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 MARCH 31, 2005
COMMISSION FILE NO. 000-25064
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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
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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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [ ] NO [X]
The number of shares outstanding of the registrant's common stock as of
May 13, 2005 was: Common Stock, $0.01 par value, 12,652,370 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 March 31, 2005 and 3
December 31, 2004
Consolidated Statements of Earnings for the three months 4
ended March 31, 2005 and 2004
Consolidated Statements of Cash Flows for the three months 5
ended March 31, 2005 and 2004
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings
Items 2-5. Not Applicable
Item 6. Exhibits
Signatures 15
Exhibit Index 16
2
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash $ 49,911 $ 241,302
Trade and other accounts receivable, less allowances of $212,000 and $210,700 8,692,559 8,147,430
Prepaid expenses and other 474,263 213,954
Deferred tax assets 1,212,500 1,660,100
----------------- -----------------
Total current assets 10,429,233 10,262,786
PROPERTY AND EQUIPMENT, net 141,042 150,308
OTHER ASSETS
Goodwill 9,022,501 9,022,501
Customer contracts, less accumulated amortization of $1,077,800 and $875,700 652,222 854,306
Trademark, less accumulated amortization of $93,300 and $75,800 256,667 274,167
Other intangible assets, less accumulated amortization of $86,300 and $81,300 11,777 61,493
Deferred tax assets 263,900 221,400
Other 76,661 87,015
----------------- -----------------
$ 20,854,003 $ 20,933,976
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 484,691 $ 840,155
Accrued salaries, wages, and payroll taxes 2,564,924 2,768,734
Other accrued liabilities 413,031 495,770
Accrued self funded insurance 218,065 225,500
Deferred revenue 1,906,602 1,977,093
----------------- -----------------
Total current liabilities 5,587,313 6,307,252
LONG-TERM OBLIGATIONS 1,573,788 1,612,759
COMMITMENTS AND CONTINGENCIES - -
PREFERRED STOCK, $0.01 par value; 5,000,000 shares authorized, 1,078,740
and 1,063,945 issued and outstanding 1,521,296 1,530,232
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 25,000,000 shares authorized;
12,652,370 and 12,582,170 shares issued and outstanding 126,524 125,822
Additional paid-in capital 17,895,457 17,836,675
Accumulated comprehensive income 2,914 2,459
Accumulated deficit (5,853,289) (6,481,223)
----------------- -----------------
12,171,606 11,483,733
----------------- -----------------
$ 20,854,003 $ 20,933,976
================= =================
See notes to consolidated financial statements.
3
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended
March 31,
------------------------------
2005 2004
------------- -------------
REVENUE $ 13,465,101 $ 12,666,374
COSTS OF REVENUE 10,023,299 9,579,437
------------- -------------
GROSS PROFIT 3,441,802 3,086,937
OPERATING EXPENSES
Salaries 1,387,923 1,342,709
Selling, general and administrative 736,866 830,106
Amortization of intangible assets 219,583 219,584
------------- -------------
Total operating expenses 2,344,372 2,392,399
------------- -------------
OPERATING INCOME 1,097,430 694,538
OTHER INCOME (EXPENSE)
Interest expense (11,923) (134,252)
Other, net (1,650) 921
------------- -------------
EARNINGS BEFORE INCOME TAX EXPENSE 1,083,857 561,207
INCOME TAX EXPENSE 434,323 209,500
------------- -------------
NET EARNINGS 649,534 351,707
Dividend to preferred shareholders 21,600 15,000
------------- -------------
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS $ 627,934 $ 336,707
============= =============
NET EARNINGS PER COMMON SHARE:
Basic $ 0.05 $ 0.03
Diluted 0.04 0.02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 12,619,603 12,409,619
Diluted 16,614,522 16,038,913
See notes to consolidated financial statements
4
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------------
2005 2004
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 649,534 $ 351,707
Adjustments to reconcile net earnings to net cash used in operating
activities:
Depreciation 19,573 24,170
Amortization 213,490 248,724
Deferred taxes 405,100 177,268
Change in assets and liabilities:
Trade and other accounts receivable (545,129) (2,944,325)
Prepaid expenses and other (260,309) (83,463)
Other assets 10,354 (113)
Trade accounts payable (355,007) (108,222)
Accrued liabilities and other (293,984) 1,258,955
Deferred revenue (70,491) 47,629
------------- -------------
Net cash used in operating activities (226,869) (1,027,670)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,307) (39,687)
Cash payments made for acquisition -- (189,706)
------------- -------------
Net cash used in investing activities (10,307) (229,393)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term obligations 7,186,985 2,450,000
Repayments of long-term obligations (7,225,956) (600,862)
Proceeds from the issuance of common stock 73,328 13,277
Proceeds from the exercise of stock options 11,428 21,000
------------- -------------
Net cash provided by financing activities 45,785 1,883,415
------------- -------------
NET INCREASE (DECREASE) IN CASH (191,391) 626,352
CASH AT BEGINNING OF PERIOD 241,302 281,294
------------- -------------
CASH AT END OF PERIOD $ 49,911 $ 907,646
============= =============
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 first
quarter ended March 31, 2005 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, 2004 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, 2004, and footnotes thereto included in the Company's Form 10-K as
filed with the United States Securities and Exchange Commission on March 31,
2005.
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
months ended March 31, 2005 are not necessarily indicative of the operating
results that may be expected for the year ended December 31, 2005.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Corporation and its wholly owned subsidiaries (the
Company) provide fitness and health management services and programs to
corporations, 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
the Company and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
Cash - The Company maintains cash balances at several financial institutions,
and at times, such balances exceed insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash.
Trade and Other Accounts Receivable - Trade and other accounts receivable
represent amounts due from companies and individuals for services and products.
The Company grants credit to customers in the ordinary course of business, but
generally does not require collateral or any other security to support amounts
due. Management performs ongoing credit evaluations of customers. The Company
determines its allowance for discounts and doubtful accounts by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company's previous loss history, the customer's current ability to
pay its obligation to the Company, and the condition of the general economy and
the industry as a whole. The Company writes off accounts receivable when they
become uncollectible, and payments subsequently received on such
6
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.
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.
Intangible Assets - The Company's intangible assets include customer
contracts, trademark, and deferred financing costs and are amortized on a
straight-line basis. Customer contracts represent the fair value assigned to
acquired management contracts and are amortized over the remaining life of the
contracts, of which 10 months remain at March 31, 2005. Trademark represents the
value assigned to an acquired trademark and is amortized over a period of five
years. Deferred financing costs 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. 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.
The Company has contracts with third-parties (e.g. janitorial services) 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 the Company based on services provided to the
ultimate customer. The Company does 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.
Comprehensive Income - Comprehensive income represents net earnings adjusted
for foreign currency translation adjustments. Total comprehensive income was
$628,389 and $335,434 for the three months ended March 31, 2005 and 2004.
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. 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, when dilutive.
Common stock options and warrants to purchase 277,500 and 365,100 shares of
common stock were excluded from the calculation for the three months ended March
31, 2005 and 2004 because their exercise price exceeded the average trading
price of the Company's common stock during each of the periods.
Stock-based Compensation - The Company utilizes the intrinsic value method of
accounting for its stock based employee compensation plans. All options granted
had an exercise price equal to the market value of the underlying common stock
on the date of grant and accordingly, no compensation cost is reflected in net
earnings for the three months ended March 31, 2005 and 2004. The following table
illustrates the effect on net
7
earnings and earnings per share if the Company had applied the fair value method
of accounting for stock options:
Three Months ended
March 31,
--------------------------------------
2005 2004
------------- ------------
Net earnings, applicable to common shareholders $ 627,934 $ 336,707
Less: Compensation expense determined under the fair value method,
net of tax (37,183) (23,621)
------------- ------------
Pro forma net earnings, basic 590,751 313,086
Add: Dividends to preferred shareholders 21,600 15,000
------------- ------------
Pro forma net earnings - diluted $ 612,351 $ 328,086
============= ============
Earnings per Share:
Basic, as reported $ 0.05 $ 0.03
============= ============
Basic, pro forma $ 0.05 $ 0.03
============= ============
Diluted, as reported $ 0.04 $ 0.02
============= ============
Diluted, pro forma $ 0.04 $ 0.02
============= ============
The pro forma information above should be read in conjunction with the related
historical information.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions and results
for the grants:
2005 2004
------------- ------------
Dividend yield None None
Expected volatility 78% 88.43%
Expected life of option 4 years 4 years
Risk-free interest rate 2.43% 3.27%
Weighted average fair value of options on grant date $ 1.59 $ 1.34
In December 2004, the Financial Accounting Standards Board, referred to herein
as the FASB, issued Statement 123R, Share-Based Payment. Statement 123R is a
revision of FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The revision requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based
payments granted to employees.
In April 2005, the United States Securities and Exchange Commission announced
the adoption of a new rule that amended the compliance dates for Statement 123R
as first adopted by the FASB. As a result of this change, the Company is
required to implement Statement 123R beginning with the Company's next fiscal
year starting January 1, 2006. The Company expects that the adoption of
Statement 123R will result in a decrease of net income due to additional
compensation expense attributed to employee stock options.
Fair Values of Financial Instruments - Due to their short-term nature, the
carrying value of the Company's 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
8
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 August 22, 2003, the Company entered into a $7,500,000 Credit Agreement with
Wells Fargo Bank, N.A. to provide the Company with acquisition financing and
general working capital (the "Wells Loan"). Working capital advances from the
Wells Loan are available on a revolving basis and are based upon a percentage of
the Company's eligible accounts receivable, less any amounts previously drawn.
At the option of the Company, the Wells Loan bears interest at prime or the
one-month LIBOR plus a margin of 2.25% to 2.75% based upon the Company's Senior
Leverage Ratio (effective rate of 5.75% and 5.25% at March 31, 2005 and December
31, 2004). Borrowing capacity under the Wells Loan decreases $250,000 on the
last day of each calendar quarter, beginning September 30, 2003, and matures on
June 30, 2007. The facility provided maximum borrowing capacity of $5,750,000
and $6,000,000 at March 31, 2005 and December 31, 2004. Excluding current
outstanding balances, $2,813,891 and $3,758,851 was available for borrowing on
such respective dates. Borrowings under the Wells Loan are collateralized by
substantially all of the Company's assets. The Company is required to comply
with certain monthly financial covenants, including a senior cash flow leverage
ratio, senior leverage ratio and current ratio. At March 31, 2005, the Company
had $1,573,788 outstanding under the Wells Loan, and was in compliance with all
of its financial covenants.
On August 25, 2003, the Company entered into a $3,000,000 Securities Purchase
Agreement with Bayview Capital Partners LP ("Bayview") to provide the Company
with acquisition financing and general working capital (the "Bayview
Investment"). The Bayview Investment was initially structured as a bridge note
(the "Bridge Note"), the proceeds of which were placed into escrow to fund a
portion of our purchase of the Health & Fitness Services Division of Johnson &
Johnson Health Care Systems Inc..
On December 8, 2003 (the "Effective Date"), the $3,000,000 Bridge Note issued to
Bayview was converted into a $2,000,000 term note (the "Term Note"), $1,000,000
in Series A Convertible Preferred Stock (the "Preferred Stock") and a warrant to
purchase common stock of the Company (the "Warrant") pursuant to the terms set
forth in the August 25, 2003 Securities Purchase Agreement.
The Preferred Stock was issued to Bayview at a price of $1.00 per share,
resulting in 1,000,000 shares issued on the Effective Date. The Preferred Stock
has a stated dividend rate of 6% per year, computed on a simple interest basis,
paid in kind in the form of additional shares of Preferred Stock using a price
of $1.00 per share ("PIK Dividends"). At the option of the holder, the Preferred
Stock, including any PIK Dividends, may be converted, at any time and from time
to time, into common stock of the Company at a price of $0.50 per share. In
addition, Bayview may require redemption of the Preferred Stock and PIK
Dividends upon a change of control or default (including default under the Term
Note).
The Warrant issued to Bayview on the Effective Date represents the right to
purchase 1,210,320 shares of common stock, which represented 8% of the Company's
common stock outstanding on a fully diluted basis at the Effective Date,
excluding the common stock issuable to Bayview upon conversion of the Preferred
Stock. The Warrant is exercisable at any time for a period of ten years at an
exercise price equal to $0.50 per share, and the shares obtainable upon exercise
of the Warrant may be put to the Company at fair market value (net of the
exercise price) upon a change of control or default.
On December 29, 2004, the Company prepaid its Bayview Term Note by utilizing
funds from the Wells Loan. In connection with the Term Note repayment, the
Company also paid a prepayment penalty of $80,000, which
9
represents 4% of the face value of the Term Note. In addition, the Company
incurred a one-time, non-cash charge to interest expense of $394,669,
representing $345,754 of unamortized difference between the face value of the
Term Note and its assigned relative fair value, as well as $48,916 of
unamortized financing costs related to the Term Note. At the same time, the
Company and Wells Fargo agreed to amend the Wells Loan to change the senior
leverage ratio covenant to reflect the Company's financial position subsequent
to the Term Note repayment. The Company was in compliance with this change in
covenant at March 31, 2005.
Balances of long-term obligations are as follows:
March 31, December 31,
2005 2004
----------- ------------
Wells Loan $ 1,573,788 $ 1,612,759
The outstanding principal balance on the Wells Loan matures June 2007.
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.
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%.
NOTE 5. STOCK OPTIONS
The Company maintains a stock option plan for the benefit of certain eligible
employees and directors of the Company. A total of 1,331,100 shares of common
stock are reserved for additional grants of options under the plan at March 31,
2005. Generally, the options outstanding (1) are granted at prices equal to the
market value of the stock on the date of grant, (2) vest over various terms and,
(3) expire over a period of five or ten years from the date of grant.
A summary of stock option activity for the quarter ended March 31, 2005 is as
follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Outstanding at December 31, 2004 1,921,550 $ 1.06
Granted 175,000 2.70
Exercised (23,375) 0.49
---------- --------
Outstanding at March 31, 2005 2,073,175 $ 1.21
========== ========
10
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 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, 2004.
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 our Annual Report on Form 10-K for
the fiscal year ended December 31, 2004.
GENERAL. Health Fitness Corporation and its wholly owned subsidiaries (the
Company) provide fitness and health management services and programs to
corporations, 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 FOR THE QUARTER ENDED MARCH 31, 2005 COMPARED TO THE
QUARTER ENDED MARCH 31, 2004.
REVENUE. Revenues increased $799,000 or 6.3% to $13,465,000 for the three months
ended March 31, 2005, from $12,666,000 for the three months ended March 31,
2004. This increase is attributable to staffing services growth of $396,000,
fitness and health program services growth of $394,000 and growth from
consulting services of $9,000.
GROSS PROFIT. Gross profit increased $355,000 or 11.5% to $3,442,000 for the
three months ended March 31, 2005, from $3,087,000 for the three months ended
March 31, 2004. This increase is due primarily to the revenue growth discussed
previously, as well as lower medical benefit costs for full-time employees.
As a percent of revenue, gross profit increased 1.2% to 25.6% from 24.4% for the
first quarter of 2004. This increase is due primarily to the increase in fitness
and health program service revenue, which generally has higher gross margins
than revenue realized from staffing services. Lower medical benefits for
full-time employees also contributed to the increase in gross profit as a
percent of revenue.
OPERATING EXPENSES AND OPERATING INCOME. Operating expenses decreased $48,000 to
$2,344,000 for the three months ended March 31, 2005 from $2,392,000 for the
three months ended March 31, 2004. This decrease is primarily attributed to a
decrease in expenses associated with the Company's acquisition integration
efforts that were incurred during the first quarter of 2004.
OTHER INCOME AND EXPENSE. Interest expense decreased $122,000 to $12,000 for the
three months ended March 31, 2005, compared to $134,000 for the same period in
2004. This decrease is due to the non-recurrance of interest charges in
connection with the December 2004 repayment of the Company's $2,000,000 Senior
Subordinated Note held by Bayview Capital Partners LP, the proceeds of which
were used to fund an acquisition. The Company's cost of borrowed funds decreased
to 6.0% for the first quarter of 2005 from 6.6% for the first quarter of 2004.
11
INCOME TAXES. Income tax expense increased $225,000 to $434,000 for the three
months ended March 31, 2005 compared to $209,000 for the same period in 2004.
The increase is primarily due to the $523,000 increase in earnings before taxes.
NET EARNINGS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the above, net
earnings applicable to common shareholders for the three months ended March 31,
2005 increased $291,000 or 86.4% to $628,000 compared to $337,000 for the same
period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $886,000 to $4,842,000 at March 31,
2005, compared to working capital of $3,956,000 at December 31, 2004. The
increase in working capital is due primarily to an increase in accounts
receivable and decreases in trade accounts payable and accrued expenses.
In addition to cash flows generated from operating activities, the Company's
other source of liquidity and working capital is provided by a $7,500,000 Credit
Agreement with Wells Fargo Bank, N.A. (the "Wells Loan"). 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, 2007. Working capital
advances from the Wells Loan are based upon a percentage of the Company's
eligible accounts receivable, less any amounts previously drawn. The facility
provided maximum borrowing capacity of $5,750,000 and $6,000,000 at March 31,
2005 and December 31, 2004. Excluding current outstanding balances, $2,813,891
and $3,758,851 was available for borrowing on such respective dates.
As of March 31, 2005, 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, 2004 for disclosure related to the Company's "Commitments and
Contingencies."
The Company believes that sources of capital to meet future obligations over the
next 12 months will be provided by cash generated through operations and the
Company's Wells Loan. Currently, the Company does 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.
The Company does not believe that inflation has had a significant impact on the
results of its operations.
12
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 the Company's
Annual Report on Form 10-K for the year ended December 31, 2004 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
improving margins, growth of the market for corporate, hospital, community and
university-based fitness centers, the development of new business models and the
Company's intention to expand the Company's programs and services. 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," "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 Item 1 of the
Company's Form 10-K for the year ended December 31, 2004 under "Risk
Factors/Forward-Looking Statements."
RECENTLY PASSED LEGISLATION
HIPPA. The Administrative Simplification provisions of the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") require group health plans
and health care providers who conduct certain administrative and financial
transactions electronically ("Standard Transactions") to (a) comply with a
certain data format and coding standards when conducting electronic
transactions; (b) use appropriate technologies to protect the security and
integrity of individually identifiable health information transmitted or
maintained in an electronic format; and (c) protect the privacy of patient
health information. The Company's occupational health line of business, which
accounts for approximately five percent of the Company's total revenue, and the
group health plan the Company sponsors for its employees are subject to HIPAA's
requirements. The Company expects to be in compliance with HIPPA requirements
within the timeline specified for the Company's affected business areas. The
Company's corporate, hospital, community and university based fitness center
management lines of business are not subject to the requirements of HIPAA.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is 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. An interest rate increase by one percentage point
would reduce the Company's future annual net income by approximately $16,000 at
current debt levels.
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.
13
ITEM 4. CONTROLS AND PROCEDURES
The Company's 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 the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits 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 the
Company's 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, the Company's internal control over financial
reporting.
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, 2004.
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
None.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
See Exhibit Index on page following signatures
14
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 16, 2005 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)
15
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
----------- -----------
**10.10 Employment agreement dated December 8, 2003 between the Company and
Brian Gagne*
**10.11 Employment agreement dated December 22, 2003 between the Company and
Michael Seethaler*
**11.0 Statement re: Computation of Earnings per Share
**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
16