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 September 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 November 5, 1999 was:
Common Stock, $.01 par value, 12,112,015 shares
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $ 209,648 $ 29,598
Trade accounts and notes receivable, less allowance for doubtful
accounts of $261,071 and $1,101,211 3,797,573 4,344,438
Inventories 2,365 26,459
Prepaid expenses and other 315,776 61,145
------------ ------------
Total current assets 4,325,362 4,461,640
PROPERTY AND EQUIPMENT, net 699,416 1,049,626
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,664,287 and $1,580,098,
respectively 6,200,464 7,568,809
Noncompete agreements, less accumulated amortization of $267,590 and $374,478,
respectively 259,260 592,373
Copyrights, less accumulated amortization of $0 and $85,608, respectively -- 584,392
Trade names, less accumulated amortization of $6,222 and $20,613, respectively 63,778 189,386
Contracts, less accumulated amortization of $53,333 and $23,334, respectively 26,667 56,667
Trade accounts and notes receivable, less allowance for doubtful accounts of
$0 and $29,843, respectively 406,716 922,966
Deferred financing costs, less accumulated amortization of $1,421,342 and
$836,082, respectively -- 585,260
Other 93,811 65,983
Net assets of discontinued operations (4,034) 4,537,716
------------ ------------
$ 12,071,440 $ 20,614,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balance $ -- $ 47,099
Notes payable 3,128,817 6,939,692
Current maturites of long-term debt 454,330 572,227
Trade accounts payable 1,070,759 2,335,509
Accrued salaries, wages, and payroll taxes 1,183,176 1,405,382
Accrued earn-out 117,029 309,962
Other accrued liabilities 901,467 631,525
Deferred revenue 1,220,195 1,629,192
------------ ------------
Total current liabilities 8,075,773 13,870,588
LONG-TERM DEBT, less current portion 572,979 900,148
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;
11,884,413 and 12,112,015 shares issued and
outstanding, respectively 121,120 118,844
Additional paid-in capital 16,855,438 16,725,126
Accumulated deficit (13,631,392) (10,951,526)
------------ ------------
3,345,166 5,892,444
Stockholder note and interest receivable (37,478) (48,362)
------------ ------------
3,307,688 5,844,082
------------ ------------
$ 12,071,440 $ 20,614,818
============ ============
See notes to condensed consolidated financial statements.
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ending Nine Months Ending
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
REVENUE $ 6,467,158 $ 6,713,148 $ 19,765,324 $ 19,125,196
COSTS OF REVENUE 4,982,471 5,109,418 15,177,948 14,343,587
------------ ------------ ------------ ------------
GROSS PROFIT 1,484,687 1,603,730 4,587,376 4,781,609
OPERATING EXPENSES:
Salaries 456,303 566,050 1,395,302 1,469,081
Selling, general, and administrative 967,531 1,169,692 2,487,259 2,632,654
Re-engineering 333,090 -- 605,344 --
------------ ------------ ------------ ------------
Total operating expenses 1,756,924 1,735,742 4,487,905 4,101,735
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (272,237) (132,012) 99,471 679,874
INTEREST EXPENSE (302,522) (202,425) (780,146) (483,290)
OTHER INCOME (EXPENSE) (360,719) 74,370 (567,778) 271,841
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (935,478) (260,067) (1,248,453) 468,425
INCOME TAXES 5,582 29 6,413 29
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (941,060) (260,096) (1,254,866) 468,396
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS
Loss from operations of Physical Therapy
Clinic division and Equipment division -- (1,393,058) (1,425,000) (2,676,230)
Loss on disposal of Physical Therapy Clinic
division and Equipment division (less applicable taxes) -- -- -- --
------------ ------------ ------------ ------------
LOSS FROM DISCONTINUED OPERATIONS -- (1,393,058) (1,425,000) (2,676,230)
------------ ------------ ------------ ------------
NET LOSS $ (941,060) $ (1,653,154) $ (2,679,866) $ (2,207,834)
============ ============ ============ ============
INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Basic $ (0.08) $ (0.02) $ (0.10) $ 0.04
Diluted (0.08) (0.02) (0.10) 0.04
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic $ -- $ (0.12) $ (0.12) $ (0.25)
Diluted -- (0.12) (0.12) (0.25)
NET LOSS PER SHARE:
Basic $ (0.08) $ (0.14) $ (0.22) $ (0.21)
Diluted (0.08) (0.14) (0.22) (0.21)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 11,982,132 11,769,808 11,939,001 10,754,077
Diluted 11,982,132 11,769,808 12,383,445 10,754,077
See notes to condensed consolidated financial statements.
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,679,866) $(2,207,831)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,382,621 1,239,569
Discontinued operations 5,168,710 (919,640)
Loss on disposition of assets 369,480
Reduction in asset book value 132,060
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable 513,171 (902,835)
Inventories (3,181) 336
Prepaid expenses and other (255,744) 112,656
Other assets 97,172 139,280
Trade accounts payable and checks written in excess of bank balance (1,311,849) 51,081
Accrued liabilities and other 70,733 (1,026,753)
Deferred revenue 73,467 (158,776)
----------- -----------
Net cash provided by (used in) operating activities 3,424,714 (3,540,853)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (99,409) (64,446)
Net proceeds from sale of property 1,298,000 115
Payments for acquisitions, net of liabilities assumed (230,472)
Collection of non-trade notes receivable 25,000 337,868
Payments in connection with earn-out provisions (391,925) (587,883)
----------- -----------
Net cash provided by (used in) investing activities 831,666 (544,818)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit (3,810,875) 5,514,295
Proceeds from issuance of subordinated debt 115,000 --
Repayment of long term debt (445,066) (3,562,264)
Payment of financing costs -- (992,595)
Proceeds from private placement of equity -- 2,785,024
Proceeds from issuance of common stock 53,727 249,651
Advances on notes receivable (4,316) (5,279)
Payments received on notes receivable 15,200 15,200
----------- -----------
Net cash provided by (used in) financing activities (4,076,330) 4,004,032
----------- -----------
NET INCREASE (DECREASE) IN CASH 180,050 (81,639)
CASH AT BEGINNING OF YEAR 29,598 81,639
----------- -----------
CASH AT END OF PERIOD $ 209,648 $ 0
=========== ===========
See notes to condensed consolidated financial statements.
HEALTH FITNESS CORPORATION
NOTES TO CONDENSED 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 third quarter and nine
months ended September 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 third quarter and nine months ended September 30, 1998 to
conform to the presentation used in 1999. Such reclassifications had no effect
on net income or stockholders' equity as previously reported.
NOTE 2. FINANCING
During the nine months ended September 30, 1999, the Company sold $115,000
principal amount of Secured Convertible Subordinated Debentures ("Debentures")
to three accredited investors. The Debentures 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 Ableco 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.
The Debentures were orginally due October 1, 1999, however all parties have
agreed to extend the conversion period and maturity of the Debentures to
coincide with the maturity of the Ableco debt.
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, 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. In the first quarter, 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.
In the third quarter ending September 30, 1999, the Company completed 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, which was due on July 8, 1999, bears
interest at a rate of 9%. The second note of $75,000 is payable in twelve
monthly installments and bears an interest rate of 9%.
NOTE 4. INCOME TAXES
The provision for income taxes for the third quarter and nine months ending
September 30, 1999 and 1998 have been offset principally by a valuation
allowance for deferred taxes.
NOTE 5. SALE OF ASSETS
The Company completed the sale of assets of the Isernhagen and PTPA divisions on
August 31, 1999 for a sales price of $1,550,000. The sale generated cash
proceeds of $1,298,000 of which $1,050,000 was used to reduce the Company's note
payable to Ableco Finance.
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
September 30,
-------------------------------------------------------
1999 % 1998 %
----------- ----- ----------- -----
REVENUE $ 6,467,000 100.0 $ 6,713,000 100.0
COSTS OF REVENUES 4,982,000 77.0 5,109,000 76.1
----------- ----- ----------- -----
GROSS PROFIT 1,485,000 23.0 1,604,000 23.9
OPERATING EXPENSES
Salaries 456,000 7.1 566,000 8.4
Selling, general, and administrative 968,000 15.0 1,170,000 17.4
Re-engineering 333,000 5.2 -- --
----------- ----- ----------- -----
1,757,000 27.2 1,736,000 25.8
----------- ----- ----------- -----
OPERATING LOSS (272,000) (4.2) (132,000) (1.9)
INTEREST EXPENSE (302,000) (4.7) (202,000) (3.0)
OTHER INCOME (EXPENSE) (361,000) (5.6) 74,000 1.1
----------- ----- ----------- -----
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (935,000) (14.5) (260,000) (3.8)
INCOME TAXES (6,000) (.1) -- --
----------- ----- ----------- -----
LOSS FROM CONTINUING
OPERATIONS (941,000) (14.6) (260,000) (3.8)
DISCONTINUED OPERATIONS -- -- (1,393,000) (20.8)
----------- ----- ----------- -----
NET LOSS $ (941,000) (14.6) $(1,653,000) (24.6)
----------- ----- ----------- -----
Nine Months Ended
September 30,
---------------------------------------------------------
1999 % 1998 %
------------ ----- ----------- -----
REVENUE $ 19,765,000 100.0 $ 19,125,000 100.0
COSTS OF REVENUE 15,178,000 76.8 14,344,000 75.0
------------ ----- ----------- -----
GROSS PROFIT 4,587,000 23.2 4,781,000 25.0
OPERATING EXPENSES
Salaries 1,395,000 7.1 1,469,000 7.7
Selling, general, and administrative 2,487,000 12.6 2,633,000 13.8
Re-engineering 605,000 3.0 -- --
------------ ----- ----------- -----
4,488,000 22.7 4,102,000 21.5
------------ ----- ----------- -----
OPERATING INCOME 99,000 .5 679,000 3.5
INTEREST EXPENSE (780,000) (3.9) (483,000) (2.5)
OTHER INCOME (EXPENSE) (568,000) (2.9) 272,000 1.4
------------ ----- ----------- -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (1,249,000) (6.3) 468,000 2.4
INCOME TAXES (6,000) 0.0 -- --
------------ ----- ----------- -----
INCOME (LOSS) FROM CONTINUING
OPERATIONS (1,255,000) (6.3) 468,000 2.4
LOSS FROM DISCONTINUED OPERATIONS (1,425,000) (7.2) (2,676,000) (14.0)
------------ ----- ----------- -----
NET LOSS $ (2,680,000) (13.5) $ (2,208,000) (11.6)
============ ===== =========== =====
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, occupational health and on-site physical therapy, and fitness club
network memberships.
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 and the sale of
the assets of the Isernhagen and PTPA divisions. They will continue to assist in
restructuring the Company's financing and with the Company's other
re-engineering efforts, as well as exploring all strategic options available to
the Company.
Results of Operations for the quarter ended September 30, 1999 compared to the
quarter ended September 30, 1998.
Revenues. Revenues decreased $246,000, or 3.7%, to $6,467,000 for the three
months ended September 30, 1999, from $6,713,000 for the period ended September
30, 1998.
Consulting and Management Fee revenues increased $39,000, or 0.7%,
for the three months ended September 30, 1999, compared to the same period in
1998. The increase was primarily due to the effect of adding new management
contracts.
Occupational Health and On-Site Physical Therapy revenues decreased
$319,000, or 35.4%, for the three months ended September 30, 1999, compared to
the same period in 1998. The decrease is attributable to a reduction in
occupational health contract revenue and the sale of the assets of the PTPA and
Isernhagen divisions on August 31, 1999.
International Fitness Club Network (IFCN) revenues increased $34,000,
or 37.4% for the three months ended September 30, 1999 compared to the same
period in 1998. The increase was due to a higher level of corporate memberships.
Operating Income (Loss). Operating income (loss) decreased $140,000 to a loss of
$272,000 for the three months ended September 30, 1999, from a loss of $132,000
for the same period in 1998. Consulting and Management Fee contribution to
operating income increased $329,000 from $465,000 for the three months ended
September 30, 1998, to $794,000 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 contribution
to operating income decreased $107,000 to $57,000 for the three months ended
September 30, 1999, from $164,000 for the same period in 1998. The decrease was
primarily due to the sale of the assets of the PTPA and Isernhagen divisions.
IFCN contribution to operating income decreased $45,000 to a loss of $68,000 for
the three months ended September 30, 1999, from a loss of $23,000 for the same
period in 1998 due to the recognition of extraordinary expenses. Corporate
expenses increased $317,000 from $738,000 for the three months ended September
30, 1998, to $1,055,000 for the same period in 1999. The increase was primarily
due to consulting and noncompete expenses incurred to re-engineer the operations
of the core business and disposal of non-strategic business assets. It is
anticipated that the Company will incur additional costs related to
re-engineering.
Interest Expense. Interest expense of $303,000 for the three months ended
September 30, 1999, represented an increase of $101,000 from $202,000 for the
same period in 1998. The increase was due to higher average borrowings.
Other Income (expense). Other income (expense) decreased $435,000 from $74,000
income for the three months ended September 30, 1998, to $361,000 expense for
the same period in 1999. The decrease is primarily due to a loss on sale of the
assets of the PTPA and Isernhagen divisions ($368,000).
Income (Loss) From Continuing Operations. As a result of the above, the
Company's income from continuing operations decreased $681,000 to a loss of
$941,000 or $(.08) diluted loss per share from continuing operations for the
three months ended September 30, 1999, from $260,000 or $(.02) diluted loss per
share from continuing operations for the same period in 1998.
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 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 September 30, 1999, the Company completed the sale of the
equipment division for $175,000.
Results of Operations for the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998.
Revenues. Revenues increased $640,000, or 3.3%, to $19,765,000 for the nine
months ended September 30, 1999, from $19,125,000 for the nine months ended
September 30, 1998.
Consulting and Management Fee revenues increased $903,000, or 5.6%,
for the nine months ended September 30, 1999, compared to the same period in
1998. The increase was primarily due to the effect of adding a net of 5 hospital
fitness center sites.
Occupational Health and On-Site Physical Therapy revenues decreased
$700,000, or 25.3%, for the nine months ended September 30, 1999, compared to
the same period in 1998. The decrease is attributable to a reduction in
occupational health contract revenue and the sale of the PTPA and Isernhagen
divisions on August 31, 1999.
International Fitness Club Network (IFCN) revenues increased $437,000
to $547,000 for the nine months ended September 30, 1999 from $110,000 for the
same period in 1998. IFCN was acquired in June 1998.
Operating Income. Operating income decreased $580,000 to $99,000 for the nine
months ended September 30, 1999, from $680,000 for the same period in 1998.
Consulting and Management Fee contribution to operating income increased
$579,000 from $1,804,000 for the nine months ended September 30, 1998, to
$2,383,000 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 contribution
to operating income decreased $476,000 to $164,000 for the nine months ended
September 30, 1999, from $640,000 for the same period in 1998. The decrease was
primarily due to the decrease in revenue associated with the occupational health
contracts. IFCN contribution to operating income increased $120,000 to $94,000
from a loss of $26,000 for the same period in 1998 due to the division being
acquired in the second quarter of 1998. Corporate expenses increased $803,000
from $1,737,000 for the nine months ended September 30, 1998, to $2,541,000 for
the same period in 1999. The increase was primarily due to consulting and
noncompete expenses incurred to re-engineer the operations of the core business
and disposal of non-strategic business assets. It is anticipated that the
Company will incur additional costs related to re-engineering.
Interest Expense. Interest expense of $780,000 for the nine months ended
September 30, 1999, increased $297,000 from $483,000 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 $840,000 from $272,000
income for the nine months ended September 30, 1998, to $568,000 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,
loss on the sale of the assets of the PTPA and Isernhagen divisions and
decreased collection of previously written off accounts receivable.
Income (Loss) From Continuing Operations. As a result of the above, the
Company's income (loss) from continuing operations decreased $1,723,000 to a
loss of $1,255,000 or $(.10) diluted loss from continuing operations per share
for the nine months ended September 30, 1999, from $468,000 or $.04 diluted
income per share from continuing operations for the same period in 1998.
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, 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 nine months ending September 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 three 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 $(3,750,000) at September 30, 1999,
versus working capital of $(8,370,000) at September 30, 1998. The change was
primarily due to a decrease in short term debt.
The Company has a revolving credit facility with Ableco 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 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 September 30, 1999, the Company had $344,180 of availability under its
revolving credit facility with Ableco 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.
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.
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.
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.
On September 22, 1999 the Company and the Lender further amended the
Credit Agreement. The amendment included the Lender's consent to the Company's
sale of Preferred Therapy Providers of America and Isernhagen & Associates which
closed on September 22, 1999, and reduced the maximum Borrowing Base to
$3,600,000 less the reductions described above (see Exhibit 10.1).
On October 16, 1999 the Company and the Lender further amended the
Credit Agreement to extend the final maturity date from October 16, 1999 to
January 14, 2000 (see Exhibit 10.2).
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. 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. Year 2000 compliant software has been
installed at the majority of sites at which the Company maintains information
processing technology and the Company expects to install compliant software at
the 20 remaining locations by December 31, 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
One-Hundred Twenty Thousand shares of common stock were issued to
Dennis and Susan Isernhagen in partial satisfaction of the Company's obligation
to issue $500,000 of Company stock in connection with the purchase of Isernhagen
Limited and Isernhagen & Associates. Such shares were issued in reliance on
Section 4(2) of the Securities Act of 1933.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K
No Forms 8-K were filed by the Company during the quarter ended
September 30, 1999.
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: November 15, 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.
4.3 Extension of Secured Convertible Subordinated Debebtures dated
as of October 1, 1999 among the Company and Debenture holders.
10.1 Amendment No. 13 to Loan and Security Agreement dated as of
September 22, 1999 among the Company, the Company subsidiaries
and Ableco Finance L.L.C. as assignee of Madeleine L.L.C.
10.2 Consent and Amendment No. 14 to Loan and Security agreement
dated as of October 16, 1999 among the Company, the Company's
subsidiaries and Ableco Finance L.L.C. as assignee of
Madeleine L.L.C.
27.1 Financial Data Schedule for 9-month period ended September 30,
1999 (in electronic version only)