Health Development Corporation

Harvard Business School Case 9-299-049

Case Software 9-201-702
2nd Edition

Copyright © 2000 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Exhibit 1Income Statement for Health Development Corporation

Year Ended December 31,

1994 1995 1996 1997 1998 1999 2000a

Total Revenue 8,316 9,957 12,584 13,636 14,549 16,162 19,324

Club Operating Expenses 5,779 6,990 8,837 9,337 9,877 10,885 13,130
Gross Profit 2,537 2,967 3,747 4,299 4,672 5,277 6,194
Rent and Other Expensesb 1,831 2,226 2,869 2,842 2,771 2,299 2,275
Depreciation and Amortization 363 426 517 619 682 1,058 1,233
Operating Income 343 315 361 838 1,219 1,920 2,687
Net Interest Expense 17 3 (22) (28) (36) 480 975
Non-Recurring Expensesc 0 36 52 186 40 (6) 0
Pre-Tax Income 325 279 331 680 1,216 1,445 1,712
Income Taxes 146 126 158 333 499 660 729
Net Income 179 153 173 347 716 785 982

Expense Adjustments
Non-Recurring Items 0 36 52 -3 40 -6 0
Directors Wages and Fees 42 40 83 78 64 74 91
Professional Fees 24 44 68 140 143 123 126
Terminated Operations 0 0 0 236 41 0 0
Contributions and Other Items 0 2 3 4 41 28 17
Adjusted Pre-Tax Income 391 400 537 1,135 1,544 1,665 1,946

Adjusted EBITDAd 771 830 1,032 1,726 2,190 3,202e 4,152

EBITDA Margin 9.30% 8.30% 8.20% 12.70% 15.10% 19.80% 21.50%

a Projections include only current HDC properties, and include no assumptions regarding additional future acquisitions.
b Includes Rent, Insurance, Real Estate Taxes, and other Tax Expenses.
c Includes $50,000 in claim settlement in 1996; $189,000 in losses on a club termination in 1997; $40,000 in purchase financin
d Figure includes $80,000 and $528,000 of losses for the company’s new Andover facility for 1999 and 2000, respectively.
e Does not reflect a full year of ownership of HDC’s Lexington facility, which would result in an additional $200,000 of EBITDA
 2001a 2002a

21,311 22,809
14,313 15,092
6,998 7,717
2,375 2,510
1,466 1,452
3,157 3,755
1094 1061
0 0
2,062 2,694
798 1,032
1,264 1,662

0 0
96 102
130 130
0 0
19 22
2,307 2,948

4,867 5,460
22.80% 23.90%

future acquisitions.

40,000 in purchase financing costs in 1998.

and 2000, respectively.
ional $200,000 of EBITDA if annualized.
Exhibit 2 Balance Sheets for Health Development Corporation

As of
September 30, 1999
Assets
Current assets
Cash and Marketable Securities 997
Accounts receivable 226
Inventory 21
Prepaid and Other Current Items 127
Total Current Assets 1,371
Property, Plant and Equipment
Property and Equipment 12,047
Construction in Progress 1,320
Total Property, Plant and Equipment 13,367
Less: Accumulated Depreciation (3,349)
Net Property and Equipment 10,018
Other Assets 716
Total Assets 12,105

Liabilities and Shareholders' Equity

Current Liabilities
Accounts Payable 135
Accrued Expenses 1,250
Prepaid Membership Fees 1,888
Current Portion of Long Term Debt 210
Other Current Liabilities 39
Total Current Liabilities 3,522
Long-Term Debt 6,704
Other Long-Term Liabilities 682
Total Liabilities 7,386
Shareholders' Equity
Common and Preferred Stock 9
Paid In Capital 718
Retained Earnings 470
Total Shareholders' Equity 1,197
Total Liabilities and Equity 12,105
Exhibit 3 Value of HDC with Owned and Leased Lexington Real Estate

Lexington Real Estate

Owning Leasing

Adjusted Pre-tax Income

(excluding Lexington Real Estate) 2,612 2,612

Cost of Lexington Real Estate

Interest 504 0
Depreciation 162 0
Lease cost 0 925

Adjusted Pre-tax Income 1,946 1,687

Interest (excluding Lexington) 471 471

Depreciation (excluding Lexington) 1,071 1,071
Lexington real estate interest 504 0
Lexington real estate depreciation 162 0

EBITDA 4,154 3,229

Multiple 5x 5x

Operations Value 20,770 16,145

Plus:
Excess Cash 750

Total Enterprise Value 20,770 16,895

Less:
Corporate debt (excluding Lexington) 1,917 1,917
Lexington real estate debt 5,750 0

Equity Value 13,103 14,978