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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________________ to _____________________
Commission file number: 0-25064
---------------------
HEALTH FITNESS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
--------------------------------------------------------------------------------
(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)
(952) 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 9, 2001 was:
Common Stock, $.01 par value, 12,265,250 shares
HEALTH FITNESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and F-1
December 31, 2000
Consolidated Statements of Earnings for the three and nine F-2
months ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the nine F-3
months ended September 30, 2001 and 2000
Notes to Consolidated Financial Statements F-4
Item 2. Management's Discussion and Analysis of Financial Condition 3
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 5
PART II. OTHER INFORMATION 6
Item 1. Legal Proceedings
Items 2-3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Not Applicable
Item 6. Exhibits and reports on Form 8-K
Signatures 8
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
--------------------------------------------------------------------------------
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current Assets
Cash $ 55,041 $ 472,930
Trade and other accounts receivable, less allowance for
doubtful accounts of $159,400 and $262,600, respectively 3,496,435 3,266,277
Prepaid expenses and other 122,756 47,789
------------ ------------
Total current assets 3,674,232 3,786,996
Property and Equipment, net 200,632 257,947
Other Assets
Goodwill, less accumulated amortization of
$2,494,600 and $2,183,400, respectively 5,382,821 5,783,550
Intangible assets, less accumulated amortization of
$561,200 and $551,900, respectively 244,639 493,947
Trade and other notes receivable -- 73,380
Other 778 3,448
------------ ------------
$ 9,503,102 $ 10,399,268
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Note payable $ 1,456,146 $ 2,685,802
Current maturities of long-term obligations 45,397 101,850
Trade accounts payable 155,753 357,117
Accrued salaries, wages, and payroll taxes 1,117,900 927,193
Other accrued liabilities 412,489 842,783
Deferred revenue 1,195,997 1,264,674
------------ ------------
Total current liabilities 4,383,682 6,179,419
Long-term Obligations, less current maturities -- 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;
12,265,250 and 12,165,250 shares issued and outstanding,
respectively 122,653 121,653
Additional paid-in capital 16,982,522 16,921,503
Accumulated deficit (11,985,755) (12,848,261)
============ ============
5,119,420 4,194,895
------------ ------------
$ 9,503,102 $ 10,399,268
============ ============
The accompanying notes are an integral part of the financial statements
F-1
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues $ 6,356,489 $ 6,495,863 $ 19,361,661 $ 19,520,005
Cost of Revenues 4,837,067 5,020,621 14,987,667 14,765,113
------------ ------------ ------------ ------------
Gross Profit 1,519,422 1,475,242 4,373,994 4,754,892
Operating Expenses
Salaries 595,037 451,212 1,609,431 1,436,434
Selling, general, and administrative 601,416 563,915 1,705,471 1,742,320
Re-engineering -- 167,342 -- 321,769
------------ ------------ ------------ ------------
Total operating expenses 1,196,453 1,182,469 3,314,902 3,500,523
------------ ------------ ------------ ------------
Operating Profit 322,969 292,773 1,059,092 1,254,369
Other Income (Expense)
Interest expense (108,188) (185,687) (354,955) (551,529)
Gain on sale of subsidiary -- -- 228,613 --
Other, net (16,736) (596) (11,988) 29,138
------------ ------------ ------------ ------------
Earnings Before Income Taxes 198,045 106,490 920,762 731,978
Income Taxes 15,169 28,622 58,256 23,759
------------ ------------ ------------ ------------
Net Earnings $ 182,876 $ 77,868 $ 862,506 $ 708,219
============ ============ ============ ============
Net Earnings Per Share:
Basic $ 0.01 $ 0.01 $ 0.07 $ 0.06
Diluted $ 0.01 $ 0.01 $ 0.07 $ 0.06
Weighted Average Common Shares Outstanding
Basic 12,264,163 12,272,792 12,198,583 12,133,675
Diluted 12,503,377 12,273,301 12,400,063 12,146,344
The accompanying notes are an integral part of the financial statements.
F-2
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
Nine Months Ended
September 30,
-------------------------------
2001 2000
----------- -----------
Cash Flows From Operating Activities:
Net earnings $ 862,506 $ 708,219
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Common stock and warrants issued for services and compensation 62,019 --
Depreciation and amortization 557,238 627,591
Amortization of financing costs 87,249 26,667
Gain on sale of subsidiary (228,613) --
Changes in operating assets and liabilities:
Trade accounts and notes receivable (163,381) 35,836
Prepaid expenses and other (77,067) (77,401)
Other assets 2,670 74,414
Trade accounts payable (181,304) (427,502)
Accrued liabilities and other (196,239) 12,504
Deferred revenue (16,945) (218,525)
----------- -----------
Net cash provided by operating activities 708,133 761,803
Cash Flows From Investing Activities:
Purchase of property and equipment (103,514) (48,217)
Net proceeds from sale of equipment -- 2,700
Net proceeds from sale of subsidiary 368,555 --
Payments in connection with earn-out provisions -- (203,541)
Payments for non-compete agreement (30,000) (60,000)
----------- -----------
Net cash provided by (used in) investing activities 235,041 (309,058)
Cash Flows From Financing Activities:
Net borrowings (payments) under line of credit (1,229,656) 29,833
Proceeds from issuance of common stock -- 12,471
Payment on subordinated notes payable -- (115,000)
Payment of financing costs (50,000) (226,831)
Repayment of long term debt (81,407) (195,863)
----------- -----------
Net cash used in financing activities (1,361,063) (495,390)
----------- -----------
Net Decrease in Cash (417,889) (42,645)
Cash at Beginning of Period 472,930 139,852
----------- -----------
Cash at End of Period $ 55,041 $ 97,207
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-3
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. They should be read in conjunction
with the annual financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000. In the opinion of management,
the interim consolidated financial statements include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the results for interim periods presented. Operating results for the three and
nine months ended September 30, 2001 are not necessarily indicative of the
operating results for the year ending December 31, 2001. The unaudited
consolidated balance sheet as of December 31, 2000 has been derived from the
audited balance sheet as of that date.
Certain reclassifications have been made to the consolidated financial
statements as of and for the three and nine months ended September 31, 2000.
Such reclassifications had no effect on net earnings or stockholders' equity as
previously reported.
NOTE 2. FINANCING
The Company maintains a credit agreement with Coast Business Credit for a $5.0
million working capital facility: the facility bears interest at prime plus 3.0%
(effective rate of 9.50% and 12.50% at September 30, 2001 and December 31,
2000), with future reductions based on the achievement of certain tangible net
worth levels, and expires in July 2003. Available credit under the loan is based
upon certain profitability and cash collection multiples. As of September 30,
2001, the available credit was approximately $1,738,000. 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 September 30, 2001.
NOTE 3. INCOME TAXES
Income taxes were calculated based on management's estimate of the Company's
effective tax rate. Income tax expense represents minimum state income taxes as
well as federal taxes due because of alternative minimum tax calculations.
NOTE 4. SALE OF SUBSIDIARY
Effective January 1, 2001, the Company sold its subsidiary, International
Fitness Club Network (IFCN). The subsidiary was in the business of organizing
and maintaining a network of commercial fitness and health clubs and marketing
memberships in such clubs to employers and insurance companies. The Company
received net proceeds of approximately $369,000, net of selling costs of
approximately $56,000, and recorded a gain on sale of approximately $229,000.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability
o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
F-4
o effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator
The Company is currently reviewing the effect of these Statements on its
financial statements.
F-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL. Health Fitness Corporation and its wholly owned subsidiaries (the
"Company") provides fitness and wellness management services and products to
corporations, hospitals, communities, and universities primarily located in the
United States and Canada. Fitness and wellness management services include the
development, marketing, and management of corporate, hospital, and community
based fitness centers, health related programming, and on-site physical therapy.
Effective January 1, 2001, the Company sold its IFCN subsidiary, which
maintained and sold memberships in a network of independently owned and operated
commercial fitness and health clubs.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO THE
QUARTER ENDED SEPTEMBER 30, 2000.
REVENUES. Revenues decreased $140,000 or 2.1% to $6,356,000 for the three months
ended September 30, 2001, from $6,496,000 for the same period in 2000. This
decrease is attributed to $223,000 of revenue that was lost from the termination
of a multi-site contract at the beginning of the quarter. This decrease in
revenue was partially offset by revenue derived from new management contracts
secured during the latter half of 2000.
COST OF REVENUES. Cost of revenues, which is primarily comprised of wages and
benefits for fitness center staff, decreased $184,000 to $4,837,000, or 76.1% of
revenues for 2001, from $5,021,000, or 77.3% of revenues for 2000. This decrease
is primarily attributed to the decrease in revenue explained previously. The
decrease in cost of revenues as a percentage of revenues is primarily attributed
to contract margin improvements.
OPERATING EXPENSES. Operating expenses consist primarily of administrative wages
and benefits as well as selling, general and administrative operating expenses.
For the three months ended September 30, 2001, operating expenses increased
$14,000 to $1,196,000 from $1,182,000 for the same period of 2000. After
subtracting from 2000 operating expenses a one-time charge of $116,000 relating
to the Company's intent to merge with Healthtrax, operating expenses increased
approximately $130,000. This increase is attributed to investments the Company
has made, and will continue to make, in new personnel as well as sales and
marketing programs to position for future growth opportunities.
OTHER INCOME AND EXPENSE. Interest expense decreased $78,000 to $108,000 for the
three months ended September 30, 2001, compared to $186,000 for the same period
in 2000. This decrease is primarily attributed to a decrease in the interest
rate on the Company's borrowings, as well as decreased levels of borrowing.
INCOME TAXES. Income tax expense increased $13,000 for the three months ended
September 30, 2001 compared to the same period in 2000 due to minimum state and
federal income taxes anticipated in 2001. The Company has offset the majority of
its current income tax liability with the reduction of a portion of the
valuation allowance previously recorded to offset net operating loss benefits..
NET EARNINGS. As a result of the above, net earnings for the three months ended
September 30, 2001 increased $105,000 to $183,000 from $78,000 for the same
period in 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2000.
REVENUES. Revenues decreased $158,000 or .8% to $19,362,000 for the nine months
ended September 30, 2001, from $19,520,000 for the same period in 2000. This
decrease is primarily attributed to a $540,000 loss of revenue from the
Company's former IFCN subsidiary, as well as the $223,000 that was lost at the
beginning of the third quarter due to a terminated contract. Offsetting these
decreases are revenue increases of approximately $605,000 related to new
management contracts the Company has secured since the latter part of 2000.
COST OF REVENUES. Cost of revenues increased $223,000 to $14,988,000, or 77.4%
of revenues for 2001, from $14,765,000, or 75.6% of revenues for 2000. This
increase is primarily attributed to an increase of approximately $496,000 in
staff wages and benefits related to new management contracts. Offsetting this
increase was a decrease in costs of approximately $325,000 related to the
Company's former IFCN subsidiary. The increase in cost of revenues as a
3
percentage of revenues from 2000 to 2001 is primarily attributed to the former
IFCN subsidiary, whose ratio of costs to revenue through September 30, 2000 was
60.2%.
OPERATING EXPENSES. For the nine months ended September 30, 2001, operating
expenses decreased $186,000 to $3,315,000 from $3,501,000 for the same period of
2000. After subtracting from 2000 operating expenses a one-time charge of
$116,000 relating to the Company's intent to merge with Healthtrax , operating
expenses from 2000 to 2001 decreased approximately $70,000. However, this
decrease is beginning to reverse itself as the Company has made, and will
continue to make, investments in personnel as well as sales and marketing
programs to position for future growth opportunities.
OTHER INCOME AND EXPENSE. Interest expense decreased $197,000 to $355,000 for
the nine months ended September 30, 2001, compared to $552,000 for the same
period in 2000. This decrease is primarily attributed to a decrease in the
interest rate on the Company's borrowings, as well as decreased levels of
borrowing. The Company also recorded a $229,000 gain on the sale of its IFCN
subsidiary during the first quarter of 2001.
INCOME TAXES. Income tax expense increased $34,000 for the nine months ended
September 30, 2001 compared to the same period in 2000 due to minimum state and
federal income taxes anticipated in 2001. The Company has offset the majority of
its current income tax liability with the reduction of a portion of the
valuation allowance previously recorded to offset net operating loss benefits.
NET EARNINGS. As a result of the above, net earnings for the nine months ended
September 30, 2001 increased $155,000 to $863,000 from $708,000 for the same
period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative working capital of $709,000 at September 30, 2001,
versus negative working capital of $2,846,000 at September 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.
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 Working Capital Facility is at the prime rate plus
3.0%, with future reductions based on the achievement of certain net worth
levels, and expires in July 2003. Available credit under the Working Capital
Facility is based upon certain profitability and cash collection multiples. As
of September 30, 2001, 5 the available credit was approximately $1,738,000.
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 September 30, 2001. The initial
proceeds of the Working Capital Facility were used to pay off the Credit
Facility with Abelco as well as the holders of certain subordinated debentures.
The Company believes that sources of capital to meet future obligations for the
remainder of 2001, and in 2002 ,will be in the form of cash provided by
operations and by the Company's Working Capital Facility. The Company does not
believe that inflation has had a significant impact on the results of its
operations.
4
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no history of, and does not anticipate in the future, investing
in derivative financial instruments, derivative commodity instruments or other
such financial instruments. Transactions with international customers are
entered into in U.S. dollars, precluding the need for foreign currency hedges.
As a result, the exposure to market risk is not material.
CAUTIONARY STATEMENT
This Form 10-Q contains forward-looking statements within the meaning of federal
securities laws. These statements include statements regarding intent, belief,
or current expectations of the Company and its management and specifically
include the statement regarding cash expected to be available from operations.
These forward-looking statements are not guarantees of the future performance
and involve a number of risks and uncertainties that may cause the Company's
actual results to differ materially from the results discussed in these
statements. Please refer to Management's Discussion and Analysis contained
within the Company's Annual Report on Form 10-K for the year ended December 31,
2000, for cautionary statements on important factors to consider in evaluating
the forward-looking statements included in this Form 10-Q.
5
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
No Change
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the Company's shareholders was held on
Wednesday, May 16, 2001.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation A under the Securities Exchange Act of 1934, there was no
solicitation in opposition to management's nominees, and the following persons
were elected directors of the Company to serve until the next annual meeting of
shareholders:
Number of Number of
Nominee Votes For Votes Withheld
------- --------- --------------
James A. Bernards 8,764,906 181,860
K. James Ehlen, M.D. 8,764,506 182,260
Jerry V. Noyce 8,856,576 90,190
John C. Penn 8,856,576 90,190
Mark W. Sheffert 8,764,706 182,060
Linda Hall Whitman 8,856,576 90,190
Rodney A. Young 8,764,906 181,860
(c) By a vote of 8,515,641 shares in favor, 389,097 shares opposed,
42,028 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved a 200,000 share increase in the number of shares reserved
for the Company's 1995 Employee Stock Purchase Plan.
(d) By a vote of 8,301,986 shares in favor, 607,280 shares opposed,
37,500 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved an amendment to the Company's 1995 Stock Option Plan to
permit incentive stock options to remain exercisable following termination of
employment.
(e) By a vote of 8,888,213 shares in favor, 22,692 shares opposed,
35,861 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved the selection of Grant Thornton LLP as the Company's
independent auditors for the current fiscal year.
Item 5. Other Information
None.
6
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page following signatures
(b) Reports on Form 8-K
None.
7
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 13, 2001 HEALTH FITNESS CORPORATION
By /s/ Jerry Noyce
----------------------------------------------
Jerry Noyce
Chief Executive Officer
(Principal Executive Officer)
By /s/ Wesley Winnekins
----------------------------------------------
Wesley Winnekins
Chief Financial Officer
(Principal Financial and Accounting Officer)
8
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30,
1997
3.2 Restated By-Laws of the Company - incorporated by
reference to the Company's Registration Statement on
Form SB-2 No. 33-83784C
4.1 Specimen of Common Stock Certificate - incorporated by
reference to the Company's Registration Statement on
Form SB-2 No. 33-83784C
10.1* Health Fitness Corporation 1995 Stock Option plan as
amended to date - incorporated by reference to the
Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2001
11.0 Computation of per Share Earnings
*designates a management contract or compensatory plan or arrangement