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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to ____________________
Commission file number: 0-25064
HEALTH FITNESS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
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(State of incorporation or organization) (I.R.S. Employer Identification No.)
3500 West 80th Street, Bloomington, Minnesota 55431
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(Address of principal executive offices) (Zip Code)
(952) 831-6830
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
capital stock, as of August 10, 2001 was:
Common Stock, $.01 par value, 12,265,250 shares
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HEALTH FITNESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000 F-1
Consolidated Statements of Earnings for the three and six F-2
months ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows for the six F-3
months ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements F-4
Item 2. Management's Discussion and Analysis of Financial Condition 3
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 6
PART II. OTHER INFORMATION 7
Item 1. Legal Proceedings
Items 2-3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Not Applicable
Item 6. Exhibits and reports on Form 8-K 8
Signatures 9
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HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2001 2000
------------ ------------
ASSETS
Current Assets
Cash $ 54,607 $ 472,930
Trade and other accounts receivable, less allowance for doubtful
accounts of $159,600 and $262,600, respectively 3,458,236 3,266,277
Prepaid expenses and other 83,945 47,789
------------ ------------
Total current assets 3,596,788 3,786,996
Property and Equipment, net 177,237 257,947
Other Assets
Goodwill, less accumulated amortization of $2,384,600 and $2,183,400, 5,492,776 5,783,550
respectively
Intangible assets, less accumulated amortization of $498,300 and
$551,900, respectively 252,538 493,947
Trade and other notes receivable -- 73,380
Other 778 3,448
------------ ------------
$ 9,520,117 $ 10,399,268
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Note payable $ 1,781,130 $ 2,685,802
Current maturities of long-term obligations 65,184 101,850
Trade accounts payable 109,355 357,117
Accrued salaries, wages, and payroll taxes 1,009,429 927,193
Other accrued liabilities 451,211 842,783
Deferred revenue 1,222,258 1,264,674
------------ ------------
Total current liabilities 4,638,567 6,179,419
Long-term Obligations, less current maturities -- 24,954
Commitments and Contingencies -- --
Stockholder's Equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none
issued or outstanding -- --
Common stock, $0.01 par value; 25,000,000 shares authorized;
shares issued and outstanding 121,653 121,653
Additional paid-in capital 16,928,522 16,921,503
Accumulated deficit (12,168,625) (12,848,261)
------------ ------------
4,881,550 4,194,895
------------ ------------
$ 9,520,117 $ 10,399,268
============ ============
The accompanying notes are an integral part of the financial statements
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HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue $ 6,578,716 $ 6,284,961 $ 13,005,172 $ 13,024,142
Cost of Revenues 5,091,116 4,749,313 10,150,586 9,693,651
------------ ------------ ------------ ------------
Gross Profit 1,487,600 1,535,648 2,854,586 3,330,491
Operating Expenses
Salaries 526,633 467,319 1,014,394 985,222
Selling, general, and administrative 614,567 606,649 1,104,068 1,229,249
Re-engineering -- 66,867 -- 154,427
------------ ------------ ------------ ------------
Total operating expenses 1,141,200 1,140,835 2,118,462 2,368,898
------------ ------------ ------------ ------------
Operating Profit 346,400 394,813 736,124 961,593
Other Income (Expense)
Interest expense (116,906) (200,990) (246,767) (365,842)
Gain on sale of subsidiary -- -- 228,613 --
Other, net 5,771 8,875 4,753 29,734
------------ ------------ ------------ ------------
Earnings Before Income Taxes 235,265 202,698 722,723 625,485
Income Taxes 13,087 (89) 43,087 (4,863)
------------ ------------ ------------ ------------
Net Earnings $ 222,178 $ 202,787 $ 679,636 $ 630,348
============ ============ ============ ============
Net Earnings Per Share:
Basic $ 0.02 $ 0.02 $ 0.06 $ 0.05
Diluted $ 0.01 $ 0.02 $ 0.05 $ 0.05
Weighted Average Common Shares Outstanding
Basic 12,165,250 12,139,906 12,165,250 12,130,831
Diluted 12,711,750 12,541,911 12,701,142 12,532,836
The accompanying notes are an integral part of the financial statements.
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HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2001 2000
------------ ------------
Cash Flows From Operating Activities:
Net earnings $ 679,636 $ 630,348
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Common stock and warrants issued for services and compensation 7,019 6,250
Depreciation and amortization 373,011 410,516
Amortization of financing costs 58,166 --
Gain on sale of subsidiary (228,613) --
Changes in operating assets and liabilities:
Trade accounts and notes receivable (125,182) 562,973
Prepaid expenses and other (38,256) (162,580)
Other assets 2,670 73,278
Trade accounts payable (227,702) (542,522)
Accrued liabilities and other (265,987) 161,675
Deferred revenue 9,315 (576,921)
------------ ------------
Net cash provided by operating activities 244,077 563,017
Cash Flows From Investing Activities:
Purchases of property and equipment (34,663) (21,228)
Net proceeds from sale of equipment -- 2,700
Net proceeds from sale of subsidiary 368,555 --
Payments in connection with earn-out provisions -- (168,290)
Payment for non-compete agreement (30,000) --
------------ ------------
Net cash provided by (used in) investing activities 303,892 (186,818)
Cash Flows From Financing Activities:
Borrowings under line of credit 13,579,686 13,632,210
Repayments of line of credit (14,484,358) (13,857,600)
Proceeds from issuance of common stock -- 10,625
Repayment of long term debt (61,620) (207,058)
------------ ------------
Net cash used in financing activities (966,292) (421,823)
------------ ------------
Net Decrease in Cash (418,323) (45,624)
Cash at Beginning of Period 472,930 139,852
------------ ------------
Cash at End of Period $ 54,607 $ 94,228
============ ============
The accompanying notes are an integral part of the financial statements
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HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. They should be read in conjunction
with the annual financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000. In the opinion of management,
the interim consolidated financial statements include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the results for interim periods presented. Operating results for the three and
six months ended June 30, 2001 are not necessarily indicative of the operating
results for the year ending December 31, 2001. The unaudited consolidated
balance sheet as of December 31, 2000 has been derived from the audited balance
sheet as of that date.
Certain reclassifications have been made to the consolidated financial
statements as of and for the three and six months ended June 31, 2000. Such
reclassifications had no effect on net income or stockholders' equity as
previously reported.
NOTE 2. FINANCING
In July 2000, the Company entered into a credit agreement with Coast Business
Credit for a $5.0 million working capital facility. The interest rate on the
loan is prime plus 3.0%, with future reductions based on the achievement of
certain tangible net worth levels. Available credit under the loan is based upon
certain profitability and cash collection multiples. As of June 30, 2001, the
available credit was approximately $1,837,000. Borrowings under the credit
agreement are collateralized by substantially all of the Company's assets.
Additionally, the Company is subject to certain financial covenants that measure
net worth, interest coverage and debt capacity. The Company is in compliance
with all of the covenants in effect on June 30, 2001.
NOTE 3. INCOME TAXES
Income taxes were calculated based on management's estimate of the Company's
effective tax rate. Income tax expense represents minimum state income taxes as
well as federal taxes due because of alternative minimum tax calculations.
NOTE 4. SALE OF SUBSIDIARY
Effective January 1, 2001, the Company sold its subsidiary, International
Fitness Club Network (IFCN). The subsidiary was in the business of organizing
and maintaining a network of commercial fitness and health clubs and marketing
memberships in such clubs to employers and insurance companies. The Company
received net proceeds of approximately $369,000, including selling costs of
approximately $56,000, and recorded a gain on sale of approximately $229,000.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001.
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability
o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
o effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator
The Company is currently reviewing the affect of these Statements on their
financial statements.
F-4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL. Health Fitness Corporation and its wholly owned subsidiaries (the
"Company") provides fitness and wellness management services and products to
corporations, hospitals, communities, and universities primarily located in the
United States and Canada. Fitness and wellness management services include the
development, marketing, and management of corporate, hospital, and community
based fitness centers, health related programming, and on-site physical therapy.
Effective January 1, 2001, the Company sold its IFCN subsidiary, which
maintained and sold memberships in a network of independently owned and operated
commercial fitness and health clubs.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2001 COMPARED TO THE
QUARTER ENDED JUNE 31, 2000.
REVENUES. Revenues increased $294,000 or 4.7% to $6,579,000 for the three months
ended June 30, 2001, from $6,285,000 for the three months ended June 30, 2000.
This increase is primarily attributed to a $162,000 increase in management fee
revenues from the Company's corporate fitness division along with a $283,000
increase in management fee revenues from the Company's hospital-based fitness
division. These increases are primarily attributed to new contracts secured
during the latter half of 2000. Offsetting this increase was a decrease in
revenues of $151,000, of which $132,000 relates to the Company's sale of its
IFCN subsidiary, and $19,000 relates to the Company's on-site physical therapy
business, which experienced a decrease in contracts over 2000.
OPERATING PROFIT. Operating profit decreased $49,000 to $346,000 for the three
months ended June 30, 2001, from $395,000 for the same period in 2000. This
decrease is primarily attributed to $25,000 of nonrecurring management revenues
that were recognized during the second quarter of 2000, which had no related
expense. The Company also experienced an increase in employee-related costs for
its corporate and hospital-based fitness facilities, with most of the increase
being attributed to higher workers compensation and other employee benefits.
OTHER INCOME AND EXPENSE. Interest expense decreased $84,000 to $117,000 for the
three months ended June 30, 2001, compared to $201,000 for the same period in
2000. This decrease is primarily attributed to a decrease in the interest rate
on the Company's borrowings, as well as decreased levels of borrowing.
INCOME TAXES. Income tax expense increased $13,000 for the three months ended
June 30, 2001 compared to the same period in 2000 due to minimum state and
federal income taxes anticipated in 2001. The Company has offset the majority of
its current income tax liability with the tax benefit of its recognition of
previously incurred net operating loss carryforwards.
NET EARNINGS. As a result of the above, net earnings for the three months ended
June 30, 2001 was $222,000, a $19,000 increase from the same period in 2000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 31, 2000.
REVENUES. Revenues decreased $19,000 or .2% to $13,005,000 for the six months
ended June 30, 2001, from $13,024,000 for the six months ended June 30, 2000.
This slight decrease is primarily attributed to a $459,000 loss of revenue from
the Company's IFCN subsidiary, which was sold by the Company in January 2001.
Also contributing to this decrease was a loss of revenue of $38,000 from the
Company's on-site physical therapy division, which experienced a decrease in
contracts over 2000. Offsetting this decrease in revenues was an increase in
fitness center management revenues, including a $457,000 increase in the
corporate fitness division and a $22,000 increase in the hospital-based fitness
division, that resulted from new contracts secured during the latter half of
2000.
OPERATING PROFIT. Operating profit decreased $225,000 to $736,000 for the six
months ended June 30, 2001, from $962,000 for the same period in 2000. This
decrease is primarily attributed to $105,000 of nonrecurring management revenues
that were recognized during the first six months of 2000, which had no related
expense. The Company also experienced a $92,000 loss of operating income related
to the sale of the IFCN subsidiary in January 2001, as well as increased
employee-related costs for its corporate and hospital-based fitness facilities,
which was primarily attributed to higher workers compensation and other employee
benefits.
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OTHER INCOME AND EXPENSE. Interest expense decreased $119,000 to $247,000 for
the six months ended June 30, 2001, compared to $366,000 for the same period in
2000. This decrease is primarily attributed to a decrease in the interest rate
on the Company's borrowings, as well as decreased levels of borrowing. Also, the
Company recorded a $229,000 gain on sale of its IFCN subsidiary.
INCOME TAXES. Income tax expense increased $48,000 for the six months ended June
30, 2001 compared to the same period in 2000 due to minimum state and federal
income taxes anticipated in 2001. The Company has offset the majority of its
current income tax liability with the tax benefit of its recognition of
previously incurred net operating loss carryforwards.
NET EARNINGS. As a result of the above, net earnings for the six months ended
June 30, 2001 was $680,000, a $50,000 increase from the same period in 2000.
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LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital of $1,042,000 at June 30, 2001, versus
negative working capital of $2,775,000 at June 31, 2000. The increase in working
capital is due to the reduction of borrowings under the line of credit as well
as the reduction of accounts payable and other obligations.
Until July 2000, the Company had a revolving credit facility with Abelco Finance
L.L.C. and other affiliates of Cerberus Partners, L.P. (the "Credit Facility").
The Company's ability to draw down on the Credit Facility was tied to the
borrowing base formula which was based upon the Company's EBITDA (defined as
earnings before interest, taxes, depreciation and amortization), revenues, or
collections, whichever is less. The Credit Facility was secured by all of the
Company's assets, including its accounts receivable, inventory, equipment, and
general intangibles and was guaranteed in part by the Company's founder and
former Chief Executive Officer. The advances under the Credit Facility accrued
interest at a rate equal to 7.0% in excess of Chase Manhattan's prime rate, with
a minimum rate of 15.5%. The Company was required to pay monthly interest
payments on outstanding borrowings at the prime rate plus 4.5%, with a minimum
rate of 13.0%. The unpaid interest (2.5%) was added to the principal balance of
the facility, and accrued interest until paid. The Credit Facility was due
September 2000. The Credit Facility was subject to various affirmative and
negative covenants customary in transactions of this type, including a
requirement to maintain certain financial ratios and limitations on the
Company's ability to incur additional indebtedness, to make acquisitions outside
of certain established parameters, or to make dividend distributions.
In July 2000, the Company entered into a credit agreement with Coast Business
Credit for a $5.0 million working capital facility (the "Working Capital
Facility"). Interest on the loan is at the prime rate plus 3.0%, with future
reductions based on the achievement of certain net worth levels after March 31,
2001. Available credit under the Working Capital Facility is based upon certain
profitability and cash collection multiples. As of June 30, 2001 the available
credit was approximately $1,837,000. Additionally, the Company is subject to
certain financial covenants that measure net worth, interest coverage and debt
capacity. The Company is in compliance with all of the financial covenants in
effect on June 30, 2001. The initial proceeds of the Working Capital Facility
were used to pay off the Credit Facility with Abelco as well as the holders of
certain subordinated debentures. The facility expires in July 2003.
The Company believes that sources of capital to meet future obligations in 2001
will be in the form of cash provided by operations and by the Company's new
Working Capital Facility. The Company does not believe that inflation has had a
significant impact on the results of its operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future, investing
in derivative financial instruments, derivative commodity instruments or other
such financial instruments. Transactions with international customers are
entered into in U.S. dollars, precluding the need for foreign currency hedges.
As a result, the exposure to market risk is not material.
CAUTIONARY STATEMENT
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding intent, belief,
or current expectations of the Company and its management and specifically
includes the statement regarding cash expected to be available from operations.
These forward-looking statements are not guarantees of the future performance
and involve a number of risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in these
statements. Please refer to Management's Discussion and Analysis contained
within the Company's Annual Report on Form 10-K for the year ended December 31,
2000, for cautionary statements on important factors to consider in evaluating
the forward-looking statements included in this Form 10-Q.
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PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
No Change
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Company's shareholders was held on
Wednesday, May 16, 2001.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation A under the Securities Exchange Act of 1934, there was no
solicitation in opposition to management's nominees, and the following persons
were elected directors of the Company to serve until the next annual meeting of
shareholders:
Nominee Number of Votes For Number of Votes Withheld
------- ------------------- ------------------------
James A. Bernards 8,764,906 181,860
K. James Ehlen, M.D 8,764,506 182,260
Jerry V. Noyce 8,856,576 90,190
John C. Penn 8,856,576 90,190
Mark W. Sheffert 8,764,706 182,060
Linda Hall Whitmen 8,856,576 90,190
Rodney A. Young 8,764,906 181,860
(c) By a vote of 8,515,641 shares in favor, 389,097 shares opposed,
42,028 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved a 200,000 share increase in the number of shares reserved
for the Company's 1995 Employee Stock Purchase Plan.
(d) By a vote of 8,301,986 shares in favor, 607,280 shares opposed,
37,500 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved an amendment to the Company's 1995 Stock Option Plan to
permit incentive stock options to remain exercisable following termination of
employment.
(e) By a vote of 8,888,213 shares in favor, 22,692 shares opposed,
35,861 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved the selection of Grant Thornton LLP as the Company's
independent auditors for the current fiscal year.
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page following signatures
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: August 13, 2001 HEALTH FITNESS CORPORATION
By /s/ Jerry Noyce
--------------------------------------
Jerry Noyce
Chief Executive Officer
(Principal Executive Officer)
By /s/ Wesley Winnekins
--------------------------------------
Wesley Winnekins
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997
3.2 Restated By-Laws of the Company - incorporated by reference to
the Company's Registration Statement on Form SB-2 No. 33-83784C
4.1 Specimen of Common Stock Certificate - incorporated by reference
to the Company's Registration Statement on Form SB-2 No.
33-83784C
10.1* Health Fitness Corporation 1995 Stock Option plan as amended to
date
11.0 Statement re Computation of per Share Earnings
*designates a management contract or compensatory plan or arrangement