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,
1997
1998
1999

1994

1995

1996

Total Revenue
Club Operating Expenses
Gross Profit
Rent and Other Expensesb
Depreciation and Amortization
Operating Income
Net Interest Expense
Non-Recurring Expensesc
Pre-Tax Income
Income Taxes
Net Income

8,316
5,779
2,537
1,831
363
343
17
0
325
146
179

9,957
6,990
2,967
2,226
426
315
3
36
279
126
153

12,584
8,837
3,747
2,869
517
361
(22)
52
331
158
173

13,636
9,337
4,299
2,842
619
838
(28)
186
680
333
347

14,549
9,877
4,672
2,771
682
1,219
(36)
40
1,216
499
716

16,162
10,885
5,277
2,299
1,058
1,920
480
(6)
1,445
660
785

19,324
13,130
6,194
2,275
1,233
2,687
975
0
1,712
729
982

Expense Adjustments
Non-Recurring Items
Directors Wages and Fees
Professional Fees
Terminated Operations
Contributions and Other Items
Adjusted Pre-Tax Income

0
42
24
0
0
391

36
40
44
0
2
400

52
83
68
0
3
537

-3
78
140
236
4
1,135

40
64
143
41
41
1,544

-6
74
123
0
28
1,665

0
91
126
0
17
1,946

771
9.30%

830
8.30%

1,032
8.20%

1,726
12.70%

2,190 3,202e
15.10%
19.80%

4,152
21.50%

Adjusted EBITDAd
EBITDA Margin

2000a

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 companys new Andover facility for 1999 and 2000, respectively.
e Does not reflect a full year of ownership of HDCs Lexington facility, which would result in an additional $200,000 of EBITDA

2001a

2002a

21,311
14,313
6,998
2,375
1,466
3,157
1094
0
2,062
798
1,264

22,809
15,092
7,717
2,510
1,452
3,755
1061
0
2,694
1,032
1,662

0
96
130
0
19
2,307

0
102
130
0
22
2,948

4,867
22.80%

5,460
23.90%

future acquisitions.

40,000 in purchase financing costs in 1998.

and 2000, respectively.
onal $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
Accounts receivable
Inventory
Prepaid and Other Current Items
Total Current Assets
Property, Plant and Equipment
Property and Equipment
Construction in Progress
Total Property, Plant and Equipment
Less: Accumulated Depreciation
Net Property and Equipment
Other Assets
Total Assets
Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable
Accrued Expenses
Prepaid Membership Fees
Current Portion of Long Term Debt
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Other Long-Term Liabilities
Total Liabilities
Shareholders' Equity
Common and Preferred Stock
Paid In Capital
Retained Earnings
Total Shareholders' Equity
Total Liabilities and Equity

997
226
21
127
1,371
12,047
1,320
13,367
(3,349)
10,018
716
12,105

135
1,250
1,888
210
39
3,522
6,704
682
7,386
9
718
470
1,197
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

504
162
0

0
0
925

Adjusted Pre-tax Income

1,946

1,687

Interest (excluding Lexington)

Depreciation (excluding Lexington)
Lexington real estate interest
Lexington real estate depreciation

471
1,071
504
162

471
1,071
0
0

EBITDA

4,154

3,229

Multiple

20,770

16,145

Cost of Lexington Real Estate

Interest
Depreciation
Lease cost

Operations Value
Plus:
Excess Cash
Total Enterprise Value
Less:
Corporate debt (excluding Lexington)
Lexington real estate debt
Equity Value

750
20,770

16,895

1,917
5,750

1,917
0

13,103

14,978

925

Particular
Estimated Revenue of the Lexington Club
Lease Payment
Growth Rate
Effective life of the Real Estate
Purchase Price
Discount Rate
PV of lease rent
NPV of real estate

23.50%
5%
20

$
3900000 Page 2
925000 Page 2
Page 2
Assumption
6500000 Page 2

8.5%
13346959
6846959

Value of HDC with

Owned Lexington
Real Estate
Adjusted Pre-tax Income
(excluding Lexington Real Estate)
Less: Lease cost
Adjusted Pre-tax Income
Add: Interest (excluding Lexington)
Add: Depreciation (excluding Lexington)

2,612
925
1,687
471
1,071

EBITDA
Multiple

3,229
5

Value of operation with leased real Estate

Add: Excess Cash
Less: Corpoate Debt

16145
750
1917

HDC value with leased real estate

14978

Incremental EBITA from Purchase

Multiple
Value of Real Estate

925
10
9250

HDC Value with real estate

Less: Lexington real estate debt
Less: Excess Cash
Equity Value

Value of HDC with

Lexington Lease of
525000 annually

Ex. 3
Ex. 3
Ex. 3
Ex. 3

2,612
525
2,087
471
1,071

Ex. 3

3,629
5

Ex. 3
Ex. 3

18145
750
1917
16978

Ex. 3
assumption

24228
5750
750
17728

525
10
5250
22228

Ex. 3
Ex. 3

5750
750
15728

Page 2