UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission file number: 0-25064
HEALTH FITNESS PHYSICAL THERAPY, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1580506
(State of incorporation or organization) (I.R.S. Employer Identification No.)
3500 West 80th Street, Bloomington, Minnesota 55431
(Address of principal executive offices) (Zip Code)
(612) 831-6830
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
capital stock, as of August 1, 1996 was:
Common Stock, $.01 par value, 7,096,259 shares
Transitional Small Business Issuer Format: [ ] Yes [X] No
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 506,652 $ 45,596
Accounts receivable 3,926,332 4,324,870
Inventory 392,158
Prepaid expenses and other 457,638 262,343
------------ ------------
Total current assets 4,890,622 5,024,967
PROPERTY (net) 807,414 1,002,825
OTHER ASSETS:
Goodwill (net) 7,925,834 8,141,929
Non-compete agreement (net) 363,823 336,191
Trade accounts receivable (long-term) 210,000 370,000
Other 85,931 347,477
------------ ------------
$ 14,283,624 $ 15,223,389
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,654,749 $ 1,141,942
Trade accounts payable 322,833 548,065
Accrued salaries, wages and payroll taxes 1,212,640 1,350,705
Other accrued liabilities 745,055 989,471
Current portion of long-term debt 195,168 262,319
Current portion of obligations under capital leases 33,388 25,537
Deferred revenue 1,122,666 1,191,303
------------ ------------
Total current liabilities 6,286,499 5,509,342
LONG-TERM DEBT, less current portion 470,965 300,662
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 3,113 --
DEFERRED LEASE OBLIGATION 124,113 102,750
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 5,000,000 shares,
none issued or outstanding
Common stock, $.01 par value; 12,000,000 and 25,000,000
shares authorized, 6,437,429 and 7,096,259 shares
issued and outstanding, respectively 64,374 70,963
Additional paid-in capital 10,200,233 11,605,706
Accumulated deficit (2,801,270) (2,289,062)
------------ ------------
7,463,337 9,387,607
Stockholder note and interest receivable (64,403) (76,972)
------------ ------------
7,398,934 9,310,635
------------ ------------
$ 14,283,624 $ 15,223,389
============ ============
See notes to consolidated financial statements.
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<TABLE>
<CAPTION>
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Fitness center management contracts $ 3,599,228 $ 3,925,641 $ 4,522,894 $ 7,825,315
Physical therapy 1,626,577 1,759,942 3,171,269 3,327,249
Equipment -- 1,212,138 -- 2,720,089
------------ ------------ ------------ ------------
5,225,805 6,897,721 7,694,163 13,872,653
COST OF REVENUES:
Salaries 3,378,034 3,860,036 4,807,055 7,753,320
Support 304,475 285,661 585,682 565,451
Occupancy 237,001 325,434 465,007 640,242
Equipment -- 854,896 -- 1,961,923
------------ ------------ ------------ ------------
3,919,510 5,326,027 5,857,744 10,920,936
------------ ------------ ------------ ------------
Gross profit 1,306,295 1,571,694 1,836,419 2,951,717
OPERATING EXPENSES:
Salaries 573,398 566,896 785,248 1,086,884
Selling, general, and administrative 526,788 635,123 768,148 1,161,153
------------ ------------ ------------ ------------
1,100,186 1,202,019 1,553,396 2,248,037
------------ ------------ ------------ ------------
206,109 369,675 283,023 703,680
INTEREST INCOME 1,789 1,904 24,694 4,757
INTEREST EXPENSE (171,095) (88,590) (194,817) (196,229)
------------ ------------ ------------ ------------
NET INCOME $ 36,803 $ 282,989 $ 112,900 $ 512,208
============ ============ ============ ============
NET INCOME PER
COMMON AND COMMON
EQUIVALENT SHARE $ .01 $ .04 $ .02 $ .07
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,027,184 6,935,726 5,949,007 6,847,896
============ ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
---------------------------
1995 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112,900 $ 512,208
Adjustment to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 391,050 542,667
Deferred revenue (39,154) (7,642)
Change in assets and liabilities:
Trade accounts receivable (73,470) (272,872)
Inventory (24,257)
Prepaid expenses and other (53,771) 232,971
Other assets 72,237 (290,915)
Trade accounts payable (329,466) (272,630)
Accrued liabilities (239,828) 347,237
----------- -----------
Net cash (used in) provided by operating activities (159,502) 766,767
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (28,389) (130,059)
Payments for acquisitions, net of liabilities assumed (3,156,999) (130,784)
----------- -----------
Net cash used in investing activities (3,185,388) (260,843)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 1,370,000 2,065,000
Repayment of line of credit (879,765) (1,110,000)
Proceeds from notes payable 2,800,000
Repayment of notes payable (1,338,494) (1,854,986)
Borrowings of long-term debt 113,000
Repayment of long-term debt (245,000)
Financing costs (55,500)
Payments on capital lease obligations (71,945) (17,730)
Proceeds from issuance of common stock 442,812 95,305
Payments of common stock issuance costs (56,010)
Advances on notes receivable (19,047) (12,569)
Payments received on notes receivable 2,210
----------- -----------
Net cash provided by (used in) financing activities 2,194,261 (966,980)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,150,629) (461,056)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,976,321 506,652
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 825,692 $ 45,596
=========== ===========
See notes to consolidated financial statements
</TABLE>
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles 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-KSB for
the year ended December 31, 1995. 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 six months ended
June 30, 1996 are not necessarily indicative of the operating results for the
year ending December 31, 1996.
INVENTORIES are recorded at the lower of cost (First-in, first-out basis) or
market.
GOODWILL represents the excess of the purchase price and related costs over the
fair value of the net assets of the business acquired. Goodwill relating to the
acquisition of operators of corporate fitness centers is being amortized on a
straightline basis over 20 years. Goodwill relating to the acquisitions of
physical therapy clinics and a supplier of fitness equipment is being amortized
on a straightline basis over 15 years.
NOTE 2. ACQUISITIONS
On April 6, 1995, the Company completed the acquisition of all of the issued and
outstanding stock of closely-held Fitness Centers of America dba Fitness Systems
("Fitness Systems"), a California-based operator of corporate fitness centers.
This acquisition was accounted for under the purchase method of accounting, and
accordingly, the consolidated statements of operations included results of
operations of Fitness Systems since April 1, 1995. The following unaudited pro
forma condensed combined statements of operations reflect the combined
operations of the Company had the acquisition of Fitness Systems occurred at the
beginning of 1995.
1995 1996
(Unaudited)
Revenues $10,302,000 $13,873,000
Cost of revenues 8,065,000 10,921,000
----------- ----------
Gross profit 2,237,000 2,952,000
Operating expenses 1,946,000 2,440,000
---------- ----------
Net income $ 291,000 $ 512,000
=========== ==========
Net income per common and
common equivalent share $ .05 $ .07
=========== ===========
Weighted average common and common
equivalent shares outstanding 5,949,000 6,848,000
=========== ===========
On January 11, 1996, the Company completed the acquisition of all of the assets
and assumed the liabilities of closely-held Pro Source Fitness, Inc. ("Pro
Source"), a Minnesota-based supplier of fitness equipment and service. This
acquisition was accounted for under the purchase method of accounting, and
accordingly, the consolidated statements of operations included results of
operations of Fitness Systems since January 1, 1996. In connection with the
acquisition, assets purchased, liabilities assumed, and cash consideration paid
were as follows:
Assets acquired:
Cash $ 9,648
Accounts receivable 285,666
Inventory 367,901
Property 237,745
Prepaid expenses and other 37,676
Excess of purchase price over net assets acquired 135,369
-----------
1,074,005
Liabilities assumed:
Accounts payable 497,862
Accrued expenses and other 116,795
Debt 361,752
-----------
976,409
-----------
Cash consideration paid $ 97,596
===========
The purchase agreement requires the Company to make an annual cash payment of up
to 30% of gross profits, as defined, to the seller for four calendar years
starting in 1996. For the fiscal year ended December 31, 1995, Pro Source
reported revenues of $4,992,000.
The Company entered into employment agreements with certain key employees of Pro
Source for terms of two to four years. These agreements provide for minimum
aggregate annual salaries of approximately $135,000 and also provide for
incentive awards based on performance. The Company also granted stock options to
the former owners of Pro Source to purchase up to 75,000 shares of the Company's
common stock at $3.00 per share in connection with these employment agreements.
On April 1, 1996 the Company purchased the assets of Christopher Breuleux, a
sole proprietor, for $83,000 plus certain stock options granted to Mr. Breuleux.
The Company has granted Mr. Breuleux stock options to purchase up to 25,000
shares of the Company's stock at $3.00 per share.
NOTE 3. DEBT
In January 1996, the Company paid $354,986 to retire the debt assumed in the Pro
Source acquisition. On February 1, 1996 the Company paid $500,000 plus the
related accrued interest on the $1,000,000 unsecured Convertible Note
outstanding at December 31, 1995, which was then cancelled and exchanged for a
replacement $500,000 unsecured Convertible Note (the "Replacement Convertible
Note") due August 1, 1996. The Replacement Convertible Note bore interest at the
prime rate plus 2%. The holder of the Replacement Convertible Note had the
option to convert the debt into shares of the Company's common stock at a
conversion price of the lesser of 85% of the average bid price of the Company's
stock over the immediately preceding 10 days or $3.33 per share beginning June
1, 1996. In connection with the cancellation of the $1,000,000 Convertible Note
and exchange for the Replacement Convertible Note, the Company reduced the
purchase price of the warrants issued in connection with the $1,000,000
unsecured Convertible Note from $4 per share to $3 per share. A value of $40,000
was assigned to the repricing of the warrants based on independent appraisal.
This cost was amortized using the interest method from the date of issuance to
the earlier of the due date or conversion. On June 26, 1996 the holder of this
$500,000 unsecured Convertible Note converted the debt and related accrued
interest into 222,856 shares of the Company's common stock at the conversion
price of $2.3375 per share representing 85% of the average bid price of the
Company's stock over the immediately preceding 10 days.
In February 1996, the Company entered into a revolving line of credit agreement
which provides for a maximum borrowing of $1,500,000 through May 31, 1997.
Interest on outstanding borrowings under the line of credit is payable monthly
and is computed at the prime rate plus 2%. Borrowings under the line of credit
are secured by substantially all the Company's assets and personally guaranteed
by the Company's president. The agreement contains various restrictive covenants
relating to minimum levels of net worth and quarterly net income levels,
limitations on additional indebtedness, and other matters. The $850,000 line of
credit existing at December 31, 1995, was terminated in February 1996. As of
June 30, 1996 the Company has borrowed $955,000 on the revolving line of credit.
On April 6, 1996 the Company paid the $1,000,000 non-interest bearing note to
the Seller of Fitness Systems using $1,000,000 from the revolving line of credit
to finance the transaction.
On April 24, 1996 the holder of a $500,000 unsecured Convertible Note converted
the debt and related accrued interest into 234,099 shares of the Company's
common stock at the conversion price of $2.3375 per share representing 85% of
the average bid price of the Company's stock over the immediately preceding 10
days.
On June 15, 1996 the Company entered into a $113,000 note payable. The note
requires monthly payments of $5,209 including interest at 9.9% through June
1998. The note is secured by various pieces of exercise equipment.
NOTE 4. STOCKHOLDERS' EQUITY
On April 6, 1996 the Company issued 40,000 shares of common stock to the sellers
of Fitness Systems as a portion of the consideration, that was withheld for one
year, pursuant to the Stock Purchase Agreement dated March 24, 1995.
On April 24, 1996 the holder of a $500,000 unsecured Convertible Note converted
the debt and related accrued interest into 234,099 shares of the Company's
common stock at the conversion price of $2.3375 per share representing 85% of
the average bid price of the Company's stock over the immediately preceding 10
days.
On June 26, 1996 the holder of the $500,000 Replacement Convertible Note
converted the debt and related accrued interest into 222,856 shares of the
Company's common stock at the conversion price of $2.3375 per share representing
85% of the average bid price of the Company's stock over the immediately
preceding 10 days.
During the six months ended June 30, 1996, the Company received proceeds of
$95,305 when a stock option and warrant holder exercised his right to purchase a
total of 161,875 shares of common stock at a price of $.58875 per share.
NOTE 5. INCOME TAXES
The provision for income taxes at June 30, 1996 and 1995 has been offset by net
operating loss carryforwards through a reduction in the valuation allowance.
As of June 30, 1996, the Company has approximately $2,175,000 of federal and
state net operating loss carryforwards. These carryforwards expire in varying
amounts from 2004 to 2009. Approximately $2,100,000 of the net operating loss is
limited under Internal Revenue Code Section 382.
NOTE 6. NET INCOME PER SHARE
Income per share of common and common equivalent was computed by dividing net
income by the weighted average number of shares of common and common equivalent
shares outstanding during each period.
This amount includes 221,319 and 200,000 contingent shares assumed to be issued
to the Sellers of Fitness for the six and three months ended June 30, 1996,
respectively. The Company has contractually agreed with the Sellers of Fitness
Systems that if the average closing sale price of the Company's publicly traded
stock during the fourth calendar quarter of 1996 does not reach at least $6.00
per share, the Company is obligated to issue sufficient additional shares of
stock so that the aggregate value of the stock consideration equals $1,200,000
based on the same three month average price calculation, using the closing sale
price of the Company's publicly traded stock on June 30, 1996. Options and
warrants were not included as common stock equivalents for the three or six
months ended June 30, 1996 due to their antidilutive effect.
This amount also includes common stock equivalents of 675,063 and 736,064 for
the six and three months ended June 30, 1995, respectively, from the assumed
exercise of outstanding options and warrants using the treasury stock method.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the consolidated statements of operations of the Company:
<TABLE>
<CAPTION>
For The Three Months
Ended June 30,
------------------------------------------------------------------
1995 1996
<S> <C> <C> <C> <C>
REVENUES:
Fitness center management contracts $3,600,000 68.9% $3,926,000 56.9%
Physical therapy 1,626,000 31.1 1,760,000 25.5
Equipment -- -- 1,212,000 17.6
---------- ------- --------- -----
Total revenues 5,226,000 100.0 6,898,000 100.0
COST OF REVENUES:
Fitness center management contracts 2,648,000 2,862,000
Physical therapy 1,272,000 1,376,000
Equipment -- 1,088,000
---------- ---------
Total cost of revenues 3,920,000 75.0 5,326,000 77.2
---------- ------- --------- -----
GROSS PROFIT:
Fitness center management contracts 952,000 1,064,000
Physical therapy 354,000 384,000
Equipment -- 124,000
---------- ----------
Total gross profit 1,306,000 25.0 1,572,000 22.8
OPERATING EXPENSES 1,100,000 21.1 1,202,000 17.4
OTHER EXPENSES, NET 169,000 3.2 87,000 1.3
---------- ------ ---------- -----
NET INCOME $ 37,000 .7% $ 283,000 4.1%
========== ====== ========== ======
For The Six Months
Ended June 30,
1995 1996
REVENUES:
Fitness center management contracts $ 4,523,000 58.8% $7,826,000 56.4%
Physical therapy 3,171,000 41.2 3,327,000 24.0
Equipment -- -- 2,720,000 19.6
----------- ------ ---------- ------
Total revenues 7,694,000 100.0 13,873,000 100.0
COST OF REVENUES:
Fitness center management contracts 3,290,000 5,853,000
Physical therapy 2,568,000 2,656,000
Equipment -- 2,412,000
----------- ----------
Total cost of revenues 5,858,000 76.1 10,921,000 78.7
----------- ------ ---------- ------
GROSS PROFIT:
Fitness center management contracts 1,233,000 1,973,000
Physical therapy 603,000 671,000
Equipment -- 308,000
----------- ----------
Total gross profit 1,836,000 23.9 2,952,000 21.3
OPERATING EXPENSES 1,553,000 20.2 2,248,000 16.2
OTHER EXPENSES, NET 170,000 2.2 192,000 1.4
----------- ------ ---------- ------
NET INCOME $ 113,000 1.5% $ 512,000 3.7%
=========== ====== ========== ======
</TABLE>
REVENUES. Revenues increased $1,672,000 or 32.0% to $6,898,000 for the three
months ended June 30, 1996 from $5,226,000 for the same period ended June 30,
1995. Revenues increased $6,179,000 or 80.3% to $13,873,000 for the six months
ended June 30, 1996 from $7,694,000 for the same period ended June 30, 1995. The
increase in fitness center management contract revenues of $326,000 for the
three months ended June 30, 1996 is due to the addition of several fitness
center management contracts and the increase in consulting revenue of $146,000.
The increase in fitness center management contract revenues of $3,303,000 for
the six months ended June 30, 1996 is primarily due to the acquisition of
Fitness Systems on April 6, 1995. The increase in physical therapy revenue of
$134,000 and $156,000 for the three and six month periods, respectively, is due
to the increase in the number of patient visits at one clinic as the result of
adding an additional physical therapist. The increase in equipment revenues is
the result of the Pro Source acquisition on January 11, 1996.
Fitness center management contract revenues for the year-ended December 31, 1996
are expected to increase as a result of revenues from Fitness Systems being
included for the entire year and the addition of new sites. Physical therapy
revenues are anticipated to increase as a result of performing physical therapy
on site at hospital and corporate fitness centers and increasing the number of
physical therapists at existing clinics. Fitness equipment revenues are expected
to be approximately $5,200,000 as a result of the Pro Source acquisition.
Fitness center management contract revenues are expected to be relatively
consistent on a quarterly basis in 1996. Physical therapy revenues are
anticipated to fluctuate on a quarterly basis in 1996. Based on limited
historical information, physical therapy revenues are relatively consistent in
the first three quarters but decrease approximately 25% in the fourth quarter.
Fitness equipment revenues are expected to be approximately $1,000,000 in the
third quarter and approximately $1,500,000 in the fourth quarter of 1996.
GROSS PROFIT. Gross profit increased $266,000 or 20.4% to $1,572,000 or 22.8% of
revenues for the three months ended June 30, 1996 from $1,306,000 or 25.0% of
revenue for the same period ended June 30, 1995. Gross profit increased
$1,116,000 or 60.8% to $2,952,000 or 21.3% of revenues for the six months ended
June 30, 1996 from $1,836,000 or 23.9% of revenue for the same period ended June
30, 1995. The increase in gross profit is due to increases of $112,000 and
$740,000 in the fitness center management segment, increases of $30,000 and
$68,000 in the physical therapy segment, and increases of $124,000 and $308,000
in the equipment segment for the three and six month periods, respectively.
The increase in total gross profit and gross profit margins in the fitness
center management segment for the three months ended June 30, 1996 was due to
the increase in consulting revenue. The increase in fitness center management
contracts gross profit for the six months ended June 30, 1996 is primarily due
to the acquisition of Fitness Systems on April 6, 1995. Gross margins in the
fitness center management segment for the six months ended June 30, 1996 did not
increase commensurate with the increase in revenues for this segment primarily
because of lower margins associated with the corporate contracts added as the
result of the Fitness Systems acquisition. Gross margins and total gross profit
in the physical therapy segment for the three months ended June 30, 1996
increased commensurate with the increase in revenues for this segment. The
increase in total gross profits and gross profit margins in physical therapy for
the six months ended June 30, 1996 is due to the sale of one underperforming
clinic in January 1995 and the addition of a physical therapist at one clinic in
January 1996. The increase in equipment gross profit is the result of the Pro
Source acquisition on January 11, 1996.
Future growth in the fitness center management business is expected to be
primarily in the corporate fitness environment with gross margins remaining
consistent with those experienced in 1995. Physical therapy gross margins are
expected to increase slightly over 1995 levels as a result of continued
centralization of accounting and marketing functions of the companies acquired
to date. Fitness equipment gross margins are anticipated to be approximately 10
to 15 percent for 1996.
OPERATING EXPENSES. Operating expenses increased $102,000 or 9.3% to $1,202,000
or 17.4% of revenue for the three months ended June 30, 1996 from $1,100,000 or
21.1% of revenue for the same period ended June 30, 1995. Operating expenses
increased $695,000 or 44.8% to $2,248,000 or 16.2% of revenue for the six months
ended June 30, 1996 from $1,553,000 or 20.2% of revenue for the same period
ended June 30, 1995. The increase is primarily due to increases in regional and
corporate salaries and benefits, occupancy, travel, and depreciation and
amortization. The increase in regional and corporate salaries and benefits and
occupancy is directly related to the acquisitions of Fitness Systems in April
1995 and Pro Source in January 1996. The increase in travel relates to an
increase in the number of fitness centers under management contracts. The
increase in depreciation and amortization is the result of the acquisitions of
Fitness Systems in April 1995 and Pro Source in January 1996. The decrease in
operating expenses as a percentage of revenues is due to the increase in 1996
revenues which offset the effect of the increase in operating expenses in 1996.
Operating costs as a percentage of fitness center management contracts and
physical therapy revenues are expected to decrease as corporate and regional
staff increases are not anticipated to be significant. Operating costs as a
percentage of fitness equipment revenues are anticipated to be approximately 7
to 10 percent in 1996.
OTHER EXPENSE (INTEREST EXPENSE/INCOME). Interest expense, net of interest
income decreased $82,000 or 48.5% to $87,000 for the three months ended June 30,
1996 from $169,000 for the same period ended June 30, 1995. Interest expense,
net of interest income increased $22,000 or 12.9% to $192,000 for the six months
ended June 30, 1996 from $170,000 for the same period ended June 30, 1995. The
decrease of $82,000 in the three month period and the increase of $21,000 in the
six month period were due almost entirely to the effective interest rate and
average borrowings in 1996 when compared to 1995.
NET INCOME. The Company's net income increased $246,000 or 664.9% to $283,000 or
$.04 per share for the three months ended June 30, 1996 from $37,000 or $.01 per
share for the same period ended June 30, 1995. For the six months ended June 30,
1996 the Company's net income increased $399,000 or 353.1% to $512,000 or $.07
per share from $113,000 or $.02 per share for the same period ended June 30,
1995.
LIQUIDITY AND CAPITAL RESOURCES. The Company had a working capital deficit of
$1,396,000 at December 31, 1995 and a working capital deficit of $484,000 as of
June 30, 1996. The change is primarily due to the increase in accounts
receivable and the decrease in notes payable. Notes payable at June 30, 1996
consisted of a $187,000 unsecured note issued in connection with a non-compete
agreement, which was paid on July 31, 1996 and $955,000 on the revolving line of
credit.
In January 1996, the Company paid $354,986 to retire the debt assumed in the Pro
Source acquisition. On February 1, 1996 the Company paid $500,000 plus the
related accrued interest on the $1,000,000 unsecured Convertible Note
outstanding at December 31, 1995, which was then cancelled and exchanged with
the Replacement Convertible Note due August 1, 1996. The Replacement Convertible
Note bore interest at the prime rate plus 2%. On June 26, 1996 this $500,000
unsecured Convertible Note was converted with its related accrued interest into
222,856 shares of the Company's common stock at the conversion price of $2.3375
per share representing 85% of the average bid price of the Company's stock over
the immediately preceding 10 days.
The debt paid in January and February of 1996 was financed from cash flows from
operations, borrowings from the revolving line of credit, and cash. To satisfy
the remaining debt obligations, the Company intends to use borrowings from the
revolving line of credit and future cash flows from operations.
In February 1996, the Company entered into a revolving line of credit agreement
which provides for a maximum borrowing of $1,500,000 through May 31, 1997. The
$850,000 line of credit existing at December 31, 1995, was terminated in
February 1996. Management believes the $1,500,000 line of credit is sufficient
to fund operations at contemplated levels. As of July 31, 1996 the Company has
borrowed $1,096,000 on the revolving line of credit.
On April 24, 1996 the holder of a $500,000 unsecured Convertible Note converted
the debt and related accrued interest into 234,099 shares of the Company's
common stock at the conversion price of $2.3375 per share representing 85% of
the average bid price of the Company's stock over the immediately preceding 10
days. The $1,000,000 non-interest bearing note was paid to the Seller of Fitness
Systems on April 6, 1996. The Company used $1,000,000 from the revolving line of
credit to retire this debt.
As of June 30, 1996, the Company's principal sources of liquidity included cash
and cash equivalents of $46,000 and trade accounts receivable of $4,325,000 and
a line of credit of $1,500,000 at a rate of prime plus 2% of which $955,000 was
outstanding at June 30, 1996. The decrease in cash and increase in trade
accounts receivable from December 31, 1995 to June 30, 1996 is primarily due to
the Company's acquisition of Pro Source and the repayment of the assumed debt.
The Company's strategy is to continue to expand its operations through
acquisitions and to improve profitability of the physical therapy clinics
purchased through the consolidation of the clinics' operating expenses.
Management anticipates that the purchase prices paid for future acquisitions
will be similar to the prices paid to date and payment terms may be a
combination of cash, notes payable, and where appropriate, shares of Common
Stock, with a portion of the purchase price to be paid at closing and, where
appropriate, a portion contingent upon achievement of earn-out criteria. As a
result of government health care regulations, however, the use in the future of
notes payable, earn-out arrangements or Common Stock may be limited. Future
financings may result in dilution to holders of Common Stock. It is anticipated
that funds required for future acquisitions and the integration of acquired
businesses with the Company will be provided from operating cash flow, the
proceeds expected from future financings and proceeds from future borrowings.
However, there can be no assurance that suitable acquisition candidates will be
identified by the Company in the future, that suitable financing for any such
acquisitions can be obtained by the Company or that any such acquisitions will
occur.
Future acquisitions may adversely affect cash flows from operating activities
due to average daily revenues outstanding on physical therapy clinic's accounts
receivable ranging from 75 to 100 days.
As a publicly-owned corporation, the Company has and will incur additional
expenses due to being a public company. The Company's growth strategy will
require expanded patient services and support, increased personnel throughout
the Company, expanded operational and financial systems and implementation of
new control procedures. These factors will affect future results and liquidity.
In order to conserve capital resources, the Company's policy is to lease its
physical facilities. As of June 30, 1996, the Company has no material
commitments to purchase capital assets.
The Company does not believe that inflation has had a significant impact of the
results of its operations.
ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", which will be effective for financial statements for fiscal years beginning
after December 15, 1995. The statement requires that such long-lived assets used
by the entity be reviewed for impairment whenever the carrying amount of an
asset may not be recoverable. The Company has determined that the carrying
amounts of its long-lived assets and intangibles at December 31, 1995 are
recoverable through expected cash flows from the use of such assets. The Company
does not currently expect this new standard to have a significant impact on
future results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and adoption of the
recognition and measurement provisions for nonemployee transactions no later
than after December 15, 1995. The new standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to financial statements
pro forma net income (loss) and earnings (loss) per share as if the company had
applied the new method of accounting.
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
has determined it will elect not to change to the fair value method for employee
stock based transactions. Adoption of the new standard for non-employee awards
did not effect the Company's cash flows.
SECURITIES LITIGATION REFORM ACT Except for the historical information contained
herein, the matters discussed in this quarterly report are forward-looking
statements which involve risks and uncertainties, including but not limited to
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices, and other factors
discussed in the Company's filings with the Securities and Exchange Commission.
Therefore, if for any reason, the Company's planned operations require more
capital than anticipated, revenues do not increase as planned, or operating
income is less than planned, the Company may need additional financing in order
to maintain its operations. There can be no assurance that the Company would be
able to obtain any required additional financing when needed or that such
financing, if obtained, would be on terms favorable or acceptable to the
Company.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may become involved in various claims and
lawsuits incident to the operation of its business, including claims arising
from accidents or from the negligent provision of physical therapy services.
On May 17, 1996, the Company was named as a defendant in a lawsuit entitled
WARREN M. HARGRAVE V. KATHRYN MEEKS, ET AL, brought in the Superior Court of
California, County of Santa Clara. The plaintiff alleged medical malpractice in
connection with the provision of physical therapy services at the Company's
physical therapy clinic. The plaintiff did not claim a specified amount of
damages. The Company tendered the defense of this claim to its insurance
carrier. The insurance carrier's initial response was that there would be no
insurance coverage for the liability represented by this litigation; however,
the carrier is re-examining its position. The Company has filed its answer on
July 24, 1996 and will defend it vigorously. The Company believes that the
outcome of this claim will not have a material adverse effect on the financial
position or results of operations of the Company. On July 8, 1996, the Company
received a Notice of Intent to Bring an Action within 90 days by Florence
Bloxsom who resides in California. Ms. Bloxsom alleges medical malpractice in
connection with the provision of physical therapy services at the Company's
physical therapy clinic in Newport Beach, California. The Notice made no claim
for a specified amount of damages. The Company believes this claim is without
merit and will defend it vigorously if and when it is filed. The Company
believes that the outcome of this claim will not have a material adverse effect
on the financial position or results of operations of the Company.
On April 17 of 1996, a former employee filed a claim entitled JULIANNA GATZA V.
HEALTH FITNESS CORPORATION AND HURLEY HEALTH SERVICES before the Circuit Court
of Genessee County in the State of Michigan, alleging wrongful termination of
employment and discrimination. The plaintiff has not claimed a specified amount
of damages. The Company tendered the defense of this claim to its insurance
carrier; and the insurance carrier's response has been that there would be no
insurance coverage for the liability represented by this litigation. The Company
has filed its answer, believes this claim is without merit and will defend it
vigorously. The Company believes that the outcome of this claim will not have a
material adverse effect on the financial position or results of operations of
the Company.
In July of 1995, a former Fitness Systems employee filed a claim entitled
FELICIA DAVIS V. FITNESS SYSTEMS before the New York Executive Department
Division of Human Rights, Case No. 1D-E-R-95-4602787-E, alleging constructive
discharge due to her race in violation of the New York state human rights law in
connection with her voluntary resignation of her employment with Fitness
Systems. The plaintiff has not claimed a specified amount of damages. The
Company believes this claim is without merit and will defend it vigorously. The
Company believes that the outcome of this claim will not have a material adverse
effect on the financial position or results of operations of the Company.
In 1994, the former program director of a fitness center operated by Fitness
Systems initiated a lawsuit against Fitness Systems entitled JOANN TODARA V.
FITNESS SYSTEMS, INC., Superior Court of New Jersey, Middlesex County, Case No.
L-4191-94, alleging disability discrimination under New Jersey law. Fitness
Systems answered the complaint and has aggressively defended the action.
Discovery is on-going and a trial calendar date of September 24, 1996 has been
set. The plaintiff requests punitive damages in her complaint. The Company
believes the outcome of this dispute will not have a material adverse effect on
its financial condition or results of operation.
In 1993, a lawsuit entitled GEORGE M. KLAPAKIS V. FITNESS SYSTEMS, INC., ET AL.,
was commenced in Los Angeles Superior Court, Case No. YC007999.. The matter
involves an employee of a client of Fitness Systems who was disciplined by that
client for alleged sexual harassment of a Fitness Systems employee. The
discipline involved a 30-day suspension without pay; the plaintiff remains an
employee of the client company. The employee has alleged sex and national origin
discrimination along with certain common law claims, including defamation. The
employee's complaint includes a request for punitive damages. On August 14,
1995, the defendants in this action filed a motion for summary judgment on each
of the plaintiff's causes of action and summary judgment, together with costs,
was granted in favor of the defendants on January 25, 1996. Plaintiff has now
appealed the decision and the Court of Appeals has not yet set dates for
briefing or oral argument. The Company intends to continue to vigorously defend
this lawsuit, which it believes is without merit, and will oppose any appeal by
the plaintiff.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Health Fitness Physical Therapy,
Inc. was held at 3:00 pm on Monday June 3, 1996. Shareholders holding 4,646,892
shares, or approximately 72.1% of outstanding shares were represented at the
meeting by proxy or in person. Matters submitted at the meeting for vote by the
shareholders were as follows:
a. Election of Directors.
The following nominees were elected to serve as members of the
Board of Directors until such time as a successor may be
elected: Number of Votes
<TABLE>
<CAPTION>
For Withheld Abstain
<S> <C> <C> <C> <C>
Loren S. Brink 4,631,967 14,925 NONE
John W. Morton 4,631,967 14,925 NONE
Charles E. Bidwell 4,631,967 14,925 NONE
James A Bernards 4,631,967 14,925 NONE
George E. Kline 4,631,967 14,925 NONE
William T. Simonet, M.D. 4,631,967 14,925 NONE
Robert K. Spinner 4,631,967 14,925 NONE
</TABLE>
All of the foregoing individuals are incumbent directors and represent
re-elections.
b. Approval of the amendment to the Company's Articles of Incorporation
to increase the number of authorized shares of Common Stock from 12,000,000 to
25,000,000. No change was made in the number of authorized shares of Preferred
Stock. As a result of the amendment, the total authorized shares of capital
stock of the Company (including both Common and Preferred) increased from
17,000,000 to 30,000,000 shares.
Shareholders approved the amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of Common Stock from
12,000,000 to 25,000,000 with a vote of 4,334,390 shares in favor, 181,466
shares against, and 131,036 shares abstained. As a result of the amendment, the
total authorized shares of capital stock of the Company (including both Common
and Preferred) increased from 17,000,000 to 30,000,000 shares.
c. Ratification of selection of independent auditors.
Shareholders ratified the selection of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 31, 1996 by a
vote of 4,119,837 in favor with 14,942 against, 4,405 abstained and 507,708 did
not vote.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Registrant was not required to file any reports on Form
8-K for the three months ended June 30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTH FITNESS PHYSICAL THERAPY, INC.
Dated: August 12, 1996 By: /s/Loren S. Brink
-------------------------------------
Loren S. Brink
Chairman, President and Chief
Executive Officer
Dated: August 12, 1996 By: /s/John W. Morton
-------------------------------------
John W. Morton
Treasurer and Chief Financial Officer
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-1-1996
<PERIOD-END> JUN-30-1996
<CASH> 45,596
<SECURITIES> 0
<RECEIVABLES> 4,495,264
<ALLOWANCES> 170,394
<INVENTORY> 392,158
<CURRENT-ASSETS> 5,024,967
<PP&E> 1,739,365
<DEPRECIATION> 736,540
<TOTAL-ASSETS> 15,223,389
<CURRENT-LIABILITIES> 5,509,342
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0
0
<COMMON> 70,963
<OTHER-SE> 9,316,644
<TOTAL-LIABILITY-AND-EQUITY> 15,223,389
<SALES> 2,720,089
<TOTAL-REVENUES> 13,872,653
<CGS> 1,961,923
<TOTAL-COSTS> 10,920,936
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 58,371
<INTEREST-EXPENSE> 196,229
<INCOME-PRETAX> 512,208
<INCOME-TAX> 0
<INCOME-CONTINUING> 512,208
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