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 September 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 November 11, 1996 was:
Common Stock, $.01 par value, 7,154,376 shares
Transitional Small Business Issuer Format: [ ] Yes [X] No
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 506,652 $ 9,297
Accounts receivable 3,926,332 4,196,549
Inventory - 436,701
Prepaid expenses and other 457,638 178,203
----------- -----------
Total current assets 4,890,622 4,820,750
PROPERTY (net) 807,414 1,544,551
OTHER ASSETS:
Goodwill (net) 7,925,834 8,128,390
Non-compete agreement (net) 363,823 347,375
Trade accounts receivable (long-term) 210,000 370,000
Other 85,931 102,148
----------- -----------
$ 14,283,624 $15,313,214
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,654,749 $ 1,430,000
Trade accounts payable 322,833 491,682
Accrued salaries, wages and payroll taxes 1,212,640 1,278,953
Other accrued liabilities 745,055 654,203
Current portion of long-term debt 195,168 263,516
Current portion of obligations under capital leases 33,388 16,672
Deferred revenue 1,122,666 1,194,005
----------- -----------
Total current liabilities 6,286,499 5,329,031
LONG-TERM DEBT, less current portion 470,965 296,901
OBLIGATIONS UNDER CAPITAL LEASES, less current portion 3,113 -
DEFERRED LEASE OBLIGATION 124,113 91,923
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 7,139,376 shares
issued and outstanding, respectively 64,374 71,394
Additional paid-in capital 10,200,233 11,630,639
Accumulated deficit (2,801,270) (2,026,601)
----------- -----------
7,463,337 9,675,432
Stockholder note and interest receivable (64,403) (80,073)
----------- -----------
7,398,934 9,595,359
----------- -----------
$14,283,624 $15,313,214
=========== ===========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1995 1996 1995 1996
-------- -------- ------- ------
<S> <C> <C> <C> <C>
REVENUES:
Preventative healthcare $3,799,998 $5,209,608 $ 8,322,892 $15,755,012
Rehabilitative healthcare 1,417,113 1,661,238 4,588,382 4,988,487
--------- --------- ----------- ----------
5,217,111 6,870,846 12,911,274 20,743,499
COST OF REVENUES:
Salaries 3,461,736 3,725,974 8,268,791 11,479,294
Support 294,357 414,297 880,039 979,748
Occupancy 239,237 334,052 704,244 974,294
Equipment - 973,957 - 2,935,880
--------- ---------- ----------- -----------
3,995,330 5,448,280 9,853,074 16,369,216
--------- ---------- ----------- -----------
Gross profit 1,221,781 1,422,566 3,058,200 4,374,283
OPERATING EXPENSES:
Salaries 458,187 436,458 1,243,435 1,523,342
Selling, general, and administrative 526,453 702,917 1,294,601 1,864,070
--------- ---------- ----------- -----------
984,640 1,139,375 2,538,036 3,387,412
--------- ---------- ---------- -----------
OPERATING INCOME 237,141 283,191 520,164 986,871
INTEREST INCOME 3,313 6,481 28,007 11,238
INTEREST EXPENSE (265,149) (27,211) (459,966) (223,440)
--------- ---------- ---------- -----------
NET (LOSS) INCOME $ (24,695) $ 262,461 $ 88,205 $ 774,669
========= ========== ========== ===========
NET (LOSS) INCOME PER
COMMON AND COMMON
EQUIVALENT SHARE $ NIL $ .04 $ .02 $ .11
========= ========== ========== ===========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 5,405,005 7,356,682 5,730,128 7,354,503
========= ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 88,205 $ 774,669
Adjustment to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 728,034 780,739
Deferred revenue 5,487 (4,940)
Change in assets and liabilities:
Trade accounts receivable (660,277) (144,551)
Inventory - (68,800)
Prepaid expenses and other 59,788 317,111
Other assets (127,571) (32,406)
Trade accounts payable (382,749) (329,013)
Accrued liabilities 26,444 (29,110)
---------- ----------
Net cash (used in) provided by operating activities (262,639) 1,263,699
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (48,515) (758,017)
Payments for acquisitions, net of liabilities assumed (3,209,885) (197,284)
Payment in connection with non-compete agreement - (25,000)
Payments in connection with earn-out provisions - (102,290)
---------- ----------
Net cash used in investing activities (3,258,400) (1,082,591)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 1,370,000 3,256,938
Repayment of line of credit (1,370,000) (1,826,938)
Proceeds from notes payable 4,100,000 -
Repayment of notes payable (1,445,882) (2,041,928)
Borrowings of long-term debt - 113,000
Repayment of long-term debt - (257,937)
Financing costs (174,965) -
Payments on capital lease obligations (78,395) (26,595)
Proceeds from issuance of common stock 496,812 120,667
Payments of common stock issuance costs (56,010) -
Advances on notes receivable (73,011) (15,670)
Payments received on notes receivable 25,000 -
---------- ----------
Net cash provided by (used in) financing activities 2,793,549 (678,463)
---------- ----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (727,490) (497,355)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,976,321 506,652
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,248,831 $ 9,297
========== ==========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
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 nine months ended
September 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 primarily 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
Revenues $15,519,000 $20,743,000
Cost of revenues 12,060,000 16,519,000
---------- ----------
Gross profit 3,459,000 4,224,000
Operating expenses 3,193,000 3,449,000
---------- ----------
Net income $ 266,000 $ 775,000
=========== ==========
Net income per common and
common equivalent share $ .05 $ .11
=========== ==========
Weighted average common and common
equivalent shares outstanding 5,730,000 7,355,000
=========== ==========
5
<PAGE>
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 services. This
acquisition was accounted for under the purchase method of accounting, and
accordingly, the Consolidated statements of operations included results of
operations of Pro Source 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 engaged in the business of providing preventative healthcare
development consulting services, for $84,336 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.
On July 2, 1996, the Company purchased the assets of Physical Therapy of Red
Wing, a general partnership engaged in the operation of an outpatient physical
therapy clinic, for $25,000. The Company also entered into a non-compete
agreement with the sellers which called for a lump sum payment of $25,000. The
non-compete agreement covers a period of two years and prohibits the sellers
from directly or indirectly competing with the Company within twenty-five miles
of the city of Red Wing, Minnesota.
6
<PAGE>
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
September 30, 1996 the Company has borrowed $1,430,000 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.
On July 31, 1996, the Company paid $206,938, including accrued interest of
$19,996, to the holder of a note payable.
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 nine months ended September 30, 1996, the Company received proceeds
of $120,667 when a stock option and warrant holder exercised his right to
purchase a total of 204,992 shares of common stock at a price of $.58875 per
share.
7
<PAGE>
NOTE 5. INCOME TAXES
The provision for income taxes at September 30, 1996 and 1995 has been offset by
net operating loss carryforwards through a reduction in the valuation allowance.
As of September 30, 1996, the Company has approximately $2,300,000 of federal
and state net operating loss carryforwards. These carryforwards expire in
varying amounts from 2004 to 2009. Approximately $2,000,000 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 257,143 contingent shares assumed to be issued to the
sellers of Fitness Systems for the three and nine months ended September 30,
1996, based on the closing sale price of the Company's stock on September 30,
1996. 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. Options and warrants were not
included as common stock equivalents for the three or nine months ended
September 30, 1996 due to their antidilutive effect.
This amount also includes common stock equivalents of 454,574 for the nine
months ended September 30, 1995 from the assumed exercise of outstanding options
and warrants using the treasury stock method and the assumed issuance of
contingent shares. Common stock equivalents were not included as common stock
equivalents for the three months ended September 30, 1995 due to their
antidilutive effect for the period in which the Company had a net loss.
8
<PAGE>
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 September 30,
----------------------------------------
1995 1996
---- ----
<S> <C> <C> <C> <C>
REVENUES:
Preventative healthcare $3,800,000 72.8% $5,210,000 75.8%
Rehabilitative healthcare 1,417,000 27.2 1,661,000 24.2
---------- ------ --------- ------
Total revenues 5,217,000 100.0 6,871,000 100.0
COST OF REVENUES 3,995,000 76.6 5,449,000 79.3
--------- ------ --------- ------
GROSS PROFIT 1,222,000 23.4 1,422,000 20.7
OPERATING EXPENSES 985,000 18.9 1,139,000 16.6
---------- ------ --------- ------
OPERATING INCOME (LOSS):
Preventative healthcare 544,000 686,000
Rehabilitative healthcare 101,000 115,000
Corporate (408,000) (518,000)
--------- ---------
Total operating income 237,000 4.5 283,000 4.1
OTHER EXPENSES, NET 262,000 5.0 21,000 0.3
---------- ------ --------- ------
NET (LOSS) INCOME $ (25,000) (0.5)% $ 262,000 3.8%
========== ======= ========= ======
For The Nine Months Ended September 30,
---------------------------------------
1995 1996
---- ----
REVENUES:
Preventative healthcare $8,323,000 64.5% $15,755,000 76.0%
Rehabilitative healthcare 4,588,000 35.5 4,988,000 24.0
----------- ------ --------- ------
Total revenues 12,911,000 100.0 20,743,000 100.0
COST OF REVENUES 9,853,000 76.3 16,369,000 78.9
----------- ------ ---------- ------
GROSS PROFIT 3,058,000 23.7 4,374,000 21.1
OPERATING EXPENSES 2,538,000 19.7 3,387,000 16.3
----------- ------ ----------- ------
OPERATING INCOME (LOSS):
Preventative healthcare 922,000 1,727,000
Rehabilitative healthcare 633,000 650,000
Corporate (1,035,000) (1,390,000)
----------- -----------
Total operating income 520,000 4.0 987,000 4.8
OTHER EXPENSES, NET 432,000 3.3 212,000 1.1
----------- ------ ----------- ------
NET INCOME $ 88,000 0.7% $ 775,000 3.7%
=========== ====== =========== ======
</TABLE>
9
<PAGE>
General. The Company is engaged in two principal lines of business (segments):
(i) preventative healthcare and (ii) rehabilitative healthcare. Preventative
healthcare includes the development, marketing and management of corporate and
hospital-based fitness centers and the sale of fitness equipment and service.
Rehabilitative healthcare relates to the operation of physical therapy clinics
that provide a full range of rehabilitation services.
The Company's preventative healthcare revenues come from the management and
consulting contracts and agreements and the sales of fitness equipment and
service. The management and consulting contracts and agreements provide for
specific management, consulting, and program fees and contain provisions for
modification, termination, and non-renewal.
The Company's rehabilitation revenues are comprised of physical therapy services
provided to patients at Company owned locations and at hospital and corporate
locations. Net revenues are a function of the number of patients treated, the
payor mix and the average net charge per treatment. Consequently, two patients
provided substantially similar treatments may result in different net revenues
because of differing reimbursement environments.
The Company incurs costs at three levels: (i) revenue generating sites, (ii)
regional sites that work closely with the revenue generating sites, and (iii)
general corporate costs. Management views the operational expenses of the
regional sites to be an integral component of the revenue generating sites.
Therefore, the discussion that follows is of revenues and operating income.
Revenues. Revenues increased $1,654,000 or 31.7% to $6,871,000 for the three
months ended September 30, 1996 from $5,217,000 for the same period ended
September 30, 1995. Revenues increased $7,832,000 or 60.7% to $20,743,000 for
the nine months ended September 30, 1996 from $12,911,000 for the same period
ended September 30, 1995. The increase in preventative healthcare revenues of
$1,410,000 for the three months ended September 30, 1996 is due to the addition
of several fitness center management contracts, the increase in consulting
revenue and the acquisition of a fitness equipment dealer on January 11, 1996.
The increase in preventative healthcare revenues of $7,432,000 for the nine
months ended September 30, 1996 is primarily due to the acquisition of Fitness
Systems on April 6, 1995 and the acquisition of a fitness equipment dealer on
January 11, 1996. The increase in rehabilitative healthcare revenues of $244,000
and $400,000 for the three and nine month periods ended September 30, 1996, when
compared to the same periods in 1995, is primarily due to the increase in the
number of patient visits at one clinic as the result of adding an additional
physical therapist.
Preventative healthcare revenues are expected to be relatively consistent on a
quarterly basis in 1996. On a quarterly basis in 1997, preventative healthcare
revenues are expected to increase as a result of adding management contracts and
increased sales of fitness equipment. Rehabilitative healthcare revenues are
anticipated to fluctuate on a quarterly basis in 1996. Based on limited
historical information, rehabilitative healthcare revenues are relatively
consistent in the first three quarters but decrease approximately 25% in the
fourth quarter. Rehabilitative healthcare revenues are anticipated to increase
on a quarterly basis in 1997 as a result of performing physical therapy on site
at additional corporate fitness centers, increasing the number of physical
therapists at existing clinics, and potential acquisitions of physical therapy
clinics. See "Liquidity and Capital Resources."
Operating Income. Operating income increased $46,000 or 19.4% to $283,000 for
the three months ended September 30, 1996 from $237,000 for the same period
ended September 30, 1995. Operating income increased $467,000 or 89.8% to
$987,000 for the nine months ended September 30, 1996 from $520,000 for the same
period ended September 30, 1995. The increase in operating income for the three
months ended September 30, 1996 is due to an increases of $142,000 in
preventative healthcare and $14,000 in rehabilitative healthcare, partially
offset by an increase of $110,000 in corporate operating costs. The increase in
operating income for the nine months ended September 30, 1996 is due to
increases of $805,000 in preventative healthcare and $17,000 in the
rehabilitative healthcare, partially offset an increase of $355,000 in corporate
operating costs.
10
<PAGE>
The increase in operating income in preventative healthcare for the three months
ended September 30, 1996 is primarily due to the acquisition of a fitness
equipment dealer on January 11, 1996 and an increase in consulting revenue. The
increase in preventative healthcare operating income for the nine months ended
September 30, 1996 is primarily due to the acquisition of an operator of
corporate fitness centers on April 6, 1995 and the acquisition of a fitness
equipment dealer on January 11, 1996.
Operating income in preventative healthcare for the three months ended September
30, 1996 did not increase commensurate with the increase in revenues for this
segment primarily due to the lower margins associated with the equipment sales
added as a result of the acquisition of a fitness equipment dealer. Operating
income, as a percentage of revenues, in preventative healthcare for the nine
months ended September 30, 1996 remained relatively consistent with that of the
same period in 1995 due to increased consulting revenue being offset by lower
margins in equipment sales.
The increase in operating income in the rehabilitative healthcare segment for
the three and nine months ended September 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, which are partially offset by the expenses
incurred to improve the Company's management and information systems. Operating
income in rehabilitative healthcare for the three and nine months ended
September 30, 1996 did not increase commensurate with the increase in revenues
for this segment primarily due to the expenses incurred to improve the Company's
management and information systems.
The increase in corporate operating costs for the three and nine months ended
September 30, 1996 is directly related to the acquisitions of an operator of
corporate fitness centers in April 1995 and a fitness equipment dealer in
January 1996. The increase is primarily due to the increase in depreciation and
amortization as a result of these acquisitions.
Preventative healthcare operating income is expected to increase in both the
corporate fitness and equipment sales environments, with operating income, as a
percentage of revenues, remaining consistent with that experienced during the
nine months ended September 30, 1996. Rehabilitative healthcare operating income
is expected to increase on a quarterly basis as a result of continued
centralization of accounting and marketing functions of the companies acquired
to date. Corporate expense increases are anticipated to be consistent with the
increases in revenue.
Other Expense (Interest Expense/Income). Interest expense, net of interest
income decreased $241,000 or 92.0% to $21,000 for the three months ended
September 30, 1996 from $262,000 for the same period ended September 30, 1995.
Interest expense, net of interest income decreased $220,000 or 50.9% to $212,000
for the nine months ended September 30, 1996 from $432,000 for the same period
ended September 30, 1995. The decreases of $241,000 in the three month period
and $220,000 in the nine month period were due to the lower average borrowings
in 1996 when compared to 1995.
Net Income (Loss). The Company's net income increased $287,000 to $262,000 or
$.04 per share for the three months ended September 30, 1996 from a loss of
$25,000 for the same period ended September 30, 1995. For the nine months ended
September 30, 1996 the Company's net income increased $687,000 or 780.7% to
$775,000 or $.11 per share from $88,000 or $.02 per share for the same period
ended September 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 $508,000 as of
September 30, 1996. The change is primarily due to the increase in accounts
receivable and the decrease in notes payable. Notes payable at September 30,
1996 consisted of the revolving line of credit.
11
<PAGE>
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.
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 and cash flows
from operating activities are sufficient to fund operations at current levels,
but that anticipated acquisitions in the Company's rehabilitative business will
require additional financing. As of October 31, 1996, the Company has borrowed
$1,077,000 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.
On July 31, 1996, the Company paid $206,938, including accrued interest of
$19,996, to the holder of a note payable using cash provided by operating
activities to finance the transaction.
On October 1, 1996, the Company entered into a software license agreement and a
computer consulting agreement with Aspen Information Systems, Inc. These
agreements require the Company to make cash payments of $420,000 within the next
calendar year. The Company expects to use cash provided by operating activities
to finance the transaction.
On October 15, 1996, the Company entered into a system design and implementation
agreement with Practice Management Consultants, Inc.("PMC") pursuant to which
PMC will design and implement various management systems for the management of
the Company's rehabilitative healthcare business. The agreement requires the
Company to pay all expenses incurred by PMC in connection with this agreement
through 1997. Costs associated with this agreement, including purchases for
equipment and software, are estimated to be in excess of $1,000,000. The Company
expects to use cash provided by operating activities and future borrowings to
finance the design and implementation of such systems.
As of September 30, 1996, the Company's principal sources of liquidity included
cash and cash equivalents of $9,000, trade accounts receivable of $4,567,000 and
a line of credit of $1,500,000 at a rate of prime plus 2% of which $1,430,000
was outstanding at September 30, 1996. The decrease in cash and increase in
trade accounts receivable from December 31, 1995 to September 30, 1996 is
primarily due to the Company's acquisition of Pro Source and the repayment of
the assumed debt.
12
<PAGE>
The Company's strategy is to continue to expand its rehabilitative healthcare
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.
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.
13
<PAGE>
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, has taken the plaintiff's deposition 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 tendered
the defense of this potential claim to its insurance carrier. No action was
taken within the 90-day period by the plaintiff, and the Company believes this
claim is without merit and will defend it vigorously if and when it is filed.
The Company believes that 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, 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 plans to take the plaintiff's deposition in late
November 1996. The Company believes that the outcome of this claim will not have
a material adverse effect on its financial position or results of operations.
14
<PAGE>
In July 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. This case
was withdrawn in August 1996.
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. This
case was settled in October 1996, the terms of which will not have a material
adverse effect on the Company's 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
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 - Articles of Incorporation, as amended, of the Company
*3.2 - Restated By-Laws of the Company
*4.1 - Specimen of Common Stock Certificate
27 - Financial Data Schedule
* Incorporated by reference to the Company's Registration Statement on
Form SB-2 No. 33-83784C.
(b) Reports on Form 8-K
The Registrant was not required to file any reports on Form 8-K for
the three months ended September 30, 1996.
15
<PAGE>
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: November 11, 1996 By: /s/Loren S. Brink
Loren S. Brink
Chairman, President and Chief
Executive Officer
Dated: November 11, 1996 By: /s/Charles E. Bidwell
Charles E. Bidwell
Chief Financial Officer
16
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
HEALTH FITNESS PHYSICAL THERAPY, INC.
I
The name of this corporation shall be Health Fitness Physical Therapy, Inc.
II
The location and post office address of the registered office of this
corporation in the State of Minnesota shall be 3600 West 80th Street, Suite 235,
Bloomington, Minnesota 55431.
III.
The aggregate number of shares of capital stock which this corporation is
authorized to issue is 30,000,000, of which 25,000,000 shares shall be common
shares with a par value of $.01 per share, and of which 5,000,000 shall be
preferred shares of $.01 par value. Authority is hereby expressly vested in the
Board of Directors of the corporation, subject to the provisions of this Article
III and to the limitations prescribed by law, to authorize the issue from time
to time of one or more series of preferred shares and, with respect to each such
series, to determine or fix by resolution or resolutions adopted by the
affirmative vote of a majority of the whole Board of Directors providing for the
issue of such series the voting powers, full or limited, if any, of the shares
of such series and the designations, preferences and relative, participating,
optional or other special rights and the qualifications, limitations or
restrictions thereof, including, without limitation, the determination or fixing
of the rates of and terms and conditions upon which any dividends shall be
payable on such series, any terms under or conditions on which the shares of
such series may be redeemed, any provision made for the conversion or exchange
of the shares of such series for shares of any other class or classes or of any
other series of the same or any other class or classes of the corporation's
capital stock, and any rights of the holders of the shares of such series upon
the voluntary or involuntary liquidation, dissolution or winding up of the
corporation.
IV
No holder of shares of any class of capital stock of the corporation shall
be entitled to any cumulative voting rights.
V
No holder of any class of capital stock of the corporation shall have any
preemptive rights to subscribe for, purchase or acquire any part of any new
stock of any class of such capital stock of the corporation.
<PAGE>
VI
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article VI
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 302A.559 of the Minnesota Business
Corporation Act or Section 80A.23 of the Minnesota Securities Law, or (iv) for
any transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article VI shall apply to or have any effect on
the liability or alleged liability of any director of the corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
VII
An action required or permitted to be taken at a meeting of the Board of
Directors of the corporation may be taken by a written action signed in the
aggregate by all of the directors unless the action need not be approved by the
shareholders of the corporation, in which case the actions may be taken by a
written action signed, or counterparts of a written action signed in the
aggregate, by the number of directors that would be required to make the same
action at a meeting of the Board of Directors of the Corporation at which all of
the directors were present.
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