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 March 31, 1997
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 April 30, 1996 was:
Common Stock, $.01 par value, 7,679,922 shares
Transitional Small Business Issuer Format: [ ] Yes [X] No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
---- ----
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Accounts receivable, less allowance for doubtful accounts
of $245,000 and $270,000, respectively $ 4,656,876 $5,517,550
Inventories 454,254 534,742
Prepaid expenses and other 433,413 244,996
--------- ---------
Total current assets 5,544,543 6,297,288
PROPERTY (net) 2,185,335 2,411,568
OTHER ASSETS:
Goodwill, less accumulated amortization of $961,424
and $1,087,739, respectively 9,376,367 10,231,382
Noncompete agreements, less accumulated amortization
of $84,874 and $106,815, respectively 346,976 445,035
Trade accounts receivable not expected to be collected within one
year, less allowance for doubtful accounts of $240,000 at both dates 640,000 780,000
Other 85,676 201,441
---------- ----------
$18,178,897 $20,366,714
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 94,643 $ 615,370
Notes payable 2,090,000 1,440,500
Trade accounts payable 1,662,077 880,328
Accrued salaries, wages and payroll taxes 1,302,770 1,609,900
Other accrued liabilities 622,182 657,198
Current portion of long-term debt 281,278 381,180
Deferred revenue 1,577,186 1,426,756
---------- ----------
Total current liabilities 7,630,136 7,011,232
LONG-TERM DEBT, less current portion 576,490 2,936,684
DEFERRED LEASE OBLIGATION 80,183 70,252
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 5,000,000 shares,
none issued or outstanding
Common stock, $.01 par value; 25,000,000 shares authorized,
7,173,293 and 7,679,122 shares issued and outstanding, respectively 71,733 76,791
Additional paid-in capital 11,693,617 11,878,427
Accumulated deficit (1,795,689) (1,528,818)
----------- -----------
9,969,661 10,426,400
Stockholder note and interest receivable (77,573) (77,854)
------------ ------------
9,892,088 10,348,546
----------- ----------
$18,178,897 $20,366,714
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HEALTH FITNESS PHYSICAL THERAPY. INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1996 1997
-------- ---------
<S> <C> <C>
REVENUES:
Preventive healthcare $5,407,625 $6,284,360
Rehabilitative healthcare 1,567,307 1,949,073
--------- ---------
6,974,932 8,233,433
COST OF REVENUES:
Salaries 3,893,284 4,430,093
Equipment 1,107,027 1,433,276
Occupancy 314,808 310,270
Support 279,790 401,386
--------- ---------
5,594,909 6,575,025
--------- ---------
GROSS PROFIT 1,380,023 1,658,408
OPERATING EXPENSES:
Salaries 498,988 487,697
Selling, general, and administrative 547,030 726,746
--------- ---------
1,046,018 1,214,443
--------- ---------
334,005 443,965
OTHER (EXPENSE) INCOME:
Interest expense (107,639) (128,861)
Other income 2,853 66,827
--------- ---------
(104,786) ( 62,034)
--------- ---------
229,219 381,931
INCOME TAXES - 115,060
--------- ---------
NET INCOME $ 229,219 $ 266,871
========= =========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ .03 $ .03
========== ==========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,734,572 7,684,022
========== =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
HEALTH FITNESS PHYSICAL THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 229,219 $ 266,871
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 247,182 315,484
Deferred revenue (26,646) (168,530)
Gain on sale of physical therapy clinics - (64,142)
Change in assets and liabilities, net of acquisitions:
Trade accounts receivable 1,189 (891,774)
Inventories (2,892) (66,996)
Prepaid expenses and other 187,212 188,417
Other assets (146,672) (3,491)
Trade accounts payable (89,992) (655,137)
Accrued liabilities and other 9,340 465,607
--------- ---------
Net cash provided by (used in) operating activities 407,940 (613,691)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (44,514) (583,691)
Payments for acquisitions, net of liabilities assumed
and cash acquired (86,448) (880,000)
Payments in connection with earn-out provisions - (178,966)
Payments in connection with noncompete agreements - (120,000)
Proceeds from the sale of physical therapy clinics - 172,500
--------- ---------
Net cash used in investing activities (130,962) (1,590,157)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances - 520,727
Borrowings under line of credit 550,500 913,000
Repayment of line of credit (300,000) (962,500)
Repayment of notes payable (883,984) -
Proceeds from long-term debt, net of financing costs - 1,600,743
Repayment of long-term debt (8,865) (13,591)
Proceeds from issuance of common stock - 145,750
Advances on notes receivable (6,641) (4,281)
Payments received on notes receivable - 4,000
--------- ---------
Net cash (used in) provided by financing activities (648,990) 2,203,848
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (372,012) -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 506,652 -
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 134,640 $ -
========== =========
See notes to consolidated financial statements
</TABLE>
<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, 1996. In the opinion of management, the interim
consolidated financial statements include all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of the results for
interim periods presented. Operating results for the three months ended March
31, 1997 are not necessarily indicative of the operating results for the year
ending December 31, 1997.
NOTE 2. ACQUISITIONS AND SALES
Acquisitions - On February 7, 1997, the Company completed the acquisition of
certain of the assets and assumed the liabilities of two related and closely
held companies: Isernhagen & Associates, Inc. and Isernhagen, Ltd. (Isernhagen).
Isernhagen, Minnesota-based companies, provide comprehensive programs and
services to professionals who work in industrial rehabilitation and work injury
services. The purchase agreement contained a noncompete provision which covers a
period of five years and prohibits the former owners from directly or indirectly
competing with the Company. In connection with the acquisition, assets purchased
and liabilities assumed, notes issued, and cash consideration paid were as
follows:
Assets acquired:
Accounts receivable $ 108,900
Inventories 13,492
Property 9,159
Noncompete agreement 120,000
Excess of purchase price over net assets acquired 1,134,915
---------
1,386,466
Liabilities assumed:
Accounts payable 72,792
Accrued expenses 45,574
Deferred revenue 18,100
------
136,466
Notes issued 250,000
-------
Cash consideration paid $ 1,000,000
=========
The Company also agreed to issue common stock with a value of $500,000 on
February 7, 1999, provided the former owners of Isernhagen are employed by
the Company on that date.
The notes issued are convertible, subordinated promissory notes, bear
interest at 8%, and are due May 7, 1998, unless converted earlier. The
convertible, subordinated promissory notes and accrued interest are
convertible at the option of the holders after August 6, 1997, at a
conversion price of the lesser of 85% of the average bid price per share of
the Company's common stock over the immediately preceding ten days or $4.00
per share.
The purchase agreement requires the Company to make annual cash payments of
50% of net income from operations in excess of 25% of revenues, as defined,
for each of the five fiscal years ending February 28, 1998 through 2002.
The purchase agreement also required the Company to enter into employment
agreements with certain key employees of Isernhagen for a term of five
years. These agreements provide for minimum aggregate annual salaries of
$195,000. The Company also granted stock options to purchase up to 70,000
shares of the Company's common stock at $4.00 per share in connection with
the employment agreements.
<PAGE>
This acquisition has been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired is
being amortized over 15 years using the straight-line method. The
consolidated statements of income include the results of operations of
Isernhagen since February 1, 1997.
The following unaudited pro forma condensed combined statements of
operations reflect the combined operations of the Company and Isernhagen
for the three months ended March 31, 1996 and 1997, adjusted for related
financing costs, as if the acquisition and the financing had occurred at
the beginning of 1996. (Pro forma information relating to the acquisitions
in 1996 and the acquisition and disposals discussed below are not included
due to the impact of the acquired companies being insignificant.) The
unaudited pro forma condensed combined statements of operations may not
necessarily reflect the actual operations of the Company which would have
resulted had the acquisition and related financing occurred as of the date
presented. The unaudited pro forma information is not necessarily
indicative of future results of operations for the combined companies.
1996 1997
---- ----
Revenues $7,344,000 $8,444,000
Cost of revenues 5,926,000 6,686,000
--------- ----------
Gross profit 1,418,000 1,758,000
Other expenses 1,187,000 1,460,000
--------- ---------
Net income $ 231,000 $ 298,000
========== ==========
Net income per common and common
equivalent share $ .03 $ .04
========== ==========
Weighted average common and common equivalent
shares outstanding 6,925,000 7,751,000
========== ==========
On April 9, 1997, the Company completed the acquisition of all the issued
and outstanding stock of closely held K.A.M. Physical Therapy Services
Corp. (K.A.M.), an Iowa-based provider of rehabilitative services. The
purchase agreement contained a noncompete provision which covers a period
of seven years and prohibits one of the former owners from directly or
indirectly competing with the Company. In connection with the acquisition
of K.A.M., the Company issued 78,911 shares of common stock valued at
$200,000 and cash consideration of $200,000.
The purchase agreement requires the Company to make annual payments up to
39% of net income from operations, as defined, for each of the five fiscal
years ending March 31, 1998 through 2002. The annual payment, if any, is
due in a combination of 50% in cash and 50% in the Company's common stock.
The number of shares issued in connection with the annual payment is
calculated by dividing the portion of the annual payment payable in common
stock by $3.50.
The purchase agreement also required the Company to enter into an
employment agreement with a key employee of K.A.M. for a term of five
years. This agreement provides for a minimum annual salary of $100,000. The
Company also granted stock options to purchase up to 5,000 shares of the
Company's common stock at $4.00 per share with this employment agreement.
This acquisition will be accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired will
be amortized over 15 years using the straight-line method.
In connection with the K.A.M. acquisition, the Company also entered into a
separate noncompete agreement with a former K.A.M. owner. The noncompete
agreement required the Company to make a lump-sum distribution of $75,000
and prohibits the former owner from directly or indirectly competing with
the Company for a period of five years.
Sales of Physical Therapy Clinics - In January 1997, the Company sold four
underperforming physical therapy clinics. The total sale price of the
clinics exceeded the carrying value of the long-lived assets associated
with the clinics. In 1996, the clinics generated revenues of approximately
$1,325,000.
<PAGE>
NOTE 3. DEBT
On February 4, 1997, the Company's term loan and credit agreement was
amended and restated (the Amended Agreement). The Amended Agreement
increased the $600,000 term note to $2.5 million, subject to certain
conditions, and extended the due dates of the term loan and the $1.5
million revolving line of credit to January 31, 2000. The Company has
borrowings of $2.5 million under the term loan. The term note is due in
eight quarterly installments of $100,000, beginning January 31, 1998, and a
final payment of $1.7 million on January 31, 2000. Interest on outstanding
term loan borrowings is payable monthly and is computed at the prime rate
plus 6%. Revolving line of credit borrowings are limited based on eligible
borrowings, as defined. Interest on outstanding revolving line of credit
borrowings is payable monthly and is computed at the prime rate plus 2%.
Borrowings under the Amended Agreement 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 quarterly
minimum levels of net worth and net income, limitations on additional
indebtedness and capital expenditures, prohibition on dividend payments,
and other matters.
On February 7, 1997, the Company entered into convertible, subordinated
promissory notes totaling $250,000 with the sellers of Isernhagen. The
notes issued bear interest at 8%, and are due May 7, 1998, unless converted
earlier. The convertible, subordinated promissory notes and accrued
interest are convertible at the option of the holders after August 6, 1997,
at a conversion price of the lesser of 85% of the average bid price per
share of the Company's common stock over the immediately preceding ten days
or $4.00 per share. A value of $44,118 has been assigned to the conversion
feature based on the value of the Company's common stock on February 7,
1997.
On April 7, 1997, the Company paid the outstanding balance of $15,000 and
accrued interest on the unsecured revolving line of credit providing up to
$50,000 in financing. Interest on outstanding borrowings under the line of
credit was at 2.60% over the prime rate.
NOTE 4. SHAREHOLDERS' EQUITY
On January 30, 1997, the Company issued 292,829 shares of common stock to
the sellers of Fitness Systems as a portion of the consideration,
contractually agreed upon , pursuant to the Stock Purchase Agreement dated
March 24, 1995, which required that the aggregate value of the stock
consideration issued equal $1,200,000.
During the three months ended March 31, 1997, the Company received proceeds
of $145,750 when the holders of stock options exercised their right to
purchase a total of 213,000 shares of common stock at prices ranging from
$.65 to $1.25 per share.
NOTE 5. INCOME TAXES
The provision for income taxes for the three months ended March 31, 1996
has been offset by a reduction in the valuation allowance for deferred
taxes. The provision for income taxes for the three months ended March 31,
1997 has been partially offset by a reduction in the valuation allowance.
NOTE 6. INCOME PER SHARE
Income per share of common and common equivalent share was computed by
dividing net income by the weighted average number of shares of common and
common equivalent shares outstanding during each period.
For the three months ended March 31, 1997 this amount includes 230,943
contingent shares issued to the Sellers of Fitness Systems on January 30,
1997 and assumed to be issued to the Sellers of Isernhagen on February 7,
1999. Options and warrants were not included as common stock equivalents
for the three months ended March 31, 1997 due to their antidilutive effect.
<PAGE>
For the three months ended March 31, 1996 this amount includes 40,000
contingent shares assumed to be issued to the Sellers of Fitness Systems on
April 6, 1996 according to the stock purchase agreement dated as of March
24, 1995. Since the Company also 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, accordingly, this amount also includes 257,143
contingent shares assumed to be issued to the Sellers of Fitness Systems.
Options and warrants were not included as common stock equivalents for the
three months ended March 31, 1996 due to their antidilutive effect.
<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 income of the Company:
<TABLE>
<CAPTION>
For The Three Months
Ended March 31,
--------------------------------------------------------------------
1996 1997
---- ----
<S> <C> <C> <C> <C>
REVENUES:
Preventive healthcare $5,408,000 77.5% $6,284,000 76.3%
Rehabilitative healthcare 1,567,000 22.5 1,949,000 23.7
---------- ---- --------- ----
Total revenues 6,975,000 100.0 8,233,000 100.0
COST OF REVENUES 5,595,000 80.2 6,575,000 79.9
--------- ---- --------- ----
GROSS PROFIT 1,380,000 19.8 1,658,000 20.1
OPERATING EXPENSES 1,046,000 15.0 1,214,000 14.7
--------- ---- --------- ----
OPERATING INCOME (LOSS):
Preventive healthcare 499,000 733,000
Rehabilitative healthcare 217,000 106,000
Corporate (382,000) (395,000)
--------- ---------
Total operating income 334,000 4.8 444,000 5.4
OTHER EXPENSES, NET 105,000 1.5 62,000 .8
--------- ---- --------- ----
229,000 3.3 382,000 4.6
INCOME TAXES - - 115,000 1.4
--------- ---- --------- ----
NET INCOME $ 229,000 3.3% $ 267,000 3.2%
========= ==== ========= ====
</TABLE>
General. The Company is engaged in two principal lines of business
(segments): (i) preventive healthcare and (ii) rehabilitative healthcare.
Preventive healthcare includes the developing, marketing and managing of
corporate and hospital-based fitness centers and selling and servicing
fitness equipment. Rehabilitative healthcare includes owning and operating
physical therapy clinics that provide a full range of rehabilitation
services, providing consulting, group buying, administrative, and marketing
services to independent physical therapy clinics, and provide occupational
health consulting services to employers, insurers and others.
The Company's preventive healthcare revenues come from management and
consulting contracts and agreements and the sales of fitness equipment and
service. The Company's 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, annual fees paid by independent physical therapy
clinic network members for consulting and group buying services, and
program and consulting fees paid by employers, insurers and others for
occupational health services. Net revenues provided to patients at Company
owned and worksite locations 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.
<PAGE>
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 $1,258,000 or 18.0% to $8,233,000 for the
three months ended March 31, 1997 from $6,975,000 for the same period ended
March 31, 1996. The increase in preventive healthcare revenues of $877,000
for the three months ended March 31, 1997 is due to the net addition of six
fitness center management contracts and the increase in sales of fitness
equipment of $492,000. The increase in rehabilitative healthcare revenues
of $382,000 for the three month period ended March 31, 1997, when compared
to the same period in 1996, is primarily due to the acquisitions of The
Preferred Companies, an operator a national network of independent physical
therapy clinics, and Isernhagen, the providers of comprehensive industrial
rehabilitation and work injury programs and services, and the increase in
the number of patient visits at several clinics, partially offset by the
sale of four underperforming clinics in January 1997. The Preferred
Companies and Isernhagen had revenues of $416,000 for the three months
ended March 31, 1997.
Operating Income. Operating income increased $110,000 or 32.9% to
$444,000 for the three months ended March 31, 1997 from $334,000 for the
same period ended March 31, 1996. The increase in operating income for the
three months ended March 31, 1996 is due to an increase of $234,000 in
preventive healthcare, partially offset by a decrease of $111,000 in
rehabilitative healthcare and an increase of $13,000 in corporate operating
costs.
The increase in operating income in preventive healthcare for the three
months ended March 31, 1997 is due to the net addition of six fitness
center management contracts, the increase in sales of fitness equipment,
and the increase in gross margins in equipment sales for this line of
business.
The decrease in operating income in the rehabilitative healthcare segment
for the three months ended March 31, 1997 is due to the sale of four
underperforming clinics in January 1997 and the expenses incurred to
improve the Company's management and information systems, partially offset
by the increase of patient visits at several sites and the addition of
Isernhagen in February 1997. Operating income in rehabilitative healthcare
for the three months ended March 31, 1997 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 months ended March
31, 1997 is related to the Company's growth strategy which has required
expanded services and support, increased personnel and expanded operational
and financial systems.
Other Expense. Other expenses is comprised of interest expense and
other income. Interest expense increased $21,000 to $129,000 for the three
months ended March 31, 1997 from $108,000 for the same period ended March
31, 1996. The increase of $21,000 was due to the higher average borrowings
and interest rates in 1997 when compared to 1996. Other income increased
$64,000 to $67,000 for the three months ended March 31, 1997 from $3,000
for the same period in 1996. The increase is primarily due to the gain on
the sale of the four underperforming clinics in January 1997.
10
<PAGE>
Income Taxes. Income taxes were calculated based on management's
estimate of the Company's effective tax rate. The provision for income
taxes for the three months ended March 31, 1996 was offset by a reduction
in the valuation allowance for deferred taxes. The provision for income
taxes for the three months ended March 31, 1997 was partially offset by a
reduction in the valuation allowance for deferred taxes.
Net Income. The Company's net income increased $38,000 to $267,000 or
$.03 per share for the three months ended March 31, 1997 from $229,000 or
$.03 per share for the same period ended March 31, 1996.
Liquidity and Capital Resources. The Company had a working capital
deficit of $2,086,000 at December 31, 1996 and a working capital deficit of
$714,000 as of March 31, 1997. The change is primarily due to the decreases
in accounts and notes payable and the increases in accounts receivable and
inventory, which are partially offset by the increases in checks written in
excess of bank balances and accrued salaries , wages and payroll taxes.
Notes payable at March 31, 1997 consisted of $1,440,500 on the revolving
lines of credit.
The Company's principal sources of liquidity included trade accounts
receivable of $5,518,000 and available borrowings of $74,500 on its line of
credit at March 31, 1997.
In February 1997, the Company entered into a second Amended and Restated
Credit and Security Agreement which provides for a line of credit of up to
$1,500,000 at the prime rate plus 2%, and a $2,500,000 term loan at the
prime rate plus 6%. Management believes the $1,500,000 line of credit and
future cash flow 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.
In February 1997, the Company paid $1,000,000 of cash and issued $250,000
of subordinated convertible promissory notes in connection with the
Company's acquisition of the Isernhagen Companies. Such cash was provided
by the Company's bank term loan.
Sources of capital to meet future obligations in 1997 and early 1998 are
anticipated to be future cash provided by operations, cash received from
customers prior to performing the related services, and available
borrowings under the Company's line of credit of approximately $75,000 at
March 31, 1997.
In order to conserve capital resources, the Company's policy is to lease
its physical facilities. As of March 31, 1997, 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.
Outlook. 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. It is anticipated that funds
required for future acquisitions and the integration of acquired businesses
with the Company will be provided from future operating cash flow, the
proceeds expected from future debt and equity financings. Future equity
financings may result in dilution to holders of Common Stock. 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.
11
<PAGE>
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.
Preventive healthcare revenues are expected to increase, on a quarterly
basis in 1997, as a result of adding management contracts and increased
sales of fitness equipment and soft goods.
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." In January 1997,
the Company sold one physical therapy clinic located in San Diego,
California and three clinics located in Delaware. These clinics accounted
for revenues of $1,325,000 in 1996. The Company anticipates that this loss
of revenue will be more than offset by the Company's acquisitions of The
Preferred Companies in December 1996, the Isernhagen Companies in February
1997 and K.A.M. Physical Therapy in April 1997.
Preventive healthcare operating income is expected to increase due to the
addition of corporate and hospital based management contracts and increases
in fitness equipment and soft goods sales. For the remainder of the year
preventive healthcare operating income, as a percentage of revenues, is
expected to remain consistent with 1996.
Rehabilitative healthcare operating income is expected to increase on a
quarterly basis as a result of recent and future acquisitions, increase in
patient visits at existing clinics, and streamlining the billing and
marketing functions of the companies acquired to date.
Corporate expenses, as a percentage of revenues, are anticipated to be
consistent with the 1996 levels.
The foregoing statements contained in this Outlook section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operation involve a number of risks and uncertainties. Some of the factors
that could cause actual results to differ materially include but are not
limited to the following:
Sufficiency of Working Capital. As of March 31, 1997, the Company had a
negative working capital of $714,000 and checks written in excess of bank
balances of $615,000. The Company's ability to fund its working capital
requirements in the future is dependent upon its ability to generate cash
flow from management contracts, equipment and soft goods sales, consulting,
and physical therapy fees. Future acquisitions may adversely affect cash
flows from operating activities due to average daily revenues outstanding
on physical therapy clients' accounts receivable ranging from 75 to 100
days. 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 the terms
favorable or acceptable to the Company.
12
<PAGE>
Reimbursement. The profitability of the Company's rehabilitative healthcare
services are dependent upon obtaining reimbursement for physical therapy
services from government agencies and third-party payors. The healthcare
industry is experiencing, and the Company expects that it will continue to
experience, significant changes in the delivery of and payment of
healthcare services. There is no assurance that reimbursement for the
Company's physical therapy services will remain at current levels or at
levels that render expansion in this service area economically attractive.
Recent and Future Acquisitions. A principal component of the Company's
growth strategy is to acquire physical therapy clinics. The successful
execution of this strategy will depend on the Company's ability to identify
and to appropriate acquisition candidates, to consummate such acquisition
on terms favorable to the Company, to retain and expand the revenues and
profitability of the acquired contracts and clinics, and to successfully
integrate the acquired contracts and clinics into the Company's operations.
There can be no assurance that the Company will be successful in executing
this strategy.
Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share, which
is effective for interim and annual reporting periods ending after December
15, 1997. The implementation of SFAS No. 128 is expected to increase
earnings per share by an immaterial amount.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15,
Earnings per Share, and replaces the presentation of primary earnings per
share with a presentation of basic earnings per share. It also requires
dual presentation for all entities with complex capital structures and
provides guidance on other computational changes.
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 alleged negligent provision of physical
therapy services.
On April 17, 1996, a former employee filed a claim entitled Julianna Gatza
vs. 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 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 of its
financial position or results of operation.
Item 2. Changes in Securities
During the quarter ended March 31, 1997, the Company sold the following
securities of the Company without registration under the Securities Act:
<TABLE>
<CAPTION>
Price Exemption
Date Amount Type Purchaser(s) Per Share Relied Upon
---- ------ ---- -------------------------------- --------- -----------
<S> <C> <C> <C> <C> <C>
1/30/97 292,829 Common Additional shares issued to previous N/A Section 4(2)
shares Stock sellers of business as additional
purchase price
2/7/97 $250,000 Convertible Two sellers of business * Section 4(2)
Note
</TABLE>
* convertible at lesser of 85% average bid price or $4.00 per share
13
<PAGE>
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
Exhibit No. Description
- ----------- -----------
***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
**10.1 Second Amended and Restated Credit and Security
Agreement dated as of February 4, 1997 by and between
the Company and Norwest Bank, N.A., together with
Revolving Note and Term Note attached thereto.
****10.2 Agreement of Purchase and Sale dated December 23, 1996 by and
among The Preferred Companies, Inc., its shareholders, and
Health Fitness Rehab, Inc.
*****10.3 Agreement of Purchase and Sale dated February 7, 1997 by and
between Isernhagen & Associates, Inc. and Health Fitness Rehab,
Inc.
*****10.4 Agreement of Purchase and Sale dated February 7, 1997 by and
between Isernhagen Ltd. and Health Fitness Rehab, Inc.
27 Financial Data Schedule (in electronic version only)
-------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 No. 33-83784C.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996.
*** Incorporated by reference to the Company Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1996.
**** Incorporated by reference to the Company's Current Report on Form 8-K filed
on January 7, 1997.
*****Incorporated by reference to the Company's Current Report Form 8-K filed
on February 21, 1997.
14
<PAGE>
(b) Reports on Form 8-K
On January 7, 1997 the Registrant filed a Form 8-K reporting the
Registrant's acquisition on December 23, 1996 of all of the outstanding
capital stock of The Preferred Companies, Inc., an Arizona corporation. On
February 21, 1997, the Registrant filed a Form 8-K reporting the
Registrant's acquisition on February 7, 1997 of substantially all the
assets of the Isernhagen Companies, as amended by Form 8-K/A filed April
23, 1997 to include the requisite financial statements of the acquired
business and pro forma financial information.
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: May 13, 1997
By: /s/Loren S. Brink
Loren S. Brink
Chairman, President and Chief
Executive Officer
Dated: May 13, 1997 By: /s/Don Paul Cochran
Don Paul Cochran
Secretary, Treasurer and Chief
Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS CONTAINED IN REGISTRANT'S FORM 10-QSB FOR QUARTER
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,787,550
<ALLOWANCES> 270,000
<INVENTORY> 534,742
<CURRENT-ASSETS> 6,297,288
<PP&E> 3,250,230
<DEPRECIATION> 838,662
<TOTAL-ASSETS> 20,366,714
<CURRENT-LIABILITIES> 7,011,232
<BONDS> 2,936,684
0
0
<COMMON> 76,791
<OTHER-SE> 10,271,755
<TOTAL-LIABILITY-AND-EQUITY> 20,366,714
<SALES> 2,000,294
<TOTAL-REVENUES> 8,233,433
<CGS> 1,433,276
<TOTAL-COSTS> 6,575,025
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,592
<INTEREST-EXPENSE> 128,861
<INCOME-PRETAX> 381,931
<INCOME-TAX> 115,060
<INCOME-CONTINUING> 266,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 266,871
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
