UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 CORPORATION
(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 13, 1998 was:
Common Stock, $.01 par value, 11,884,413 shares
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 81,639
Trade accounts and notes receivable,
less allowance for doubtful accounts of $552,000 and
$225,000, respectively 7,742,814 6,502,963
Inventories 644,479 810,805
Prepaid expenses and other 325,942 533,321
------------ ------------
Total current assets 8,713,235 7,928,728
PROPERTY, less accumulated depreciation of $1,395,448
and $842,121, respectively 3,270,889 3,598,188
OTHER ASSETS:
Goodwill, less accumulated amortization of $1,733,051
and $1,276,287, respectively 9,093,846 8,989,848
Noncompete agreements, less accumulated amortization
of $512,270 and $279,639, respectiveLY 1,329,580 932,211
Copyrights, less accumulated amortization of $74,442
and $40,944, respectively 595,558 629,056
Trade names, less accumulated amortization of
$31,338 and $13,667, respectively 378,662 246,333
Contracts, less accumulated amortization of
$157,773 and $48,194, respectively 262,227 171,806
Trade accounts and notes receivable, less allowance
for doubtful accounts of $54,000 and $650,000, respectively 1,193,632 679,376
Deferred financing costs, less accumulated amortization of $585,257 836,085
Other 205,413 556,736
------------ ------------
TOTAL ASSETS $ 25,879,127 $ 23,732,282
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balance 213,619
Trade accounts payable 1,796,073 1,873,472
Accrued salaries, wages, and payroll taxes 1,437,405 1,779,200
Accrued earn-out 26,604 533,444
Other accrued liabilities 604,003 1,233,538
Current portion of long-term debt 7,527,408 503,540
Accrued expenses and losses related to disc. operations 1,362,416 --
Deferred revenue 1,732,331 1,844,460
------------ ------------
Total current liabilities 14,699,859 7,767,654
LONG-TERM DEBT, less current portion 805,231 5,785,018
DEFERRED LEASE OBLIGATION -- 31,170
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;
11,884,413 and 8,136,828 shares
issued and outstanding, respectively 118,844 81,368
Additional paid-in capital 16,725,126 12,976,680
Accumulated deficit (6,412,625) (2,842,379)
------------ ------------
10,431,345 10,215,669
Stockholder note and interest receivable (57,308) (67,229)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 10,374,037 10,148,440
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,879,127 $ 23,732,282
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Health services $ 6,713,150 $ 5,311,708 $ 19,125,198 $ 15,526,342
Health and fitness products 1,545,879 1,593,693 5,695,389 4,920,120
------------- ------------- -------------- --------------
Total revenues 8,259,029 6,905,401 24,820,587 20,446,462
COSTS OF REVENUES:
Health services 5,109,419 4,006,641 14,343,588 12,029,999
Health and fitness products 1,181,960 1,198,500 4,404,261 3,530,773
------------- ------------- -------------- --------------
Total cost of revenues 6,291,379 5,205,141 18,747,849 15,560,772
GROSS PROFIT 1,967,650 1,700,260 6,072,738 4,885,690
OPERATING EXPENSES:
Salaries 856,687 787,403 2,341,623 2,045,318
Selling, general, and administrative 1,428,638 1,107,398 3,208,897 2,664,541
------------- ------------- ------------ -----------
Total operating expenses 2,285,325 1,894,801 5,550,520 4,709,859
------------- ------------- -------------- --------------
OPERATING (LOSS) INCOME (317,675) (194,541) 522,218 175,831
INTEREST EXPENSE (256,447) (111,589) (612,267) (271,509)
OTHER INCOME (EXPENSE) 45,104 (15,157) 104,697 6,905
------------- ------------- -------------- --------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE TAXES (529,018) (321,287) 14,648 (88,773)
INCOME TAX (EXPENSE) BENEFIT (29) 59,923 (29) (25,911)
------------- ------------- -------------- --------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (529,047) (261,364) 14,619 (114,684)
------------- ------------- -------------- --------------
DISCONTINUED OPERATIONS (NOTE. 7):
LOSS FROM OPERATIONS OF PHYSICAL THERAPY
CLINIC DIVISION (LESS APPLICABLE TAXES OF $-0-) (363,021) (403,765) (1,461,363) (75,469)
LOSS ON DISPOSAL OF PHYSICAL THERAPY CLINIC
DIVISION, INCLUDING PROVISION OF $1,868,106 FOR
OPERATING LOSSES DURING PHASE-OUT PERIOD
(LESS APPLICABLE TAXES OF $-0-) (2,123,502) - (2,123,502) -
------------- ------------- -------------- --------------
LOSS FROM DISCONTINUED OPERATIONS (2,486,523) (403,765) (3,584,865) (75,469)
------------- ------------- -------------- --------------
NET LOSS $ (3,015,570) $ (665,129) $ (3,570,246) $ (190,153)
============= ============= ============== ==============
(LOSS) INCOME FROM CONTINUING OPERATIONS PER SHARE:
Basic $ (0.04) $ (0.03) $ 0.00 $ (0.01)
Diluted (0.04) (0.03) 0.00 (0.01)
LOSS FROM DISCONTINUED OPERATIONS PER SHARE:
Basic $ (0.21) $ (0.05) $ (0.32) $ (0.01)
Diluted (0.21) (0.05) (0.30) (0.01)
NET LOSS PER SHARE:
Basic $ (0.25) $ (0.08) $ (0.32) $ (0.02)
Diluted (0.25) (0.08) (0.30) (0.02)
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 11,866,182 8,026,847 11,116,763 7,803,910
Diluted 11,866,182 8,026,847 12,116,763 7,803,910
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,570,246) $ (190,153)
Adjustment to reconcile net loss to net cash
used in operating activities:
Discontinued operations 1,362,416 --
Net gain on disposition of clinic assets -- (496,461)
Depreciation and amortization 2,056,102 932,485
Reduction in asset book value 132,060 --
Deferred revenue (158,776) (103,211)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (1,598,049) (320,615)
Inventories 166,326 (113,117)
Prepaid expenses and other 121,702 142,867
Other assets 19,504 (208,480)
Trade accounts payable (283,524) (855,812)
Accrued liabilities and other (1,026,749) (141,043)
----------- -----------
Net cash used in operating activities (2,779,234) (1,353,540)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (210,418) (1,472,020)
Payments for acquisitions, net of liabilities assumed
and cash acquired (858,794) (1,594,408)
Payments in connection with earn-out provisions (673,227) (178,966)
Payments in connection with noncompete agreements -- (322,000)
Proceeds from sale of physical therapy clinics, net -- 1,220,600
Collection of non-trade notes receivable 334,045 174,476
----------- -----------
Net cash used in investing activities (1,408,394) (2,172,318)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances 213,619 254,602
Net borrowings under line of credit 5,514,295 (415,000)
Payment of financing costs (992,595) --
Proceeds from long term debt, net of financing costs -- 3,193,146
Repayment of long term debt (3,673,926) (290,598)
Borrowings under notes payable -- 500,000
Proceeds from private placement of equity 2,785,024 --
Proceeds from the issuance of common stock 249,651 276,500
Advances on notes receivable (5,279) (4,281)
Payments received on notes receivable 15,200 11,489
----------- -----------
Net cash provided by financing activities 4,105,989 3,525,858
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (81,639) --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 81,639 --
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 0 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION 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, 1997. 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, 1998 are not necessarily indicative of the operating results for
the year ending December 31, 1998.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." For the periods presented,
comprehensive (loss) income is the same as net (loss) income.
Certain reclassifications have been made to the consolidated statements of
income for the three and nine months ended September 30, 1998. Such
reclassifications had no effect on net income or stockholders' equity as
previously reported.
NOTE 2. ACQUISITIONS
On February 27, 1998, the Company completed the acquisition of all the issued
and outstanding stock of closely held Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. The purchase
agreement contained a noncompete provision that covers a period of five years
and prohibits the former owners from directly or indirectly competing with the
Company. In connection with the acquisition of Midlands, the Company issued
200,000 shares of common stock valued at $362,500 and cash consideration of
$648,794.
The purchase agreement requires the Company to make annual payments of up to 35%
of Midlands' net income from operations, as defined, for each of the five fiscal
years ending February 28, 1999 through 2003. 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 $3.00. The
purchase agreement also requires the Company to make an annual payment of
$25,000 for each of the three fiscal years ending February 28, 1999 to 2001 if
net income from operations, as defined, exceeds 20%.
The purchase agreement also required the Company to enter into employment
agreements with certain key employees for a term of five years. These agreements
provide for minimum aggregate annual salaries of $200,000. The Company also
granted stock options to purchase up to 50,000 shares of the Company's common
stock at $4.00 per share in connection with the employment agreements.
Assets acquired:
Prepaid expenses $ 21,750
Trade names 80,000
Noncompetition agreements 490,000
Contracts 120,000
Property 196,789
Excess of purchase price over net assets acquired 335,402
----------
1,243,941
Liabilities assumed:
Notes payable 111,662
Accounts payable 120,985
Common stock issued 362,500
----------
Cash consideration paid $ 648,794
<PAGE>
NOTE 2. ACQUISITIONS (Continued)
On June 4, 1998, the Company completed the acquisition of all the issued and
outstanding stock of closely held David W. Pickering, Inc. (DWP), a Rhode Island
corporation doing business as International Fitness Club Network (IFCN). IFCN is
in the business of organizing and maintaining a network of commercial fitness
and health clubs and marketing memberships in such clubs to employers and
insurance companies (the "IFCN Business"). The IFCN Business was formerly
conducted by the International Health and Racquet Sports Association (IHRSA).
The purchase agreement contained a noncompete provision that covers a period of
five years and prohibits the former owner from directly or indirectly competing
with the Company. In connection with the acquisition of DWP, the Company issued
30,000 shares of common stock valued at $45,000, an automobile valued at
approximately $30,000 and cash consideration of $210,000.
The purchase agreement requires the Company to make annual payments of up to 45%
of DWP's net income from operations, as defined, for each of the five fiscal
years ending May 31, 1999 through 2003. 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 $3.00
The Company also entered into a five-year, management agreement with
International Club Network, Inc. (ICN) to manage the IFCN Business on behalf of
the Company. ICN is owned and operated by the former shareholder of DWP. The
management agreement requires the Company to compensate ICN at the rate of
$125,000 per year payable monthly. As additional compensation, the Company will
grant ICN nonqualified stock options to purchase up to 15,000 shares of the
Company's common stock at an exercise price equal to the fair market value of
the Company's common stock on the last day of each DWP earn-out year provided
DWP's earn-out ratio is at least 20%.
Assets acquired:
Accounts receivable $156,058
Prepaid expenses 10,070
Property 14,178
Trade name 70,000
Noncompetition agreement 140,000
Contracts 80,000
Excess of purchase price over net assets acquired 63,050
--------
533,356
Liabilities assumed:
Notes payable 92,050
Accounts payable 85,140
Deferred revenue 46,647
Accrued expenses 24,249
Property 30,270
Common stock issued 45,000
--------
Cash consideration paid $210,000
========
<PAGE>
NOTE 3. FINANCING
On February 17, 1998, the Company entered into a credit agreement (the Credit
Agreement) that provides for maximum borrowings of $12.5 million. Interest on
outstanding borrowings is computed at the prime rate plus 7.0% with a minimum
rate of 15.5%. The Company is required to pay monthly interest payments on
outstanding borrowings at the prime rate plus 4.5% with a minimum rate of 13.0%.
The remaining interest is added to the outstanding borrowings as of the first of
the current month. The Company is also required to pay a monthly servicing fee
of $5,000 per month. The Credit Agreement is due on July 17, 1999.
The Company's Borrowing Base under the Credit Agreement is limited to the lesser
of i) $12.5 million, ii) earnings before interest, taxes, depreciation, and
amortization, as defined, for the immediately preceding 12-month period
multiplied by 375%, decreasing to 350% by June 30, 1998, iii) 90% of revenue, as
defined, for the immediately preceding 13-week period, or iv) 90% of accounts
receivable collections, as defined, for the immediately preceding 17-week
period, minus (b) required reserves.
Borrowings under the Credit Agreement are secured by substantially all of the
Company's assets and partially guaranteed by the Company's president. The Credit
Agreement contains various restrictive covenants relating to changes in
accumulated deficit, maintenance of fixed charge coverage ratio, minimum working
capital requirements, prohibits dividend payments, and other matters.
The Credit Agreement required the Company to pay a closing fee of $317,500, pay
$212,991 of the lender's expenses and issue 312,497 shares (the Shares) of the
Company's common stock to the lender. The Shares' value, $343,747, was
determined based on the market value of the Company's common stock. In addition
to the costs above, the Company incurred incremental direct costs of $513,590
relating to the Credit Agreement. These costs have been capitalized as deferred
financing costs and amortized using the effective interest method over the life
of the Credit Agreement.
The Credit Agreement required a portion of the initial borrowings to be used to
repay the Company's revolving line of credit, term note, and a portion of a
related party note. The remaining portion of the related party note was paid on
February 20, 1998 with proceeds from the equity offering on February 18 and 19,
1998 (the Equity Offering) (see Note 4).
On June 26, 1998, the Company and the lender amended the Credit Agreement. The
amendment waived certain covenants and requires the Company to maintain a
"Special Availability Reserve" in an amount equal to the Borrowing Base minus
$8,000,000.
On September 10, 1998, the Company and the lender further amended the Credit
Agreement. The amendment waived certain covenants and requires the Company to
maintain a "Special Availability Reserve" in an amount equal to the Borrowing
Base minus $8,000,000 minus the amount equal to $200,000 plus an additional
$100,000 each week, commencing September 15, 1998, for four consecutive weeks,
until the amount calculated equals $7,400,000. In the event that the borrowing
base is greater than $7,700,000, the lender may, at its option, elect to
decrease the Special Availability Reserve by up to $300,000 (see Exhibit 10.1).
NOTE 4. STOCKHOLDERS' EQUITY
Issuance of Common Stock - In February 1998, the Company obtained gross proceeds
of $3,300,000 of equity financing through a private placement of 3,000,000
units, with each unit consisting of one share of common stock and a detachable
warrant to purchase one-fourth of a share of common stock at $2.25 per share
(the Equity Offering). The warrants are currently exercisable and expire four
years from the date of issuance.
In connection with the private placement, the Company also issued warrants to
purchase 300,000 shares of common stock to the selling agents. The selling
agents' warrants are exercisable from February 18, 1999 through February 18,
2003 at $1.65 per share and contain a net value exercise provision allowing for
the issuance of a lesser number of shares than provided in the warrant without
payment of the cash exercise price.
During the nine months ended September 30, 1998, the Company received proceeds
of $140,000 when holders of stock options and warrants exercised their right to
purchase a total of 112,000 shares of common stock at a price of $1.25 per
share. The Company also issued 93,088 shares of common stock in connection with
the Company's employee stock purchase plan.
<PAGE>
NOTE 5. INCOME TAXES
The benefit for income taxes has been offset by a valuation allowance for the
three and nine months ended September 30, 1998, because the Company's net
operating losses could not be carried back and future realization of the net
operating loss carryforwards is uncertain. Income tax expense for the three and
nine months ended September 30, 1997, has been offset by an increase in the
valuation allowance for deferred taxes.
NOTE 6. (LOSS) INCOME FROM CONTINUING OPERATIONS PER SHARE, LOSS FROM
DISCONTINUED OPERATIONS PER SHARE AND NET LOSS PER COMMON SHARE
Basic (loss) income from continuing operations per share, basic loss from
discontinued operations per share and basic net loss per share are computed by
dividing (loss) income from continuing operations, loss from discontinued
operations and net loss by the weighted average number of common shares
outstanding and contingently issuable shares. Diluted (loss) income from
continuing operations per share, diluted loss from discontinued operations per
share and diluted net loss per share assume conversion of convertible
subordinated notes as of the beginning of the year, issuance of contingently
issuable shares, and exercise of stock options and warrants using the treasury
stock method, if dilutive. For the three months ended September 30, 1998,
diluted loss from continuing operations per share, diluted loss from
discontinued operations per share and diluted net loss per share are the same as
basic loss from continuing operations per share, basic loss from discontinued
operations per share and basic net loss per share due to the antidilutive effect
of the assumed conversions. The following is a reconciliation of the numerators
and denominators used to calculate (loss) income from continuing operations per
share, loss from discontinued operations per share and net loss per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic Computation:
(Loss) Income from continuing operations $ (529,047) $ (261,364) $ 14,619 $ (114,684)
Loss from discontinued operations (2,486,523) (403,765) (3,584,865) (75,469)
Net loss (3,015,570) (665,129) (3,570,246) (190,153)
Weighted average common shares outstanding 11,866,182 8,026,847 11,116,763 7,771,731
Contingently issuable shares - - - 32,179
----------- ----------- ----------- -----------
Average shares used in basic computation 11,866,182 8,026,847 11,116,763 7,803,910
(Loss) Income from continuing operations per share $ (0.04) $ (0.03) $ 0.00 $ (0.01)
=========== =========== =========== ===========
Loss from discontinued operations per share $ (0.21) $ (0.05) $ (0.32) $ (0.01)
=========== =========== =========== ===========
Net loss per share $ (0.25) $ (0.08) $ (0.30) $ (0.02)
=========== =========== =========== ===========
Diluted Computation:
(Loss) Income from continuing operations $ (529,047) $ (261,364) $ 14,619 $ (114,684)
Loss from discontinued operations (2,486,523) (403,765) (3,584,865) (75,469)
Net loss (3,015,570) (665,129) (3,570,246) (190,153)
Weighted average common shares outstanding 11,866,182 8,026,847 11,116,763 7,771,731
Contingently issuable shares - - 1,000,000 32,179
Dilutive effect of stock option and warrant - - - -
----------- ----------- ----------- -----------
Average shares used in basic computation 11,866,182 8,026,847 12,116,763 7,803,910
(Loss) Income from continuing operations per share $ (0.04) $ (0.03) $ 0.00 $ (0.01)
=========== =========== =========== ===========
Loss from discontinued operations per share $ (0.21) $ (0.05) $ (0.32) $ (0.01)
=========== =========== =========== ===========
Net loss per share $ (0.25) $ (0.08) $ (0.30) $ (0.02)
=========== =========== =========== ===========
</TABLE>
<PAGE>
NOTE 7. DISCONTINUED OPERATIONS
In August 1998, the Company formally adopted a plan to dispose of its
freestanding physical therapy clinics division ("the division"). The plan of
disposal specifically targets a sale of substantially all the assets of the
division to a major provider of outpatient physical therapy services. The
Company is in the process of identifying potential buyers and estimates that a
transaction will be completed by June 30, 1999.
As of September 30, 1998, the net assets and liabilities of the division were as
follows:
(in millions)
Total assets $ 6.3
Less: Total liabilities .9
------
Net Assets $ 5.4
------
The division loss from operations for the quarter and nine months ended
September 30, 1998 includes only the results of operations for the division for
the two months and eight months ended August 31, 1998, the date the Company
formally adopted a plan to dispose of the division. The loss from operations
included revenues of $990,000 for the two months ended August 31, 1998 and
$4,064,000 for the eight months ended August 31,1998. Interest expense included
in the two months ended August 31, 1998 was $231,000. Interest expense was
$755,000 for the eight months ended August 31, 1998. No tax benefit or expense
was recorded for the two months and eight months ended August 31, 1998.
The division loss from operations for the quarter and nine months ended
September 30, 1997 included revenues of $1,344,000 for the three months ended
September 30, 1997 and $4,333,000 for the nine months ended September 30, 1997.
Interest expense included in the quarter and nine months ended September 30,
1997 was $98,000 and $237,000, respectively. Tax benefit of $93,000 was recorded
for the quarter ended September 30, 1997. No tax benefit or expense was recorded
for the nine months ended September 30, 1997.
The division loss on disposal for the quarter and nine months ended September
30, 1998 includes a provision for operating losses during the phase-out period,
September 1, 1998 to June 30, 1999, plus any projected shutdown costs. The
Company projects revenues of $4,505,000 and operating losses of $1,868,106
during the phase-out period. Interest expense included in the projected
operating loss was $541,000. No tax benefit was included in the projected
operating loss. Potential shutdown costs are estimated at $255,000.
The Company expects the net realizable value from the sale of the division, net
of the estimated loss from operations for the period September 1, 1998 to June
30, 1999, to be less than its net book value.
<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>
Three Months Ended
September 30,
-----------------------------------------------
1998 % 1997 % Change % Change
------------- ------- ------------ ------- -------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Health services $ 6,713,000 81.3% $ 5,312,000 76.9% 1,401,000 26.4%
Health and fitness products 1,546,000 18.7% 1,594,000 23.1% (48,000) -3.0%
------------- ------- ------------ ------- -------------------
Total revenues 8,259,000 100.0% 6,906,000 100.0% 1,353,000 19.6%
COSTS OF REVENUES:
Health services 5,109,000 61.9% 4,007,000 58.0% 1,102,000 27.5%
Health and fitness products 1,182,000 14.3% 1,199,000 17.4% (17,000) -1.4%
------------- ------- ------------ ------- -------------------
Total costs of revenues 6,291,000 76.2% 5,206,000 75.4% 1,085,000 20.8%
------------- ------- ------------ ------- -------------------
GROSS PROFIT:
Health services 1,604,000 23.9% 1,305,000 - 24.6% 299,000 22.9%
Health and fitness products 364,000 23.5% 395,000 - 24.8% (31,000) -7.8%
------------- ------- --------------------- -------------------
Total gross profit 1,968,000 23.8% 1,700,000 - 24.6% 268,000 15.8%
OPERATING EXPENSES:
Salaries 857,000 10.4% 787,000 11.4% 69,000 8.8%
Selling, general, and administrative 1,429,000 17.3% 1,107,000 16.0% 322,000 29.1%
------------- ------- ------------ ------- -------------------
Total operating expenses 2,285,000 27.7% 1,894,000 27.4% 391,000 20.6%
------------- ------- ------------ ------- -------------------
OPERATING (LOSS) (318,000) -3.9% (194,000) -2.8% (123,000) 63.4%
INTEREST EXPENSE (256,000) -3.1% (112,000) -1.6% (290,000) 258.9%
OTHER INCOME (EXPENSE) 45,000 0.5% (15,000) -0.2% 60,000 -400.0%
------------- ------- ------------ ------- -------------------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (529,000) -6.4% (321,000) -4.6% (353,000) 110.0%
INCOME TAX BENEFIT - 0.0% 60,000 0.9% (60,000) -100.0%
------------- ------- ------------ ------- -------------------
(LOSS) FROM CONTINUING OPERATIONS $ (529,000) -6.4% $ (261,000) -3.7% (413,000) 158.2%
============= ======= ============ ======= ===================
Nine Months Ended
September 30,
-----------------------------------------------
1998 % 1997 % Change % Change
------------- ------- ------------ ------- -------------------
REVENUES:
Health services $ 19,125,000 77.1% $ 15,526,000 75.9% 3,599,000 23.2%
Health and fitness products 5,695,000 22.9% 4,920,000 24.1% 775,000 15.8%
------------- ------- ------------ ------- -------------------
Total revenues 24,820,000 100.0% 20,446,000 100.0% 4,374,000 21.4%
COSTS OF REVENUES:
Health services 14,343,000 57.8% 12,030,000 58.8% 2,313,000 19.2%
Health and fitness products 4,404,000 17.7% 3,530,000 17.3% 874,000 24.8%
------------- ------- ------------ ------- -------------------
Total costs of revenues 18,747,000 75.5% 15,560,000 76.1% 3,187,000 20.5%
GROSS PROFIT
Health services 4,782,000 25.0% 3,496,000 22.5% 1,286,000 36.8%
Health and fitness products 1,291,000 22.7% 1,390,000 28.3% (99,000) -7.1%
------------- ------- ------------ ------- -------------------
Total gross profit 6,073,000 24.5% 4,886,000 23.9% 1,187,000 24.3%
OPERATING EXPENSES:
Salaries 2,342,000 9.4% 2,045,000 10.0% 297,000 14.5%
Selling, general, and administrative 3,209,000 12.9% 2,665,000 13.0% 544,000 20.4%
------------- ------- ------------ ------- -------------------
Total operating expenses 5,551,000 22.3% 4,710,000 23.0% 841,000 17.9%
------------- ------- ------------ ------- -------------------
OPERATING INCOME 522,000 2.1% 176,000 0.9% 346,000 196.6%
INTEREST EXPENSE (612,000) -2.5% (272,000) -1.3% (485,000) 178.3%
OTHER INCOME 105,000 0.4% 7,000 0.0% 98,000 1400.0%
------------- ------- ------------ ------- -------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 15,000 0.1% (89,000) -0.4% (41,000) 46.1%
INCOME TAX (EXPENSE) - 0.0% (26,000) -0.1% 26,000 -100.0%
------------- ------- ------------ ------- -------------------
INCOME FROM CONTINUING OPERATIONS $ 15,000 0.1% $ (115,000) -0.6% (15,000) 13.0%
============= ======= ============ ======= ===================
</TABLE>
<PAGE>
General. The Company is in the business of providing preventive health care
services to Fortune 1000 companies. Preventive health care services include
integrated health management services and the sale and servicing of health and
fitness products. Health services include the development, marketing and
management of corporate and hospital-based fitness centers, injury prevention
and work-injury management consulting and on-site physical therapy.
The Company's revenues come from fitness center management and consulting
contracts, the sales and service of health and fitness products, fees paid by
employers, insurers and others for injury prevention and work-injury management
consulting and physical therapy services provided to patients at corporate
locations. The fitness center management and consulting contracts provide for
specific management, consulting, and program fees and contain provisions for
modification, termination, and non-renewal.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenues. For the three months ended September 30, 1998, total revenues
increased $1,353,000, or 19.6%, from the three months ended September 30, 1997.
The increase was primarily due to the growth in new fitness center management
contracts. The Company added a net 22 corporate and hospital fitness center
sites during the first nine months of 1998.
Gross Profit. Gross profit as a percent of revenue for the three months ended
September 30, 1998 declined .8 percentage points when compared to the same
period in the prior year. Gross profit dollars for the three months ended
September 30, 1998 increased $268,000, or 15.8%, from the three months ended
September 30, 1997. The decrease in gross profit percent was primarily due to an
equipment sales mix shift from commercial and retail sales to higher
volume/lower margin, corporate fitness center sales.
Operating Expenses. Operating expenses for the three months ended September 30,
1998 increased $391,000, or 20.6% from the prior year period. Operating
expenses, as a percent of revenue, for the three months ended September 30, 1998
increased .3 percentage points over the same period in 1997. The dollar increase
was due to two one-time, non-cash adjustments required to properly recognize
potential bad debt expense ($200,000) and properly reflect the value of certain
assets on the balance sheet ($215,000).
Operating (Loss). The Company incurred an operating loss of $318,000 for the
quarter ended September 30, 1998, an increase in operating loss of $124,000 over
the prior year quarter. The operating loss for the quarter and the increase in
operating loss over the prior year quarter were directly attributable to the
non-cash adjustments recorded in the period.
Interest Expense. Interest expense for the quarter ended September 30, 1998
increased $144,000 from the prior year period due to higher average borrowings
and a higher effective interest rate in 1998 versus 1997.
Income Taxes. Income taxes were calculated based on management's estimate of the
Company's effective tax rate. The benefit for income taxes for the three months
ended September 30, 1997 has been offset by a valuation allowance because the
Company's net operating loss could not be carried back and future realization of
the net operating loss is uncertain.
Loss From Continuing Operations. For the three months ended September 30, 1998,
the Company incurred a loss from continuing operations of $529,000, a $268,000
increase from the prior year period. The increase in loss from continuing
operations was due to the non-cash adjustments coupled with the increase in
interest expense.
<PAGE>
Discontinued Operations. In August 1998, the Company formally adopted a plan to
dispose of its freestanding physical therapy clinics division ("the division").
The plan of disposal specifically targets a sale of substantially all the assets
of the division to a major provider of outpatient physical therapy services. The
Company is in the process of identifying potential buyers and estimates that a
transaction will be completed by June 30, 1999.
The division loss from operations for the quarter and nine months ended
September 30, 1998 includes only the results of operations for the division for
the two months and eight months ended August 31, 1998, the date the Company
formally adopted a plan to dispose of the division. The loss from operations for
the two months ended August 31, 1998 was $363,000 and included revenues of
$990,000. Interest expense included in the two months ended August 31, 1998 was
$231,000. No tax benefit or expense was recorded for the two months ended August
31, 1998. The loss from operations for the eight months ended August 31,1998 was
$1,461,000 and included revenues of $4,064,000. Interest expense was $755,000
for the eight months ended August 31, 1998. No tax benefit or expense was
recorded for the eight months ended August 31, 1998.
The division incurred losses from operations of $404,000 and $75,000 for the
quarter and nine months ended September 30, 1997, respectively. The losses
included revenues of $1,344,000 for the quarter ended September 30, 1997 and
$4,333,000 for the nine months ended September 30, 1997. Interest expense
included in the quarter and nine months ended September 30, 1997 was $98,000 and
$237,000, respectively. Tax benefit of $93,000 was recorded for the quarter
ended September 30, 1997. No tax benefit or expense was recorded for the nine
months ended September 30, 1997.
The division loss on disposal for the quarter and nine months ended September
30, 1998 includes a provision for operating losses during the phase-out period,
September 1, 1998 to June 30, 1999, plus any projected shutdown costs. The
Company projects revenues of $4,505,000 and operating losses of $1,868,000
during the phase-out period. Interest expense included in the projected
operating loss was $541,000. No tax benefit was included in the projected
operating loss. Potential shutdown costs are estimated at $255,000.
The Company expects the net realizable value from the sale of the division, net
of the estimated loss from operations for the period September 1, 1998 to June
30, 1999, to be less than its net book value.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues. For the nine months ended September 30, 1998, total revenues increased
$4,374,000, or 21.4%, from the nine months ended September 30, 1997. The
increase was primarily due to the growth in new fitness center management
contracts and the associated equipment sales. The Company added a net 22
corporate and hospital fitness center sites during the 1998.
Gross Profit. Gross profit as a percent of revenue for the nine months ended
September 30, 1998 increased .6 percentage points when compared to the same
period in the prior year. Gross profit dollars for the nine months ended
September 30, 1998 increased $1,187,000, or 24.3%, from the nine months ended
September 30, 1997. The increase in gross profit dollars and percent was
primarily due to overall sales improvements in the injury prevention and
work-injury management consulting, on-site physical therapy visits and physical
therapy clinic network contracts, offset by an equipment sales mix shift from
commercial and retail sales to higher volume/lower margin, corporate fitness
center sales.
Operating Expenses. Operating expenses for the nine months ended September 30,
1998 increased $841,000, or 17.9% from the prior year period. Operating
expenses, as a percent of revenue, for the nine months ended September 30, 1998
decreased .7 percentage points over the same period in 1997. The dollar increase
was due to two one-time, non-cash adjustments that occurred in September and
were required to properly recognize potential bad debt expense ($200,000) and
properly reflect the value of certain assets on the balance sheet ($215,000),
increases in the quantity and quality of finance/accounting personnel and
general cost and salary increases.
Operating Income. The Company generated operating income of $522,000 for the
nine months ended September 30, 1998, an increase in operating income of
$346,000 over the prior year period. The increase was primarily due to the gross
margin improvements coupled with the reduction in operating expenses as a
percent of revenue.
Interest Expense. Interest expense for the nine months ended September 30, 1998
increased $346,000 from the prior year period due to higher average borrowings
and a higher effective interest rate in 1998 versus 1997.
<PAGE>
Income Taxes. Income taxes were calculated based on management's estimate of the
Company's effective tax rate. Income tax expense for the nine months ended
September 30, 1997 has been partially offset by a reduction in the valuation
allowance for deferred taxes.
Income From Continuing Operations. For the nine months ended September 30, 1998,
the Company generated income from continuing operations of $15,000, a $130,000
improvement from the prior year period. The improvement was primarily due to the
increase in operating income offset by the increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, the Company used $2,779,000 of
cash in operating activities as compared to $1,353,000 for the same period in
1997. The increase in usage was primarily due to the increase in trade accounts
and notes receivable and the reduction in acrrued liabilities.
As of September 30, 1998, the Company had $480,000 of availability under its
revolving credit facility with Madeleine L.L.C.
On June 4, 1998, the Company completed the acquisition of all the issued and
outstanding stock of closely held David W. Pickering, Inc. (DWP), a Rhode Island
corporation doing business as International Fitness Club Network (IFCN). IFCN is
in the business of organizing and maintaining a network of commercial fitness
and health clubs and marketing memberships in such clubs to employers and
insurance companies. The purchase agreement contained a non-compete provision
that covers a period of five years and prohibits the former owner from directly
or indirectly competing with the Company. In connection with the acquisition of
DWP, the Company issued 30,000 shares of common stock valued at $45,000, an
automobile valued at approximately $30,000 and cash consideration of $210,000.
On February 27, 1998, the Company completed the acquisition of all the issued
and outstanding stock of closely held Midlands Physical Therapy, Inc.
(Midlands), a Nebraska-based provider of rehabilitative services. The purchase
agreement contained a noncompete provision that covers a period of five years
and prohibits the former owners from directly or indirectly competing with the
Company. In connection with the acquisition of Midlands, the Company issued
200,000 shares of common stock valued at $362,500 and cash consideration of
$650,000.
The Company has a revolving credit facility with Madeleine L.L.C., an affiliate
of Cerberus Partners, L.P. (the "Lender"). The Company's ability to draw down on
the facility is tied to the Borrowing Base formula which is based upon the
Company's EBITDA (defined as earnings before interest, taxes, depreciation and
amortization), revenues, or collections, whichever is less. The credit facility
is secured by all of the Company's assets, including its accounts receivable,
inventory, equipment, and general intangibles and is guaranteed in part by the
Company's President and Chief Executive Officer. The Company paid the Lender a
commitment fee equal to 1.5% of the total credit facility, and a closing fee
equal to 1.0% of the total credit facility. The Company also issued to the
Lender 312,497 shares of common stock. The Company pays the Lender a loan
servicing fee of $5,000 per month. The advances under the credit facility accrue
interest at a total rate of interest equal to 7.0% in excess of Chase
Manhattan's prime rate (but in no event less than 8.5%). Interest accruing at
the rate of such prime rate plus 4.5% is payable monthly. Interest accruing at
the rate of 2.5% is added to the principal balance of the facility, and will
accrue interest until paid. The credit facility is due July 1999. The credit
facility is subject to various affirmative and negative covenants customary in
transactions of this type, including a requirement to maintain certain financial
ratios and limitations on the Company's ability to incur additional
indebtedness, to make acquisitions outside of certain established parameters, or
to make dividend distributions.
On June 26, 1998, the Company and the lender amended the Credit Agreement. The
amendment waived certain covenants and requires the Company to maintain a
"Special Availability Reserve" in an amount equal to the Borrowing Base minus
$8,000,000.
<PAGE>
On September 10, 1998, the Company and the lender further amended the Credit
Agreement. The amendment waived certain covenants and requires the Company to
maintain a "Special Availability Reserve" in an amount equal to the Borrowing
Base (as defined below) minus $8,000,000 minus the amount equal to $200,000 plus
an additional $100,000 each week, commencing September 15, 1998, for four
consecutive weeks, until the amount calculated equals $7,400,000. In the event
that the borrowing base is greater than $7,700,000, the lender may, at its
option, elect to decrease the Special Availability Reserve by up to $300,000
(see Exhibit 10.1).
In February 1998, the Company also completed the private sale of 3,000,000 Units
at an aggregate offering price of $3,300,000. Each Unit consisted of one share
of common stock and a warrant to purchase one-fourth (.25) of one share of
common stock at $2.25 per whole share.
Sources of capital to meet future obligations in 1998 are anticipated to be cash
provided by operations and the Company's revolving credit facility. 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 on the results of its operations.
Outlook
Over the past nine months a number of factors in the rehabilitation marketplace
have led the Company to conclude that the opportunity in the freestanding
physical therapy clinic business may be diminishing. These factors include
increased penetration of managed care health plans, the increasing complexity of
Medicare reimbursement and increased competition for clinic acquisition by
large, well-financed competitors. Consequently, in August 1998, the Company
formally adopted a plan to dispose of its freestanding physical therapy clinics
division. The plan of disposal specifically targets a sale of substantially all
the assets of the freestanding physical therapy clinics division to a major
provider of outpatient physical therapy services. The Company is in the process
of identifying potential buyers and estimates that a transaction will be
completed by June 30, 1999.
.
The Company believes the outlook for its preventive health care services
business has improved dramatically as a result of increased corporate health
care costs and the wellness and fitness trend gaining momentum. Going forward,
the Company has shifted its strategy to focus its growth efforts solely on its
preventive health care services business.
In its preventive health care services business, the Company's strategy is to
expand through the addition of new management contracts, products and services
and selective acquisitions. 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 Company's revolving credit facility and
the proceeds from potential future equity financings. Future equity financings,
if any, may result in dilution to holders of the Company's 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.
Operating income, as a percentage of revenues, is expected to increase compared
with that experienced for the year ended December 31, 1997 as the Company
expects to control site costs and maintain operating expenses, as a percentage
of revenues, at levels consistent with 1997.
Year 2000 Compliance
The Company has initiated a project to prepare its products and computer systems
for the year 2000 impact on its business operations, product offerings,
customers and suppliers. The Company has completed the awareness phase of the
project and is currently in various stages of the assessment, remediation and
internal testing phases. The project is expected to be by the end of the third
quarter of calendar year 1999. Accordingly, management believes the year 2000
issue will not have a significant impact on its business. If necessary
modification and conversions are not completed on a timely basis, the year 2000
issue could have an adverse effect on the Company's business. At this time, the
Company believes it is unnecessary to adopt a contingency plan covering the
possibility that the project will not be completed in a timely manner, but as
part of the overall project, the Company will continue to assess the need for a
contingency plan.
<PAGE>
The costs associated with the year 2000 issues are being expensed during the
period in which they are incurred. The financial impact to the Company of
implementing any necessary changes to become year 2000 compliant has not and is
not anticipated to be material to the Company's business. However, uncertainties
that could impact actual costs and timing of becoming year 2000 compliant do
exist. Factors that could affect the Company's estimates include, but are not
limited to, the availability and cost of trained personnel, the ability to
identify all systems and programs that are not year 2000 compliant, the nature
and amount of programming necessary to replace or upgrade affected programs or
systems, and the success of the Company's suppliers and customers to address
these issues. The Company will continue to assess and evaluate cost estimates
and target completion dates of the project on a periodic basis.
Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 redefines how operating
segments are determined and requires disclosures of certain financial and
descriptive information about a company's operating segments. The adoption of
SFAS No. 131 will increase the number of reportable segments for the Company. In
accordance with SFAS No. 131, the additional segment disclosure will be included
in the Company's Form 10-K for the year ending December 31, 1998.
Private Securities Litigation Reform Act
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this Form 10-Q
and other materials filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral statements or other
written statements made or to be made by the Company) contain statements that
are forward-looking, such as statements relating to plans for future expansion,
product development, market acceptance of new products, and other business
development activities as well as other capital spending, financing sources and
the effects of regulation and competition. Such forward-looking information
involves important risks and uncertainties that could significantly affect
anticipated results in the future and, accordingly, such results may differ from
those expressed in any forward-looking statements made by or on behalf of the
Company. These risks and uncertainties include, but are not limited to, those
relating to product development and market acceptance of new products,
dependence on existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), domestic or global economic
conditions, changes in federal or state tax laws or the administration of such
laws.
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.
Item 2. Changes in Securities
During the six months ended September 30, 1998, the Company issued the following
options, warrants, or other equity securities not previously reported on Form
10-Q in consideration of services rendered or to be rendered without
registration under the Securities Act:
Exercise Price Exemption Relied
Date Amount Type Purchaser(s) per Share Upon
---- ------ ---- ------------ -------------- ----------------
5/19/98 62,500 Option Employees $2.00 Section 4(2)
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
<PAGE>
Item 5. Other Information
The Company has received notification from The Nasdaq Stock Market, Inc. that
the Company's common stock will be delisted from The Nasdaq SmallCap Market
unless the closing price for the Company's common stock exceeds $1.00 per share
for at least ten consecutive days prior to December 22, 1998. The Company is
considering what, if any, actions to take in response to such notification.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index immediately following signature page.
(b) Reports on Form 8-K
No Forms 8-K were filed by the Company during the three months ended
September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 13, 1998 HEALTH FITNESS CORPORATION
By /s/ Loren S. Brink
Loren S. Brink
Chairman, President and Chief Executive Officer
Principal Executive Officer)
By /s/ Charles E. Bidwell
Charles E. Bidwell
Secretary, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Michael P. Wise
Michael P. Wise
Vice President and Corporate Controller
(Principal Accounting Officer)
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX
HEALTH FITNESS CORPORATION
FORM 10-Q
Exhibit No. Description
3.1 Articles of Incorporation, as amended, of the Company -
incorporated by reference to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997
3.2 Restated By-Laws of the Company -- incorporated by reference
to the Company's Registration Statement on Form SB-2 No.
33-83784C
4.1 Specimen of Common Stock Certificate -- incorporated by
reference to the Company's Registration Statement on Form SB-2
No. 33-83784C
10.1 Amendment No. 4 to Madeliene L.L.C. Loan and Security
Agreement dated September 8, 1998
27.1 Financial Data Schedule for 9-month period ended June 30, 1998
(in electronic version only)
[9/10/98]
AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT
AMENDMENT dated September 10, 1998, by and among Health Fitness
Corporation, a Minnesota corporation ("Borrower"), Health Fitness Rehab, Inc., a
Minnesota corporation ("HF Rehab"), The Preferred Companies, Inc., an Arizona
corporation ("TPC"), Health Fitness Rehab of Iowa, Inc., an Iowa corporation
("HF Rehab Iowa"), Duffy & Associates Physical Therapy Corp., an Iowa
corporation ("Duffy"), Medlink Corporation, an Iowa corporation ("Medlink"),
Medlink Services, Inc., an Iowa corporation ("Medlink Services"), Midlands
Physical Therapy, Inc., a Nebraska corporation ("Midlands"), Fitness Centers of
America, a California corporation ("Fitness Centers"), Sports & Orthopedic
Physical Therapy, Inc., a Minnesota corporation ("Sports Therapy") and
International Fitness Club Network, Inc., a Rhode Island corporation, formerly
known as David W. Pickering, Inc., ("IFCN", and together with Sports Therapy, HF
Rehab, TPC, HF Rehab Iowa, Duffy, Medlink, Medlink Services, Midlands and
Fitness Centers, collectively, "Guarantors" and sometimes referred to
individually as a "Guarantor") and Madeleine L.L.C., a New York limited
liability company ("Lender").
W I T N E S S E T H
WHEREAS, Lender and Borrower have entered into financing arrangements
pursuant to which Lender may make loans and advances and provide other financial
accommodations to Borrower as set forth in the Loan and Security Agreement,
dated February 17, 1998, by and among Lender, Borrower and Guarantors, as
amended by Amendment No. 1 to Loan and Security Agreement, dated February 28,
1998, Amendment No. 2 to Loan and Security Agreement, dated June 4, 1998, and
Amendment No. 3 to Loan and Security Agreement, dated June 26, 1998 (and as
amended hereby and as the same may be further amended, modified, supplemented,
extended, renewed, restated or replaced, the "Loan Agreement") and the
agreements, documents and instruments at any time executed and/or delivered in
connection therewith or related thereto (collectively, together with the Loan
Agreement, the "Financing Agreements");
WHEREAS, Borrower and Guarantors have requested certain amendments to
the Loan Agreement and Lender is willing to agree to such amendments, subject to
the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. Definitions.
(a) All references to the term "Special Availability Reserve"
in the Loan Agreement and each such reference is hereby amended to mean a
reserve calculated as follows (to the extent such calculation results in a
positive number): (i) the Borrowing Base (calculated without regard to the
<PAGE>
Special Availability Reserve) minus (ii) the amount equal to (A) $8,000,000
minus (B) the amount equal to $200,000 plus an additional $100,000 as of the
opening of business on Tuesday of each week, commencing with Tuesday, September
15, 1998, for four (4) consecutive weeks, until the amount calculated pursuant
to this clause (ii) equals $7,400,000. Without limiting any other rights or
remedies of Lender, in the event that the Borrowing Base calculated as of August
31, 1998 is greater than $7,700,000, Lender may, at its option, elect to
decrease the Special Availability Reserve by decreasing the amount of the
Special Availability Reserve by up to $300,000, or such other amount as Lender
may determine.
(b) For purposes of this Amendment, unless otherwise defined
herein, all terms used herein, including, but not limited to, those terms used
and/or defined in the recitals above, shall have the respective meanings
assigned to such terms in the Loan Agreement.
2. Waivers.
(a) Subject to the terms and conditions contained herein,
Lender hereby waives the Event of Default arising under Section 9.1(b) of the
Loan Agreement as a result of the failure of Borrower to comply with Section
8.10 and Section 8.10A of the Loan Agreement as of July 31, 1998, provided,
that, (i) such waiver shall only apply to the failure of Borrower to comply with
such Sections for the period from January 1, 1998 through and including July 31,
1998 (and not as of the end of any month thereafter) and (ii) such waiver shall
not be effective unless and until Lender shall have received an original of this
Amendment duly executed and delivered by Borrower and Guarantors.
(b) Lender has not waived, is not by this letter waiving, and
has no intention of waiving any Event of Default which may have occurred on or
prior to the date hereof, whether or not continuing on the date hereof, or which
may occur after the date hereof (whether the same or similar to the Events of
Default referred to above or otherwise), other than the Events of Default
specifically referred to above for the period ending July 31, 1998. Upon the
occurrence of any other Event of Default, whether or not continuing on the date
hereof, or which may occur on or after the date hereof (whether the same or
similar to the Event of Default described above, including an Event of Default
pursuant to the failure of Borrower and Guarantors to comply with Section 8.10
or Section 8.10A of the Loan Agreement as of the last day of any month after
July 31, 1998), Lender shall have and hereby specifically reserves the right in
its discretion, to exercise any and all of its rights and remedies under the
Loan Agreement, the other Financing Agreements, applicable law or otherwise.
(c) The foregoing waiver shall not be construed as a bar to or
a waiver of any other or further Event of Default on any future occasion,
whether similar in kind or otherwise and shall not constitute a waiver, express
or implied of any of the rights and remedies of Lender arising under the terms
of the Financing Agreements on any future occasion or otherwise.
3. Binding Effect. This Amendment has been duly executed and delivered
by Borrower and Guarantors and is in full force and effect as of the date
hereof, and the agreements and obligations of Borrower and Guarantors contained
herein constitute the legal, valid and binding obligations of Borrower and
Guarantors enforceable against Borrower and Guarantors in accordance with their
respective terms.
<PAGE>
4. Conditions Precedent. The effectiveness of the other provisions of
this Amendment shall be subject to the receipt by Lender of an original of this
Amendment, duly authorized, executed and delivered by Borrower and Guarantors.
5. Effect of this Amendment. Except as modified pursuant hereto, no
other changes or modifications to the Financing Agreements are intended or
implied and in all other respects the Financing Agreements are hereby
specifically ratified, restated and confirmed by all parties hereto as of the
effective date hereof. To the extent of conflict between the terms of this
Amendment and the other Financing Agreements, the terms of this Amendment shall
control.
6. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be necessary or
proper to effectuate the provisions and purposes of this Amendment.
7. Governing Law. The rights and obligations hereunder of each of the
parties hereto shall be governed by and interpreted and determined in accordance
with the internal laws of the State of New York (without giving effect to
principles of conflicts of law or choice of law).
8. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
9. Counterparts: This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned have caused this agreement
to be duly authorized, executed and delivered as of the day and year first above
written.
HEALTH FITNESS CORPORATION HEALTH FITNESS REHAB, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
DUFFY & ASSOCIATED PHYSICAL THE PREFERRED COMPANIES, INC.
THERAPY SERVICES CORP.
By: /s/ Charles E. Bidwell
By: /s/ Charles E. Bidwell
Title: Chief Financial Officer
Title: Chief Financial Officer
MEDLINK CORPORATION HEALTH FITNESS REHAB OF IOWA, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
MEDLINK SERVICES, INC. FITNESS CENTERS OF AMERICA
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title: Chief Financial Officer
SPORTS & ORTHOPEDIC PHYSICAL INTERNATIONAL FITNESS CLUB
THERAPY, INC. NETWORK, INC.
By: /s/ Charles E. Bidwell By: /s/ Charles E. Bidwell
Title: Chief Financial Officer Title:
MIDLANDS PHYSICAL THERAPY, INC.
By: /s/ Charles E. Bidwell
Title: Chief Financial Officer
MADELEINE, L.L.C.
By: /s/ Daniel E. Wolf
Title: Managing Director
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 0
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<RECEIVABLES> 8,294,814
<ALLOWANCES> 552,000
<INVENTORY> 644,479
<CURRENT-ASSETS> 8,713,235
<PP&E> 4,666,337
<DEPRECIATION> 1,395,448
<TOTAL-ASSETS> 25,879,127
<CURRENT-LIABILITIES> 14,699,859
<BONDS> 8,332,639
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0
<COMMON> 118,844
<OTHER-SE> 10,255,143
<TOTAL-LIABILITY-AND-EQUITY> 25,879,127
<SALES> 5,695,389
<TOTAL-REVENUES> 24,820,587
<CGS> 5,695,389
<TOTAL-COSTS> 24,298,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 612,267
<INCOME-PRETAX> 14,658
<INCOME-TAX> 29
<INCOME-CONTINUING> 14,619
<DISCONTINUED> (3,851,455)
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