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, 1999
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
(State of incorporation or organization) (I.R.S. Employer Identification No.)
3500 West 80th Street, Bloomington, Minnesota 55431
(Address of principal executive offices) (Zip Code)
(612) 831-6830
(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 13, 1999 was:
Common Stock, $.01 par value, 11,957,720 shares
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 26,692 $ 29,598
Trade accounts and notes receivable, less allowance for doubtful
accounts of $226,526 and $1,101,211 4,675,365 4,344,438
Inventories 28,549 26,459
Prepaid expenses and other 177,654 61,145
------------ ------------
Total current assets 4,908,260 4,461,640
PROPERTY AND EQUIPMENT, net 709,509 1,049,626
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,815,908
and $1,580,098, respectively 7,373,822 7,568,809
Noncompete agreements, less accumulated amortization of
$460,104 and $374,478, respectively 506,747 592,373
Copyrights, less accumulated amortization of $107,941 and $85,608, respectively 562,059 584,392
Trade names, less accumulated amortization of $27,615 and $20,613, respectively 182,385 189,386
Contracts, less accumulated amortization of $43,333 and $23,334, respectively 36,667 56,667
Trade accounts and notes receivable, less allowance for doubtful accounts of
$5,663 and $29,843, respectively 466,220 922,966
Deferred financing costs, less accumulated amortization of $1,337,732 and
$836,082, respectively 83,610 585,260
Other 38,983 65,983
Net assets of discontinued operations 422,039 4,537,716
------------ ------------
$ 15,290,300 $ 20,614,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balance $ 371,457 $ 47,099
Notes payable 4,696,266 6,939,692
Current maturites of long-term debt 440,389 572,227
Trade accounts payable 1,171,252 2,335,509
Accrued salaries, wages, and payroll taxes 1,201,018 1,405,382
Accrued earn-out -- 309,962
Other accrued liabilities 705,514 631,525
Deferred revenue 1,711,374 1,629,192
------------ ------------
Total current liabilities 10,297,269 13,870,588
LONG-TERM DEBT, less current portion 693,043 900,148
SUBORDINATED DEBT 115,000 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized 5,000,000 shares,
none issued or outstanding -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
11,957,720 and 11,884,413
shares issued and outstanding, respectively 119,577 118,844
Additional paid-in capital 16,796,549 16,725,126
Accumulated deficit (12,690,335) (10,951,526)
------------ ------------
4,225,791 5,892,444
Stockholder note and interest receivable (40,803) (48,362)
------------ ------------
4,184,988 5,844,082
------------ ------------
$ 15,290,300 $ 20,614,818
============ ============
See notes to condensed consolidated financial statements.
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ending Six Months Ending
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUE $ 6,350,508 $ 6,235,309 $ 13,298,166 $ 12,412,048
COSTS OF REVENUE 5,013,382 4,670,953 10,195,477 9,234,169
------------ ------------ ------------ ------------
GROSS PROFIT 1,337,126 1,564,356 3,102,689 3,177,879
OPERATING EXPENSES:
Salaries 461,095 388,923 939,003 903,031
Selling, general, and administrative 974,138 795,311 1,791,982 1,462,962
------------ ------------ ------------ ------------
Total operating expenses 1,435,233 1,184,234 2,730,985 2,365,993
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (98,107) 380,122 371,704 811,886
INTEREST EXPENSE (236,379) (180,136) (477,624) (280,865)
OTHER INCOME (EXPENSE) (252,383) 87,998 (207,059) 197,471
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (586,869) 287,984 (312,979) 728,492
INCOME TAXES -- (12,339) 831 --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (586,869) 300,323 (313,810) 728,492
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS
Loss from operations of Physical Therapy
Clinic division and Equipment division -- (884,632) (1,425,000) (1,283,172)
Loss on disposal of Physical Therapy Clinic division
and Equipment division (less applicable taxes) -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS -- (884,632) (1,425,000) (1,283,172)
------------ ------------ ------------ ------------
NET (LOSS) $ (586,869) $ (584,309) $ (1,738,810) $ (554,680)
============ ============ ============ ============
INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Basic $ (0.05) $ 0.03 $ (0.03) $ 0.07
Diluted (0.05) 0.03 (0.02) 0.07
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic $ -- $ (0.08) $ (0.12) $ (0.12)
Diluted -- (0.08) (0.11) (0.12)
NET (LOSS) PER SHARE:
Basic $ (0.05) $ (0.05) $ (0.15) $ (0.05)
Diluted (0.05) (0.05) (0.14) (0.05)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 11,949,383 11,769,808 11,917,078 10,754,077
Diluted 11,949,383 11,769,808 12,583,744 10,754,077
See notes to condensed consolidated financial statements.
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,738,810) $ (554,676)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,010,644 732,990
Discontinued operations 4,742,636 (1,319,128)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (295,210) (812,817)
Inventories (2,090) 335
Prepaid expenses and other (116,509) (1,938)
Other assets 2,000 87,364
Trade accounts payable and checks written in excess of bank balance (839,899) (759,718)
Accrued liabilities and other (130,374) (589,543)
Deferred revenue 82,182 (167,470)
---------------- ----------------
Net cash provided by (used in) operating activities 2,714,570 (3,384,600)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (4,735) (49,254)
Proceeds from sale of property 700 -
Payments for acquisitions, net of liabilities assumed (210,000)
Collection of non-trade notes receivable 25,000 337,868
Payments in connection with earn-out provisions (316,925) (402,931)
---------------- ----------------
Net cash used in investing activities (295,960) (324,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit (2,243,426) $5,412,925
Proceeds from issuance of subordinated debt 115,000 -
Repayment of long term debt (338,943) ($3,731,873)
Payment of financing costs - (992,595)
Proceeds from private placement of equity - 2,785,024
Proceeds from issuance of common stock 38,294 194,867
Advances on notes receivable (458) (4,140)
Payments received on notes receivable 8,017 10,399
---------------- ----------------
Net cash provided by financing activities (2,421,516) 3,674,607.44
---------------- ----------------
NET INCREASE (DECREASE) IN CASH (2,906) (34,310)
CASH AT BEGINNING OF YEAR 29,598 81,639
---------------- ----------------
CASH AT END OF PERIOD $ 26,692 $ 47,329
================ ================
See notes to condensed consolidated financial statements.
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles 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, 1998. In the opinion of management, the interim
condensed 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 second quarter and six
months ended June 30, 1999 are not necessarily indicative of the operating
results to be expected for the year ending December 31, 1999.
Certain reclassifications have been made to the condensed consolidated financial
statements for the second quarter and six months ended June 30, 1998. Such
reclassifications had no effect on net income or stockholders' equity as
previously reported.
NOTE 2. FINANCING
During the six months ended June 30, 1999, the Company sold $115,000 principal
amount of Secured Convertible Subordinated Debentures ("Debentures") to three
accredited investors. The Debentures are due October 1, 1999 and bear interest
at the rate of 16% per annum. The Debentures are secured by a lien on the
Company's assets, however both the payment of the Debentures and the security
interest securing the Debentures are subordinate to the Company's borrowings
from Abelco Finance LLC. Principal and accrued interest on the Debentures is
convertible into Company common stock at a price of $.30 per share. For each
$4.00 principal amount of Debentures purchased, the purchaser received a Warrant
to purchase one share of Company common stock at $1.00 per share, exercisable
for a period of four years.
NOTE 3. DISCONTINUED OPERATIONS
In August 1998 and November 1998, the company formally adopted plans to dispose
of its freestanding physical therapy clinics business segment ("the PT clinic
division") and its fitness equipment business segment ("the equipment
division").
The operating losses during the phase out period (January 1 through June 30)
which included projected shutdown costs and the expected net realizable loss
from the sale of these segments, were recorded as discontinued operations during
the year ended December 31, 1998. During the six months ending June 30, 1999 the
Company accrued an additional loss of $1,425,000 due to actual operating losses
exceeding earlier estimates, changes in the net realizable value of certain
assets, changes in the estimated sales price of the segments and increased
employee severance costs.
In the second quarter ending June 30, 1999, the Company completed the sale of
the majority of the PT clinic division for a sales price of $3,750,000. Net
proceeds from the sale of $2,250,000 were used to reduce the Company's note
payable.
NOTE 4. INCOME TAXES
The provision for income taxes for the second quarter and six months ending June
30, 1999 and 1998 have been offset principally by a reduction in the valuation
allowance for deferred taxes.
NOTE 5. SUBSEQUENT EVENT
On July 2, 1999, the Company closed the sale of the equipment division for a
sales price of $175,000 for the inventory and fixed assets. The proceeds from
the sale were cash of $80,000 and two notes receivable. The first note of
$20,000 is due on July 8, 1999 and bears interest at a rate of 9% if the note is
not paid on the due date. The second note of $75,000 is payable in twelve
monthly installments and bears an interest rate of 9%.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the condensed consolidated statements of operations of the Company:
Three Months Ended
June 30,
-------------------------------------------------------
1999 % 1998 %
----------- ----- ----------- -----
REVENUES $ 6,350,000 100.0 $ 6,235,000 100.0
COSTS OF REVENUES 5,013,000 78.9 4,671,000 74.9
----------- ----- ----------- -----
GROSS PROFIT 1,337,000 21.1 1,564,000 25.1
OPERATING EXPENSES
Salaries 461,000 7.3 389,000 6.2
Selling, general, and administrative 974,000 15.3 795,000 12.8
----------- ----- ----------- -----
1,435,000 22.6 1,184,000 19.0
----------- ----- ----------- -----
OPERATING INCOME (LOSS) (98,000) (1.5) 380,000 6.1
INTEREST EXPENSE (236,000) (3.7) (180,000) (2.9)
OTHER INCOME (EXPENSE) (253,000) (4.0) 88,000 1.4
----------- ----- ----------- -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (587,000) (9.2) 288,000 4.6
INCOME TAXES -- -- (12,000) (0.2)
----------- ----- ----------- -----
INCOME (LOSS) FROM CONTINUING (587,000) (9.2) 300,000 4.8
OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS -- -- (884,000) (14.2)
----------- ----- ----------- -----
NET LOSS $ (587,000) (9.2) $ (584,000) (9.4)
=========== ===== =========== =====
Three Months Ended
June 30,
-------------------------------------------------------
1999 % 1998 %
----------- ----- ----------- -----
REVENUES $ 13,298,000 100.0 $ 12,412,000 100.0
COSTS OF REVENUES 10,195,000 76.7 9,234,000 74.4
------------ ----- ------------ -----
GROSS PROFIT 3,103,000 23.3 3,178,000 25.6
OPERATING EXPENSES
Salaries 939,000 7.1 903,000 7.3
Selling, general, and administrative 1,792,000 13.4 1,463,000 11.8
------------ ----- ------------ -----
2,731,000 20.5 2,366,000 19.1
------------ ----- ------------ -----
OPERATING INCOME 372,000 2.8 812,000 6.5
INTEREST EXPENSE (478,000) (3.6) (281,000) (2.3)
OTHER INCOME (EXPENSE) (207,000) (1.6) 197,000 1.6
------------ ----- ------------ -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (313,000) (2.4) 728,000 5.8
INCOME TAXES 1,000 0.0 -- --
------------ ----- ------------ -----
INCOME (LOSS) FROM CONTINUING (314,000) (2.4) 728,000 5.8
OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS (1,425,000) (10.7) (1,283,000) (10.3)
------------ ----- ------------ -----
NET LOSS $ (1,739,000) (13.1) $ (555,000) (4.5)
============ ===== ============ =====
General. The Company is in the business of providing preventive health care
services and products to corporations and health care organizations. Preventive
health care services are integrated health management services that include the
development, marketing and management of corporate and hospital-based fitness
centers, injury prevention and work-injury management consulting and on-site
physical therapy.
The Company's revenues come from fitness center management and
consulting contracts, fees paid by employers, insurers and others for injury
prevention and work-injury management consulting and physical therapy services
provided to patients at corporate locations. The fitness center management and
consulting contracts provide for specific management, consulting, and program
fees and contain provisions for modification, termination, and non-renewal.
On April 8, 1999, the Company retained Manchester Companies, Inc., a
Minneapolis-based multi-disciplinary professional services firm which provides
investment banking, finance, turnaround and management advisory services to
small and middle market companies. Manchester has assisted with the sale of the
physical therapy clinics and fitness equipment business segments, will
restructure the Company's financing, and assist with the Company's
re-engineering efforts.
Results of Operations for the quarter ended June 30, 1999 compared to the
quarter ended June 30, 1998.
Revenues. Revenues increased $115,000, or 1.8%, to $6,350,000 for the three
months ended June 30, 1999, from $6,235,000 for the period ended June 30, 1998.
Consulting and Management Fee revenues increased $160,000, or 2.9%,
for the three months ended June 30, 1999, compared to the same period in 1998.
The increase was primarily due to the effect of adding new hospital contracts.
Occupational Health and On-Site Physical Therapy revenues decreased
$73,000, or 8.7%, for the three months ended June 30, 1999, compared to the same
period in 1998. The decrease is attributable to a reduction in occupational
health contract revenue.
International Fitness Club Network (IFCN) revenues increased $28,000,
or 144.5% for the three months ended June 30, 1999 compared to the same period
in 1998. IFCN was acquired in June 1998.
Operating Income (Loss). Operating income (loss) decreased $478,000 to a loss of
$98,000 for the three months ended June 30, 1999, from $380,000 for the same
period in 1998. Consulting and Management Fee operating income increased $77,000
from $701,000 for the three months ended June 30, 1998, to $778,000 for the same
period in 1999. The increase was due to the restructuring of the middle
management of the Company's fitness center division. Occupational Health and
On-Site Physical Therapy operating income decreased $141,000 to $44,000 for the
three months ended June 30, 1999, from $185,000 for the same period in 1998. The
decrease was primarily due to the decrease in revenue associated with the
occupational health contracts. IFCN operating income decreased $96,000 from the
same period in 1998 due to the contract renewal cycle.
Corporate Expenses. Corporate expenses increased $318,000 from $502,000 for the
three months ended June 30, 1998, to $820,000 for the same period in 1999. The
increase was due to the investments made to strengthen the management team and
an increase in employee benefits expenses.
Interest Expense. Interest expense of $236,000 for the three months ended June
30, 1999, increased $56,000 from $180,000 for the same period in 1998. The
increase was due to higher average borrowings.
Other Income (expense). Other income (expense) decreased $341,000 from $88,000
income for the three months ended June 30, 1998, to $253,000 expense for the
same period in 1999. The decrease is primarily due to recognizing expenses
associated with preparing fitness center operating systems for Y2K compliance
($295,000).
Income (Loss) From Continuing Operations. The Company's income from continuing
operations decreased $887,000 to a loss of $587,000 or $.05 diluted loss per
share from continuing operations for the three months ended June 30, 1999, from
$300,000 or $.03 diluted income per share from continuing operations for the
same period in 1998. The continuing operations performance and subsequent loss
for the three months ended June 30, 1999 is primarily due to re-engineering one
time costs. It is anticipated that this trend will continue for the remainder of
this financial year with retained business operations becoming normalized
relating to cost levels in the first quarter of 2000.
Discontinued Operations. In August 1998 and November 1998, the Company formally
adopted plans to dispose of its freestanding physical therapy clinics business
segment ("the PT clinic division") and its fitness equipment business segment
("the equipment division").
The operating losses during the phase out period (January 1 through June 30)
which included projected shutdown costs and the expected net realizable loss
from the sale of the divisions, were recorded as discontinued operations during
the year ended December 31, 1998 and adjusted in the quarter ending March
31,1999. In the quarter ending June 30, 1999, the Company completed the sale of
a majority of the PT clinic division for a sales price of $3,750,000. On July 2,
1999, the Company completed the sale of the equipment division for $175,000.
Results of Operations for the six months ended June 30, 1999 compared to the six
months ended June 30, 1998.
Revenues. Revenues increased $886,000, or 7.1%, to $13,298,000 for the six
months ended June 30, 1999, from $12,412,000 for the six months ended June 30,
1998.
Consulting and Management Fee revenues increased $864,000, or 8.2%,
for the six months ended June 30, 1999, compared to the same period in 1998. The
increase was primarily due to the effect of adding a net of five corporate
fitness center sites.
Occupational Health and On-Site Physical Therapy revenues decreased
$381,000, or 20.4%, for the six months ended June 30, 1999, compared to the same
period in 1998. The decrease is attributable to a reduction in occupational
health contract revenue.
International Fitness Club Network (IFCN) revenues were $423,000 for
the six months ended June 30, 1999 compared to $19,000 for the same period in
1998. IFCN was acquired in June 1998.
Operating Income. Operating income decreased $440,000 to $372,000 for the six
months ended June 30, 1999, from $812,000 for the same period in 1998.
Consulting and Management Fee operating income increased $250,000 from
$1,339,000 for the six months ended June 30, 1998, to $1,589,000 for the same
period in 1999. The increase was due to the increase in fitness center contracts
and restructuring of middle management of the fitness center division.
Occupational Health and On-Site Physical Therapy operating income decreased
$369,000 to $107,000 for the six months ended June 30, 1999, from $476,000 for
the same period in 1998. The decrease was primarily due to the decrease in
revenue associated with the occupational health contracts. IFCN operating income
increased $165,000 from the same period in 1998 due to the division being
acquired in the second quarter of 1998.
Corporate Expenses. Corporate expenses increased $487,000 from $999,000 for the
six months ended June 30, 1998, to $1,486,000 for the same period in 1999. The
increase was due to the investments made to strengthen the management team and
higher professional fees.
Interest Expense. Interest expense of $478,000 for the six months ended June 30,
1999, increased $197,000 from $281,000 for the same period in 1998. The increase
was due to higher average borrowings and the cost of borrowing.
Other Income (Expense). Other income (expense) decreased $404,000 from $197,000
income for the six months ended June 30, 1998, to $207,000 expense for the same
period in 1999. The decrease is primarily due to recognizing expenses associated
with preparing fitness center operating systems for Y2K compliance ($295,000).
Income (Loss) From Continuing Operations. The Company's income (loss) from
continuing operations decreased $1,042,000 to a loss of $314,000 or $.02 diluted
loss from continuing operations per share for the six months ended June 30,
1999, from $728,000 or $.07 diluted income per share from continuing operations
for the same period in 1998. The continuing operations performance and
subsequent loss year to date is primarily due to re-engineering one time costs.
It is anticipated that this trend will continue for the remainder of this
financial year with retained business operations becoming normalized relating to
cost levels in the first quarter of 2000.
Discontinued Operations. In August 1998 and November 1998, the Company formally
adopted plans to dispose of its freestanding physical therapy clinics business
segment ("the PT clinic division") and its fitness equipment business segment
("the equipment division").
The operating losses during the phase out period which includes the six
months ending June 30, 1999, included projected shutdown costs and the expected
net realizable loss from the sale of the divisions, were recorded as
discontinued operations during the year ended December 31, 1998. During the six
months ending June 30, 1999, the Company accrued an additional loss of
$1,425,000 due to actual losses exceeding earlier estimates, changes in net
realizable value of certain assets and changes in the estimated sales price of
the divisions.
In the six months ending June 30, 1999, the Company completed the sale
of the majority of the PT clinic division for a sales price of $3,750,000. On
July 2, 1999, the Company completed the sale of the equipment division for
$175,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $(5,389,000) at June 30, 1999,
versus working capital of $(7,714,000) at June 30, 1998. The change was
primarily due to a decrease in short term debt.
The Company has a revolving credit facility with Abelco Finance L.L.C.
and other affiliates of Cerberus Partners, L.P. (the "Lender"). The Company's
ability to draw down on the facility is tied to the Borrowing Base formula which
is based upon the Company's EBITDA (defined as earnings before interest, taxes,
depreciation and amortization), revenues, or collections, whichever is less. The
credit facility is secured by all of the Company's assets, including its
accounts receivable, inventory, equipment, and general intangibles and is
guaranteed in part by the Company's former President and Chief Executive
Officer. The advances under the credit facility accrue 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 is required to pay monthly interest payments on outstanding
borrowings at the prime rate plus 4.5%, with a minimum rate of 13%. The unpaid
interest (2.5%) is added to the principal balance of the facility, and will
accrue interest until paid. The credit facility was originally due July 1999.
The credit facility is 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. As of June 30, 1999, the Company
had $129,530 of availability under its revolving credit facility with Abelco
Finance L.L.C.
On May 10, 1999, the Company and the Lender amended the Credit
Agreement. The amendment included the Lender's consent to the Company's sale of
a majority of the Company's PT clinic division which closed on May 14, 1999, and
reduced the maximum Borrowing Base to $4,950,000, as further reduced each week
commencing May 14, 1999 by 25% of the Company's weekly collections on retained
accounts receivable of the sold PT clinic division (see Exhibit 10.1).
On May 24, 1999, the Company and the Lender further amended the Credit
Agreement. The amendment, as modified by a subsequent letter agreement dated as
of June 1, 1999, included the Lender's consent to the Company's sale of its
equipment division which closed on July 2, 1999, and reduced the maximum
Borrowing Base to $4,830,000, as further reduced (a) monthly commencing July 21,
1999 by 25% of the Company's monthly collections on retained accounts receivable
of the sold equipment division, (b) weekly commencing June 7, 1999 by 40% of
amounts received weekly by the Company from operations of equipment by the
equipment division pending its sale, and (c) by $60,000 upon completion of the
sale of the equipment division and by an additional $10,000 one week after
completion of such sale (see Exhibits 10.2 and 10.3).
On June 30, 1999 the Company and the Lender further amended the Credit
Agreement. The amendment included the Lender's consent to the Company's sale of
an additional clinic of the Company's PT clinic division which closed on June
30, 1999, and reduced the maximum Borrowing Base to $4,730,000 less the
reductions described above (see Exhibit 10.4).
On July 15, 1999 the Company and the Lender further amended the Credit
Agreement to extend the final maturity date from July 17, 1999 to October 16,
1999 (see Exhibit 10.5).
In May 1999, in conjunction with the sale of the PT clinic division,
the Company used the net proceeds of $2,250,000 to reduce its outstanding
revolving credit facility balance. Sources of capital to meet future obligations
in 1999 are anticipated to be cash provided by its ongoing operations, the
refinancing of the existing credit facility, and further asset disposals. The
Company expects to replace its revolving credit facility prior to its extended
due date of October 16, 1999. In order to conserve capital resources, the
Company's policy is to lease its physical facilities. The Company does not
believe that inflation has had a significant impact on the results of its
operations.
Year 2000 Compliance
The Company has initiated a project to prepare its products and
computer systems for the year 2000 impact on its business operations, product
offerings, customers and suppliers. The Company has completed the awareness
phase of the project and is currently in various stages of the assessment,
remediation and internal testing phases. Y2K compliant software has been
installed at 40 of the 150 sites at which the Company maintains information
processing technology and the Company expects to install compliant software at
the balance of the locations by September 30, 1999. Accordingly, management
believes the year 2000 issue will not have a significant impact on its business.
If necessary modification and conversions are not completed on a timely basis,
the year 2000 issue could have an adverse effect on the Company's business. At
this time, the Company believes it is unnecessary to adopt a contingency plan
covering the possibility that the project will not be completed in a timely
manner, but as part of the overall project, the Company will continue to assess
the need for a contingency plan.
The Company is also communicating and working with its significant
vendors, customers and other business partners to minimize year 2000 risks and
protect the Company and its customers from potential service interruptions.
However, the Company could be adversely affected by the failure of third parties
to become year 2000 compliant, including the risk of operational outages due to
disruptions in communications or electrical service. Although the Company
believes the effect of such disruptions would be localized and temporary, there
is no assurance that these or other year 2000 risks will not have a material
financial impact in any future period.
The costs associated with the year 2000 issues are being expensed
during the period in which they are incurred. The financial impact to the
Company of implementing any necessary changes to become year 2000 compliant has
not and is not anticipated to be material to the Company's business. However,
uncertainties that could impact actual costs and timing of becoming year 2000
compliant do exist. Factors that could affect the Company's estimates include,
but are not limited to, the availability and cost of trained personnel, the
ability to identify all systems and programs that are not year 2000 compliant,
the nature and amount of programming necessary to replace or upgrade affected
programs or systems, and the success of the Company's suppliers and customers to
address these issues. The Company will continue to assess and evaluate cost
estimates and target completion dates of the project on a periodic basis.
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. 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.
Risks to the Company include its ability to generate sufficient working capital,
the need for permanent new management, potential changes in workers'
compensation laws, uncertainties regarding government funding of health care,
competition and the lack of barriers to entry into the Company's industry. For a
more complete description, see Management's Discussion and Analysis section of
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On July 2, 1999 the Company entered into an Employment Agreement with
Loren S. Brink pursuant to which Mr. Brink resigned as the Company's President
and Chief Executive Officer. Pursuant to the Employment Agreement, Mr. Brink
will serve as President of the Company's Consulting and Corporate Development
Division at a salary of $130,000 per year plus a bonus equal to 10% of the
Company's profit margin during the first year of customer contracts closed by
Mr. Brink. The term of the Employment Agreement is through December 31, 2001
subject to automatic one-year extensions. In consideration of a two-year
noncompete covenant from Mr. Brink, the Company paid Mr. Brink $180,000.
During the second quarter, the Company appointed Charles J.B. Mitchell
as the Company's Acting Chief Executive Officer, Thomas A. Knox as Acting Vice
President/Strategy, and James L. Nichols as Acting Chief Financial Officer.
The Company and an administrator for the government of Medicare and
Medicaid payments have discussed issues relating to the Company's timeliness of
reporting of costs and identification of the provider of services billed to
Medicare and Medicaid. No issues of overcharging or charging for services not
rendered have been raised but, nonetheless, the Company may possibly be liable
for late fees and other penalties. The amounts at issue are not known at this
time but the Company believes that any such amounts would be immaterial to the
financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K
On June 1, 1999, the Company filed a Current Report on Form 8-K
disclosing the Company's sale of a majority of its PT clinic division.
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, 1999 HEALTH FITNESS CORPORATION
By /s/ Charles J.B. Mitchell
Charles J.B. Mitchell
Acting Chief Executive Officer
(Principal Executive Officer)
By /s/ Robert Peterson
Robert Peterson
Vice President - Finance
(Principal Financial and
Accounting Officer)
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
4.2 Form of Secured Convertible Subordinated Debentures -
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999.
10.1 Amendment No. 9 to Loan and Security Agreement dated as of May
10, 1999 among the Company, the Company subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C.
10.2 Amendment No. 10 to Loan and Security agreement dated as of
May 24, 1999 among the Company, the Company's subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C.
10.3 Letter agreement dated as of June 1, 1999 among Company, the
Company's subsidiaries and Abelco Finance L.L.C. as assignee
of Madeleine L.L.C. modifying Amendment No. 10 to Loan and
Security Agreement.
10.4 Amendment No. 11 to Loan and Security Agreement dated June 30,
1999 among the Company, the Company's subsidiaries and Abelco
Finance L.L.C. as assignee of Madeleine L.L.C.
10.5 Amendment No. 12 to Loan and security Agreement dated July
15,1999 Among the Company, the Company's subsidiaries and
Abelco Finance L.L.C. as assignee of Madeleine L.L.C.
10.6 Employment Agreement dated June 30, 1999 between Company and
Loren S. Brink.
10.7 Retainer Agreement, dated April 7, 1999, between the Company
and Manchester Business Services, Inc.
27.1 Financial Data Schedule for 6-month period ended June 30, 1999
(in electronic version only)