, 2006 or such time
as the Company shall have raised capital sufficient to fund the entire amount of
Cash Consideration. The promissory notes accrue simple interest at the annual
rate of five percent (5%) for the first sixty days, and will accrue simple
interest at the annual rate of ten percent (10%) thereafter.
Capital Partners' shareholders are collectively entitled to earn additional
consideration. This additional consideration is a one-time payment in cash and a
one-time payment in the Company's common stock (collectively "the Earnout
Consideration"). The Earnout Consideration is equal to (1) the amount, if any,
by which (a) one-half of Capital Partners' earnings before interest, taxes,
depreciation and amortization (computed in accordance with GAAP) during the
first eight full calendar quarters following the Merger (as certified by the
Company's independent public accountant) exceeds (b) an amount equal to the sum
of (i) $3,158,933 plus (ii) one-half of the amount of any portion of $400,000 of
bridge loan made by the Company to Capital Partners that is used by Capital
Partners for working capital purposes, (2) multiplied by 4.2.
The merger was recorded by allocating the cost of the assets acquired, including
intangible assets and liabilities assumed, based on their estimated fair values
at February 13, 2006. The excess of cost of the merger over the net of the
amounts assigned to the fair value of the assets acquired and the liabilities
assumed is recorded as goodwill. The Company is in the process of obtaining
valuations of certain assets; thus the allocation of the purchase price is
subject to refinement. The purchase price has been allocated as follows:
Accounts receivable $ 580,300
Related party receivables 206,700
Advances to shareholders 129,800
Property and equipment 2,124,800
Customer list/brand name 2,699,000
Identifiable intangible assets 20,400
Goodwill 10,562,900
Other long-term assets 60,600
Accounts payable and accrued liabilities (638,200)
Current and long-term notes payable (988,800)
Current and long-term capital leases (545,600)
Current and long-term deferred revenue (2,848,800)
Total purchase price $ 11,363,100
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Pro Forma Results
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Capital Partners as if the merger had
occurred at January 1, 2005 and 2004. The pro forma results are presented below
for September 30, 2005 and for the nine months then ended and for the year ended
December 31, 2004 and combine the results of the Company and Capital Partners
from January 1, 2004 through September 30, 2005. The unaudited pro forma
financial information is not intended to represent or be indicative of the
Company's consolidated results of operations or financial condition that would
have been reported had the merger been completed as of the beginning of the
periods presented and should not be taken as indicative of the Company's future
consolidated results of operations or financial condition.
The pro forma net earnings for the nine months ended September 30, 2005 and the
year ended December 31, 2004 include $674,800 and $899,700, respectively, for
amortization of the purchased customer list/brand name. Also included for the
nine months ended September 30, 2004 and the year ended December 31, 2004 is
$524,500 and $641,000, respectively, for interest related to the note payable
issued as part of the acquisition price.
Pro Forma Results
The following unaudited pro forma financial information presents the combined
results of operations
The Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2005 of
Capital Partners and Health Partnership Inc.
Unaudited Pro Forma Consolidated Statements of Operations for the Nine Months
Ended September 30, 2005 of Capital Partners and Health Partnership Inc.
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 2004 of Capital Partners and Health Partnership Inc.
Capital Partners for Health & Fitness, Inc.
Unaudited Pro Forma Consolidated Balance Sheet
September 30, 2005
Capital Health Pro Forma
Partners Partnership Adjustments Pro Forma
------------ ------------ ------------ ------------
Assets
Current assets:
Cash $ 20,400 $ 53,400 $ $ 73,800
Accounts receivable, net 580,300 580,300
Related party receivables 206,700 206,700
Advances to shareholders 129,800 129,800
Total current assets 937,200 53,400 990,600
Property and equipment, net 2,124,800 2,124,800
Identified intangible assets, net 20,400 1,124,500(3) 1,144,900
Goodwill 10,562,900(3) 10,562,900
Other long term assets 60,600 60,600
------------ ------------ ------------ ------------
Total assets $ 3,143,000 $ 53,400 $ 11,687,400 $ 14,883,800
============ ============ ============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Cash overdraft $ 80,100 $ $ $ 80,100
Accounts payable, trade 152,500 152,500
Accrued interest expense 8,700 1,165,500(1) 1,174,200
Accrued payroll and payroll taxes 102,900 102,900
Notes payable, current 940,200 434,800 6,992,900(1) 8,367,900
Capital leases, current 433,300 433,300
Deferred revenue, current 2,106,400 2,106,400
Other accrued liabilities 323,100 323,100
------------ ------------ ------------ ------------
Total current liabilities 4,138,500 443,500 8,158,400 12,740,400
Long-term liabilities:
Deferred revenue less current portion 742,400 742,400
Notes payable, less current portion 48,600 48,600
Capital leases, less current portion 112,300 112,300
------------ ------------ ------------ ------------
Total long-term liabilities 903,300 903,300
Stockholders' equity:
Preferred stock
Common stock 1,000 1,600 (700)(1)(2) 1,900
Additional paid-in capital 424,500 2,772,400 3,945,400 (1)(2) 7,142,300
Accumulated deficit (2,324,300) (3,164,100) (415,700)(1)(2) (5,904,100)
------------ ------------ ------------ ------------
Total stockholders' equity (1,898,800) (390,100) 3,529,000 1,240,100
Total liabilities and stockholders' equity $ 3,143,000 $ 53,400 $ 11,687,400 $ 14,833,800
============ ============ ============ ============
(1) For pro forma presentation, Health Partnership issued a note payable for
$6,992,859 which is expected to be repaid via the issuance of 5,594,287
shares of common stock, in consideration for all of the outstanding common
stock of Capital Partners.
(2) For pro forma presentation, the issuance of 3,496,430 shares of common
stock will be valued at $1.25 per share.
(3) For pro forma presentation, the excess of the purchase price over the net
book value has been allocated to customer list and brand name and
goodwill. The net book value of property and equipment approximates fair
value, as the majority of these assets are capital leased items.
The accompanying notes are an integral part of the financial statements.
Capital Partners for Health & Fitness, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Nine Months Ended September 30, 2005
Capital Health Pro-Forma
Partners Partnership Adjustments Pro Forma
-------------- -------------- -------------- --------------
Revenues:
Membership revenue $ 6,751,700 $ $ $ 6,751,700
Membership refunds (33,800) (33,800)
Other returns (99,300) (99,300)
-------------- -------------- -------------- --------------
Total revenue 6,618,600 6,618,600
General and administrative expenses 4,873,100 174,100 674,800(2) 5,722,000
Other expenses (income):
Other income (277,400) (277,400)
Interest expense 87,900 8,700 524,500 621,100
-------------- -------------- -------------- --------------
Total other expenses (income) (189,500) 8,700 524,500 343,700
Net (loss) income $ 1,935,000 $ (182,800) $ (1,199,300)(3)$ 552,900
============== ============== ============== ==============
Basic and dilutive income per share of common stock $ 1,935.00 $ (0.23) $ $ 0.12
============== ============== ============== ==============
Weighted average common shares outstanding 1,000 792,503 3,495,230(1) 4,288,733
============== ============== ============== ==============
Weighted average diluted common share outstanding 1,000 792,503 3,495,230(1) 4,288,733
============== ============== ============== ==============
(1) Additional shares of common stock issued upon completion of the
merger.
(2) Additional amortization expense related to the customer list and
brand recognition.
(3) Additional interest expense related to the note payable issued as
part of the merger.
The accompanying notes are an integral part of the financial statements.
Capital Partners for Health & Fitness, Inc.
Unaudited Pro Forma Consolidated Statements of Operations
For the Year Ended December 31, 2004
Capital Health Pro Forma
Partners Partnership Adjustments Pro Forma
-------------- -------------- -------------- --------------
Revenues:
Membership revenue $ 9,661,200 $ $ $ 9,661,200
Membership refunds (128,700) (128,700)
Other returns (156,800) (156,800)
-------------- -------------- -------------- --------------
Total revenue 9,375,700 9,375,700
-------------- -------------- -------------- --------------
General and administrative expenses 7,998,600 10,100 899,700 8,908,400
Other expenses (income):
Loss on sale of fixed assets 9,900 9,900
Gain on forgiveness of debt (2,657,700) (2,657,700)
Other (income) expense (126,000) 46,500 (79,500)
Interest expense 141,700 641,000 782,700
-------------- -------------- -------------- --------------
Total other expenses (income) 25,600 (2,611,200) 641,000 (1,944,600)
-------------- -------------- -------------- --------------
Net income $ 1,351,500 $ 2,601,100 $ 1,540,700 $ 2,411,900
-------------- -------------- -------------- --------------
Basic and dilutive income per share of common stock $ 1,351.50 $ .07 $ .57
-------------- -------------- -------------- --------------
Weighted average common shares outstanding $ 1,000 752,502 3,496,230 4,248,732
-------------- -------------- -------------- --------------
Weighted average diluted common share outstanding 1,000 752,502 3,496,230 4,248,732
-------------- -------------- -------------- --------------
(1) Additional shares of common stock issued upon completion of the
merger.
(2) Additional amortization expense related to the customer list and
brand recognition.
(3) Additional interest expense related to the note payable issued as
part of the merger.
The accompanying notes are an integral part of the financial statements.