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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
HEALTH FITNESS CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
HEALTH FITNESS CORPORATION
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
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The Annual Meeting of Shareholders of Health Fitness Corporation will
be held on May 18, 2004, at 3:30 p.m. CST, at the Company's corporate offices,
3600 American Boulevard, West, Bloomington, Minnesota, for the following
purposes:
1. To elect eight individuals to serve on the Board of Directors
for a term of one year or until their successors are duly
named.
2. To increase the shares of capital stock that the corporation
is authorized to issue from 30,000,000 to 60,000,000, of which
50,000,000 shall be designated as common shares and 10,000,000
shall be designated as preferred stock.
3. To approve a 1,500,000-share increase in the number of shares
reserved for the Company's 1995 Stock Option Plan.
4. To ratify the selection of Grant Thornton LLP as the Company's
independent auditors for the current fiscal year.
5. To consider and act upon such other matters as may properly
come before the meeting and any adjournments thereof.
Only shareholders of record at the close of business on March 31, 2004,
are entitled to notice of and to vote at the meeting or any adjournment thereof.
Your vote is important. We ask that you complete, sign, date and return
the enclosed proxy in the envelope provided. The prompt return of proxies will
save the Company the expense of further requests for proxies.
BY ORDER OF THE BOARD OF DIRECTORS
Jerry V. Noyce
President and Chief Executive Officer
Bloomington, Minnesota
April 9, 2004
HEALTH FITNESS CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
MAY 18, 2004
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PROXY STATEMENT
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INTRODUCTION
Your Proxy is solicited by the Board of Directors of Health Fitness
Corporation ("the Company") for the Annual Meeting of Shareholders to be held on
May 18, 2004, at the location and for the purposes set forth in the notice of
meeting, and at any adjournment thereof.
The cost of soliciting proxies, including the preparation, assembly and
mailing of the proxies and soliciting material, as well as the cost of
forwarding such material to beneficial owners of the Company's Common Stock,
will be borne by the Company. Directors, officers and regular employees of the
Company may, without compensation other than their regular remuneration, solicit
proxies personally or by telephone.
Any shareholder giving a proxy may revoke it at any time prior to its
use at the meeting by giving written notice of such revocation to the Secretary
of the Company. Proxies not revoked will be voted in accordance with the choice
specified by shareholders by means of the ballot provided on the Proxy for that
purpose. Proxies which are signed but which lack any such specification will,
subject to the following, be voted in favor of the proposals set forth in the
Notice of Meeting and in favor of the number and slate of directors proposed by
the Board of Directors and listed herein. If a shareholder abstains from voting
as to any matter, then the shares held by such shareholder shall be deemed
present at the meeting for purposes of determining a quorum and for purposes of
calculating the vote with respect to such matter, but shall not be deemed to
have been voted in favor of such matter. Abstentions, therefore, as to any
proposal will have the same effect as votes against such proposal. If a broker
returns a "non-vote" proxy, indicating a lack of voting instructions by the
beneficial holder of the shares and a lack of discretionary authority on the
part of the broker to vote on a particular matter, then the shares covered by
such non-vote proxy shall be deemed present at the meeting for purposes of
determining a quorum but shall not be deemed to be represented at the meeting
for purposes of calculating the vote required for approval of such matter.
The mailing address of the principal executive office of the Company is
3600 American Boulevard West, Suite 560, Bloomington, Minnesota 55431. The
Company expects that this Proxy Statement, the related proxy and notice of
meeting will first be mailed to shareholders on or about April 9, 2004.
OUTSTANDING SHARES AND VOTING RIGHTS
The Board of Directors of the Company has fixed March 31, 2004, as the
record date for determining shareholders entitled to vote at the Annual Meeting.
Persons who were not shareholders on such date will not be allowed to vote at
the Annual Meeting. At the close of business on March 31, 2004, 12,438,245
shares of the Company's Common Stock were issued and outstanding. The Common
Stock is the only outstanding class of capital stock of the Company entitled
to vote at the meeting. Each share of Common Stock is entitled to one vote on
each matter to be voted upon at the meeting. Holders of Common Stock are not
entitled to cumulative voting rights.
PRINCIPAL SHAREHOLDERS AND MANAGEMENT SHAREHOLDINGS
The following table sets forth the number of shares of Common Stock
beneficially owned as of March 31, 2004, by persons known to the Company to be
beneficial owners of more than 5% of the Company's Common Stock, by each
executive officer of the Company named in the Summary Compensation table, by
each current director and nominee for director of the Company and by all current
directors and executive officers as a group. Unless otherwise indicated, the
shareholders listed in the table have sole voting and investment powers with
respect to the shares indicated. Officers and directors can be reached at the
Company's principal executive office.
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS (1)
---------------------- ------------------ ----------------
Bayview Capital Partners LP 3,217,988 (2)
641 East Lake Street, Suite 2400 20.6%
Wayzata, MN 55391
Cary Musech 3,217,988 (2), (3) 20.6%
c/o Bayview Capital Partners LP
641 East Lake Street, Suite 2400
Wayzata, MN 55391
Perkins Capital Management, Inc. 2,229,250 (4) 17.9%
730 East Lake Street
Wayzata, MN 55391
Destin Capital Partners, LLC (4) 1,044,002 (5) 8.4%
P. O. Box 27
Eldorado, IL 62930
Charles E. Bidwell 985,473 (6) 7.9%
3535 Kilkenny Lane
Hamel, MN 55340
Jerry V. Noyce 285,568 (7) 2.3%
James A. Bernards 196,000 (8) 1.6%
Jeanne C. Crawford 132,920 (9) 1.1%
Mark W. Sheffert 131,000 (10) 1.0%
James A. Narum 93,982 (11) *
Wesley W. Winnekins 88,250 (12) *
K. James Ehlen, M.D. * 56,000 (13)
John C. Penn 56,000 (13) *
Linda Hall Whitman 56,000 (13) *
Rodney A. Young 56,000 (13) *
David T. Hurt 31,250 (14) *
All current directors and current executive 4,400,958 (15) 26.8%
officers as a group (12 persons)
------------------------
* Less than 1%
2
(1) Shares not outstanding but deemed beneficially owned by virtue of the
right of a person to acquire them as of March 31, 2004 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) Includes 1,210,320 shares which may be purchased upon exercise of
warrants by Bayview Capital Partners LP which are exercisable as of
March 31, 2004 or within 60 days of such date. Also includes 2,007,668
shares that Bayview would be entitled to receive upon conversion of
1,003,834 preferred shares.
(3) Consists of 3,217,988 shares beneficially owned by Bayview Capital
Partners LP, as to which Mr. Musech disclaims any beneficial ownership.
Mr. Musech is the Chief Executive Officer of Bayview Capital Management
LLC, which is the general partner of Bayview Capital Partners LP. Mr.
Musech serves as one of five members of the Board of Governors of
Bayview Capital Management LLC, and the Board of Governors makes all
investment decisions on behalf of Bayview Capital Partners LP,
including any decisions regarding acquisition or disposition of
securities of the Company.
(4) In its most recent Schedule 13G/A filing with the Securities and
Exchange Commission on February 4, 2004, Perkins Capital Management,
Inc. represents it has sole voting power over 920,500 of such shares
and sole dispositive power over all such shares.
(5) Destin Capital Partners, LLC is controlled by Burt H. Rowe, Jr.
(6) Includes 45,000 shares which may be purchased upon exercise of options
by Mr. Bidwell which are exercisable as of March 31, 2004 or within 60
days of such date.
(7) Includes 261,500 shares which may be purchased upon exercise of options
that are exercisable by Mr. Noyce as of March 31, 2004 or within 60
days of such date.
(8) Includes 100,000 shares held by Brightstone Capital, Ltd., an
investment firm controlled by Mr. Bernards and David Dalvey, 10,000
shares held by an employee benefit plan over which Mr. Bernards has
voting and investment power, and 50,000 shares which may be purchased
upon exercise of options that are exercisable by Mr. Bernards as of
March 31, 2004 or within 60 days of such date.
(9) Includes 41,250 shares which may be purchased upon exercise of options
by Ms. Crawford which are exercisable as of March 31, 2004 or within 60
days of such date. Also includes 39,000 shares held by Ms. Crawford's
spouse.
(10) Includes 36,000 shares which may be purchased upon exercise of options
by Mr. Sheffert which are exercisable as of March 31, 2004 or within 60
days of such date. Also includes a currently exercisable warrant to
purchase 75,000 shares held by Manchester Business Services, Inc.
("Manchester"). As President, Chief Executive Officer and controlling
shareholder of Manchester, Mr. Sheffert may be deemed to share
dispositive power over the shares underlying such warrant.
(11) Includes 71,250 shares which may be purchased upon exercise of options
by Mr. Narum that are exercisable as of March 31, 2004 or within 60
days of such date.
(12) Such shares are not outstanding but may be purchased upon exercise of
options by Mr. Winnekins that are exercisable as of March 31, 2004 or
within 60 days of such date.
(13) Includes 36,000 shares which may be purchased upon exercise of options
by each of Mr. Ehlen, Mr. Penn, Ms. Whitman and Mr. Young that are
exercisable as of March 31, 2004 or within 60 days of such date.
(14) Such shares are not outstanding but may be purchased upon exercise of
options by Mr. Hurt that are exercisable as of March 31, 2004 or within
60 days of such date.
(15) Includes 2,008,820 shares which may be purchased upon exercise of
options and warrants that are exercisable as of March 31, 2004 or
within 60 days of such date. Also includes 2,007,668 shares to be
received upon conversion of 1,003,834 preferred shares.
3
ELECTION OF DIRECTORS
(PROPOSAL #1)
GENERAL INFORMATION
The Board of Directors has fixed the number of directors for the
ensuing year at eight and the independent directors of the Board recommend that
the eight current members be nominated and elected at the Annual Meeting. Under
applicable Minnesota law, the election of each nominee requires the affirmative
vote of the holders of the greater of (1) a majority of the voting power of the
shares represented in person or by proxy at the Annual Meeting with authority to
vote on such matter, or (2) a majority of the voting power of the minimum number
of shares that would constitute a quorum for the transaction of business at the
Annual Meeting.
In the absence of other instructions, each proxy will be voted for each
of the nominees listed below. If elected, each nominee will serve until the next
annual meeting of shareholders and until his or her successor shall be elected
and qualified. If, prior to the meeting, it should become known that any of the
nominees will be unable to serve as a director after the meeting by reason of
death, incapacity or other occurrence, the proxies will be voted for such
substitute nominee as is selected by the Board of Directors or, alternatively,
not voted for any nominee.
The names and ages of all of the director nominees and the positions
held by each with the Company are as follows:
NAME AGE POSITION
---- --- --------
James A. Bernards 57 Director
K. James Ehlen, M.D. 59 Director
Cary Musech 46 Director
Jerry V. Noyce 59 President, CEO and Director
John C. Penn 64 Chairman
Mark W. Sheffert 56 Director
Linda Hall Whitman 55 Director
Rodney A. Young 49 Director
JAMES A. BERNARDS, a director of the Company from 1993 to June 1998 and
since March 1999, served as Chairman of the Board from April 1999 through
December 2003, has been President of Brightstone Capital, LLC, a venture capital
firm, since 1985 and President of Facilitation Incorporated, a consulting firm
he founded 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.
4
K. JAMES 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, he 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 the section titled Certain Transactions
contained within this Proxy Statement. Dr. Ehlen is also a director of Arizant
and IZEX Technology.
CARY MUSECH, is a director of the Company who was named as a director
effective as of December 8, 2003, the date of consummation of the Company's
acquisition of the Health & Fitness Services Business, a division of Johnson &
Johnson Health Care Systems Inc. Mr. Musech currently serves as the Chief
Executive Officer of Bayview Capital Management LLC, which is the general
partner of Bayview Capital Partners LP, a private equity management firm he
co-founded in June 1998. 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 NA (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 V. 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 C. 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 Centers for Diagnostic Imaging, Benson Optical and Arctic Enterprises.
Mr. Penn is also a director of Angeion Corporation.
5
MARK W. 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.
LINDA HALL WHITMAN, a director of the Company since April 2001, has
been Chief Executive Office of MinuteClinic, a healthcare services company,
since May 2002. Prior to that, she was President of Ceridian Performance
Partners (an employee benefits provider), Ceridian Corporation, from 1996
through December 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. Ms. Whitman is also a director of two
additional public companies, MTS Systems Corporation and August Technology
Corporation, as well as several private companies. Since 1999 she has served on
the Ninth District Federal Reserve Bank Board, and is currently Chair.
RODNEY A. YOUNG, a director of the Company since April 2001, was Chief
Executive Officer, President and a director of LecTec Corporation, a developer,
manufacturer and marketer of healthcare consumer and over-the-counter
pharmaceutical products, from August 1996 to July 2003, and Chairman of the
Board of LecTec from November 1996 to July 2003. Prior to assuming the
leadership role with LecTec, 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., and Delta Dental Plan of Minnesota.
Pursuant to the terms of a stock purchase agreement, Bayview Capital
Partners LP ("Bayview") has the right to designate an individual for one
directorship on the Company's Board of Directors. Mr. Musech was designated as
the Bayview nominee and was elected as a director by the Board of Directors of
the Company effective as of December 8, 2003, the date of consummation of the
Company's acquisition of the Health & Fitness Services Business, a division of
Johnson & Johnson Health Care Systems Inc. There are no other arrangements or
understandings between any of the directors or any other person (other than
arrangements or understandings with directors acting as such) pursuant to which
any person was selected as a director or nominee of the Company. There are no
family relationships among the Company's directors.
6
CORPORATE GOVERNANCE
INDEPENDENCE
The Board has determined that a majority of its members are
"independent" as defined by the Securities Exchange Act of 1933. The independent
directors are James A. Bernards, John C. Penn, Mark W. Sheffert, Linda Hall
Whitman and Rodney A. Young. Jerry Noyce is precluded from being considered
independent since he currently serves as an executive officer of the Company. K.
James Ehlen is precluded from being considered independent because of his
services as a consultant to the Company. Cary Musech is precluded from being
considered independent since he has a relationship as a principal of a
significant lender to the Company.
CODE OF CONDUCT
The Board has approved an Ethics and Code of Conduct that applies to
all employees, directors and officers, including the principal executive
officer, principal financial officer, principal accounting officer and
controller. The Ethics and Code of Conduct addresses such topics as protection
and proper use of our assets, compliance with applicable laws and regulations,
accuracy and preservation of records, accounting and financial reporting,
conflicts of interest and insider trading. The Ethics and Code of Conduct is
available on the Company's website at www.hfit.com. Health Fitness Corporation
intends to include on its website any amendment to, or waiver from, a provision
of its code of ethics that applies to the principal executive officer, principal
financial officer, principal accounting officer and controller that relates to
any element of the code of ethics definition enumerated in Item 406(b) of
Regulation S-K under the Securities Act of 1933.
SHAREHOLDER COMMUNICATION WITH BOARD
Shareholders may communicate directly with the Board of Directors. All
communications should be directed to the Company's Secretary at the address
below and should prominently indicate on the outside of the envelope that it is
intended for the Board of Directors or for non-management directors. If no
director is specified, the communication will be forwarded to the entire Board.
Shareholder communications to the Board should be sent to:
Health Fitness Corporation Board of Directors
Attention: Secretary
3600 American Boulevard West, Suite 560
Bloomington, Minnesota 55431
7
DIRECTOR ATTENDANCE AT ANNUAL MEETINGS
Directors' attendance at Annual Meetings can provide shareholders with
an opportunity to communicate with directors about issues affecting the Company.
The Company does not have a policy regarding director attendance, but all
directors are encouraged to attend the Annual Meeting of Shareholders. An Annual
Meeting of Shareholders was not held in 2003.
COMMITTEE AND BOARD MEETINGS
The Company's Board of Directors has four standing committees, the
Audit Committee, the Compensation Committee, the Finance Committee and
Nominating Committee. Members of such Committees meet formally and informally
from time to time throughout the year on Committee matters.
Audit Committee
The Audit Committee is comprised of directors James A. Bernards
(Chair), K. James Ehlen and Mark W. Sheffert. Messrs. Bernards and Sheffert are
independent under both SEC and Nasdaq rules. Director K. James Ehlen will serve
on the Audit Committee until the 2004 Annual Meeting, at which time he will step
down if his consulting services relationship at that time continues to preclude
him from being considered to be an independent director. The Audit Committee is
responsible for the oversight relating to the Company's financial reporting
process, its systems of internal accounting and financial controls, the internal
audit process and the annual independent audit process of the Company's annual
financial statements. The Committee is also responsible for appointment,
compensation, retention and oversight of the work of any publicly registered
accounting firm, including the Company's independent public accountants.
Attached as Exhibit A is the Charter for the Audit Committee approved by the
Board of Directors. The Audit Committee met ten times during fiscal 2003.
The Board has determined that James A. Bernards 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. Bernards as the audit committee
financial expert does not impose on Mr. Bernards any duties, obligations or
liability that are greater than the duties, obligations and liability imposed on
Mr. Bernards as a member of the Audit Committee and the Board of Directors in
the absence of such designation or identification. Mr. Bernards has assumed the
duties of the audit committee financial expert on an interim basis until a
permanent replacement is found by the Board of Directors.
Compensation Committee
The Compensation Committee, which consists of Linda Hall Whitman
(Chair), James A. Bernards and Rodney A. Young, each of whom is independent, is
charged with oversight responsibility for management's performance and the
adequacy and effectiveness of compensation and benefit plans. In addition, the
Compensation Committee makes recommendations to the Board of Directors regarding
remuneration arrangements for senior management, and adoption of employee
compensation and benefit plans. The Compensation Committee met three times
during fiscal 2003.
8
Finance Committee
The Finance Committee, which consists of James A. Bernards, Mark W.
Sheffert (Chair), and Cary Musech, was formed in January, 2002, and is charged
with exploring opportunities for strategic acquisitions and the methods that
might be available for financing such opportunities. The Finance Committee met
eight times during fiscal 2003.
Nominating Committee
The Company's Nominating Committee was formed on March 10, 2004,
consisting of the Chairman of the Board (John C. Penn), the Chairman of the
Audit Committee (James A. Bernards), the Chairman of the Compensation Committee
(Linda Hall Whitman), and the Chairman of the Finance Committee (Mark W.
Sheffert), all of whom are independent directors. Prior to formation of the
Nominating Committee, the directors have addressed the nominations process
efficiently and successfully as a full board. The nominees for election to the
Board at the annual meeting of shareholders to be held on May 18, 2004, were
nominated by a vote of the Company's independent directors at a meeting of the
full Board, and in the future, only independent directors will be permitted to
vote on prospective Board nominees. The Board has not adopted a nominating
committee charter, and the newly-formed Nominating Committee did not meet during
2003.
The Company has 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.
9
The directors often communicate informally to discuss the affairs of
the Company and, when appropriate, take formal Board action by written consent
of a majority of all directors, in accordance with the Company's Articles of
Incorporation and Minnesota law, rather than hold formal meetings. During fiscal
2003, the Board of Directors held ten formal meetings. Each incumbent director
attended 75% or more of the total number of meetings held during the period(s)
for which he or she has been a director or served on committee(s) of the Board
and of committee(s) of which he or she was a member.
DIRECTORS FEES
During fiscal 2001, the Board implemented a compensation plan for
outside directors pursuant to which directors who are not employees of the
Company receive a fee of $1,000 for each Board meeting attended and are
reimbursed for out-of-town travel expenses incurred to attend such Board
meetings. Under the plan, each non-employee director also receives (i) a fully
vested grant of 20,000 shares of Common Stock upon first election to the Board
and (ii) a six-year option to purchase 12,000 shares of Common Stock upon first
election to the Board and annually thereafter. Each such option is granted at
the fair market value of the Company's Common Stock on the date of grant and is
fully exercisable on the date of grant.
Effective January 2003, the Board compensation plan was amended to
provide for compensation to Directors who participate on the Company's board
committees. Committee Chairpersons will receive a cash payment of $325 and
Committee Members will receive a cash payment of $250 for attending each regular
and special committee meeting up to the following annual limit: Compensation
Committee up to four meetings; Audit Committee up to eight meetings; Finance
Committee up to eight meetings. Telephonic committee meetings, or a Director's
telephonic attendance at a committee meeting, will be compensated at 75% of the
full payment.
In May 2003, Directors Bernards, Ehlen, Penn, Sheffert, Whitman and
Young each received a six-year option to purchase 12,000 shares at an exercise
price of $0.50 per share.
Effective December 2003, the Board compensation plan was amended to
provide for the following changes:
1. The Chairperson and Directors will receive a monthly cash
retainer of $416.67 payable quarterly at a rate of $1,125.
2. The Chairperson will receive a cash payment of $1,300 and
Directors will receive 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, will be compensated at 75% of the full payment.
3. Committee Chairpersons will receive a cash payment of $650 and
Committee Members will receive a cash payment of $500 for
attending each regular and special committee meeting up to the
following annual limit: Compensation Committee up to four
meetings; Audit Committee up to eight meetings; Finance
Committee up to eight meetings. Telephonic committee meetings,
or a Director's telephonic attendance at a committee meeting,
will be compensated at 75% of the full payment.
4. Upon first 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.
10
AUDIT COMMITTEE REPORT
The Board of Directors maintains an Audit Committee currently comprised
of three of the Company's directors. The Board of Directors and the Audit
Committee acknowledge that the Audit Committee's current member composition
fails to satisfy the rule of the National Association of Securities Dealers,
Inc. ("NASD") that governs audit committee composition, Rule 4350(d)(2), because
one current audit committee member, K. James Ehlen, is a consultant to the
Company. Dr. Ehlen therefore is not an "independent director" as that term is
defined under NASD Rule 4200(a)(15) by reference to Rule 10-A-3((b)(1)(ii)(A) of
the Securities Exchange Act of 1934, which rule will become effective as to the
Company at the time of the 2004 Annual Shareholder Meeting. Dr. Ehlen's position
on the Audit Committee therefore will end effective with the 2004 Annual
Shareholder Meeting.
In accordance with its written charter adopted by the Board of
Directors, as amended, (set forth in Exhibit A to this proxy statement), the
Audit Committee assists the Board of Directors with fulfilling its oversight
responsibility regarding the quality and integrity of the accounting, auditing
and financial reporting practices of the Company. In discharging its oversight
responsibilities regarding the audit process, the Audit Committee:
(1) reviewed and discussed the audited financial statements with
management;
(2) discussed with the independent auditors the material required
to be discussed by Statement on Auditing Standards No. 61; and
(3) reviewed the written disclosures and the letter from the
independent auditors required by the Independence Standards
Board's Standard No. 1, and discussed with the independent
auditors any relationships that may impact their objectivity
and independence.
Based upon the review and discussions referred to above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003, as filed with the Securities and Exchange
Commission.
MEMBERS OF THE AUDIT COMMITTEE:
James A. Bernards (Chair)
K. James Ehlen
Mark W. Sheffert
11
CERTAIN 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 to be provided by Dr. Ehlen primarily include 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. Dr. Ehlen received a monthly
retainer of $10,000 and the Agreement expired after 120 days. The Company and
Dr. Ehlen are evaluating the relationship to determine if the continuation of
Dr. Ehlen's services is necessary. For fiscal year 2003, the Company paid Dr.
Ehlen $10,000 for his services.
On August 25, 2003, the Company entered into a $3,000,000 Securities
Purchase Agreement with Bayview Capital Partners LP ("Bayview") to provide the
Company with acquisition financing and general working capital (the "Bayview
Investment"). Cary Musech, a director of the Company, is the Chief Executive
Officer of Bayview Capital Management LLC, which is the general partner of
Bayview Capital Partners LP. The Bayview Investment was structured as a bridge
note (the "Bridge Note").
On December 8, 2003, the $3,000,000 Bridge Note was converted into a
$2,000,000 term note (the "Term Note"), $1,000,000 in Series A Convertible
Preferred Stock of the Company (the "Preferred Stock"), and a warrant to
purchase common stock of the Company (the "Warrant"). The Term Note will bear
interest at 12% per year, payable monthly, and will mature on December 8, 2009.
The Preferred Stock was issued to Bayview at a price of $1.00 per
share, resulting in 1,000,000 shares issued on December 8, 2003. 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 the Company's common stock at a price of $0.50 per
share. In addition, Bayview may require redemption of the Preferred Stock and
PIK Dividends upon a change of control or default (including default under the
Term Note).
The Warrant issued to Bayview represents the right to purchase
1,210,320 shares of common stock, which represents 8% of the Company's common
stock outstanding on a fully diluted basis at December 8, 2003, 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 the Company at fair market value (net of the exercise
price) upon a change of control or default.
12
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee of the Board of Directors is composed of outside
directors Linda Hall Whitman, James A. Bernards and Rodney A. Young. None of
such members of the Committee is or ever has been an employee or officer of the
Company and none of such persons are affiliated with any entity other than the
Company with which an executive officer of the Company is affiliated. Mr. Noyce,
the Company's President and CEO, served on the Compensation Committee during the
period from January 19 to June 15, 2001; however, during this period the
Compensation Committee limited its activities to review and recommendation of a
compensation package for the Company's directors and did not undertake to review
or make recommendations regarding CEO compensation.
OVERVIEW AND PHILOSOPHY. In accordance with the Compensation Committee
Charter, the Compensation Committee (i) develops procedures and policies for
compensating directors; (ii) reviews the Company's procedures, processes and
policies used to compensate the Company's CEO and principal executives (Chief
Financial Officer, National Vice Presidents of Account Services, Vice President
of Human Resources, Vice President of Marketing, Vice President of Programs and
Partnerships, Vice President of Consulting and Best Practices and National Vice
President of Business Development); (iii) reviews the performance evaluation
procedures for the CEO and principal executives; (iv) recommends compensation
plans for the CEO to the Board and approves compensation plans for the principal
executives. The Compensation Committee has developed executive compensation
programs designed to attract and retain qualified executives and to motivate
them to maximize shareholder investment by achieving Company goals. There are
three basic components to the Company's executive compensation program: base
pay, annual incentive bonus, and long-term, equity-based incentive compensation
in the form of stock options. Each component is established in light of
individual and Company performance, comparable compensation programs in the
Minneapolis/Saint Paul metropolitan area, equity among employees and cost
effectiveness.
BASE PAY. Base pay is designed to be competitive, although
conservative, as compared to salary levels for equivalent positions at
comparable companies in the Minneapolis/Saint Paul metropolitan area. The
executive's actual salary within this competitive framework depends on the
individual's performance, responsibilities, experience, leadership and potential
future contribution. The base pay of the CEO and CFO are currently set by their
employment agreements (See "Employment Agreements" below), with increases for
the CEO determined by the Board upon recommendation of the Compensation
Committee and increases for the CFO determined by the CEO and the Compensation
Committee.
ANNUAL INCENTIVE BONUS. In addition to base pay, the CEO and other
principal executives may be eligible to receive an annual cash bonus based on
criteria determined by the Board of Directors for the CEO and for other
principal executives by the CEO and Compensation Committee. Bonus eligibility
may range from 10% to 45% of base pay.
LONG-TERM, EQUITY-BASED INCENTIVE COMPENSATION. The long-term,
equity-based compensation program is tied directly to shareholder return. Under
13
the current program, long-term incentive compensation consists of stock options
that generally do not fully vest until after four years. Stock options are
awarded with an exercise price equal to the fair market value of the Company's
common shares on the date of grant. Accordingly, the executive is rewarded only
if the shareholders receive the benefit of appreciation in the price of the
Common Stock.
Because long-term options vest over time, the Company periodically
(generally once each year) grants new options to provide continuing incentives
for future performance. The size of the previous grants and the number of
options held are considered by the Compensation Committee, but are not entirely
determinative of future grants. Each executive's annual grants are based upon
the individual's performance, responsibilities, experience, leadership and
potential future contribution and any other factors deemed relevant by the
Committee. Stock option grants for the CEO and CFO are made by the Board of
Directors upon recommendation of the Compensation Committee. Stock option grants
for other principal executives are made by the CEO and Compensation Committee,
including grants from a stock option pool subject to the discretion of the CEO
within certain parameters.
Stock options are designed to align the interests of the Company's
executives with those of shareholders by encouraging executives to enhance the
value of the Company and, hence, the price of the Common Stock and the
shareholders' investment. In addition, through deferred vesting, this component
of the compensation system is designed to create an incentive for the executive
to remain with the Company.
BENEFITS. The Company also provides medical and insurance benefits to
its executive officers, which are generally available to all Company employees.
The Company has a 401(k) plan in which all qualified employees, including the
executive officers, are eligible to participate. During 2003, the Company made
aggregate matching contributions of approximately $140,000 to plans qualified
under IRC Section 401(k).
ANNUAL REVIEWS. Each year the Compensation Committee reviews its
executive compensation polices and programs and determines what changes, if any,
are appropriate for the following year. In addition, the Committee and Board of
Directors reviews the individual performance of the CEO.
COMPENSATION IN 2003. Jerry Noyce was employed as the Company's Chief
Executive Officer in November 2000 pursuant to a written Employment Agreement.
See "Employment Agreements." During 2003, the Board of Directors approved the
recommendation of the Compensation Committee to maintain Mr. Noyce's annual base
salary at $238,050, and to grant Mr. Noyce options to purchase 82,000 shares of
the Company's common stock, vesting over 4 years, with an exercise price equal
to fair market value as of the date of grant. The Company paid a cash bonus to
Mr. Noyce of $10,000 in fiscal year 2003 for the achievement of fiscal year 2002
bonus objectives. In April 2003, the Board of Directors, upon the recommendation
of the Compensation Committee, approved a bonus program for Mr. Noyce for fiscal
year 2003 pursuant to which Mr. Noyce has the opportunity to earn a bonus of up
to 20% of his base pay upon achievement of certain revenue targets and a bonus
of up to 25% of base pay based upon achievement of certain EBITDA targets. In
December 2003, the Board of Directors approved the recommendation of the
Compensation Committee to grant Mr. Noyce an option to purchase 20,000 shares of
the Company's common stock, vesting immediately, with an exercise price equal to
fair market value as of the date of grant. Such grant was made as compensation
14
for the completion of the acquisition of the Health & Fitness Services Business
of Johnson & Johnson Health Care Systems Inc (the "J&J Fitness Business").
Wes Winnekins was employed as the Company's Chief Financial Officer in
February 2001 pursuant to a written Employment Agreement. See "Employment
Agreements." During 2003, Mr. Winnekins' annual base salary was increased by
3.5%, to $131,860, and he was granted options to purchase 17,000 shares of the
Company's common stock, vesting over 4 years, with an exercise price equal to
fair market value as of the date of grant. The Company paid a cash bonus to Mr.
Winnekins of $5,000 for the achievement of fiscal year 2002 bonus objectives. In
July 2003, Mr. Winnekins was granted an option to purchase 10,000 shares of the
Company's common stock for work performed in connection with the Company's
acquisition of the J&J Fitness Business. In December 2003, the Company paid a
cash bonus to Mr. Winnekins of $10,000 as compensation for the completion of the
acquisition of the J&J Fitness Business.
MEMBERS OF THE COMPENSATION COMMITTEE:
Linda Hall Whitman (Chair)
James A. Bernards
Rodney A. Young
15
SUMMARY COMPENSATION TABLE
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 most highly compensated executive
officers who received compensation in excess of $100,000 during fiscal 2003
(such individuals referred to as the "named executive officers").
Long Term Compensation
----------------------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Restricted Securities LTIP All Other
Name and Principal Fiscal Stock Underlying Payouts Compensation
Position Year Salary ($) Bonus ($) Other ($) Awards ($) Options ($) ($)
--------- ---- ---------- --------- --------- ---------- ------- ------- ------------
Jerry V. Noyce, 2003 238,050 10,000 8,400 (2) -- 102,000 -- --
President and Chief 2002 236,533 -- 8,000 (2) -- 82,000 -- --
Executive Officer 2001 230,000 -- 8,000 (2) -- 30,000 --
Wesley W. Winnekins, 2003 131,159 15,000 -- -- 27,000 -- --
Chief Financial Officer 2002 126,318 -- -- -- 17,000 -- --
2001 105,489 -- -- -- 97,500 -- --
Jeanne C. Crawford, Vice 2003 123,311 20,230 -- -- 25,000 -- --
President - Human 2002 113,421 10,692 -- -- 15,000 -- --
Resources 2001 106,924 -- -- -- 40,000 -- --
James A. Narum, National 2003 122,498 8,283 -- -- 15,000 -- --
Vice President - Account 2002 118,730 19,463 -- -- 15,000 -- --
Services 2001 114,999 30,000 -- -- -- -- --
David T. Hurt, National 2003 113,537 7,963 -- -- 15,000 -- --
Vice President - Account 2002 108,904 10,426 -- -- 15,000 -- --
Services (1)
------------------------
(1) Such persons first became executive officers during fiscal 2002.
(2) Amount represents payments for a car allowance and country club
membership. See "Employment Agreements - Jerry V. Noyce."
EMPLOYMENT AGREEMENTS
JERRY V. NOYCE. In November 2000, the Company entered into an
employment agreement with Jerry V. Noyce pursuant to which Mr. Noyce serves as
the Company's President and Chief Executive Officer at an annual base salary of
$230,000, subject to future increases as determined by the Board of Directors.
Mr. Noyce's current annual base salary under his employment agreement is
$238,050. 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.
16
WESLEY W. WINNEKINS. The Company has an employment agreement with
Wesley W. Winnekins, effective February 9, 2001, which continues for an
indefinite term until terminated in accordance with the agreement. Pursuant to
the agreement, Mr. Winnekins serves as Chief Financial Officer at an annual base
salary of $120,000 subject to future increases as determined by the Board of
Directors. Mr. Winnekins' current annual base salary under his employment
agreement is $131,860. Mr. Winnekins is also eligible to earn an annual bonus
based on criteria set by the Company's CEO and approved by the Compensation
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
C. Crawford, effective March 1, 2003, which continues for an indefinite term
until terminated in accordance with the agreement. Under the agreement, Ms.
Crawford serves as Vice President - Human Resources at an annual base salary of
$125,235, subject to future increases as determined by the Company. Ms. Crawford
is also eligible to earn an annual bonus based on criteria set by the Company's
CEO and approved by the Compensation 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.
JAMES V. NARUM. Effective March 1, 2003, the Company amended and
restated its employment agreement with James V. Narum. Pursuant to the
agreement, Mr. Narum serves as the Company's National Vice President - Account
Services at an annual base salary of $123,188, subject to future increases as
determined by the Company. Mr. Narum is also eligible to earn an annual bonus
based on criteria set by the Company's CEO and approved by the Compensation
Committee. The agreement may be terminated by either party upon written notice
to the other party. In the event Mr. Narum's employment is terminated without
"cause", he will continue to receive his base salary for a period of four months
following such termination.
DAVID T. HURT. The Company has an employment agreement with David
Hurt, effective August 14, 2001, which continues for an indefinite term until
terminated in accordance with the agreement. Under the agreement, Mr. Hurt
serves as National Vice President - Account Services at an annual base salary of
$104,251, subject to future increases as determined by the Company. Mr. Hurt's
current annual base salary under his employment agreement is $114,384. Mr. Hurt
is also eligible to earn an annual bonus based on criteria set by the Company's
CEO and approved by the Compensation Committee. The agreement may be terminated
by either party upon written notice to the other party. If Mr. Hurt is
terminated without "cause," he will continue to receive his base salary for a
period of four months following such termination.
17
OPTION GRANTS DURING FISCAL YEAR 2003
The following table sets forth information regarding stock options
granted to the named executive officers during the fiscal year ended December
31, 2003. The Company has not granted stock appreciation rights:
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS EXERCISE PRICE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE PER OPTION TERM
OPTIONS EMPLOYEES IN SHARE EXPIRATION -----------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
----- --------------- ------------- ---------- ---------- ---------- ---------
Jerry V. Noyce 82,000 (1) 19% 0.39 2/10/09 10,876 24,675
20,000 (2) 5% 1.25 12/8/13 15,722 39,844
Wesley W. Winnekins 17,000 (1) 4% 0.39 2/10/09 2,255 5,115
10,000 (2) 2% 0.69 7/25/13 4,339 10,997
Jeanne C. Crawford 15,000 (1) 4% 0.39 2/10/09 1,990 4,514
10,000 (2) 2% 0.69 7/25/13 4,339 10,997
James A. Narum 15,000 (1) 4% 0.39 2/10/09 1,990 4,514
David T. Hurt 15,000 (1) 4% 0.39 2/10/09 1,990 4,514
------------------------
(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.
(2) Exercisable in full upon the date of grant.
AGGREGATED OPTION EXERCISES DURING FISCAL YEAR 2003 AND FISCAL 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 IN-
ACQUIRED UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
ON EXERCISE VALUE OPTIONS AT 12/31/03 12/31/032(1)
NAME (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------- --------- ------------------------- -------------------------
Jerry V. Noyce -- -- 220,500 / 243,500 $163,945 / $208,930
Wesley W. Winnekins -- -- 63,750 / 77,750 $ 30,890 / $ 50,010
Jeanne C. Crawford -- -- 33,750 / 46,250 $ 21,850 / $ 34,750
James A. Narum -- -- 63,750 / 26,250 $ 57,900 / $ 21,150
David T. Hurt -- -- 23,750 / 46,250 $ 16,450 / $ 34,750
------------------------
(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 number of
shares subject to options. The closing price as of December 31, 2003 on
the OTC Bulletin Board was $1.23.
18
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total
shareholder return on the Company's Common Stock from December 31, 1998 through
December 31, 2003, with the cumulative total return of the S&P 500 Index and the
S&P 500 Consumer Discretionary Index. The comparison assumes $100 was invested
on December 31, 1998 in the Company's Common Stock and in each of the foregoing
indices, and assumes reinvestment of dividends.
[COMPARISON CUMULATIVE FIVE YEAR TOTAL RETURN LINE GRAPH]
Base Indexed Returns
Period Years Ending
------ ------------
Company/Index Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03
------------- ------ ------ ------ ------ ------ ------
HEALTH FITNESS CORP 100 76.19 50.29 79.24 76.19 187.43
S&P 500 INDEX 100 121.04 110.02 96.95 75.52 97.18
S&P 500 CONSUMER DISCRETIONARY 100 125.18 100.14 102.93 78.42 107.76
19
INCREASE IN SHARES OF CAPITAL STOCK
OF THE CORPORATION
(PROPOSAL #2)
At the Annual Meeting, shareholders will be asked to approve an
amendment to the Company's Articles of Incorporation to increase the shares of
capital stock that the corporation is authorized to issue from 30,000,000 to
60,000,000, of which 50,000,000 shares shall be designated as common shares with
a par value of $0.01 per share, and 10,000,000 shares shall be designated as
preferred shares with a par value of $0.01 per share. Of the total preferred
shares, 1,500,000 shares shall be Series A Convertible Preferred Stock with a
par value $0.01 per share, with preferences, rights and privileges as set forth
in that certain Certificate of Designation, Preferences and Rights of Series A
Convertible Preferred Stock filed with the Office of the Secretary of State of
Minnesota on December 5, 2003, and of which 8,500,000 shares shall be
undesignated. Currently, the Company is authorized to issue 30,000,000 shares of
capital stock, of which 25,000,000 are designated as common shares with a par
value of $0.01 per share, and 5,000,000 shares are designated as preferred
shares with a par value of $0.01 per share.
The Board of Directors believes that the increase in the number of
authorized shares will give the Company the ability to pursue future equity
financings and additional acquisition opportunities. Accordingly, the Board of
Directors has adopted and recommends for shareholder approval an amendment to
the Articles of Incorporation of the Company which would increase the number of
authorized shares.
VOTE REQUIRED; RECOMMENDATION
Adoption of the amendment to the Company's Articles of Incorporation to
increase the Company's authorized shares requires the affirmative vote of the
holders of the greater of (1) a majority of the voting power of the shares
represented in person or by proxy at the Annual Meeting with authority to vote
on such matter, or (2) a majority of the voting power of the minimum number of
shares that would constitute a quorum for the transaction of business at the
Annual Meeting.
20
INCREASE IN SHARES RESERVED FOR
1995 STOCK OPTION PLAN
(PROPOSAL #3)
GENERAL
The Company has in effect a 1995 Stock Option Plan (the "Stock Option
Plan"). The Board of Directors has recommended an increase in the number of
shares of the Company's Common Stock reserved for issuance under the Stock
Option Plan from 2,000,000 to 3,500,000 shares. A general description of the
basic features of the Stock Option Plan is presented below, but such description
is qualified in its entirety by reference to the full text of the Stock Option
Plan, a copy of which may be obtained without charge upon written request to the
Company's Chief Financial Officer.
DESCRIPTION OF THE 1995 STOCK OPTION PLAN
PURPOSE. The purpose of the Stock Option Plan is to advance the
interests of the Company and its shareholders by enabling the Company to attract
and retain persons of ability 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 Stock Option Plan until February
25, 2005, or until such earlier date as the Stock Option Plan is discontinued or
terminated by the Board. The Company anticipates that the term of the Plan will
be extended before expiration and that options will continue to be granted under
the Plan as extended, subject to approval of such extension at the 2005 Annual
Shareholders' Meeting.
ADMINISTRATION. The Stock Option Plan is administered by the Board of
Directors or by a Committee of the Board of Directors (the "Administrator"). The
Stock Option Plan gives broad powers to the Administrator to administer and
interpret the 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 salaried employees of the Company or any subsidiary
are eligible to receive incentive stock options pursuant to the Stock Option
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 March 31, 2004, the Company had approximately
560 salaried employees (of which five are officers listed herein), six directors
who are not employees, and one consultant.
OPTIONS. When an option is granted under the Stock Option 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 market value of the Company's Common Stock on
March 31, 2004 was approximately $23.5 million. The term during which the option
21
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 Stock Option Plan is nontransferable during the
lifetime of the optionee. Each outstanding option under the Stock Option 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 Stock Option Plan or revise or amend it in any respect;
provided, the Stock Option 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 Stock Option 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
Stock Option Plan; (c) materially increase the benefits accruing to optionees
under the Stock Option Plan or (d) cause incentive stock options to fail to meet
the requirements of the Internal Revenue Code.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN. Under present law, an
optionee will not realize any taxable income on the date a nonqualified option
is granted pursuant to the Stock Option 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 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 Stock Option 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.
22
PLAN BENEFITS. The table below shows the total number of stock options
that have been received by the following individuals and groups under the Stock
Option Plan:
Total Number of
Name and Position/Group Options Received(1)
----------------------- ------------------
Jerry V. Noyce, President and CEO 544,000
Wesley W. Winnekins, CFO 158,500
Jeanne C. Crawford, Vice President Human Resources 95,000
James A. Narum, Corporate Vice President of Operations 100,000
David T. Hurt, Vice President Operations 77,500
Current Executive Officer Group 975,000
Current Non-executive Officer Director Group 180,000
Current Non-executive Officer Employee Group 627,500
Total Stock Options Granted Under the Plan 1,782,500
(1) This table reflects the total number of options granted under the Stock
Option Plan as of March 31, 2004. Because future grants of stock
options under the Stock Option Plan are subject to the discretion of
the Committee, the future benefits that may be received by these
individuals and groups under the Stock Option Plan cannot be determined
at this time, except for the automatic grants of nonqualified options
to outside directors as described above.
VOTE REQUIRED
Because of the employees' positive response to the 1995 Stock Option
Plan, and to have an adequate reserve of shares to grant to new employees,
including employees obtained as a result of possible future acquisitions, the
Board of Directors recommends that the shareholders approve the 1,500,000 share
increase in the number of shares reserved under the Plan. Approval of the
increase requires the affirmative vote of the greater of (i) a majority of the
voting power of the shares represented in person or by proxy at the meeting with
authority to vote on such matter or (ii) a majority of the voting power of the
minimum number of shares that would constitute a quorum for the transaction of
business at the Annual Meeting.
23
The following table provides information as of December 31, 2003 about
the Company's equity compensation plans.
-------------------------- -------------------- -------------------------------------
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE NUMBER OF SECURITIES REMAINING
ISSUED UPON EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, EQUITY COMPENSATION PLANS (EXCLUDING
WARRANTS AND RIGHTS WARRANTS AND RIGHTS SECURITIES REFLECTED IN COLUMN (a))
-------------------------- -------------------- -------------------------------------
(a) (b) (c)
-------------------------- -------------------- -------------------------------------
Equity compensation plans
approved by security 1,710,900 $0.88 634,665 (1)
holders
------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security 1,460,320 (2) $0.48 --
holders
------------------------------------------------------------------------------------------------------------------------
TOTAL 3,171,220 $0.70 634,665
------------------------------------------------------------------------------------------------------------------------
(1) Includes 351,815 shares of common stock available for issuance under
the Company's Employee Stock Purchase Plan.
(2) Represents outstanding warrants to investors, selling agents and
consultants in consideration for services performed and in connection
with the issuance of debt.
APPROVAL OF SELECTION OF AUDITORS
(PROPOSAL #4)
Grant Thornton LLP acted as the Company's independent auditors for the
fiscal years ended December 31, 2002 and December 31, 2003, and has been
selected by the Audit Committee to act as the Company's auditors for fiscal
2004. Although it is not required to do so, the Board wishes to submit the
selection of Grant Thornton LLP to the shareholders for ratification. In the
event the shareholders do not approve such selection, the Audit Committee will
reconsider its selection. A representative of Grant Thornton LLP is expected to
be present at the Annual Meeting of Shareholders. Such representative will have
an opportunity to make a statement if he or she desires to do so and will be
available to respond to appropriate questions.
24
AUDIT FEES
The following fees were paid to Grant Thornton LLP in fiscal years 2002
and 2003:
FY 2002 FY 2003
------- -------
Audit Fees 48,216 $51,479
Audit-Related Fees 8,334 6,565
Tax Fees 35,026 38,849
All Other Fees -- 16,705
Audit fees are for professional services rendered and expenses incurred
for the audit of the Company's annual financial statements and review of
financial statements included in our Forms 10-K and 10-Q or services that are
normally provided by the accountant in connection with statutory and regulatory
filings or engagements.
Audit-related fees are primarily for services rendered and expenses
incurred for the audit of the Company's 401K Employee Benefit Plan.
Tax fees include fees for services provided and expenses incurred in
connection with the preparation of federal and state tax returns, tax advice and
tax planning.
All other fees include fees for services provided and expenses incurred
for non-audit related accounting services. The other fees paid in 2003 relate
primarily to due diligence assistance provided by Grant Thornton LLP in
connection with the Company's acquisition of the J&J Fitness Business.
Pursuant to its written charter, the Audit Committee is required to
pre-approve the audit and non-audit services performed by the Company's
independent auditors in order to assure that the provision of such services does
not impair the auditor's independence. Unless a particular service has received
general pre-approval by the Audit Committee, each service provided must be
specifically pre-approved. Any proposed services exceeding pre-approved costs
levels will require specific pre-approval by the Audit Committee. As such, the
Audit Committee adopted a policy in February 2003 that states the Audit
Committee is required to approve all audit and non-audit accounting-related
services. The Audit Committee has pre-approved services to be requested from
time to time by the Company's Chief Executive Officer and Chief Financial
Officer only on accounting matters that do not exceed $5,000 on any one occasion
or $25,000 per year; provided that the Company's Chief Financial Officer must
report to the Audit Committee on the provision of such services at the Audit
Committee meeting held immediately thereafter.
The Company's Audit Committee has considered whether provision of the
above non-audit services is compatible with maintaining Grant Thornton LLP's
independence and has determined that such services have not adversely affected
Grant Thornton LLP's independence.
25
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's executive officers and directors, and persons who own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Officers, directors and
greater than ten percent shareholders ("Insiders") are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based on a review of the copies of such
reports furnished to the Company, during the fiscal year ended December 31,
2003, all Section 16(a) filing requirements applicable to Insiders were complied
with, except James Bernards, Wes Winnekins, Jeanne Crawford, James Ehlen, Mark
Sheffert, Linda Whitman, Rodney Young and Jerry Noyce were late filing one Form
4 each reporting one transaction, and Ralph Colao, Katherine Hamlin, Brian Gagne
and Michael Seethaler were late filing a Form 3 and a Form 4 each reporting one
transaction.
OTHER BUSINESS
Management knows of no other matters to be presented at the meeting. If
any other matter properly comes before the meeting, the appointees named in the
proxies will vote the proxies in accordance with their best judgment.
SHAREHOLDER PROPOSALS
Any appropriate proposal submitted by a shareholder of the Company and
intended to be presented at the 2005 Annual Meeting must be received by the
Company by December 10, 2004, to be includable in the Company's proxy statement
and related proxy for the 2005 Annual Meeting.
Also, if a shareholder proposal intended to be presented at the 2005
Annual Meeting but not included in the Company's proxy statement and proxy is
received by the Company after February 23, 2005, then management named in the
Company's proxy form for the 2005 Annual Meeting will have discretionary
authority to vote the shares represented by such proxies on the shareholder
proposal, if presented at the meeting, without including information about the
proposal in the Company's materials.
FORM 10-K
A COPY OF THE COMPANY'S FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2003 (WITHOUT EXHIBITS), ACCOMPANIES THIS NOTICE OF MEETING
AND PROXY STATEMENT. NO PART OF THE ANNUAL REPORT IS INCORPORATED HEREIN AND NO
PART THEREOF IS TO BE CONSIDERED PROXY SOLICITING MATERIAL. THE COMPANY WILL
FURNISH WITHOUT CHARGE TO EACH PERSON WHOSE PROXY IS BEING SOLICITED, UPON
WRITTEN REQUEST OF ANY SUCH PERSON, ANY EXHIBIT DESCRIBED IN THE LIST
ACCOMPANYING THE FORM 10-K, UPON THE PAYMENT, IN ADVANCE, OF REASONABLE FEES
RELATED TO THE COMPANY'S FURNISHING SUCH EXHIBIT(S). REQUESTS FOR COPIES OF SUCH
EXHIBIT(S) SHOULD BE DIRECTED TO MR. WESLEY W. WINNEKINS, CHIEF FINANCIAL
OFFICER, AT THE COMPANY'S PRINCIPAL ADDRESS.
Dated: April 9, 2004
Bloomington, Minnesota
26
EXHIBIT A
Health Fitness Corporation
AUDIT COMMITTEE CHARTER
March 13, 2001
As Amended and Approved December 20, 2002
ORGANIZATION
This charter governs the operation of the Audit Committee. The Committee
shall review and reassess the adequacy of this charter at least annually and
obtain the approval of the Board of Directors for any proposed changes to the
charter. The Committee shall be comprised of three or more directors as
determined by the Board, each of whom shall be independent directors, and free
from any relationship that, in the opinion of the Board, would interfere with
the exercise of his or her independent judgment as a member of the Committee.
All Committee members must be able to read and understand financial statements
at the time of their appointment to the Committee. At least one member of the
Committee shall be a "financial expert." In order to be a "financial expert," a
person must, at a minimum, have (through education and experience as a public
accountant or as a financial officer):
- an understanding of GAAP and financial statements;
- experience in preparing or auditing financial statements of
generally comparable companies and the application of GAAP to
estimates, accruals and reserves;
- experience with internal accounting controls; and
- an understanding of audit committee functions.
STATEMENT OF POLICY
The Audit Committee shall provide oversight relating to the Company's
financial reporting process, its systems of internal accounting and financial
controls, the internal audit process and the annual independent audit process of
the Company's annual financial statements. In discharging its duties, the
Committee is empowered to investigate any matter brought to its attention with
full access to all books, records, facilities, and personnel of the Company.
Management is responsible for implementing adequate internal accounting
controls and for preparing the Company's financial statements. Further,
management and the independent auditors are responsible for planning and
conducting audits and determining that the audited financial statements are
complete, accurate and in accordance with Generally Accepted Accounting
Principles. The Committee, in carrying out its oversight responsibilities, shall
discuss with the independent auditors and management their judgment of the
quality and the acceptability of the Company's financial reporting.
The Audit Committee shall also be responsible for approving certain
transactions involving the Company.
27
In carrying out its responsibilities, the Committee shall have the
authority to engage independent advisors, including legal and financial
advisors. The Company shall provide appropriate funding to pay for any
independent advisors engaged by the Committee.
RESPONSIBILITIES AND PROCESS
The following shall be the principal recurring process of the Audit
Committee in carrying out its oversight responsibilities:
Independent Auditors
- Annually, the Committee shall evaluate and appoint the Company's
independent auditors. The Committee shall have a clear
understanding with management and the independent auditors that
the independent auditors are ultimately accountable to the Audit
Committee. The Committee shall have the ultimate authority and
responsibility to select, evaluate, compensate and, where
appropriate, replace the independent auditors. The independent
auditors shall report directly to the Committee. The Committee
shall receive an annual report and such other reports as the
Committee deems appropriate from the independent auditors
regarding the auditors' independence, and discuss with the
auditors such reports and the matters included in the written
disclosures required by the Independence Standards Board Standard
No. 1. If necessary, the Committee shall take appropriate action
with respect to the independence of the auditors.
Internal Controls and Audit Process
The audit function is designed to provide a check that a system of
internal controls is maintained through the Company which protects the assets of
the Company and provides the proper authorization and recording of transactions
such that the financial information is reliable and materially accurate; and
financial statements fairly present, in all material respects, the financial
condition and results of operations of the Company in accordance with U.S.
generally accepted accounting principles.
- The Committee shall discuss with the internal auditors and the
independent auditors the overall scope and plans for their
respective audits. Also, the Committee shall discuss with
management, the internal auditors and the independent auditors the
adequacy and effectiveness of the Company's accounting and
financial controls. Further, the Committee shall meet separately
with internal auditors and the independent auditors, with and
without management present, to discuss the results of their
examinations.
- The Committee shall establish and maintain procedures for
efficiently responding to complaints received by the Company
regarding accounting, internal accounting controls and auditing.
At a minimum, these procedures shall allow employees to submit
concerns regarding questionable accounting and auditing matters on
a confidential, anonymous basis.
28
Annual Audit
- The Committee will discuss with the independent auditors the
results of the annual audit and any other matters required to be
communicated to the Committee by the independent auditors under
Statement of Auditing Standards 61.
Financial Reporting
- The Committee shall review with management and the independent
auditors the financial statements to be included in the Company's
Annual Report on Form 10-K. Based on these reviews, the Committee
shall annually report to the Board whether the Committee recommend
inclusion of the financial statements in the Company's Annual
Report and Form 10-K.
Proxy Report
- The Committee shall prepare the report required by the rules of
the Securities and Exchange Commission to be included in the
Company's annual proxy statement.
Committee Approval of Certain Transactions
The Committee shall, prior to approval by the Board, pre-approve all
audit services and non-audit services to be performed by the Company's
independent auditors. Neither the Committee nor the Board shall approve, and the
Company's independent auditors shall not provide to the Company, the following
non-audit services if such services are to be provided contemporaneously with an
audit of the Company: bookkeeping services; financial IS design and
implementation services; appraisal or valuation services; fairness opinions;
contribution-in-kind reports; actuarial services; internal audit outsourcing
services; management functions or HR; broker/dealer, investment adviser or
investment banking services; and legal services and expert services unrelated to
the audit.
The Committee shall review and approve all related-party transactions
to which the Company is a party.
29
HEALTH FITNESS CORPORATION
ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, MAY 18, 2004
3:30 P.M.
3600 AMERICAN BOULEVARD WEST
BLOOMINGTON, MINNESOTA 55431
HEALTH FITNESS CORPORATION
3600 AMERICAN BOULEVARD WEST, BLOOMINGTON, MN 55431 PROXY
--------------------------------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON MAY 18, 2004.
The shares of stock you hold in your account or in a dividend reinvestment
account will be voted as you specify on the reverse side.
IF NO CHOICE IS SPECIFIED, THE PROXY WILL BE VOTED "FOR" ITEMS 1, 2, 3 AND 4.
The undersigned hereby appoints JOHN C. PENN, JAMES A. BERNARDS and MARK W.
SHEFFERT, and each of them, individually, with full power of substitution, as
Proxies to represent and vote, as designated below, all shares of Common Stock
of Health Fitness Corporation registered in the name of the undersigned at the
Annual Meeting of Shareholders of the Company to be held at the Company's
corporate offices, 3600 American Boulevard West, Bloomington, Minnesota, at 3:30
p.m. (Minneapolis time) on May 18, 2004, and at any adjournment thereof, and the
undersigned hereby revokes all proxies previously given with respect to the
meeting.
See reverse for voting instructions.
- Please detach here -
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2, 3 AND 4.
1. Elect directors:
01 James A. Bernards 04 Mark W. Sheffert
02 K. James Ehlen, M.D. 06 Linda Hall Whitman
03 Jerry V. Noyce 07 Rodney A. Young
04 John C. Penn 08 Cary Musech
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDICATED NOMINEE, WRITE
THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT).
[ ] Vote FOR [ ] Vote WITHHELD
all nominees from all nominees
(except as marked)
2. To increase the shares of capital stock that the corporation is authorized
to issue from 30,000,000 to 60,000,000, of which 50,000,000 shall be
designated as common shares and 10,000,000 shall be designated as
preferred stock
[ ] For [ ] Against [ ] Abstain
3. Approve 1,500,000-share increase in number of shares reserved for 1995
Stock Option Plan
[ ] For [ ] Against [ ] Abstain
4. Ratify selection of Grant Thornton LLP as independent auditors
[ ] For [ ] Against [ ] Abstain
5. In their discretion, upon such other business as may properly come before
the Meeting or any adjournment thereof
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR EACH PROPOSAL.
Address Change? Mark Box [ ] Indicate changes below:
Date
----------------------------------------
Signature(s) in Box
PLEASE DATE AND SIGN ABOVE exactly as name
appears at the left indicating, where
appropriate, official position or
representative capacity. For stock held in
joint tenancy, each joint tenant should
sign.