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, 2002
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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 or organization) (I.R.S. Employer 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 9, 2002 was:
Common Stock, $.01 par value, 12,265,250 shares
HEALTH FITNESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and F-1
December 31, 2001
Consolidated Statements of Earnings for the three F-2
months ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows for the three F-3
months ended March 31, 2002 and 2001
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 2-5. Not Applicable
Item 6. Exhibits and reports on Form 8-K
Signatures 7
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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March 31, December 31,
2002 2001
---------------- ---------------
ASSETS
Current Assets
Cash $ 181,717 $ 221,008
Trade and other accounts receivable, less allowance for doubtful
accounts of $84,700 3,686,914 3,388,856
Prepaid expenses and other 144,908 130,090
Deferred tax asset 617,500 777,300
---------------- ---------------
Total current assets 4,631,039 4,517,254
Property and Equipment, net 153,672 174,912
Other Assets
Goodwill 5,308,761 5,308,761
Intangible assets, less accumulated amortization of $677,000 and
$619,100, respectively 128,835 186,737
Deferred tax asset 670,800 -
Other 40,920 11,410
---------------- ---------------
$ 10,934,027 $ 10,199,074
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable $ 983,443 $ 1,442,304
Trade accounts payable 110,761 141,736
Accrued salaries, wages, and payroll taxes 1,277,587 915,379
Other accrued liabilities 540,424 392,794
Deferred revenue 1,171,576 1,243,946
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Total current liabilities 4,083,791 4,136,159
Commitments and Contingencies - -
Stockholders' Equity
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none
issued or outstanding - -
Common stock, $0.01 par value; 25,000,000 shares authorized;
12,265,250 shares issued and outstanding 122,653 122,653
Additional paid-in capital 16,982,522 16,982,522
Accumulated deficit (10,254,939) (11,042,260)
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6,850,236 6,062,915
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$ 10,934,027 $ 10,199,074
================ ===============
The accompanying notes are an integral part of the financial statements.
F-1
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
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Three Months Ended
March 31,
2002 2001
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Revenue $ 6,687,394 $ 6,426,456
Cost of Revenues 5,213,103 5,059,471
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Gross Profit 1,474,291 1,366,985
Operating Expenses
Salaries 665,981 484,761
Selling, general, and administrative 412,248 492,501
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Total operating expenses 1,078,229 977,262
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Operating Profit 396,062 389,723
Other Income (Expense)
Interest expense (98,622) (129,861)
Gain on sale of subsidiary - 228,613
Other, net (1,747) (1,017)
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Earnings Before Income Taxes 295,693 487,458
Income Tax Expense (Benefit) (491,628) 30,000
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Net Earnings $ 787,321 $ 457,458
================ ==============
Net Earnings Per Share:
Basic $ $
0.06 0.04
Diluted 0.06 0.03
Weighted Average Common Shares Outstanding
Basic 12,265,250 12,165,250
Diluted 12,396,891 12,690,417
The accompanying notes are an integral part of the financial statements.
F-2
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended
March 31,
2002 2001
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Cash Flows From Operating Activities:
Net earnings $ 787,321 $ 457,458
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Common stock and warrants issued for services and compensation - 7,019
Depreciation and amortization 62,194 186,853
Amortization of financing costs 29,083 29,083
Deferred income taxes (511,000) -
Gain on sale of subsidiary - (228,613)
Changes in operating assets and liabilities:
Trade and other accounts receivable (298,058) 107,608
Prepaid expenses and other (14,818) (61,844)
Other assets (29,510) 275
Trade accounts payable (30,975) (111,849)
Accrued liabilities 509,838 (14,314)
Deferred revenue (72,370) (20,618)
----------------------------
Net cash provided by operating activities 431,705 351,058
Cash Flows From Investing Activities:
Purchases of property and equipment (12,135) (8,412)
Net proceeds from sale of subsidiary - 368,555
Payment for non-compete agreement - (30,000)
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Net cash provided by (used in) investing activities (12,135) 330,143
Cash Flows From Financing Activities:
Borrowings under note payable 6,201,955 6,674,870
Repayments of note payable (6,660,816) (7,595,857)
Repayment of long term debt - (30,200)
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Net cash used in financing activities (458,861) (951,187)
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Net Decrease in Cash (39,291) (269,986)
Cash at Beginning of Period 221,008 472,930
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Cash at End of Period $ 181,717 $ 202,944
============================
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, 2001. 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
months ended March 31, 2002 are not necessarily indicative of the operating
results for the year ending December 31, 2002.
NOTE 2. NOTE PAYABLE
The Company maintains a credit agreement with Coast Business Credit for a $5.0
million working capital facility which expires in July 2003. The facility bears
interest at the prime rate plus 3.0% with a minimum rate of 9.0% (effective rate
of 9.0% at March 31, 2002 and December 31, 2001). Available credit under the
loan is based upon certain profitability and cash collection multiples and was
approximately $1,979,000 at March 31, 2002. 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 was in compliance
with all of the covenants in effect as of March 31, 2002.
NOTE 3. INCOME TAXES
Income taxes were calculated based on management's estimate of the Company's
effective tax rate. Income taxes include a reduction of the deferred tax asset
valuation allowance totaling $625,300, offset by $114,300 of income tax expense,
and the recording of management's estimate of minimum state income taxes and
federal taxes due because of alternative minimum tax calculations. The reduction
of the Company's deferred tax asset valuation allowance is based upon the
Company's estimate of future taxable income. The Company will continue to
evaluate its results of operations and estimated future taxable income to
determine when the remaining deferred tax valuation allowance of $1,875,900 can
be reduced.
NOTE 4. SALE OF SUBSIDIARY
Effective January 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.
NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002 the Company adopted Statement of Financial Accounting
Standards (SFAS) 141, "Business Combinations," SFAS 142, "Goodwill and
Intangible Assets," SFAS 143, "Accounting for Asset Retirement Obligations," and
SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS 141 eliminates the pooling-of-interest method of accounting for business
combinations and requires intangible assets acquired in business combinations to
be recorded separately from goodwill. The adoption of SFAS 141 did not affect
the Company's consolidated financial position or results of operations.
F-4
SFAS 142 eliminates the amortization of goodwill and other intangible assets
with indefinite lives and requires that these assets be tested for impairment
annually or whenever an impairment indicator arises using the two step
impairment test outlined in SFAS 142. Effective January 1, 2002, the Company
discontinued the amortization of goodwill. The first step of the goodwill
impairment test, which must be completed within six months of the effective date
of SFAS No. 142, will identify potential goodwill impairment. The second step of
the goodwill impairment test, which must be completed prior to the issuance of
the annual financial statements, will measure the amount of goodwill impairment
loss, if any. The Company has not completed step one of the transitional
goodwill impairment testing and expects to complete this test by the end of the
second quarter in 2002. The Company has determined that its goodwill relates to
one reporting unit for purposes of impairment testing and elected to complete
the impairment testing of goodwill annually on December 31.
The pro forma effect of adopting SFAS 142 on net earnings and net earnings per
share for the three months ended March 31, 2001 compared to actual results for
the three months ended March 31, 2002 is as follows:
Three Months Ended
March 31,
2002 2001
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Net earnings as reported $787,321 $457,458
Goodwill amortization - 106,692
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Adjusted net earnings $787,321 $564,150
Basic net earnings per share:
Net earnings per share as reported $ 0.06 $ 0.04
Goodwill amortization per share - 0.01
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Adjusted net earnings per share $ 0.06 $ 0.05
Diluted net earnings per share:
Net earnings per share as reported $ 0.06 $ 0.03
Goodwill amortization per share - 0.01
Adjusted net earnings per share $ 0.06 $ 0.04
Amortization expense of other intangible assets totaled $57,902 for the three
months ended March 31, 2002 and 2001. Amortization expense for the succeeding
years is expected to be as follows:
Years ending December 31:
2002 $ 178,571
2003 $ 58,166
SFAS 143 applies to all entities that have legal obligations associated with the
retirement of a tangible long-lived asset that result from acquisition,
construction, or development and (or) normal operations of the long-lived asset.
For purposes of SFAS 143, a liability for an asset retirement obligation should
be recognized if the obligation meets the definition of a liability in FASB
Concepts Statement 6, "Elements of Financial Statements," and if the amount of
the liability can be reasonably estimated. Consequently, an entity should
recognize a liability for an asset retirement obligation if (a) the entity has a
duty or responsibility to settle an asset retirement obligation, (b) the entity
has little or no discretion to avoid the future transfer or use of assets, and
(c) the transaction or other event obligating the entity has occurred. The
adoption of SFAS 143 did not affect the Company's consolidated financial
position or results of operations.
F-5
SFAS 144 retains the requirement from SFAS 121 to test a long-lived asset or
asset group for impairment using a two-step impairment test whenever a
triggering event occurs and provides an additional triggering event, a current
expectation that, more likely than not, a long-lived asset or asset group will
be sold or disposed of significantly before the end of its previously estimated
useful life would indicate the need to test that asset or asset group for
impairment. The adoptions of SFAS 144 did not affect the Company's consolidated
financial position or results of operations.
F-6
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 programs to
corporations, hospitals, communities and universities 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, injury prevention and work-injury management consulting, and
on-site physical therapy. While consumers of these services are typically
corporate employees and individuals interested in a healthy lifestyle, revenues
are generated almost exclusively through business to business, contractual
relationships.
Effective January 1, 2001, the Company sold its subsidiary, International
Fitness Club Network (IFCN), which organized and maintained a network of
commercial fitness and health clubs and marketed memberships in such clubs to
employers and insurance companies.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2002 COMPARED TO THE
QUARTER ENDED MARCH 31, 2001.
REVENUES. Revenues increased $261,000 or 4.1% to $6,687,000 for the three months
ended March 31, 2002, from $6,426,000 for the three months ended March 31, 2001.
Management fee and consulting revenues increased $184,000 or 2.9% while the
on-site and occupational health services revenues increased $77,000 or 42.8% for
the three months ended March 31, 2002, compared to the same period in 2001.
These increases are attributed to the addition of new contracts and the
expansion of several existing contracts.
OPERATING INCOME. Operating income increased $6,000 or 1.5 % to $396,000 for the
three months ended March 31, 2002, from $390,000 for the same period in 2001.
This increase in operating income is attributed to an increase in gross profit
of $107,000 or 7.8%, and a decrease in the selling, general, and administrative
expenses of $80,000 or 16.2%, offset by an increase of $181,000 in salaries
expense. The increase in gross profit is the result of the addition of new
contracts and the expansion of several existing contracts. The decrease in
selling, general, and administrative expenses is primarily due to the adoption
of SFAS 142, which eliminates the amortization of goodwill and intangible assets
with indefinite lives. The amount of amortization expense related to goodwill in
the three months ended March 31, 2001 totaled $107,000. The increase in salary
expense is primarily attributed to additions to the sales and marketing staff,
and increased benefits costs.
OTHER INCOME AND EXPENSE. Interest expense decreased $31,000 or 23.9% to $99,000
for the three months ended March 31, 2002, compared to $130,000 for the same
period in 2001. This decrease is due to decreased levels of borrowing and a
lower interest rate. The Company's cost of borrowed funds decreased from 11.50%
for the first quarter of 2001, to 9.00% for the first quarter of 2002. Other
income decreased $229,000 due the gain on sale of IFCN that was recognized in
the first quarter of 2001.
INCOME TAXES. Income taxes decreased $522,000 to a benefit of $492,000 for the
three months ended March 31, 2002 compared to an expense of $30,000 for the same
period in 2001. The decrease is mainly due to a reduction of the deferred tax
asset valuation of $625,300, offset by $114,300 of income tax expense. The
reduction of the Company's deferred tax asset valuation allowance is based upon
the Company's estimate of future taxable income. The Company will continue to
evaluate its results of operations and estimated future taxable income to
determine when the remaining deferred tax valuation allowance of $1,875,900 can
be reduced.
NET EARNINGS. As a result of the above, net earnings for the three months ended
March 31, 2002 increased $330,000 to $787,000 for the three months ended March
31, 2002, compared to $457,000 for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $547,000 at March 31, 2002, compared to
working capital of $381,000 at December 31, 2001. The increase in working
capital is due to the increase in accounts receivable.
3
The Company maintains a credit agreement with Coast Business Credit for a $5.0
million working capital facility which expires in July 2003. The facility bears
interest at the prime rate plus 3.0% with a minimum rate of 9.0% (effective rate
of 9.0% at March 31, 2002 and December 31, 2001). Available credit under the
loan is based upon certain profitability and cash collection multiples and was
approximately $1,979,000 at March 31, 2002. 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 was in compliance
with all of the covenants in effect as of March 31, 2002.
As of March 31, 2002, the Company has no off-balance sheet arrangements or
transactions with unconsolidated, limited purpose entities. Refer to the
footnotes in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001 for disclosure related to the Company's "Commitments and
Contingencies."
The Company believes that sources of capital to meet future obligations will be
provided by cash generated through operations and 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,
2001, 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
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
None.
6
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 9, 2002 HEALTH FITNESS CORPORATION
..
By /s/ Jerry Noyce
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Jerry Noyce
Chief Executive Officer
(Principal Executive Officer)
By /s/ Wesley Winnekins
--------------------------------------------------
Wesley Winnekins
Chief Financial Officer
(Principal Financial and Accounting Officer)
7
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-- incorporated by reference to the Company's Quarterly Report
on form 10-QSB for the quarter ended March 31, 2001
11.0 Statement re: Computation of Earnings per Share