FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-131045
PROSPECTUS SUPPLEMENT NO. 3
(TO PROSPECTUS DATED APRIL 10, 2006)
HEALTH FITNESS CORPORATION
6,681,000 SHARES OF COMMON STOCK
This Prospectus Supplement No. 3 should be read in conjunction with the
prospectus dated April 10, 2006 (as previously supplemented by prospectus
supplements dated April 11, 2006 and May 16, 2006, collectively, the
"Prospectus") relating to the offer and sale from time to time by the selling
shareholders identified in the Prospectus of up to 6,681,000 shares of the
common stock of Health Fitness Corporation. We will not receive any of the
proceeds from the sale of the common stock covered by the Prospectus.
On August 14, 2006, we filed with the U.S. Securities and Exchange
Commission the attached Quarterly Report for the three and six month periods
ended June 30, 2006.
The information contained in this Prospectus Supplement No. 3,
including the information attached hereto, supplements and supersedes, in part,
the information contained in the Prospectus. This Prospectus Supplement No. 3
should be read in conjunction with the Prospectus, and is qualified by reference
to the Prospectus except to the extent that the information in this Prospectus
Supplement No. 3 supersedes the information contained in the Prospectus.
INVESTING IN OUR COMMON STOCK IS SPECULATIVE AND INVOLVES RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 OF THE PROSPECTUS DATED APRIL 10,
2006, TOGETHER WITH ANY ADDITIONAL OR MODIFIED RISK FACTORS
CONTAINED IN SUPPLEMENTS TO SUCH PROSPECTUS.
------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT NO. 2. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT NO. 3 IS AUGUST 14, 2006.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
COMMISSION FILE NO. 000-25064
----------
HEALTH FITNESS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA NO. 41-1580506
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3600 AMERICAN BOULEVARD WEST, BLOOMINGTON, MINNESOTA 55431
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER (952) 831-6830
----------
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 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.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares outstanding of the registrant's common stock as of August
10, 2006 was: Common Stock, $0.01 par value, 18,931,718 shares
================================================================================
HEALTH FITNESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2006 and 3
December 31, 2005
Consolidated Statements of Earnings for the three and six 4
months ended June 30, 2006 and 2005
Consolidated Statements of Cash Flows for the six 5
months ended June 30, 2006 and 2005
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 12
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Items 2-3. Not Applicable 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 19
Item 6. Exhibits 19
Signatures 20
Exhibit Index 21
2
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
2006 2005
----------- ------------
ASSETS
CURRENT ASSETS
Cash $ 1,295,045 $ 1,471,505
Trade and other accounts receivable, less allowances of $183,300 and
$200,700 9,270,835 8,839,046
Prepaid expenses and other 644,506 509,273
Deferred tax assets 347,701 337,800
----------- -----------
Total current assets 11,558,087 11,157,624
PROPERTY AND EQUIPMENT, net 413,122 347,820
OTHER ASSETS
Goodwill 13,005,498 12,919,689
Software, less accumulated amortization of $176,200 and $0 1,749,531 1,762,000
Customer contracts, less accumulated amortization of $1,746,500 and
$1,626,100 68,472 188,889
Trademark, less accumulated amortization of $196,700 and $147,000 296,432 346,057
Other intangible assets, less accumulated amortization of $129,700 and
$88,000 399,414 441,086
Deferred tax assets 366,300 374,500
Other 35,434 47,105
----------- -----------
$27,892,290 $27,584,770
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 565,423 $ 687,125
Accrued salaries, wages, and payroll taxes 2,922,422 2,693,927
Other accrued liabilities 370,396 763,115
Accrued self funded insurance 344,297 250,000
Deferred revenue 1,752,863 1,868,446
----------- -----------
Total current liabilities 5,955,401 6,262,613
LONG-TERM OBLIGATIONS -- --
COMMITMENTS AND CONTINGENCIES -- --
WARRANT OBLIGATION -- 2,210,889
PREFERRED STOCK, $0.01 par value, 10,000,000 shares authorized, 0 and 1,000
issued and outstanding -- 8,623,546
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 50,000,000 shares authorized;
18,931,718 and 13,787,349 shares issued and outstanding 189,317 137,874
Additional paid-in capital 25,733,284 15,625,425
Accumulated comprehensive income 372 1,245
Accumulated deficit (3,986,084) (5,276,822)
----------- -----------
21,936,889 10,487,722
----------- -----------
$27,892,290 $27,584,770
=========== ===========
See notes to consolidated financial statements.
3
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUE $15,575,130 $13,678,615 $30,142,391 $27,143,716
COSTS OF REVENUE 11,415,116 10,227,999 22,377,897 20,251,298
----------- ----------- ----------- -----------
GROSS PROFIT 4,160,014 3,450,616 7,764,494 6,892,418
OPERATING EXPENSES
Salaries 1,805,533 1,406,562 3,484,367 2,794,485
Other selling, general and administrative 1,560,098 942,631 2,996,339 1,679,497
Amortization of acquired intangible assets 107,610 219,754 216,072 439,337
----------- ----------- ----------- -----------
Total operating expenses 3,473,241 2,568,947 6,696,778 4,913,319
----------- ----------- ----------- -----------
OPERATING INCOME 686,773 881,669 1,067,716 1,979,099
OTHER INCOME (EXPENSE)
Interest expense (2,470) (16,326) (4,150) (28,249)
Change in fair value of warrants 406,694 -- 841,215 --
Other, net 14,071 (340) 10,061 (1,990)
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 1,105,068 865,003 1,914,842 1,948,860
INCOME TAX EXPENSE 377,594 345,220 527,695 779,543
----------- ----------- ----------- -----------
NET EARNINGS 727,474 519,783 1,387,147 1,169,317
Dividend to preferred shareholders -- 21,600 96,410 43,200
----------- ----------- ----------- -----------
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS $ 727,474 $ 498,183 $ 1,290,737 $ 1,126,117
=========== =========== =========== ===========
NET EARNINGS PER SHARE:
Basic $ 0.04 $ 0.04 $ 0.08 $ 0.09
Diluted 0.02 0.03 0.03 0.07
WEIGHTED AVERAGE COMMON SHARES:
Basic 18,831,169 12,652,370 17,005,769 12,636,465
Diluted 20,310,830 16,618,997 20,305,674 16,617,853
See notes to consolidated financial statements.
4
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
-------------------------
2006 2005
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $1,290,737 $ 1,169,317
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 241,033 39,066
Amortization 219,434 431,574
Warrant valuation (841,215) --
Compensation for stock options 238,404 --
Deferred taxes (1,701) 663,251
Loss on disposal of assets 158 --
Changes in operating assets and liabilities,
net of assets acquired:
Trade and other accounts receivable (431,789) 54,838
Prepaid expenses and other (135,234) (213,399)
Other assets 11,671 20,707
Trade accounts payable (122,572) (243,113)
Accrued liabilities and other (69,927) (445,723)
Deferred revenue (115,583) (150,603)
---------- ------------
Net cash provided by operating activities 283,416 1,325,915
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (301,748) (34,749)
Other (85,807) (7,084)
Business acquisition -- --
---------- ------------
Net cash used in investing activities (387,555) (41,833)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under note payable -- 12,440,808
Repayments of note payable -- (14,030,793)
Costs from issuance of preferred stock (161,725) --
Proceeds from issuance of common stock 85,698 73,328
Proceeds from the exercise of stock options 3,706 11,428
---------- ------------
Net cash used in financing activities (72,321) (1,505,229)
---------- ------------
NET DECREASE IN CASH (176,460) (221,147)
CASH AT BEGINNING OF PERIOD 1,471,505 241,302
---------- ------------
CASH AT END OF PERIOD $1,295,045 $ 20,155
========== ============
Supplemental cash flow information:
Cash paid for interest $ 788 $ 28,876
Cash paid for taxes 475,817 226,750
Noncash financing activities affecting cash flow:
Conversion of warrant liability to
additional paid in capital 1,369,674 --
Dividend to preferred shareholders -- 43,200
See notes to consolidated financial statements.
5
HEALTH FITNESS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements for the three and
six months ended June 30, 2006 have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information. Financial information as of December 31, 2005 has been
derived from our audited consolidated financial statements. In accordance with
the rules and regulations of the United States Securities and Exchange
Commission, the Company has omitted footnote disclosures that would
substantially duplicate the disclosures contained in the audited financial
statements of the Company. The unaudited consolidated financial statements
should be read together with the financial statements for the year ended
December 31, 2005, and footnotes thereto included in the Company's Form 10-K as
filed with the United States Securities and Exchange Commission on March 30,
2006.
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. These
financial statements include some amounts that are based on management's best
estimates and judgments. These estimates may be adjusted as more information
becomes available, and any adjustment could be significant. The impact of any
change in estimates is included in the determination of earnings in the period
in which the change in estimate is identified. Operating results for the three
and six months ended June 30, 2006 are not necessarily indicative of the
operating results that may be expected for the year ended December 31, 2006.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - We provide fitness and health management services and programs to
corporations, governmental units, hospitals, communities and universities
located in the United States and Canada. Fitness and health management services
include the development, marketing and management of corporate, hospital,
community and university based fitness centers, injury prevention and
work-injury management consulting, on-site physical therapy and employee health
management services. Programs include wellness and health programs for
individual customers, including health risk assessments, biometric screenings,
nutrition and weight loss programs, smoking cessation, massage therapy, back
care and ergonomic injury prevention.
Consolidation - The consolidated financial statements include the accounts of
our Company and our wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Cash - We maintain cash balances at several financial institutions, and at
times, such balances exceed insured limits. We have not experienced any losses
in such accounts and believe we are not exposed to any significant credit risk
on cash. At June 30, 2006 and December 31, 2005, we had cash of approximately
$2,612 and $24,468 (U.S. Dollars) in a Canadian bank account.
Trade and Other Accounts Receivable - Trade and other accounts receivable
represent amounts due from companies and individuals for services and products.
We grant credit to customers in the ordinary course of business, but generally
do not require collateral or any other security to support amounts due.
Management performs ongoing credit evaluations of customers. We determine our
allowance for discounts and doubtful accounts by considering a number of
factors, including the length of time trade accounts receivable are past due,
our previous loss history, the customer's current ability to pay its obligation
to us, and the condition of the general economy and the industry as a whole. We
write off accounts receivable when they become uncollectible, and payments
subsequently received on such receivable are credited to the allowance.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers and their geographic dispersion.
6
Property and Equipment - Property and equipment are stated at cost. Depreciation
and amortization are computed using both straight-line and accelerated methods
over the useful lives of the assets.
Goodwill - Goodwill represents the excess of the purchase price and related
costs over the fair value of net assets of businesses acquired. The carrying
value of goodwill is not amortized, but is tested for impairment on an annual
basis or when factors indicating impairment are present. Projected discounted
cash flows are used in assessing these assets. We elected to complete the annual
impairment test of goodwill on December 31 of each year and determined that our
goodwill relates to one reporting unit for purposes of impairment testing.
Intangible Assets - Our intangible assets include customer contracts, trademarks
and tradenames, software and other intangible assets, all of which are amortized
on a straight-line basis. Customer contracts represent the fair value assigned
to acquired management contracts, which are amortized over the remaining life of
the contracts, approximately 10-20 months. Trademark and tradenames represent
the value assigned to acquired trademarks and tradenames, and are amortized over
a period of five years. Software represents the value assigned to an acquired
web-based software program and is amortized over a period of five years. Other
intangible assets include the value assigned to acquired customer lists, which
is amortized over a period of six years, as well as deferred financing costs,
which are amortized over the term of the related credit agreement.
Revenue Recognition - Revenue is recognized at the time the service is provided
to the customer. We determine our allowance for discounts by considering
historical discount history and current payment practices of our customers. For
annual contracts, monthly amounts are recognized ratably over the term of the
contract. Certain services provided to the customer may vary on a periodic basis
and are invoiced to the customer in arrears. The revenues relating to these
services are estimated in the month the service is performed based on the cost
of the services.
Amounts received from customers in advance of providing the services of the
contract are recorded as deferred revenue and recognized when the services are
provided.
We have contracts with third-parties to provide ancillary services in connection
with their fitness and wellness management services and programs. Under such
arrangements, the third-parties invoice and receive payments from us based on
transactions with the ultimate customer. We do not recognize revenues related to
such transactions as the ultimate customer assumes the risk and rewards of the
contract and the amounts billed to the customer are either at cost or with a
fixed markup.
Amounts received from new customers for website activation fees are treated as
deferred revenue and recognized over a period of three years, which is the
estimated life of a new customer.
Valuation of Derivative Instruments - In accordance with the interpretive
guidance in EITF Issue No. 05-4, "The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock", we value warrants we issued in November 2005 in our
financing transaction as a derivative liability. We must make certain periodic
assumptions and estimates to value the derivative liability. Factors affecting
the amount of this liability include changes in our stock price, the computed
volatility of our stock price and other assumptions. The change in value is
reflected in our statements of operations as non-cash income or expense, and the
changes in the carrying value of derivatives can have a material impact on our
financial statements. For the quarter and six months ended June 30, 2006, we
recognized non-cash income of $406,694 and $841,215, respectively, upon
revaluation of certain warrants that are subject to this accounting treatment.
The derivative liability associated with these warrants is reflected on our
balance sheet as of December 31, 2005 as a long-term liability.
On June 15, 2006, we reached an agreement with the investors owning these
warrants to amend the terms of the investment documents, which resulted in the
warrants to be reflected as equity. As a result of this accounting change, we
made a final valuation of our warrant liability on June 15, 2006, which resulted
in non-cash income of $406,694 for our second quarter, and the remaining warrant
liability of $1,369,674 was reclassified to additional paid in capital. We are
no longer required to revalue these warrants on a prospective basis.
7
Comprehensive Income - Comprehensive income represents net earnings adjusted for
foreign currency translation adjustments. Total comprehensive income was
$1,289,864 and $1,127,838 for the six months ended June 30, 2006 and 2005.
Net Earnings Per Share - Basic net earnings per share is computed by dividing
net earnings applicable to common shareholders by the number of weighted average
common shares outstanding. For the three and six months ended June 30, 2006,
diluted net earnings per share is computed by dividing net earnings applicable
to common shareholders, plus dividends to preferred shareholders (net earnings),
less the non-cash benefit related to a change in fair value of warrants by the
number of weighted average common shares outstanding, and common share
equivalents relating to stock options, stock warrants, and stock warrants
accounted for as a liability, if dilutive. For the three and six months ended
June 30, 2005, diluted net earnings per share is computed by dividing net
earnings applicable to common shareholders, plus dividends to preferred
shareholders (net earnings) by the number of weighted average common shares
outstanding, and common share equivalents relating to stock options and stock
warrants, if dilutive. Refer to Exhibit 11.0 attached hereto for a detail
computation of earnings per share.
Common stock options and warrants to purchase 1,955,272 and 450,000 shares of
common stock were excluded from the calculation for the three months ended June
30, 2006 and 2005, and 1,988,270 and 375,000 were excluded from the calculation
for the six months ended June 30, 2006 and 2005 because their exercise price
exceeded the average trading price of the Company's common stock during each of
the periods.
Stock-based Compensation - We maintain a stock option plan for the benefit of
certain eligible employees and directors of the Company. We have authorized
3,500,000 shares for grant under our 2005 Stock Option Plan, and a total of
706,350 shares of common stock are reserved for additional grants of options at
June 30, 2006. Our stock options generally vest ratably over four years of
service and have a contractual life of 6 years.
Commencing January 1, 2006, we adopted Statement of Financial Accounting
Standard No. 123R, "Share Based Payment" ("SFAS 123R"), which requires all
share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair values over the
requisite service period. The compensation cost we record for these awards will
be based on their grant date fair value as calculated for the proforma
disclosures required by Statement 123. The Company recorded $162,945 and
$238,404 of related compensation expense, included in salaries within our
operating expenses section, for the three and six months ended June 30, 2006. We
also recorded a deferred tax benefit of $65,178 and $95,362 for the three and
six months ended June 30, 2006 in connection with recording this non-cash
expense. This deferred tax benefit will be adjusted based upon the actual tax
benefit realized from the exercise of the underlying stock options. The
compensation expense reduced diluted earnings per share by less than $0.01 for
the three months ended June 30, 2006, and by approximately $0.01 for the six
months ended June 30, 2006.
As of June 30, 2006, approximately $879,000 of total unrecognized compensation
costs related to non-vested awards is expected to be recognized over a weighted
average period of approximately 2.97 years.
Prior to adopting SFAS 123R, we accounted for stock-based compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." We have applied the modified prospective method in adopting SFAS
123R. Accordingly, periods prior to adoption have not been restated.
8
The following table summarizes information about stock options at June 30, 2006:
Options Outstanding Options Exercisable
----------------------------------------- ----------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding In Years Price Exercisable Price
---------------- ----------- ---------------- -------- ----------- --------
$0.30 - $0.39 406,075 1.26 $0.33 364,675 $0.33
0.47 - 0.69 596,650 1.95 0.56 594,150 0.56
0.95 - 1.25 279,000 4.15 1.17 162,000 1.15
1.26 - 2.27 435,100 4.19 1.89 327,550 1.82
2.28 - 3.00 891,000 4.22 2.72 369,500 2.79
--------- ---------
2,607,825 3.26 $1.55 1,817,875 $1.25
========= =========
We use the Black-Scholes option pricing model to determine the weighted average
fair value of options. The weighted average fair value of options granted during
the three month periods ended June 30, 2006 and 2005 were $0.77 and $0.94,
respectively. The fair value of options at date of grant and the assumptions
utilized to determine such values are indicated in the following table:
Three Months Ended
June 30,
-----------------
2006 2005
---- ----
Risk-free interest rate 4.97% 2.87%
Expected volatility 52.6% 69.0%
Expected life (in years) 3.00 2.20
Dividend yield -- --
Option transactions under the 2005 Stock Option Plan during the second quarter
ended June 30, 2006 are summarized as follows:
Weighted Weighted
Average Aggregate Average
Exercise Intrinsic Remaining
Options Price Value Term
--------- -------- --------- ---------
Outstanding at March 31, 2006 2,504,175 $1.53
Granted 105,000 $1.93
Exercised (1,350) $0.43
Canceled/Forfeited -- --
--------- ----- ---------- ----
Outstanding at June 30, 2006 2,607,825 $1.55 $1,546,629 3.26
Exercisable at June 30, 2006 1,817,875 $1.25 $1,412,830 2.62
Option transactions under the 2005 Stock Option Plan during the six months ended
June 30, 2006 are summarized as follows:
Weighted Weighted
Average Aggregate Average
Exercise Intrinsic Remaining
Options Price Value Term
--------- -------- ---------- ---------
Outstanding at December 31, 2005 2,157,425 $1.34
Granted 455,500 $2.52
Exercised (3,850) $0.96
Canceled/Forfeited (1,250) $1.25
--------- -------- ---------- --------
Outstanding at June 30, 2006 2,607,825 $1.55 $1,546,629 3.26
Exercisable at June 30, 2006 1,817,875 $1.25 $1,412,830 2.62
9
The aggregate intrinsic value of options exercised during the quarter ended June
30, 2006 was $2,390. Cash received from the exercise of options for the quarter
ended June 30, 2006 was $581 and the related tax benefit realized was $232. The
total number of options that vested during the quarter ended June 30, 2006 was
120,000 with a fair value of $100,500.
Fair Values of Financial Instruments - Due to their short-term nature, the
carrying value of our current financial assets and liabilities approximates
their fair values. The fair value of long-term obligations, if recalculated
based on current interest rates, would not significantly differ from the
recorded amounts.
Use of Estimates - Preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 3. FINANCING
On November 14, 2005 (the "Effective Date"), in a Private Investment in Public
Equity transaction (the "PIPE Transaction"), we issued an aggregate of 1,000
shares of Series B Convertible Preferred Stock (the "Series B Stock"), together
with warrants to purchase 1,530,000 shares of common stock at $2.40 per share,
to a limited number of accredited investors for aggregate gross proceeds of
$10.2 million. After selling commissions and expenses, we received net proceeds
of approximately $9.4 million. The Series B Stock automatically converted into
5,100,000 shares of our common stock on March 10, 2006, the date the Securities
and Exchange Commission (the "SEC") first declared effective a registration
statement covering these shares. Each share of Series B Stock was entitled to a
number of votes equal to the number of shares of common stock into which it was
then convertible. Except as required by law, holders of Series B Stock were
entitled to vote together as one class with holders of common stock. Each share
of Series B Stock had a stated dividend rate of 5% per year calculated based
upon the initial share issuance price of $10,200. We used the proceeds from this
PIPE Transaction to redeem our Series A Convertible Preferred Stock and to fund
the acquisition of HealthCalc.Net, Inc.
In accordance with the terms of the PIPE Transaction, we were required to file
with the SEC, within sixty (60) days from the Effective Date, a registration
statement covering the common shares issued and issuable in the PIPE
Transaction. We were also required to cause the registration statement to go
effective on or before the expiration of one hundred twenty (120) days from the
Effective Date. We would have been subject to liquidated damages of one percent
(1%) per month of the aggregate gross proceeds ($10,200,000), if we failed to
meet these date requirements. On March 10, 2006, the SEC declared effective our
Form S-1 registration statement and, as a result, we did not pay any liquidated
damages for failure to meet the filing and effectiveness date requirements. We
could nevertheless be subject to the foregoing liquidated damages if we fail to
maintain the effectiveness of the registration statement. On June 15, 2006, we
entered into an agreement with the accredited investors to amend the
Registration Rights Agreement to cap the amount of liquidated damages we could
pay at 9% of the aggregate purchase price paid by each accredited investor.
The warrants, which were issued together with the Series B Stock, have a term of
five years, and give the investors the option to require us to repurchase the
warrants for a purchase price, payable in cash within five (5) business days
after such request, equal to the Black Scholes value of any unexercised warrant
shares, only if, while the warrants are outstanding, any of the following change
in control transactions occur: (i) we effect any merger or consolidation, (ii)
we effect any sale of all or substantially all of our assets, (iii) any tender
offer or exchange offer is completed whereby holders of our common stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (iv) we effect any reclassification of our common stock whereby it
is effectively converted into or exchanged for other securities, cash or
property. On June 15, 2006, we entered into an agreement with the accredited
investors to amend the Warrant Agreement to give us the ability to repurchase
the warrants, in the case of a change in control transaction, using shares of
stock, securities or assets, including cash.
10
Under EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" (EITF 00-19"), the fair value
of the warrants issued under the PIPE Transaction have been reported as a
liability due to the requirement to net-cash settle the transaction. There are
two reasons for this treatment: (i) there are liquidated damages, payable in
cash, of 1% of the gross proceeds per month ($102,000) should we fail (subject
to certain permitted circumstances) to maintain effectiveness of the
registration statement in accordance with the PIPE Transaction; and (ii) the
investors may put their warrants back to us for cash if a change in control
transaction that meets the definition previously discussed occurs. On June 15,
2006, we reached an agreement with the investors owning these warrants to amend
the terms of the investment documents, which resulted in the warrants to be
reflected as equity. As a result of this accounting change, we made a final
valuation of our warrant liability on June 15, 2006, which resulted in non-cash
income of $406,694 for our second quarter, and the remaining warrant liability
of $1,369,674 was reclassified to additional paid in capital. We are no longer
required to revalue these warrants on a prospective basis.
NOTE 4. INCOME TAXES
The Company records income taxes in accordance with the liability method of
accounting. Deferred income taxes are provided for temporary differences between
the financial reporting and tax basis of assets and liabilities and federal
operating loss carryforwards. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of the enactment.
We do not record a tax liability or benefit in connection with the change in
fair value of certain of our warrants. Income taxes are calculated based on
management's estimate of the Company's effective tax rate, which takes into
consideration a federal tax rate of 34% and an effective state tax rate of 6%.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our interim consolidated financial
statements and related notes included in Item 1 of Part 1 of this Quarterly
Report, and the audited consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2005.
CRITICAL ACCOUNTING POLICIES. Our most critical accounting policies, which are
those that require significant judgment, include: revenue recognition, trade and
other accounts receivable, goodwill and stock-based compensation. A more
in-depth description of these can be found in Note 2 to the interim consolidated
financial statements included in this Quarterly Report and our Annual Report on
Form 10-K for the fiscal year ended December 31, 2005.
GENERAL. We provide fitness and health management services and programs to
corporations, governmental units, hospitals, communities and universities
located in the United States and Canada. Fitness and health management services
include the development, marketing and management of corporate, hospital,
community and university based fitness centers, injury prevention and
work-injury management consulting, on-site physical therapy and employee health
management services. Programs include wellness and health programs for
individual customers, including health risk assessments, biometric screenings,
nutrition and weight loss programs, smoking cessation, massage therapy, back
care and ergonomic injury prevention.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a percentage
of total revenues and also sets forth other financial and operating data for the
three and six months ended June 30, 2006 and 2005:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
----- ----- ----- -----
REVENUE 100.0% 100.0% 100.0% 100.0%
COSTS OF REVENUE 73.3 74.8 74.2 74.6
----- ----- ----- -----
GROSS PROFIT 26.7 25.2 25.8 25.4
OPERATING EXPENSES
Salaries 11.6 10.3 11.6 10.3
Other selling, general and administrative 10.0 6.9 9.9 6.2
Amortization of acquired intangible assets 0.7 1.6 0.7 1.6
----- ----- ----- -----
Total operating expenses 22.3 18.8 22.2 18.1
----- ----- ----- -----
OPERATING INCOME 4.4 6.4 3.6 7.3
OTHER INCOME (EXPENSE) 2.7 (0.1) 2.8 (0.1)
----- ----- ----- -----
EARNINGS BEFORE INCOME TAXES 7.1 6.3 6.4 7.2
INCOME TAX EXPENSE 2.4 2.5 1.8 2.9
----- ----- ----- -----
NET EARNINGS 4.7 3.8 4.6 4.3
Dividend to preferred shareholders -- 0.2 0.3 0.2
----- ----- ----- -----
NET EARNINGS APPLICABLE TO
COMMON SHAREHOLDERS 4.7% 3.6% 4.3% 4.1%
===== ===== ===== =====
12
OTHER FINANCIAL AND OPERATING DATA:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Fitness Management Revenue
Staffing Services $ 9,969,192 $ 9,528,699 $19,692,076 $19,044,876
Program and Consulting Services 647,865 634,202 1,225,808 1,116,873
----------- ----------- ----------- -----------
10,617,057 10,162,901 20,917,884 20,161,749
----------- ----------- ----------- -----------
Health Management Revenue
Staffing Services 3,266,531 3,011,348 6,375,403 6,099,339
Program and Consulting Services 1,691,542 504,366 2,849,104 882,628
----------- ----------- ----------- -----------
4,958,073 3,515,714 9,224,507 6,981,967
----------- ----------- ----------- -----------
Total Revenue
Staffing Services 13,235,723 12,540,047 26,067,479 25,144,215
Program and Consulting Services 2,339,405 1,138,567 4,074,912 1,999,501
----------- ----------- ----------- -----------
$15,575,130 $13,678,615 $30,142,391 $27,143,716
----------- ----------- ----------- -----------
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2006 AS COMPARED TO THE
QUARTER ENDED JUNE 30, 2005.
REVENUE. Revenues increased $1,896,000, or 13.9%, to $15,575,000 for the three
months ended June 30, 2006, from $13,679,000 for the three months ended June 30,
2005. This increase is attributable to revenue growth of $1,511,000 from new
contracts and incremental business from existing contracts, in addition to
revenue growth of $385,000 from HealthCalc, a company we acquired in December
2005. For the second quarter, health management revenue grew 41.0% and fitness
management grew 4.5% over the same period last year.
GROSS PROFIT. Gross profit increased $709,000, or 20.6%, to $4,160,000 for the
three months ended June 30, 2006, from $3,451,000 for the three months ended
June 30, 2005. This increase is due primarily to our revenue growth.
As a percent of revenue, gross profit increased to 26.7%, from 25.2% for the
second quarter of 2005. This increase is due primarily to the new health
management business we have recently won.
OPERATING EXPENSES. Operating expenses increased $904,000, or 35.2%, to
$3,473,000 for the three months ended June 30, 2006, from $2,569,000 for the
three months ended June 30, 2005.
Of this increase, approximately $455,000 is attributed to salaries, operating
expenses and asset depreciation related to our acquisition of HealthCalc. In
addition, we incurred approximately $163,000 of stock option compensation
expense in the second quarter of 2006 in connection with our adoption of SFAS
123R on January 1, 2006. The remaining cost increase of $286,000 is primarily
due to additional staff we hired during 2005 to execute our health management
business plan. We expect to continue incurring these costs at varying levels on
a quarterly basis.
OTHER INCOME AND EXPENSE. Interest expense decreased $14,000 to $2,000 for the
three months ended June 30, 2006, compared to $16,000 for the same period in
2005. This decrease is due to the repayment of our Wells Fargo credit line. Our
cost of borrowed funds was 6.8% for the second quarter of 2005.
For the quarter ended June 30, 2006, we recorded a $407,000 non-cash benefit
related to a change in fair value for 1,530,000 warrants we issued in connection
with the sale of $10.2 million of our Series B Convertible Preferred Stock in
November 2005. Refer to the section titled "Summary of Significant Accounting
Policies," Valuation of Derivative Instruments, contained elsewhere in this
document for further discussion of the accounting we use to value these
warrants.
13
INCOME TAXES. Income tax expense increased $33,000 to $378,000 for the three
months ended June 30, 2006 compared to $345,000 for the same period in 2005. The
increase is primarily due to changes in permanent and temporary timing
differences between book and tax balances for stock option expense, change in
fair value of warrants, depreciation and amortization, prepaid expenses and
vacation accruals.
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the above, and
the cessation of dividends payable to preferred shareholders, net earnings
applicable to common shareholders for the three months ended June 30, 2006
increased $229,000, or 46.0%, to $727,000, from $498,000 for the three months
ended June 30, 2005.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2005.
REVENUE. Revenues increased $2,999,000, or 11.0%, to $30,142,000 for the six
months ended June 30, 2006, from $27,144,000 for the six months ended June 30,
2005. This increase is attributable to revenue growth of $2,022,000 from new
contracts and incremental business from existing contracts as discussed below,
in addition to revenue growth of $977,000 from HealthCalc. For the first six
months, health management revenue grew 32.1% and fitness management grew 3.8%
over the same period last year..
During the first six months of 2006, we have won a number of new contracts, as
well as expanded our services at existing contracts, within our Health
Management and Fitness Management business areas. In Health Management, we have
won twenty-six new contracts, and expanded five existing contracts, which may
realize annualized incremental revenue of approximately $6.4 million. In Fitness
Management, we have won seven new contracts, and expanded one existing contract,
which may realize annualized incremental revenue of $2.7 million. The value of
our new and expanded contracts is a forward looking statement, is based upon an
estimate of the anticipated annualized incremental revenue, and should be used
only as an indication of the sales activity we have recently experienced in our
two business areas. These estimates should not be considered an indication of
the total incremental revenue growth we expect to generate in 2006, or in any
year, as actual growth may differ from these estimates due to actual staffing
levels, participation rates and contract duration, in addition to other revenue
we may lose due to contract termination.
GROSS PROFIT. Gross profit increased $872,000, or 12.7%, to $7,764,000 for the
six months ended June 30, 2006, from $6,892,000 for the six months ended June
30, 2005. This increase is due primarily to our revenue growth.
As a percent of revenue, gross profit increased to 25.8%, from 25.4% for the six
months ended June 30, 2005. This increase is due primarily to the new health
management business we have recently won.
OPERATING EXPENSES. Operating expenses increased $1,784,000, or 36.3%, to
$6,697,000 for the six months ended June 30, 2006, from $4,913,000 for the six
months ended June 30, 2005.
Of this increase, approximately $883,000 is due to salaries, operating expenses
and asset depreciation related to our acquisition of HealthCalc. In addition, we
incurred approximately $238,000 of stock option compensation expense for the six
months ended June 30, 2006 in connection with our adoption of SFAS 123R on
January 1, 2006. The remaining cost increase of $663,000 is primarily due to
additional staff we hired during 2005 to execute our health management business
plan. We expect to continue incurring these costs at varying levels on a
quarterly basis.
OTHER INCOME AND EXPENSE. Interest expense decreased $24,000 to $4,000 for the
six months ended June 30, 2006, compared to $28,000 for the same period in 2005.
This decrease is due to the repayment of our Wells Fargo credit line. Our cost
of borrowed funds was 6.0% for the second quarter of 2005.
For the six months ended June 30, 2006, we recorded an $841,000 non-cash benefit
related to a change in fair value for 1,530,000 warrants we issued in connection
with the sale of $10.2 million of our Series B Convertible Preferred Stock in
November 2005. Refer to the section titled "Summary of Significant Accounting
Policies," Valuation of Derivative Instruments, contained elsewhere in this
document for further discussion of the accounting we use to value these
warrants.
14
INCOME TAXES. Income tax expense decreased $252,000 to $528,000 for the six
months ended June 30, 2006, compared to $780,000 for the same period in 2005.
The decrease is primarily due to the $911,000 decrease in operating income along
with no tax liability associated with the $841,000 non-cash benefit related to
the revaluation of our warrants.
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the above
changes, which were partially offset by an increase in dividends paid to
preferred shareholders, net earnings applicable to common shareholders for the
six months ended June 30, 2006 increased $165,000, or 14.6%, to $1,291,000, from
$1,126,000 for the six months ended June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $708,000 to $5,603,000 at June 30, 2006,
compared to working capital of $4,895,000 at December 31, 2005. The increase in
working capital is due primarily to an increase in trade and other accounts
receivable and prepaid expense, and decreases in trade accounts payable, other
accrued liabilities and deferred revenue. These were offset by a decrease in
cash and increases to accrued salaries and accrued self funded insurance.
In addition to cash flows generated from operating activities, our other primary
source of liquidity and working capital is provided by a $7,500,000 Credit
Agreement with Wells Fargo Bank, N.A. (the "Wells Loan"). At our option, the
Wells Loan bears interest at prime, or the one-month LIBOR plus a margin of
2.25% to 2.75% based upon our Senior Leverage Ratio (effective rate of 8.25% and
7.25% at June 30, 2006 and December 31, 2005). The availability of the Wells
Loan decreases $250,000 on the last day of each calendar quarter, beginning
September 30, 2003, and matures on June 30, 2008, as amended. Working capital
advances from the Wells Loan are based upon a percentage of our eligible
accounts receivable, less any amounts previously drawn. The facility provided
maximum borrowing capacity of $4,500,000 and $5,000,000 at June 30, 2006 and
December 31, 2005. Excluding current outstanding balances, and based upon
eligible accounts receivable, $4,500,000 and $5,000,000 was available for
borrowing on such respective dates. All borrowings are collateralized by
substantially all of our assets. At June 30, 2006, we were in compliance with
all of our financial covenants.
On November 14, 2005 (the "Effective Date"), in a Private Investment in Public
Equity transaction (the "PIPE Transaction"), we issued an aggregate of 1,000
shares of Series B Convertible Preferred Stock (the "Series B Stock"), together
with warrants to purchase 1,530,000 shares of common stock at $2.40 per share,
to a limited number of accredited investors for aggregate gross proceeds of
$10.2 million. After selling commissions and expenses, we received net proceeds
of approximately $9.4 million. The Series B Stock automatically converted into
5,100,000 shares of our common stock on March 10, 2006, the date the Securities
and Exchange Commission (the "SEC") first declared effective a registration
statement covering these shares. We used the proceeds from this PIPE Transaction
to redeem our Series A Convertible Preferred Stock and to fund the acquisition
of HealthCalc.Net, Inc.
In accordance with the terms of the PIPE Transaction, we were required to file
with the SEC, within sixty (60) days from the Effective Date, a registration
statement covering the common shares issued and issuable in the PIPE
Transaction. We were also required to cause the registration statement to be
declared effective on or before the expiration of one hundred twenty (120) days
from the Effective Date. We would have been subject to liquidated damages of one
percent (1%) per month of the aggregate gross proceeds ($10,200,000), if we
failed to meet these date requirements. On March 10, 2006, the SEC declared
effective our registration statement and, as a result, we did not pay any
liquidated damages for failure to meet the filing and effectiveness date
requirements. We could nevertheless be subject to the foregoing liquidated
damages if we fail (subject to certain permitted circumstances) to maintain the
effectiveness of the registration statement. On June 15, 2006, we entered into
an agreement with the accredited investors to amend the Registration Rights
Agreement to cap the amount of liquidated damages we could pay at 9% of the
aggregate purchase price paid by each accredited investor.
15
The warrants, which were issued together with the Series B Stock, have a term of
five years, and give the investors the option to require us to repurchase the
warrants for a purchase price, payable in cash within five (5) business days
after such request, equal to the Black Scholes value of any unexercised warrant
shares, only if, while the warrants are outstanding, any of the following change
in control transactions occur: (i) we effect any merger or consolidation, (ii)
we effect any sale of all or substantially all of our assets, (iii) any tender
offer or exchange offer is completed whereby holders of our common stock are
permitted to tender or exchange their shares for other securities, cash or
property, or (iv) we effect any reclassification of our common stock whereby it
is effectively converted into or exchanged for other securities, cash or
property. On June 15, 2006, we entered into an agreement with the accredited
investors to amend the Warrant Agreement to give us the ability to repurchase
the warrants, in the case of a change in control transaction, using shares of
stock, securities or assets, including cash.
Under EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock" (EITF 00-19"), the fair value
of the warrants issued under the PIPE Transaction have been reported as a
liability due to the requirement to net-cash settle the transaction. There are
two reasons for this treatment: (i) there are liquidated damages, payable in
cash, of 1% of the gross proceeds per month ($102,000) should we fail to
maintain effectiveness of the registration statement in accordance with the PIPE
Transaction; and (ii) our investors may put their warrants back to us for cash
if we initiate a change in control that meets the definition previously
discussed. As a result of the agreement amendments we structured with the
accredited investors on June 15, 2006, we were allowed to account for the
warrants as equity. On June 15, 2006, we reached an agreement with the investors
owning these warrants to amend the terms of the investment documents, which
resulted in the warrants to be reflected as equity. As a result of this
accounting change, we made a final valuation of our warrant liability on June
15, 2006, which resulted in non-cash income of $406,694 for our second quarter,
and the remaining warrant liability of $1,369,674 was reclassified to additional
paid in capital. We are no longer required to revalue these warrants on a
prospective basis.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2006, we have no off-balance sheet arrangements or transactions
with unconsolidated, limited purpose entities.
We believe that sources of capital to meet future obligations over the next 12
months will be provided by cash generated through operations and our Wells Loan.
Currently, we do not have plans to make any significant investments in capital
assets or any other one-time expenses that may affect our cash flows from
investing activities.
We do not believe that inflation has had a significant impact on the results of
our operations.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Such "forward-looking" information is included
in this Form 10-Q, including the MD&A section, as well as in our Annual Report
on Form 10-K for the year ended December 31, 2005 that was filed with the
Securities and Exchange Commission, and in other materials filed or to be filed
by the Company with the Securities and Exchange Commission (as well as
information included in oral statements or other written statements made or to
be made by the Company).
Forward-looking statements include all statements based on future expectations
and specifically include, among other things, all statements relating to
increasing revenue, improving margins, growth of the market for corporate,
hospital, community and university-based fitness centers, the development of new
business models, our ability to expand our programs and services and the
sufficiency of our liquidity and capital resources. Any statements that are not
based upon historical facts, including the outcome of events that have not yet
occurred and our expectations for future performance, are forward-looking
statements. The words "believe," "estimate," "expect," "intend,"
16
"may," "could," "will," "plan," "anticipate," and similar words and expressions
are intended to identify forward-looking statements. Such statements are based
upon the current beliefs and expectations of our management. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to those matters identified and discussed in Part II, Item 1A of
this Form 10-Q (if any), and in Item 1 of the Company's Form 10-K for the year
ended December 31, 2005 under "Risk Factors/Forward-Looking Statements."
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement 109. FIN
48 prescribes a comprehensive model for recognizing, measuring, presenting and
disclosing in the financial statements, tax positions taken or expected to be
taken on a tax return, including the decision whether to file or not to file in
a particular jurisdiction. FIN 48 is effective for fiscal years beginning after
December 15, 2006. If there are changes in net assets as a result of application
of FIN 48, these changes will be accounted for as an adjustment to retained
earnings. We are currently assessing the impact of FIN 48 on our consolidated
financial position and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to changes in U.S. and international
interest rates. All of the Company's long-term obligations bear interest at a
variable rate.
We have no history of, and do 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, our exposure to market risk is not material.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
concluded (based upon their evaluation of these controls and procedures as of
the end of the period covered by this report) that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules of the Securities and Exchange Commission. The Certifying Officers also
have indicated that there were no significant changes in our internal control
over financial reporting that occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
17
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Item 3 (Legal Proceedings) in the Company's Annual Report on Form 10-K
for the year ended December 31, 2005.
Item 1A. Risk Factors
In addition to the other information set forth in this report, including the
important information in "Private Securities Litigation Reform Act," you should
carefully consider the "Risk Factors" discussed in our Annual Report on Form
10-K for the year ended December 31, 2005. Those factors, if they were to occur,
could cause our actual results to differ materially from those expressed in our
forward-looking statements in this report, and materially adversely affect our
financial condition or future results. Although we are not aware of any other
factors that we currently anticipate will cause our forward-looking statements
to differ materially from our future actual results, or materially affect the
Company's financial condition or future results, additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial might materially adversely affect our actual business, financial
condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 Tuesday, May
23, 2006.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees, and the shareholders elected the following
persons as directors of the Company to serve until the next annual meeting of
shareholders:
Nominee Number of Votes For Number of Votes Withheld
------- ------------------- ------------------------
James A. Bernards 12,689,457 232,619
K. James Ehlen, M.D 12,523,386 398,690
Robert J. Marzec 12,689,457 232,619
Jerry V. Noyce 12,687,957 234,119
John C. Penn 12,689,457 232,619
Mark W. Sheffert 12,690,457 231,619
Linda Hall Whitman 12,690,457 231,619
Rodney A. Young 12,689,457 232,619
(c) By a vote of 5,178,739 shares in favor, 708,831 shares opposed, 9,606 shares
abstaining, and 7,024,900 shares represented by broker nonvotes, the
shareholders approved an increase in the number of shares reserved under the
1995 Stock Purchase Plan from 700,000 to 1,000,000.
(d) By a vote of 4,977,012 shares in favor, 910,008 shares opposed, 10,156
shares abstaining, and 7,024,900 shares represented by broker nonvotes, the
shareholders approved an increase in the number of shares reserved under the
2005 Stock Option Plan from 3,500,000 to 4,000,000.
18
(e) By a vote of 12,643,174 shares in favor, 267,523 shares opposed, 11,379
shares abstaining, and 0 shares represented by broker nonvotes, the shareholders
ratified the selection of Grant Thornton LLP as the Company's independent
auditors for the current fiscal year.
Item 5. Other Information
(a) Although not required to be contained in a report on Form 8-K, Mr. Mark W.
Sheffert has replaced Mr. John C. Penn as Chairman of the Board effective May 9,
2006.
Item 6. Exhibits
(a) Exhibits - See Exhibit Index on page following signatures
19
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 14, 2006 HEALTH FITNESS CORPORATION
By /s/ Jerry V. Noyce
-------------------------------------
Jerry V. Noyce
Chief Executive Officer
(Principal Executive Officer)
By /s/ Wesley W. Winnekins
-------------------------------------
Wesley W. Winnekins
Chief Financial Officer
(Principal Financial and Accounting
Officer)
20
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
----------- -----------
**11.0 Statement re: Computation of Earnings per Share
**10.1 Fourth Amendment to Credit Agreement, dated June 6, 2006, Between
Wells Fargo Bank, N.A. and Health Fitness Corporation
**10.2 Form of Amendment No.1 to Warrant Agreement Between Certain
Accredited Investors and Health Fitness Corporation
**10.3 Form of Amendment No. 1 to Registration Rights Agreement Between
Certain Accredited Investors and Health Fitness Corporation
**31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
**31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
**32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
**32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
----------
* Indicates management contract or compensatory plan or arrangement
**Filed herewith
21
EXHIBIT 11.0
Computation of Earnings per Share
The following represents the computation of earnings per share reflecting the
assumption that the granted shares under the option and warrants plan which
would be dilutive will be exercised.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net earnings applicable to common
shareholders, basic $ 727,474 $ 498,183 $ 1,290,737 $ 1,126,117
Add: Dividend to preferred shareholders -- 21,600 96,410 43,200
Less: Change in fair value of warrants (406,694) -- (841,215) --
----------- ----------- ----------- -----------
Net earnings, diluted $ 320,780 $ 519,783 $ 545,932 $ 1,169,317
=========== =========== =========== ===========
Weighted average common shares
outstanding, basic 18,931,169 12,652,370 17,005,769 12,636,465
Common share equivalents relating to:
Preferred stock -- 2,157,480 1,916,022 2,142,767
Stock options 719,502 671,434 786,722 689,647
Warrants 660,158 1,137,713 597,161 1,148,974
----------- ----------- ----------- -----------
Weighted average common shares outstanding 20,310,829 16,618,997 20,305,674 16,617,853
=========== =========== =========== ===========
Net earnings per share:
Basic $ 0.04 $ 0.04 $ 0.08 $ 0.09
Diluted $ 0.02 $ 0.03 $ 0.03 $ 0.07
Anti-dilutive preferred stock, stock
options and warrants not included in the
diluted earnings per share computations 1,955,272 450,000 1,988,270 375,000
See notes to consolidated financial statements.