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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 March 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-25064
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HEALTH FITNESS CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
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(State of incorporation (I.R.S. Employer
or organization) 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 May 11, 2001 was:
Common Stock, $.01 par value, 12,165,250 shares
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HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001 and F-1
December 31, 2000
Condensed Consolidated Statements of Operations for the three F-2
months ended March 31, 2001 and 2000
Condensed Consolidated Statements of Cash Flows for the three F-3
months ended March 31, 2001 and 2000
Notes to Condensed 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 5
PART II. OTHER INFORMATION 6
Item 1. Legal Proceedings
Items 2-5. Not Applicable
Item 6. Exhibits and reports on Form 8-K
Signatures 7
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HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2001 2000
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ASSETS
CURRENT ASSETS
Cash $ 202,944 $ 472,930
Trade and other accounts receivable, less allowance
for doubtful accounts of $156,200 and $262,600,
respectively 3,225,446 3,266,277
Prepaid expenses and other 107,533 47,789
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Total current assets 3,535,923 3,786,996
PROPERTY AND EQUIPMENT, net 198,372 257,947
OTHER ASSETS
Goodwill, less accumulated amortization of $2,274,700 5,602,730 5,783,550
and $2,183,400 respectively
Intangible assets, less accumulated amortization of
$445,400 and $551,900, respectively 310,437 493,947
Trade and other notes receivable -- 73,380
Other 3,173 3,448
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$ 9,650,635 $ 10,399,268
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable $ 1,764,815 $ 2,685,802
Current maturities of long-term obligations 92,745 101,850
Trade accounts payable 225,208 357,117
Accrued salaries, wages, and payroll taxes 1,072,138 927,193
Other accrued liabilities 640,173 842,783
Deferred revenue 1,192,325 1,264,674
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Total current liabilities 4,987,404 6,179,419
LONG-TERM OBLIGATIONS, less current maturities 3,859 24,954
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $0.01 par value; 25,000,000 shares
authorized; 12,165,250 shares issued and outstanding 121,653 121,653
Additional paid-in capital 16,928,522 16,921,503
Accumulated deficit (12,390,803) (12,848,261)
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4,659,372 4,194,895
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$ 9,650,635 $ 10,399,268
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The accompanying notes are an integral part of the financial statements.
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HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
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2001 2000
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REVENUE $ 6,426,456 $ 6,738,891
COST OF REVENUE 5,059,471 4,944,077
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GROSS PROFIT 1,366,985 1,794,814
OPERATING EXPENSES
Salaries 484,761 517,952
Selling, general, and administrative 492,501 622,520
Re-engineering -- 87,560
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Total operating expenses 977,262 1,228,032
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OPERATING INCOME 389,723 566,782
OTHER INCOME
Interest expense (129,861) (164,852)
Gain on sale of subsidiary 228,613 --
Other, net (1,017) 20,857
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INCOME BEFORE INCOME TAXES 487,458 422,787
INCOME TAXES 30,000 (4,774)
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NET INCOME $ 457,458 $ 427,561
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NET INCOME PER SHARE:
Basic $ 0.04 $ 0.04
Diluted 0.03 0.03
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 12,165,250 12,121,756
Diluted 12,690,417 12,523,255
The accompanying notes are an integral part of the financial statements.
F-2
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HEALTH FITNESS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 457,458 $ 427,561
Adjustments to reconcile net income to net cash
provided by operating activities:
Common stock and warrants issued for services
and compensation 7,019 6,250
Depreciation and amortization 186,853 200,070
Amortization of financing costs 29,083 --
Gain on sale of subsidiary (228,613) --
Changes in operating assets and liabilities:
Trade accounts and notes receivable 107,608 746,894
Prepaid expenses and other (61,844) (42,581)
Other assets 275 72,546
Trade accounts payable (111,849) (359,433)
Accrued liabilities and other (14,314) 84,599
Deferred revenue (20,618) (78,761)
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Net cash provided by operating activities 351,058 1,057,145
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (8,412) (21,274)
Net proceeds from sale of equipment -- 2,700
Net proceeds from sale of subsidiary 368,555 --
Payments in connection with earn-out provisions - (55,550)
Payment for non-compete agreement (30,000) --
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Net cash provided by (used in) investing activities 330,143 (74,124)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 6,674,870 6,809,700
Repayments of line of credit (7,595,857) (7,677,822)
Repayment of long term debt (30,200) (120,161)
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Net cash used in financing activities (951,187) (988,283)
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NET DECREASE IN CASH (269,986) (5,262)
CASH AT BEGINNING OF PERIOD 472,930 139,852
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CASH AT END OF PERIOD $ 202,944 $ 134,590
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The accompanying notes are an integral part of the financial statements.
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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 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 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 three months ended March 31, 2001 are not necessarily indicative of the
operating results for the year ending December 31, 2001. The unaudited condensed
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 condensed consolidated financial
statements as of and for the three months ended March 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 net worth levels after March 31, 2001. Available credit under the loan
is based upon certain profitability and cash collection multiples. As of March
31, 2001, the available credit was approximately $2,070,000. 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 March 31, 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.
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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.
While consumers of these services are typically corporate employees and hospital
customers, revenues are generated almost exclusively through business to
business, contractual relationships. 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 MARCH 31, 2001 COMPARED TO THE
QUARTER ENDED MARCH 31, 2000.
REVENUES. Revenues decreased $312,000 to $6,426,000 for the three months ended
March 31, 2001, from $6,739,000 for the three months ended March 31, 2000. This
decrease is primarily attributed to a $327,000 decrease in revenue from the
Company's International Fitness Club Network (IFCN), which was sold by the
Company in January 2001. Consulting and Management Fee revenues increased
$34,000, or .5%, for the three months ended March 31, 2001, compared to the same
period in 2000. This increase is primarily attributed to the addition of fitness
management contracts. Finally, On-Site Physical Therapy revenues decreased
$19,000, or 9.5%, for the quarter ended March 31, 2001, compared to the same
period in 2000 as a result of fewer contract opportunities.
OPERATING INCOME. Operating income decreased $177,000 to $390,000 for the three
months ended March 31, 2001, from $567,000 for the same period in 2000. This
decrease is primarily attributed to the elimination of approximately $130,000 of
operating income associated with the sale of IFCN, which occurred effective on
January 1, 2001. The remaining decrease of $47,000 is primarily attributed to an
increase in costs associated with managing the Company's corporate fitness
facilities.
OTHER INCOME AND EXPENSE. Interest expense decreased $35,000 to $130,000 for the
three months ended March 31, 2001, compared to $165,000 for the same period in
2000. This decrease is primarily attributed to decreased levels of borrowing,
which lowered the amount of fees and interest paid on the Company's line of
credit. Also, the Company's cost of borrowed funds decreased from 13.25% for the
first quarter of 2000, compared to 11.50% for the first quarter of 2001.
Finally, the Company recorded a $229,000 gain on sale of the IFCN subsidiary.
INCOME TAXES. Income tax expense increased $35,000 to an expense of $30,000 for
the three months ended March 31, 2001 compared to a benefit of $5,000 for the
same period in 2000 due to minimum state and federal income taxes anticipated in
2001. The Company has offset the majority of income tax liability with the
recognition of previously incurred net operating loss carryforwards.
NET INCOME. As a result of the above, net income for the three months ended
March 31, 2001 was $457,000, a $30,000 increase from the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital of $1,451,000 at March 31, 2001, versus
negative working capital of $3,132,000 at March 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
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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 March 31, 2001 the available
credit was approximately $2,070,000. 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 March 31, 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. 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 the
Management's Discussion and Analysis section of 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page following signatures
(b) Reports on Form 8-K
On March 15, 2001, the Company filed a current form 8-K to announce deadlines
for submitting proxy proposals relating to its Annual Meeting on May 16, 2001.
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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: May 15, 2001 HEALTH FITNESS CORPORATION
By /s/ Jerry Noyce
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Jerry Noyce
Chief Executive Officer
(Principal Executive Officer)
By /s/ Wesley Winnekins
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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
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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 Agreement of Purchase and Sale of Stock of David W. Pickering,
Inc. dated January 1, 2001
11.0 Statement re Computation of per Share Earnings