UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number: 0-25064
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HEALTH FITNESS CORPORATION
--------------------------
(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 November 12, 2002 was:
Common Stock, $0.01 par value, 12,297,661 shares
HEALTH FITNESS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002 and F-1
December 31, 2001
Consolidated Statements of Earnings for the three and
nine months ended September 30, 2002 and 2001 F-2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 F-3
Notes to Consolidated Financial Statements F-4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 5
Item 4. Controls and Procedures 6
PART II. OTHER INFORMATION 7
Item 1. Legal Proceedings
Items 2.-3. Not Applicable 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 5. Not Applicable 7
Item 6. Exhibits and reports on Form 8-K 8
Signatures 9
Sarbanes-Oxley Section 302 certifications of Chief Executive Officer
and Chief Financial Officer 10
HEALTH FITNESS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
--------------------------------------------------------------------------------
September 30, December 31,
2002 2001
-------------- --------------
ASSETS
Current Assets
Cash $ 132,539 $ 221,008
Trade and other accounts receivable, less allowance for doubtful
accounts of $84,200 and $84,700 4,019,148 3,388,856
Prepaid expenses and other 150,016 130,090
Deferred tax asset 537,500 777,300
-------------- --------------
Total current assets 4,839,203 4,517,254
Property and Equipment, net 111,971 174,912
Other Assets
Goodwill 5,308,761 5,308,761
Intangible assets, less accumulated amortization of $768,600
and $619,100 87,248 186,737
Deferred tax asset 1,894,100 --
Other 1,044 11,410
-------------- --------------
$ 12,242,327 $ 10,199,074
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable $ 436,185 $ 1,442,304
Trade accounts payable 176,423 141,736
Accrued salaries, wages, and payroll taxes 1,382,428 915,379
Other accrued liabilities 545,287 392,794
Deferred revenue 1,287,946 1,243,946
-------------- --------------
Total current liabilities 3,828,269 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;
12,297,661 and 12,265,250 shares issued and outstanding 122,977 122,653
Additional paid-in capital 16,997,367 16,982,522
Accumulated deficit (8,706,286) (11,042,260)
-------------- --------------
8,414,058 6,062,915
-------------- --------------
$ 12,242,327 $ 10,199,074
============== ==============
The accompanying notes are an integral part of the financial statements.
F-1
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
--------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue $ 6,934,758 $ 6,356,489 $ 20,308,959 $ 19,361,661
Cost of Revenue 5,514,309 4,837,067 15,960,684 14,987,667
------------ ------------ ------------ ------------
Gross Profit 1,420,449 1,519,422 4,348,275 4,373,994
Operating Expenses
Salaries 702,243 595,037 2,058,319 1,609,431
Selling, general, and administrative 463,824 601,416 1,293,757 1,705,471
------------ ------------ ------------ ------------
Total operating expenses 1,166,067 1,196,453 3,352,076 3,314,902
------------ ------------ ------------ ------------
Operating Income 254,382 322,969 996,199 1,059,092
Other Income (Expense)
Interest expense (100,586) (108,188) (298,710) (354,955)
Gain on sale of subsidiary -- -- -- 228,613
Other, net (2,967) (16,736) (8,254) (11,988)
------------ ------------ ------------ ------------
Earnings Before Income Taxes 150,829 198,045 689,235 920,762
Income Tax Expense (28,664) (79,169) (259,161) (368,256)
Income Tax Benefit 655,300 64,000 1,905,900 310,000
============ ============ ============ ============
Net Earnings $ 777,465 $ 182,876 $ 2,335,974 $ 862,506
============ ============ ============ ============
Net Earnings Per Share
Basic $ 0.06 $ 0.01 $ 0.19 $ 0.07
Diluted 0.06 0.01 0.19 0.07
Weighted Average Common Shares Outstanding
Basic 12,289,558 12,264,163 12,173,442 12,198,583
Diluted 12,413,530 12,503,377 12,332,195 12,400,063
The accompanying notes are an integral part of the financial statements.
F-2
HEALTH FITNESS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
Nine Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net earnings $ 2,335,974 $ 862,506
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Common stock and warrants issued for services and compensation -- 62,019
Depreciation and amortization 151,273 557,238
Amortization of financing costs 87,248 87,249
Deferred taxes (1,654,300) --
Gain on sale of subsidiary -- (228,613)
Changes in operating assets and liabilities:
Trade and other accounts receivable (630,292) (163,381)
Prepaid expenses and other (19,926) (77,067)
Other assets 10,366 2,670
Trade accounts payable 34,687 (306,806)
Accrued liabilities 619,542 (70,737)
Deferred revenue 44,000 (16,945)
------------ ------------
Net cash provided by operating activities 978,572 708,133
Cash Flows From Investing Activities:
Purchases of property and equipment (26,091) (103,514)
Net proceeds from sale of subsidiary -- 368,555
Payment for non-compete agreement -- (30,000)
------------ ------------
Net cash provided by (used in) investing activities (26,091) 235,041
Cash Flows From Financing Activities:
Borrowings under note payable 19,728,215 19,849,780
Repayments of note payable (20,734,334) (21,079,436)
Proceeds from issuance of common stock 15,169 --
Payment of financing costs (50,000) (50,000)
Repayment of long term debt -- (81,407)
------------ ------------
Net cash used in financing activities (1,040,950) (1,361,063)
------------ ------------
Net Decrease in Cash (88,469) (417,889)
Cash at Beginning of Period 221,008 472,930
------------ ------------
Cash at End of Period $ 132,539 $ 55,041
============ ============
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 and
nine months ended September 30, 2002 are not necessarily indicative of the
operating results for the year ending December 31, 2002.
Certain reclassifications have been made to the consolidated financial
statements as of and for the three and nine months ended September 30, 2001 to
conform to the presentation used in 2002. Such reclassifications had no effect
on net earnings or stockholders' equity as previously reported.
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 September 30, 2002 and December 31, 2001). The Company is required to
pay minimum monthly interest equal to the effective rate times $2.5 million.
Available credit under the loan is based upon certain profitability and cash
collection multiples and was approximately $1,135,000 at September 30, 2002.
Borrowings under the credit agreement are secured 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. At
September 30, 2002, the Company was not in compliance with the covenant that
requires the Company to maintain a certain minimum tangible net worth. The
tangible net worth covenant requires the inclusion of the profit and loss effect
related to the recognition of deferred tax benefits, but excludes the balance
sheet effect of the deferred tax asset.
On October 31, 2002, the Company entered into an annual renewable, revolving
line of credit with Merrill Lynch Business Financial Services, Inc. (the
"Merrill Loan") to refinance the Company's working capital facility with Coast
Business Credit. The maximum funds available on the Merrill Loan are the lesser
of i.) $2,750,000, or ii.) 80% of the Company's trade accounts receivable less
than 90 days old. The Merrill Loan bears interest at an annual rate of 2.35%
plus the One-Month LIBOR rate, or 4.09% at October 31, 2002. Borrowings under
the Merrill Loan are secured by substantially all of the Company's assets. The
Company is also required to comply with certain quarterly financial covenants,
including covenants related to the Company's minimum tangible net worth, total
liabilities to tangible net worth and fixed charge coverage.
NOTE 3. INCOME TAXES
Income taxes were calculated based on management's estimate of the Company's
effective tax rate. Income taxes for the nine months ended September 30, 2002
include benefits realized from a $1,875,900 reduction of the Company's deferred
tax asset valuation allowance and a $30,000 federal tax refund related to the
enactment of the 2002 economic stimulus bill. These benefits are offset by
$259,200 of income tax expense, which includes the recognition of federal and
state income taxes owing on taxable income, as well as management's estimate of
minimum state 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. Based
upon the Company's current assessment of future profitability, the Company
expects to recognize its remaining deferred tax valuation allowance of $625,000
by December 31, 2002.
F-4
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 $425,000 and recorded a gain on sale of approximately $229,000.
NOTE 5. LEASE COMMITMENT
Effective November 1, 2002, the Company amended its corporate office lease.
Under the amended lease, the Company moved its corporate headquarters to a new
office in the same building complex, and extended the term of the lease through
October 31, 2007. In addition to base rental payments, the lease requires the
Company to pay its proportionate share of real estate taxes, special
assessments, and maintenance costs. Approximate minimum rent payments under this
lease are as follows:
Years ending December 31,
2002 $ 17,000
2003 102,000
2004 104,000
2005 106,000
2006 108,000
Total minimum rent payments under the Company's current office lease was
approximately $72,000 for the nine months ended September 30, 2002.
NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS AND LEGISLATION
ADOPTION OF NEW ACCOUNTING STANDARDS
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 statement of earnings.
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 completed
step one of the transitional goodwill impairment test, and determined that no
potential impairment exists at June 30, 2002. The Company determined that its
goodwill relates to one reporting unit for purposes of impairment testing and
elected to complete the impairment test of goodwill annually on December 31,
2002.
The pro forma effect of adopting SFAS 142 on net earnings and net earnings per
share for the three and nine months ended September 30, 2001 compared to actual
results for the three and nine months ended September 30, 2002 is noted on the
following page:
F-5
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net earnings as reported $ 777,465 $ 182,876 $ 2,335,974 $ 862,506
Goodwill amortization -- 109,955 -- 326,601
------------ ------------ ------------ ------------
Adjusted net earnings $ 777,465 $ 292,831 $ 2,335,974 $ 1,189,107
============ ============ ============ ============
Basic net earnings per share:
Net earnings per share as reported $ 0.06 $ 0.01 $ 0.19 $ 0.07
Goodwill amortization per share -- 0.01 -- 0.03
------------ ------------ ------------ ------------
Adjusted net earnings per share $ 0.06 $ 0.02 $ 0.19 $ 0.10
============ ============ ============ ============
Diluted net earnings per share:
Net earnings per share as reported $ 0.06 $ 0.01 $ 0.19 $ 0.07
Goodwill amortization per share -- 0.01 -- 0.03
------------ ------------ ------------ ------------
Adjusted net earnings per share $ 0.06 $ 0.02 $ 0.19 $ 0.10
============ ============ ============ ============
Amortization expense of other intangible assets totaled $33,688 and $57,900 for
the three months ended September 30, 2002 and 2001, and totaled $149,486 and
$173,695 for the nine months ended September 30, 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
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS 145 streamlines the reporting
of debt extinguishments and requires that only gains and losses from
extinguishments meeting the criteria in Accounting Policies Opinion 30 will be
classified as extraordinary. Thus, gains and losses arising from extinguishments
that are part of a company's recurring operations will not be reported as an
extraordinary item. SFAS 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. The Company has chosen not to
early-adopt SFAS No. 145. We believe the adoption of SFAS No. 145 will not have
a material effect on our consolidated financial position or results of
operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 addresses accounting and processing
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue 94-3. SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date a company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We believe the adoption
of SFAS No. 146 will not have a material effect on our consolidated financial
position or results of operations.
F-6
RECENTLY PASSED LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Act"), which immediately impacts Securities and Exchange Commission
registrants, public accounting firms, lawyers and securities analysts.
This legislation is the most comprehensive since the passage of the Securities
Acts of 1933 and 1934. It has far reaching effects on the standards of integrity
for corporate management, board of directors, and executive management.
Additional disclosures, certifications and procedures will be required of the
Company. We do not expect any material adverse effect on the Company as a result
of the passage of this legislation; however, the full scope of the Act has not
yet been determined. The Act provides for additional regulations and
requirements of publicly traded companies, which have yet to be issued.
Refer to management's certifications contained elsewhere in this report
regarding the Company's compliance with Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002.
F-7
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.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2002 AS COMPARED TO
THE QUARTER ENDED SEPTEMBER 30, 2001.
REVENUE. Revenue increased $579,000 or 9.1% to $6,935,000 for the three months
ended September 30, 2002, from $6,356,000 for the three months ended September
30, 2001. Management fees and consulting revenue increased $512,000 or 8.3%
while occupational health services revenue increased $67,000 or 34.0%. These
increases are attributed to the addition of new contracts in our current lines
of business and the expansion of existing contracts.
GROSS PROFIT. Gross profit decreased $99,000 or 6.5% to $1,420,000 for the three
months ended September 30, 2002, from $1,519,000 for the three months ended
September 30, 2001. This decrease in gross profit is primarily due to higher
direct costs to manage certain contracts.
OPERATING INCOME. Operating income decreased $69,000 or 21.4% to $254,000 for
the three months ended September 30, 2002 from $323,000 for the three months
ended September 30, 2001. Operating income was affected by a decrease in gross
profit, an increase in salary expense, and a decrease in selling, general, and
administrative expense. For the three months ended September 30, 2002 as
compared to the three months ended September 30, 2001, salary expense increased
$107,000 or 18.0% and selling, general and administrative expenses decreased
$137,000 or 22.80%. The increase in salary expense is primarily attributed to
additions to the sales and marketing staff and increased employee benefits
costs. The decrease in selling, general, and administrative expenses is due to
lower contract service expenses and 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
September 30, 2001 totaled $110,000.
OTHER INCOME AND EXPENSE. Interest expense decreased $7,000 to $101,000 for the
three months ended September 30, 2002, compared to $108,000 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 an average of
9.6% for the third quarter of 2001, to 9.0% for the third quarter of 2002.
INCOME TAXES. Income taxes on a net basis decreased $642,000 to a benefit of
$627,000 for the three months ended September 30, 2002 compared to an expense of
$15,000 for the same period in 2001. The decrease is primarily due to a $625,000
reduction of the Company's deferred tax asset valuation allowance. 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 $625,000 can be
reduced.
NET EARNINGS. As a result of the above, net earnings for the three months ended
September 30, 2002 increased $594,000 to $777,000, compared to net earnings of
$183,000 for the same period in 2001.
3
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001.
REVENUE. Revenue increased $947,000 or 4.9% to $20,309,000 for the nine months
ended September 30, 2002, from $19,362,000 for the nine months ended September
30, 2001. Management fee and consulting revenue increased $736,000 or 3.9% while
occupational health services revenue increased $211,000 or 37.8% for the nine
months ended September 30, 2002, compared to the same period in 2001. These
increases are attributed to the addition of new contracts in our current lines
of business and the expansion of existing contracts.
GROSS PROFIT. Gross profit decreased $26,000 or 0.6% to $4,348,000 for the nine
months ended September 30, 2002, from $4,374,000 for the nine months ended
September 30, 2001. This decrease in gross profit is primarily due to higher
direct costs to manage certain contracts.
OPERATING INCOME. Operating income for the nine months ended September 30, 2002
decreased $63,000 to $996,000, a 5.9% decrease from $1,059,000 for the nine
months ended September 30, 2001. This decrease in operating income is primarily
attributed to the decrease in gross profit, an increase in salary expense of
$449,000, offset by a decrease in selling, general, and administrative expenses
of $412,000. The increase in salary expense is primarily attributed to additions
to the sales and marketing staff and increased employee benefits costs. The
decrease in selling, general, and administrative expenses is due to lower
contract service expenses and 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 nine months ended September
30, 2001 totaled $327,000.
OTHER INCOME AND EXPENSE. Interest expense decreased $56,000 to $299,000 for the
nine months ended September 30, 2002, compared to $355,000 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 an average of
10.6% for the nine months ended September 30, 2001, to 9.0% for the nine months
ended September 30, 2002. The gain on sale of subsidiary for the nine months
ended September 30, 2001 relates to the sale of the Company's IFCN subsidiary in
January 2001.
INCOME TAXES. Income taxes on a net basis decreased $1,705,000 to a benefit of
$1,647,000 for the nine months ended September 30, 2002 compared to an expense
of $58,000 for the same period in 2001. The decrease is primarily due to a
$1,876,000 reduction of the Company's deferred tax asset valuation allowance, a
federal income tax refund of $30,000, which are offset by $259,000 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
$625,000 can be reduced. Based upon the Company's current assessment of future
profitability, the Company expects to recognize its remaining deferred tax
valuation allowance of $625,000 by December 31, 2002.
NET EARNINGS. As a result of the above, net earnings for the nine months ended
September 30, 2002 increased $1,473,000 to $2,336,000 compared to net earnings
of $863,000 for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
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 September 30, 2002 and December 31, 2001). Available credit under the
loan is based upon certain profitability and cash collection multiples and was
approximately $1,315,000 at September 30, 2002. Borrowings under the credit
agreement are secured 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. At September 30, 2002, the
Company was not in compliance with the covenant that requires the Company to
maintain a certain minimum tangible net worth. The tangible net worth covenant
requires the inclusion of the profit and loss effect related to the recognition
of deferred tax benefits, but excludes the balance sheet effect of the deferred
tax asset.
4
On October 31, 2002, the Company entered into an annual renewable, revolving
line of credit with Merrill Lynch Business Financial Services, Inc. (the
"Merrill Loan") to refinance the Company's working capital facility with Coast
Business Credit. The maximum funds available on the Merrill Loan are the lesser
of i.) $2,750,000, or ii.) 80% of the Company's trade accounts receivable less
than 90 days old. The Merrill Loan bears interest at an annual rate of 2.35%
plus the One-Month LIBOR rate, or 4.09% at October 31, 2002. Borrowings under
the Merrill Loan are secured by substantially all of the Company's assets. The
Company is also required to comply with certain quarterly financial covenants,
including covenants related to the Company's minimum tangible net worth, total
liabilities to tangible net worth and fixed charge coverage.
As of September 30, 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."
On a short and long-term basis, the Company believes that sources of capital to
meet future obligations will be provided by cash generated through operations
and the Company's Merrill Loan. The Company does not believe that inflation has
had a significant impact on its results of its operations.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS 145 streamlines the reporting
of debt extinguishments and requires that only gains and losses from
extinguishments meeting the criteria in Accounting Policies Opinion 30 will be
classified as extraordinary. Thus, gains and losses arising from extinguishments
that are part of a company's recurring operations will not be reported as an
extraordinary item. SFAS 145 is effective for fiscal years beginning after May
15, 2002 with earlier adoption encouraged. The Company has chosen not to
early-adopt SFAS No. 145. We believe the adoption of SFAS No. 145 will not have
a material effect on our consolidated financial position or results of
operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 addresses accounting and processing
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force (EITF) Issue 94-3. SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date a company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. We believe the adoption
of SFAS No. 146 will not have a material effect on our consolidated financial
position or results of operations.
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
and Management's expectations concerning the time period in which the Company
will be able to recognize its remaining deferred tax valuation allowance of
$625,300. 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.
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.
5
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 a
date within 90 days of the filing of this report) that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in this report is accumulated and communicated to the
Company's management, including its principal executive officers as appropriate,
to allow timely decisions regarding required disclosure. The Certifying Officers
also have indicated that there were no significant changes in the Company's
internal controls or other factors that could significantly affect such controls
subsequent to the date of their evaluation, and there were no corrective actions
with regard to significant deficiencies and material weaknesses.
6
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to Item 3 (Legal Proceedings) of the Company's Annual Report on Form 10-K
for the year ended December 31, 2001.
Item 2. Changes in 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
Monday, May 13, 2002.
(b) Proxies for the Annual Meeting were solicited pursuant to
Regulation A under the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees, and the following persons
were elected directors of the Company to serve until the next annual meeting of
shareholders:
Nominee Number of Votes For Number of Votes Withheld
------- ------------------- ------------------------
James A. Bernards 10,367,316 147,123
K. James Ehlen, M.D. 10,447,986 66,453
Jerry V. Noyce 10,423,686 90,753
John C. Penn 10,447,986 66,453
Mark W. Sheffert 10,368,316 146,123
Linda Hall Whitmen 10,318,316 196,123
Rodney A. Young 10,447,986 66,453
(c) By a vote of 10,012,410 shares in favor, 446,179 shares opposed,
55,850 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved a 300,000 share increase in the number of shares issuable
under the Company's 1995 Employee Stock Purchase Plan.
(d) By a vote of 10,453,527 shares in favor, 4,678 shares opposed,
56,234 shares abstaining, and no shares represented by broker nonvotes, the
shareholders approved the selection of Grant Thornton LLP as the Company's
independent auditors for the current fiscal year.
Item 5. Other Information
None.
7
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page following signatures
(b) Reports on Form 8-K
On August 13, 2002, the Company filed a Current Report on Form 8-K to announce
that Jerry V. Noyce, Chief Executive Officer, and Wesley W. Winnekins, Chief
Financial Officer, of Health Fitness Corporation had submitted correspondence to
the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
On October 28, 2002, the Company filed a Current Report on Form 8-K to announce
that the Company had issued a press release announcing that it has been selected
by 3M to develop and operate onsite employee fitness centers at the company's
headquarters in St. Paul, Minnesota.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: November 12, 2002 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)
9
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Jerry Noyce, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Fitness
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
By /s/ Jerry V. Noyce
-------------------------------
Jerry V. Noyce
Chief Executive Officer
10
SARBANES-OXLEY SECTION 302 CERTIFICATION
I, Wesley Winnekins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Fitness
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
By /s/ Wesley Winnekins
-------------------------------
Wesley Winnekins
Chief Financial Officer
11
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly
Report on Form 10-QSB for the quarter ended September
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 September 30, 2001
10.13 Second Amendment, dated September 12, 2002, to Lease
Agreement between the Company and United Properties
Investment LLC, a Minnesota limited liability company -
incorporated by reference to the Company's Quarterly
Report on form 10-QSB for the quarter ended June 30,
2002
10.14 WCMA Loan and Security Agreement dated October 31, 2002
between the Company and Merrill Lynch Business Financial
Services, Inc.
11.0 Statement re: Computation of Earnings per Share
99.1 Certification by Jerry Noyce, Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification by Wesley Winnekins, Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002