UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 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 7, 1997 was:
Common Stock, $.01 par value, 8,098,603 shares
Transitional Small Business Issuer Format: [ ] Yes [X] No
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements HEALTH FITNESS CORPORATION AND SUBSIDIARIES
(Formerly Health Fitness Physical Therapy, Inc.)
CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts and notes receivable, less allowance for doubtful
accounts of $245,000 and $810,000, respectively $ 4,656,876 $ 5,285,802
Inventories 454,254 580,863
Prepaid expenses and other 433,413 292,436
------------- -----------
Total current assets 5,544,543 6,159,101
PROPERTY, net 2,185,335 3,389,459
OTHER ASSETS:
Goodwill, less accumulated amortization of $961,424
and $1,251,807, respectively 9,376,367 10,077,980
Noncompete agreements, less accumulated amortization
of $84,874 and $160,731, respectively 346,976 593,119
Trade accounts and notes receivable not expected to be collected
within one year, less allowance for doubtful accounts of
$240,000 and $300,000, respectively 640,000 977,757
Other 85,676 631,400
------------- -----------
$18,178,897 $21,828,816
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 94,643 $ 349,245
Notes payable 2,090,000 1,575,000
Trade accounts payable 1,662,077 1,061,591
Accrued salaries, wages, and payroll taxes 1,302,770 1,388,277
Other accrued liabilities 622,182 816,914
Current portion of long-term debt 281,278 897,708
Deferred revenue 1,577,186 1,492,075
------------- -----------
Total current liabilities 7,630,136 7,580,810
LONG-TERM DEBT, less current portion 576,490 3,325,742
DEFERRED LEASE OBLIGATION 80,183 47,887
COMMITMENTS AND CONTINGENCIES
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 8,096,603 shares issued and outstanding,
respectively 71,733 80,966
Additional paid-in capital 11,693,617 12,849,618
Accumulated deficit (1,795,689) (1,985,842)
------------- -----------
9,969,661 10,944,742
Stockholder note and interest receivable (77,573) (70,365)
------------- -----------
9,892,088 10,874,377
------------- -----------
$18,178,897 $21,828,816
============= ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
(Formerly Health Fitness Physical Therapy, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30,
------------ -------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Preventive healthcare $5,209,608 $6,046,823 $15,755,012 $18,102,411
Rehabilitative healthcare 1,661,238 2,203,008 4,988,487 6,263,798
--------- ---------- ----------- -----------
6,870,846 8,249,831 20,743,499 24,366,209
COST OF REVENUES:
Salaries 3,725,974 4,719,818 11,479,294 13,878,809
Equipment 973,957 1,198,501 2,935,880 3,530,774
Occupancy 334,052 277,240 974,294 960,430
Support 414,297 292,560 979,748 1,133,806
--------- --------- ---------- ----------
5,448,280 6,488,119 16,369,216 19,503,819
--------- --------- ---------- ----------
GROSS PROFIT 1,422,566 1,761,712 4,374,283 4,862,390
OPERATING EXPENSES
Salaries 436,458 757,211 1,523,342 1,775,567
Selling, general, and administrative 702,917 1,127,274 1,864,070 2,730,825
Loss on disposition of
California clinics -- 470,516 -- 18,197
--------- --------- ---------- ----------
1,139,375 2,355,001 3,387,412 4,524,589
--------- --------- ---------- ----------
OPERATING INCOME (LOSS) 283,191 (593,289) 986,871 337,801
OTHER (EXPENSE) INCOME:
Interest expense (27,211) (209,176) (223,440) (508,948)
Other income (expense) 6,481 (15,157) 11,238 6,905
----------- ----------- ---------- ----------
(20,730) (224,333) (212,202) (502,043)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAX BENEFIT (EXPENSE) 262,461 (817,622) 774,669 (164,242)
INCOME TAX BENEFIT (EXPENSE) - 152,493 - (25,911)
----------- ----------- ---------- ---------
NET INCOME (LOSS) $ 262,461 $ (665,129) $ 774,669 $ (190,153)
=========== =========== ========== =========
NET INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT SHARE $ .04 $ ( .08) $ .11 $ ( .02)
============ =========== ========== =========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,356,682 8,007,574 7,354,503 7,689,714
============ =========== ========== =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
(Formerly Health Fitness Physical Therapy, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 774,669 $ (190,153)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 780,739 932,485
Deferred revenue (4,940) (103,211)
Gain on sale of physical therapy clinics -- (496,461)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (144,551) (320,615)
Inventories (68,800) (113,117)
Prepaid expenses and other 317,111 142,867
Other assets (32,406) (208,480)
Trade accounts payable (329,013) (855,812)
Accrued liabilities (29,110) (141,043)
------------- -------------
Net cash provided by (used in) operating activities 1,263,699 (1,353,540)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (758,017) (1,472,020)
Payments for acquisitions, net of liabilities assumed and
cash acquired (197,284) (1,594,408)
Payments in connection with earnout provisions (102,290) (178,966)
Payment in connection with noncompete agreements (25,000) (322,000)
Proceeds of notes receivable collections -- 174,476
Proceeds from sale of physical therapy clinics -- 1,220,600
------------- --------------
Net cash used in investing activities (1,082,591) (2,172,318)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances -- 254,602
Borrowings under line of credit 3,256,938 972,500
Repayment of line of credit (1,826,938) (1,387,500)
Borrowings of notes payable -- 500,000
Repayment of notes payable (2,041,928) --
Proceeds from long-term debt, net of financing costs 113,000 3,193,146
Repayment of long-term debt (284,532) (290,598)
Proceeds from issuance of common stock 120,667 276,500
Advances on notes receivable (15,670) (4,281)
Payments received on notes receivable - 11,489
-------------- --------------
Net cash (used in) provided by financing activities (678,463) 3,525,858
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (497,355) --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 506,652 --
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,297 $ --
============== ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
(Formerly Health Fitness Physical Therapy, Inc.)
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 and nine months ended
September 30, 1997 are not necessarily indicative of the operating results for
the year ending December 31, 1997.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
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 1,165,022
--------------
1,416,573
Liabilities assumed:
Accounts payable 72,792
Accrued expenses 75,681
Deferred revenue 18,100
-------------
166,573
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.
<PAGE>
The purchase agreement also required the Company to enter into employment
agreements with two key employees of Isernhagen for terms 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.
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 operations include the results of operations of Isernhagen since
February 1, 1997.
The following unaudited pro forma condensed combined statements of income
reflect the combined operations of the Company and Isernhagen for the nine
months ended September 30, 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 income 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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30
------------
1996 1997
---- ----
<S> <C> <C>
Revenues $21,850,000 $24,578,000
Cost of revenues 17,362,000 19,615,000
---------- ----------
Gross profit 4,488,000 4,963,000
Other expenses 3,707,000 5,122,000
---------- -----------
Net income (loss) $ 781,000 $ (159,000)
========== ===========
Net income (loss) per common and common equivalent share $ .10 $ (.02)
========== ===========
Weighted average common and common equivalent shares outstanding 7,565,000 7,690,000
========== ===========
</TABLE>
<PAGE>
On April 9, 1997, the Company acquired all of 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. In
connection with the acquisition, assets purchased and liabilities assumed,
common stock issued and cash consideration paid were as follows:
Assets acquired:
Cash $ 3,175
Accounts receivable 24,964
Property 30,110
Noncompete agreement 125,000
Excess of purchase price over net assets acquired 343,233
-------
526,482
Liabilities assumed:
Accounts payable 74,517
Accrued expenses 51,965
-------
126,482
Common stock issued 200,000
-------
Cash consideration paid $ 200,000
=======
The purchase agreement requires the Company to make annual payments of 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 valued at
$3.50 per share.
The purchase agreement also required the Company to enter into a five year
employment agreement with, and issue stock options to, a key employee of K.A.M.
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.
<PAGE>
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 payment of $75,000 and
prohibits the former owner from directly or indirectly competing with the
Company for a period of five years.
On May 16, 1997, the Company acquired all of the issued and outstanding
stock of closely held Duffy and Associates Physical Therapy Corp. (Duffy and
Associates) of Des Moines, Iowa. Duffy and Associates provides outpatient
physical therapy, sports medicine, and occupational health services at two
clinics, one in Des Moines and one in Ankeny, Iowa. It also contracts with area
hospitals and corporations and provides services to Ankeny high school athletic
teams. In connection with the acquisition, the Company issued 50,000 shares of
common stock valued at $143,750 and cash consideration of $300,000. In
connection with the acquisition, assets purchased and liabilities assumed,
common stock issued and cash consideration paid were as follows:
Assets acquired:
Accounts receivable $ 211,428
Property 168,500
Prepaid expenses and other 2,280
Noncompete agreement 30,000
Excess of purchase price over net assets acquired 266,237
-------
678,445
Liabilities assumed:
Accounts payable 101,421
Notes payable 70,000
Accrued expenses 63,274
--------
234,695
Common stock issued 143,750
-------
Cash consideration paid $ 300,000
=======
The purchase agreement requires the Company to make annual payments of up
to 35% of net income from operations, as defined, for each of the five fiscal
years ending April 30, 1998 through 2002. The annual payment, if any, is due in
a combination of 33% in cash and 67% in the Company's common stock valued at the
average closing bid price of the Company's common stock for the ten trading days
ending two business days immediately preceding the date such payment is due.
The purchase agreement also required the Company to enter into a five year
employment agreement with, and issue stock options to, a key employee of Duffy
and Associates.
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.
In August 1997 the Company completed the acquisition, effective as of July
31, 1997, of all the issued and outstanding stock of Medlink Management
Services, Inc., and Medlink Corporation (collectively Medlink), two closely held
and related rehabilitation services companies based in Iowa. 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 Medlink acquisition the Company issued 25,000
shares of common stock valued at $71,875 and cash consideration of $425,000
(subject to adjustment). In connection with the acquisition, assets purchased
and liabilities assumed, common stock issued and cash consideration paid were as
follows:
<PAGE>
Assets acquired:
Cash $ 5,417
Accounts receivable 300,776
Property 94,518
Prepaid expenses and other 23,282
Noncompete agreement 47,000
Excess of purchase price over net assets acquired 249,451
-------
720,444
Liabilities assumed
Accrued expenses 138,963
Notes payable 84,606
-------
223,569
Common stock issued 71,875
-------
Cash consideration paid $425,000
=======
The purchase agreement requires the Company to make annual payments up to
35% of net income from operations, as defined, for each of the five fiscal years
ending July 31, 1998 through 2002. The annual payment if any, is due in a
combination of 33% cash and 67% in the Company's common stock valued at $3.50
per share.
The purchase agreement also required the Company to enter into a five year
employment agreements with, and issue stock options to, certain key employees of
Medlink.
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.
Dispositions of Under-performing Physical Therapy Clinics -In January 1997,
the Company sold one physical therapy clinic located in San Diego, California,
and three clinics in Delaware. In May 1997, the Company sold seven clinics in
Orange County, Sacramento and North Tahoe, California. These clinics accounted
for revenues of approximately $4,146,000 in 1996. At closing, the Company
received $1,222,500 and notes receivable totaling $445,000. The notes
receivables have interest rates of 6% to 7% and require annual or quarterly
principal payments. The notes receivables are recorded in Other Assets, except
for the current portion of such notes, which are included in Prepaid Expenses
and Other. One of the acquiring companies also assumed the Company's
non-interest bearing note payable requiring total future payment of $330,000.
The Company recorded a gain in the second quarter of approximately $452,000 on
the sales of the California clinics. In the third quarter, the Company recorded
a loss of approximately $471,000 in connection with retained accounts receivable
of these clinics.
NOTE 3. OTHER ASSETS
At September 30, 1997, other assets include $204,00 of costs incurred in
connection with a private placement debt-offering. These costs will be amortized
using the effective interest rate method from the date of issuance to maturity
of the private placement debt. In the event the private placement is not
completed, these costs will be expensed.
<PAGE>
NOTE 4. DEBT
In February 1997, the Company's term loan and credit agreement was amended
and restated (the Amended Agreement) to enable the Company to pursue expansion
of its rehabilitative healthcare business. The Amended Agreement increased the
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. In May 1997 the term note was further increased to $2.85 million. In
August 1997 the term note was further increased to $3.275 million. At September
30, 1997, the Company has borrowings of $3.275 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 $2.475 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. At
September 30, 1997, the Company was not in compliance with certain covenants.
The Company has discussed these defaults with the financial institution and
expects that such defaults as of September 30, 1997 will be waived.
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
terminated on the unsecured revolving line of credit.
On April 15, 1997, the Company entered into a $319,000 note payable. The
note requires monthly payments of $7,223 including interest at 12.77% through
April 2002. The note is secured by various pieces of exercise equipment.
On August 15, 1997, the Company entered into a $250,000 note payable. The
note requires monthly payments of $11,594 including interest at 10.5% through
August 1999. The note is secured by various pieces of computer and exercise
equipment and software, and is personally guaranteed by the Company's president.
On August 26, 1997, the Company entered into a $500,000 subordinated note
payable with a related party. The note issued bears interest at 12%, and is due
November 24, 1997. The Company also issued a five-year warrant to purchase
20,000 shares of common stock at $3.00 per share in connection with the note. If
the Company elects not to repay the note upon maturity, it is required to issue
an additional warrant to purchase 2,500 shares of common stock at $3.00 per
share, and to issue an additional warrant to purchase 2,500 shares of common
stock at $3.00 per share for each 60-day period thereafter that the note remains
unpaid. The number of warrant shares and exercise price are also subject to
adjustment to equal any more favorable warrant terms that may be granted to an
unsecured subordinated lender in a future private placement debt-offering.
During the nine months ended September 30, 1997, the holders of three
convertible subordinated promissory notes with face values of $300,000 due
December 1, 1998 converted their notes and accrued interest of $14,756 into
130,358 shares of the Company's common stock.
<PAGE>
NOTE 5. STOCKHOLDERS' 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 nine months ended September 30, 1997, the Company issued 30,000
shares of common stock in return for services provided. The value of the common
stock issued, $75,000, was based on the market value of the Company's common
stock.
During the nine months ended September 30, 1997, the Company received
proceeds of $276,500 when the holders of stock options or warrants exercised
their right to purchase a total of 299,800 shares of common stock at prices
ranging from $.65 to $2.28 per share. The Company also issued 16,412 shares of
common stock in connection with the Company's employee stock purchase plan.
NOTE 6. LEGAL PROCEEDINGS
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. 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 the foregoing claim will not have
a material adverse effect of its financial position, results of operation or
cash flows. The Company is also involved in various other claims and lawsuits
incident to the operations of its business, including claims arising from
accidents of from the negligent provision of physical therapy services. The
Company believes that their outcome will not have a material adverse effect on
its financial condition, results of operations or cash flows.
NOTE 7. INCOME TAXES
The provision for income taxes for the nine months ended September 30, 1996
has been offset by a reduction in the valuation allowance for deferred taxes.
During the nine months ended September 30, 1997 the Company recorded income
tax expense of $26,000 despite having a loss before income taxes primarily due
to a portion of goodwill amortization expense not being deductible for tax
purposes which has been partially offset by a reduction in the valuation
allowance.
NOTE 8. NET INCOME (LOSS) PER SHARE
Net income (loss) per share of common and common equivalent was computed by
dividing net income (loss) by the weighted average number of shares of common
and common equivalent shares outstanding during each period.
The weighted average number of common and common equivalent shares for the
three and nine months ended September 30, 1997 does not include contingent
shares, options, and warrants due to their antidilutive effect.
For the three and nine months ended September 30, 1996, these amounts
includes 257,143 contingent shares, assumed to be issued to the Sellers of
Fitness Systems. The Company contractually agreed with the Sellers of Fitness
Systems that if the average closing sale price of the Company's common stock
during the fourth calendar quarter of 1996 did not reach at least $6.00 per
share, the Company was obligated to issue sufficient additional shares of stock
so that the aggregate value of the stock consideration equals $1,200,000 based
on the same three month average price calculation. Options and warrants were not
included as common stock equivalents for the three or nine months ended
September 30, 1996 due to their antidilutive effect.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company:
<TABLE>
<CAPTION>
For The Three Months
Ended September 30,
-----------------------------------------------------------------
1996 1997
---- ----
<S> <C> <C> <C> <C>
REVENUES:
Preventive healthcare $ 5,210,000 75.8% $ 6,047,000 73.3%
Rehabilitative healthcare 1,661,000 24.2 2,203,000 26.7
--------- ------ --------- ------
Total revenues 6,871,000 100.0 8,250,000 100.0
COST OF REVENUES 5,449,000 79.3 6,488,000 78.6
--------- ------ --------- ------
GROSS PROFIT 1,422,000 20.7 1,762,000 21.4
OPERATING EXPENSES 1,139,000 16.6 2,355,000 28.6
--------- ------ --------- ------
OPERATING INCOME (LOSS):
Preventive healthcare 686,000 469,000
Rehabilitative healthcare 115,000 252,000
Corporate (518,000) (844,000)
Loss on disposition of California clinics -- (470,000)
--------- ---------
Total operating income (loss) 283,000 4.1 (593,000) (7.2)
OTHER (EXPENSES) INCOME, NET ( 21,000) (0.3) (225,000) (2.7)
--------- ------ --------- -----
262,000 3.8 (818,000) (9.9)
INCOME TAX BENEFIT (EXPENSE) -- - 153,000 1.8
--------- ------ --------- -----
NET INCOME (LOSS) $ 262,000 3.8% $( 665,000) (8.1)%
========= ====== ========= ======
</TABLE>
<TABLE>
<CAPTION>
For The Nine Months
Ended September 30,
-----------------------------------------------------------------
1996 1997
---- ----
<S> <C> <C> <C> <C>
REVENUES:
Preventive healthcare $15,755,000 76.0% $18,102,000 74.3%
Rehabilitative healthcare 4,988,000 24.0 6,264,000 25.7
---------- ------ ---------- ------
Total revenues 20,743,000 100.0 24,366,000 100.0
COST OF REVENUES 16,369,000 78.9 19,504,000 80.0
---------- ------ ---------- ------
GROSS PROFIT 4,374,000 21.1 4,862,000 20.0
OPERATING EXPENSES 3,387,000 16.3 4,524,000 18.6
---------- ------ ---------- ------
OPERATING INCOME (LOSS):
Preventive healthcare 1,727,000 1,881,000
Rehabilitative healthcare 650,000 358,000
Corporate (1,390,000) (1,883,000)
Loss on disposition of California clinics -- (18,000)
---------- ----------
Total operating income 987,000 4.8 338,000 1.4
OTHER (EXPENSES) INCOME, NET (212,000) (1.1) (502,000) (2.1)
---------- ------ ---------- ------
775,000 3.7 (164,000) (0.7)
INCOME TAX BENEFIT (EXPENSE) -- - (26,000) (0.1)
---------- ------ ---------- ------
NET INCOME (LOSS) $ 775,000 3.7% $ (190,000) (0.8)%
========== ====== ========== ======
</TABLE>
<PAGE>
General. The Company is engaged in two principal lines of business: (i)
preventive healthcare and (ii) rehabilitative health care. Preventive healthcare
includes the development, marketing and management of corporate and
hospital-based fitness centers and the sale and servicing of fitness equipment.
Rehabilitative healthcare relates to the operation of physical therapy clinics
that provide a full range of rehabilitative services, provides occupational
health (injury prevention and work-injury management consulting services) and a
network of independent physical therapy clinics.
The Company's preventive healthcare revenues come from fitness center
management and consulting contracts and the sales and service of fitness
equipment. The management and consulting contracts provide for specific
management, consulting, and program fees and contain provisions for
modification, termination, and non-renewal.
The Company's rehabilitation revenues come from 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.
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
(loss).
<PAGE>
Revenues. Revenues increased $1,379,000 or 20.1% to $8,250,000 for the
three months ended September 30, 1997 from $6,871,000 for the same period ended
September 30, 1996. Revenues increased $3,623,000 or 17.5% to $24,366,000 for
the nine months ended September 30, 1997 from $20,743,000 for the same period
ended September 30, 1996.
Preventive healthcare revenues increased $837,000 and $2,347,000 for the
three and nine month periods ended September 30, 1997 compared to the same
periods in 1996. The increases were primarily due to the annualized effect of
adding a net of four corporate fitness center management contracts and the
increase in sales of fitness equipment and service of $302,000 and $908,000 for
the three and nine month periods ended September 30, 1997.
Rehabilitative healthcare revenues increased by $542,000 and $1,276,000 for
the three and nine month periods ended September 30, 1997 compared to the same
period in 1996. The increases were primarily due to the acquisition of The
Preferred Companies in December 1996, the Isernhagen Companies in February 1997,
K.A.M. in April 1997, Duffy & Associates in May 1997 and Medlink in August 1997,
and the increase in the number of patient visits at several clinics, partially
offset by the sale of four under-performing clinics in January 1997 and seven
under-performing clinics in May 1997. The eleven clinics sold had revenues of
$1,236,000 for the nine month period ended September 30, 1997; and revenues of
$992,000 and $2,942,000 for the three and nine months ended September 30, 1996.
The newly acquired clinics and clinic networks had revenues of $1,158,000 and
$2,372,000 for the three and nine month periods ended September 30, 1997.
Operating Income (Loss). Operating income decreased $876,000 to a loss of
($593,000) for the three months ended September 30, 1997 from $283,000 for the
same period in 1996. Operating income decreased by $649,000 to $338,000 for the
nine months ended September 30, 1997 from $987,000 for the same period in 1996.
Losses associated with the disposition of the California clinics accounted for
$470,000 and $18,000 of this decrease for the three and nine months ended
September 30, 1997. The remaining decrease in operating income for the three
months ended September 30, 1997 was due to a decrease in operating income for
preventive healthcare of $217,000 and an increase in corporate costs of $326,000
partially offset by an increase in operating income for rehabilitative
healthcare of $137,000. The remaining decrease in operating income for the nine
months ended September 30, 1997 was due to a decrease in operating income for
rehabilitative healthcare of $292,000, an increase in corporate costs of
$493,000, partially offset by an increase in operating income for preventive
health care of $154,000.
The decrease in operating income for the three and nine month periods ended
September 30, 1997 is due to an increase in regional salaries and support for
rehabilitative healthcare, an increase in regional support for preventive
healthcare, and an increase in corporate salaries and support. The increase in
operating costs was related to the Company's growth strategy which has required
expanded services and support, increased personnel and expanded operational and
financial systems.
<PAGE>
Other Expense. Other expenses is comprised of interest expense and other
income. Interest expense increased $182,000 to $209,000 for the three months
ended September 30, 1997 from $27,000 for the same period in 1996, and increased
$286,000 to $509,000 for the nine months ended September 30, 1997 from $223,000
for the same period in 1996. The increase in interest expense was due to the
higher average borrowings and interest rates in 1997 when compared to 1996.
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 nine
months ended September 30, 1996 was offset by a reduction in the valuation
allowance for deferred taxes. The Company recorded a provision for income tax
for the nine months ended September 30, 1997 despite having a loss before income
taxes primarily due to a portion of goodwill amortization expense not being
deductible for tax purposes which has been partially offset by a reduction in
the valuation allowance.
Net Income (Loss). The Company's net income decreased $927,000 to a loss of
($665,000) or ($.08) per share for the three months ended September 30, 1997
from $262,000 or $.04 per share for the same period in 1996. For the nine months
ended September 30, 1997, the Company's net income decreased $965,000 to a loss
of ($190,000) or ($.02) per share from $775,000 or $.11 per share for the same
period in 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 $1,422,000 as of September 30, 1997. The
change was primarily due to the decrease in accounts and notes payable and the
increases in accounts and notes receivable and inventories, which are partially
offset by the increases in checks written in excess of bank balances. Notes
payable at September 30, 1997 included $1,075,000 on its $1,500,000 existing
line of credit. The Company's principal sources of liquidity at September 30,
1997 included trade accounts and notes receivable of $5,286,000, net of
allowance for doubtful accounts which was increased in the third quarter
primarily with respect to trade accounts receivable of the Company's previously
sold California physical therapy clinic operations.
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%. The amount of the term loan was increased to $2,850,000 in May
1997, and further increased to $3,275,000 in August 1997. To fund operations at
current levels, management has implemented plans to extend payment terms of
existing obligations, obtain additional debt and/or equity financing and to
generate cash flow from operating activities. However, to finance planned
infrastructure development and the acquisition of free-standing physical therapy
clinics in the rehabilitative business segment, the Company 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. The cash for such acquisitions was
provided by the Company's bank term loan.
In April 1997, the Company paid $200,000 of cash and issued 78,911 shares
of the Company's common stock in connection with the Company's acquisition of
K.A.M. The cash for such acquisition was provided by the Company's bank term
loan.
In May 1997, the Company paid $300,000 of cash and issued 50,000 shares of
the Company's common stock in connection with the Company's acquisition of Duffy
and Associates. The cash for such acquisition was provided by the Company's bank
term loan.
<PAGE>
In August 1997, the Company paid $425,000 of cash and issued 25,000 shares
of the Company's common stock in connection with the Company's acquisition of
Medlink. The cash for such acquisition was provided by the Company's bank term
loan.
On August 26, 1997, the Company borrowed $500,000 from Brightbridge Fund I,
L.P. ("Brightbridge"), a limited partnership of which Brightstone Capital
Limited LLC ("Brightstone") is the general partner and a 20% limited partner.
Brightstone is owned 50% by Jim Bernards and 50% by George Kline, each a
director of the Company. The loan bears interest at 12% per annum and is due on
the earlier of (i) November 24, 1997, or (ii) three business days after the
closing of any private or public offering(s) of unsecured subordinated debt or
equity securities of the Company resulting in cumulative aggregate proceeds to
the Company of at least $4,000,000 (an "Offering"). Brightbridge received
five-year warrants to purchase 20,000 shares of Company common stock at an
exercise price of $3.00 per share, subject to increase by 2,500 shares if the
bridge loan is not paid when due, and an additional 2,500 shares for each 60-day
period thereafter that the bridge loan remains unpaid. The number of warrant
shares and exercise price are also subject to adjustment to equal any more
favorable warrant terms that may be granted to an unsecured subordinated lender
in an Offering.
Sources of capital to meet future obligations in the fourth quarter of 1997
and the first nine months of 1998 are anticipated to be cash provided by
operations and additional debt and/or equity financing. There is no assurance
that such additional debt and/or equity financing will be available to the
Company. In order to conserve capital resources, the Company's policy is to
lease its physical facilities. The Company does not believe that inflation has
had a significant impact of the results of its operations.
ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board (FASB) 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. 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. The implementation of SFAS No. 128 is
expected to decrease earnings per share by a nominal amount.
OUTLOOK
The Company's strategy is to continue to expand its rehabilitative
healthcare operations through acquisitions and to improve profitability of the
physical therapy clinics acquired through the consolidation of the clinics'
operating expenses. The Company intends to focus its acquisitions on physical
therapy clinics primarily located in secondary markets in the Midwest.
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 shares of the Company's common stock,
with a portion of the purchase price to be paid at closing and, where
appropriate, a portion contingent upon achievement of earnout arrangements. 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 and the proceeds from future debt and/or 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.
<PAGE>
Preventive healthcare revenues are expected to increase as new contracts
are added. Preventative healthcare operating income, as a percentage of
revenues, is expected to remain generally consistent with that experienced for
the year ended December 31, 1996.
Rehabilitative healthcare revenues are expected to increase as a result of
introducing additional physical therapy work sites at additional corporate
fitness centers, increasing the number of physical therapists at existing
clinics, and potential acquisitions of free-standing physical therapy clinics.
See "Liquidity and Capital Resources." In January and May 1997, the Company sold
eight physical therapy clinics located in California and three clinics located
in Delaware. These clinics accounted for revenues of $4,146,000 in 1996. The
Company anticipated that this loss of revenue would be offset by the Company's
acquisition of The Preferred Companies in December 1996, the Isernhagen
Companies in February 1997, K.A.M. in April 1997, Duffy & Associates in May
1997, Medlink in July 1997 and other planned physical therapy acquisitions in
the fourth quarter of 1997, however the Company is behind schedule on its
planned acquisitions due to delays in obtaining financing. Rehabilitative
healthcare operating income as a percentage of revenues is expected to increase
as a result of the Company's investment in operational systems streamlining the
billing and marketing functions of the companies acquired to date. However, the
Company is experiencing a time lag in achieving these anticipated operational
efficiencies. Corporate expenses, as a percentage of revenues, are anticipated
to be consistent with 1996 levels.
The foregoing financial statement notes and Management's Discussion and
Analysis of Financial Condition and Results of Operation contain numerous
forward-looking statements that involve a number of risks and uncertainties.
Factors that could cause actual results to differ materially from such
forward-looking statements include but are not limited to the following:
Sufficiency of working capital
At September 30, 1997, the Company had negative working capital of
$1,422,000. The Company's ability to fund its working capital requirements in
the future is materially dependent upon its ability to generate cash flow from
its existing and future management contracts, equipment sales, consulting fees,
fees generated from its work site and free-standing physical therapy operations
and future debt and/or equity financings. Future potential acquisitions, and the
costs associated with the successful integration of such acquisitions, could
adversely affect Company cash flows from operating activities. In addition, the
Company materially relies on third party reimbursement for its physical therapy
services. If such third party payors defer or delay payment for any reason, the
Company's cash flows would be materially adversely affected. Historically, the
Company has experienced excessive account receivable aging from certain of its
physical therapy clinics. The Company attributes the majority of such
receivables to be the result of the poor performance of the clinics it sold in
1997. If the Company's existing operations would require more capital than
currently anticipated, or if revenues or expenses are greater than what are
currently anticipated, the Company may need additional financing in order to
maintain its operations and implement its physical therapy acquisition strategy.
Such sources of additional financing could include, but may not be limited to,
sales of the Company's debt or equity securities. No assurance can be given that
the Company will be able to secure any such financing when needed, or that such
financing, if obtained, would be on terms favorable or acceptable to the
Company.
Dependence upon successful execution of acquisition strategy; risks
associated with integration of free-standing physical therapy clinics.
<PAGE>
A major element of the Company's business strategy is to acquire
free-standing outpatient physical therapy clinics primarily in secondary markets
throughout the Midwest. Acquisitions have constituted, and the Company expects
them to constitute in the future, a significant portion of the Company's growth.
Since December 1991 to September 30, 1997, the Company has grown from owning and
operating one physical therapy clinic to owning and operating 13 free-standing
clinics and 13 worksite physical therapy clinics. No assurance can be given as
to whether, when or on what terms, any possible acquisitions of free-standing
clinics may be completed, if at all.
The Company believes that competition for acquisitions will increase as
consolidation of the outpatient rehabilitation industry continues. Many of the
companies actively seeking such acquisitions are well established and have
substantially greater resources than the Company. Such interest may lead to
increased competition for attractive acquisition candidates. Accordingly, there
can be no assurance that existing outpatient rehabilitation clinics will
continue to be available to the Company in the secondary markets in the Midwest
on terms and conditions favorable or acceptable to the Company, or at all. The
failure of the Company to be able to successfully locate, negotiate, close and
integrate such free-standing physical therapy acquisitions would adversely
affect the Company's future growth potential. In addition, the Company's ability
to secure the necessary financing to acquire such physical therapy clinics on
terms and conditions favorable to the Company will impact the Company's ability
to successfully execute its acquisition strategy. Federal and state laws may
prohibit or restrict the use by the Company of its securities as consideration
for the acquisition of clinics from referral sources or otherwise prohibit or
restrict the Company's ability to make acquisitions. Such prohibitions and
restrictions could restrict the Company's ability to make acquisitions, which
would adversely affect the Company's growth potential, financial condition,
results of operations and cash flows.
Risks associated with expansion and rapid growth.
The Company's growth strategy will require increased personnel throughout
the Company, expanded operational and financial systems and the implementation
of new and additional control procedures. There can be no assurance that the
Company will be able to manage expanded or newly integrated operations
effectively. The failure to implement such operational and financial systems
could have a material adverse affect on the Company's results of operations,
financial condition and cash flows.
Material dependence on referrals.
Although not the Company's primary strategy, the Company has acquired in
the past (and may acquire in the future) certain clinics from healthcare
professionals (such as physicians) who are the primary patient referral source
for such clinics. Under current and proposed federal and state legislation,
depending on the type of consideration paid by the Company and the nature of any
other financial relationships between the sellers, the seller and other referral
sources may be prohibited from referring patients to the clinic. In connection
with the acquisition of clinics from physicians in particular, the Company
typically enters into noncompetition agreements with the sellers for
approximately 60 months (although such sellers are not restricted from referring
patients to other clinics). There can be no assurance, however, that such
contracts would be enforced according to their terms and conditions and that the
sellers would not begin competing with the Company.
Potential adverse effects of existing and future government regulation.
The Company's physical therapy business is subject to extensive and rapidly
changing federal, state and local regulation governing licensure, conduct of
operations, payment of referral fees, purchase or leasing of facilities and
employment of therapists and other professionals by business corporations.
<PAGE>
Virtually all states in which the Company operates have enacted laws and
adopted regulations that restrict healthcare practitioners from referring
patients to healthcare facilities in which the practitioner has an ownership or
other financial interest. Other state laws and regulations often prohibit the
giving and accepting of referral fees or other consideration as compensation or
inducement for patient referrals. The Company believes that its operations are
structured to comply with all such laws and regulations currently in effect, as
well as laws and regulations enacted or adopted but not yet effective. There can
be no assurance, however, that enforcement authorities will not take a contrary
position. The Company also believes that, if it is subsequently determined that
the Company's operations do not comply with such laws or regulations, it could
restructure its operations to comply with such laws and regulations. There can
be no assurance, however, that the Company would be able to restructure its
operations. In addition, there can be no assurance that the states in which the
Company currently operates, or may operate in the future, will not enact similar
or more restrictive laws and that the Company will be able to operate or
restructure its operations to comply with such new legislation or regulations or
interpretations of existing or new legislation and regulations.
Additional federal restrictions became effective in 1995 for certain
designated health services (including physical therapy) that require notice to
governmental agencies of ownership on the part of physicians and members of
their families of debt or equity interests in providers of physical therapy,
such as the Company. Payment will not be made for services provided to Medicare
or Medicaid beneficiaries as a result of referrals from such physicians. This
law also regulates a wide variety of other relationships between referring
physicians and providers and imposes substantial penalties for violations of its
provisions. Proposed federal legislation would extend these restrictions to all
services provided, regardless of whether this source of payment is the Medicare
or Medicaid programs or some other public or private source of payment. In the
event such legislation at the state or national level were enacted, the Company
may be required to restructure its relationships with certain of its referring
physicians. There can be no assurance that the Company would be able to do so
without an adverse effect on its financial condition, operations or cash flows.
Possible limitations on third-party reimbursement.
The healthcare industry has experienced a material trend toward cost
containment as private and governmental payors seek to respond to, and control,
rapidly escalating healthcare costs. One response has been to place limitations
on reimbursement rates by capping or lowering fees and restricting the number of
treatments which will be reimbursed for any given condition. All states in which
the Company currently conducts business have fee schedules which limit the
reimbursement rates under workers' compensation programs. The Company expects
that legislation limiting the reimbursement of fees for various outpatient
services (including physical therapy and other related services) will become
more prevalent. Reimbursement for the Company's services may also be limited by
third party payors. Such payors often limit the amount of fees per visit,
regardless of the number or type of therapy applied to the patient, or otherwise
limit, by the terms of the managed care contract, the amount of fees that may be
charged. One method of governmental and third party payors has been to institute
what are known as "capitated" programs. Under capitated programs, payors
contract with providers for specific physical therapy services in return for set
prepaid fees per individual enrollee ("capitated" monthly fees). If the provider
has accurately analyzed and negotiated its capitated monthly fees, and the costs
in providing services are less than the demand for treatment, the provider
benefits from positive margins in cash flow resulting from the prepayment of the
capitated monthly fees. However, to the extent that the actuarial analysis
underlying such capitated fees is inaccurate and enrollees require more
treatment than is anticipated, aggregate capitated fees may be insufficient to
cover the costs of providing enrollees with the services required. Although the
Company could seek to negotiate stop-loss reinsurance to contractually shift the
risk of financial exposure beyond certain limits to an insurance carrier in the
event the Company determined to participate in such a capitated program, there
can be no assurance that the Company would be able to obtain such reinsurance.
<PAGE>
In addition, the Company could be required to obtain licenses from certain
governmental authorities in order to participate in such capitated programs. The
Company does not currently have a license from any governmental a authority to
offer such programs, and there can be no assurance that the Company would be
able to secure any such licenses when and if sought by the Company. Moreover, in
order to effectively manage such capitated contracts, the Company may need to
acquire and implement additional operational and informational systems.
The Company expects the trend toward third party payors limiting
reimbursement levels for various out-patient services, including outpatient
rehabilitation services, to continue. As a consequence, there can be no
assurance that reimbursement for the Company's rehabilitation services will
remain at current or anticipated levels. Any reduction or limits on
reimbursement levels for the Company's services would adversely affect the
profitability of, or demand for, the Company's services and could have a
material adverse effect on the Company's financial condition, results of
operations and liquidity. In addition, such payors are expected to continue to
develop programs designed to control and reduce the cost of healthcare services
that may adversely affect the profitability of, or demand for, the Company's
services.
State limitations imposed upon the corporate practice of medicine.
Certain states have legislation or regulations, or have interpreted
existing physical therapy licensing laws, to prohibit or restrict business
corporations, such as the Company, from practicing physical therapy through the
direct employment of physical therapists. In other states, the courts or state
officials have issued rulings or opinions stating or suggesting that healthcare
professionals may not lawfully provide services as employees of business
corporations such as the Company. For example, in Texas, an opinion of the
Attorney General suggests that unlicensed corporate entities may not engage in
the practice of physical therapy, although the Company believes that other Texas
regulators disagree with this conclusion and that this opinion has generally not
been followed, or enforced, in Texas. Similarly however, in California, the
Attorney General has opined that physical therapists may not be employed by
corporate employers, such as the Company. The Physical Therapy Examining
Committee of the California Board of Medical Quality Assurance, however, has
concluded that there is no such prescription under California law, and to the
best of the Company's knowledge, the Attorney General's opinion has not been
enforced to date. There can be no assurance that regulators, or others in Texas,
California and other states, will not seek to enforce, or adopt, this type of
restriction, or that other states in which the Company operates, or may operate
in the future, will not enact or enforce similar, or more restrictive,
legislation or regulations or that the Company can adapt its operations to
comply with such legislation and regulations.
Material dependence upon existing management and physical therapy clinic
personnel.
The success of the Company is highly dependent on the services of Mr. Loren
S. Brink, its President and Chief Executive Officer, and upon Mr. Thomas Coplin,
President of Health Fitness Rehab. The loss of either Mr. Brink's or Mr.
Coplin's services would have a material adverse effect on the Company's
business. In January 1997, the Company entered into an "evergreen" three year
employment agreement with Mr. Brink. The Company is currently negotiating a long
term employment agreement with Mr. Coplin which should be finalized by December
31, 1997. No assurance can be given that such long term employment agreement
will be entered into between the Company and Mr. Coplin or on terms, and
conditions, acceptable to the Company. The failure by the Company to enter into
such long term employment agreement would have an adverse effect on the
Company's business. The Company owns and maintains a key-man life insurance
policy on Mr. Brink's life in the amount of $3.5 million and intends to purchase
similar key-man life insurance policy on Mr. Coplin's life in connection with
the execution of the employment agreement summarized above.
<PAGE>
The Company's operations are also dependent upon attracting and retaining
highly-qualified physical therapists. Although, to date, the Company has not
experienced significant difficulty in attracting and retaining qualified
physical therapists, it is generally accepted that the demand for physical
therapists exceeds the available supply. As the Company's operations expand, the
Company could experience difficulty recruiting and maintaining adequate staff.
Most of the Company's competitors are larger and have greater financial
resources, which may provide such competitors with an advantage in attracting
and retaining physical therapists. In addition, the Company's ability to attract
and retain physical therapists may be limited as the Company's ability to
increase its fees to cover such additional costs is restricted by the cost
containment pressures on healthcare providers. The inability to attract
therapists without substantially increasing their compensation could interfere
with the Company's business plans and adversely affect its results of operations
and cash flows.
Possible quarterly volatility in Company financial results.
The Company may experience, as other companies in the business of owning
and operating physical therapy clinics have experienced, a decrease in revenue
and income from operations in the third and fourth quarters of each year as
patient visits historically tend to decline during the summer and holiday
months. In addition, the timing, number and integration of the Company's
potential free-standing physical therapy acquisitions may cause financial
results of operations to vary on a quarterly basis. No assurance can be given
that the timing or integration of possible future acquisitions will not
materially adversely affect the Company's financial position, results of
operations and cash flows on a quarterly or annual basis.
Likely material changes in workers' compensation laws.
Workers' compensation coverage is a creation of state law, and thus, is
subject to material change by state legislatures and is materially influenced by
the political process in each state. Several states have mandated that employers
receive coverage only from funds operated by the state. New laws affecting the
workers' compensation system in Minnesota and any other state where the Company
may do business in the future (including laws that require all employers to
participate in state-sponsored funds or that mandate premium reductions) would
have a material adverse effect on the Company and its financial position,
results of operations and cash flows. Several bills to modify Minnesota's
workers' compensation laws have been introduced in the State legislature in the
past. The Company is not able, at this point in time, to predict the likelihood
that any of these bills will be enacted or the potential effect these bills
could have on the Company and its operations, if enacted into law.
Possible risk in converting physical therapy "independent practices" to
"rehabilitation agency" status.
Under current Medicare standards, a facility certified as an "independent
practice" is subject to a $900 per capita limit in connection with the provision
of physical therapy services. In contrast, physical therapy sites or facilities
certified as "rehabilitation agencies" are not subject to such $900 per capita
reimbursement limitation. As a result, management views the change in
certification from an "independent practice" to a "rehabilitation agency" as an
important factor, despite the fact that only approximately 8% of the Company's
rehabilitation revenues are derived from Medicare or Medicaid. Management
believes a certain non-quantifiable stigma may apply to those "independent
practices" that have not yet, or do not in the future, convert to such
"rehabilitation agencies." As of September 30, 1997, five of the Company's 13
free-standing physical therapy clinics had been certified as "rehabilitation
agencies." For five of the Company's free-standing physical therapy sites,
"rehabilitation agency" status is not applicable due to the nature of their
hospital contract business and the remaining three sites are currently in the
certification process. No assurance can be given that all or any portion to the
Company's future free-standing physical therapy clinics can or will be converted
to such "rehabilitation agency" status, nor can any assurance be given that the
failure to achieve such status will not have a material adverse effect on the
Company's rehabilitation business.
<PAGE>
Competition.
There are a significant number of companies currently existing in, as well
as entering, the physical therapy market. The Company competes for physical
therapy business with other significantly larger physical therapy companies.
Most physical therapy companies that compete with the Company have greater
capital and financial resources, operational experience, marketing capabilities
and name recognition than the Company. The health fitness business is also very
competitive. The Company competes for management contracts for corporate and
hospital-based fitness centers with other health and fitness management
companies. There can be no assurance that the Company will be able to compete
successfully with these management and physical therapy companies.
Possible de-listing from Nasdaq SmallCap Market(sm) ("SmallCap Market")
In August 1997, the Securities and Exchange Commission ("SEC") approved
enhanced listing and maintenance requirements for companies listing their
securities on the Nasdaq SmallCap Market and the Nasdaq National Market(R). The
enhanced maintenance requirements for listing the Company's securities on the
SmallCap Market include a requirement that the Company have either (1) net
tangible assets of at least $2 million, (2) $500,000 of net income in the most
recent fiscal year or in two of the last three fiscal years, or (3) a market
capitalization of at least $35 million. Nasdaq companies have until February
1998 to comply with the new listing requirements. The Company does not have net
tangible assets of $2 million nor a market capitalization of $35 million.
Moreover, unless the Company earns net income of at least $500,000 in fiscal
1997, it will also fail to meet the net income requirement. If the Company fails
to meet such requirements by February 1998, the Company's securities could be
de-listed from the SmallCap Market. In such event, trading, if any, in the
Company's common stock would thereafter be conducted in the over-the-counter
markets or in the so called "pink sheets" or the Nasdaq's electronic bulletin
board. Consequently, the liquidity of the Company's securities could be
impaired, not only in the number of securities which could be bought or sold,
but also through delays and timing of transactions, reductions in security
analysts' and the news media's coverage of the Company, and possibly, lower
prices for the Company's securities than might otherwise be attained.
Possible dilution and depressive effect on price of the Company's common
stock from common stock issued in connection with physical therapy acquisitions.
In connection with the Company's strategy to acquire and integrate
free-standing physical therapy clinic operations, the Company intends to issue
shares of its common stock, as well as grant certain earnout provisions that may
include the future issuance of the Company's common stock. Although the
aggregate number of such shares to be issued in connection with existing and
future physical therapy acquisitions is not currently ascertainable by the
Company, such issuances may be material in the aggregate. Such issuances of the
Company's common stock in connection with free-standing physical therapy
acquisitions may be dilutive to existing shareholders of the Company and sales
of such securities into the public market could have a depressive effect on the
price of the Company's common stock. No assurance can be given that such future
issuances of the Company's securities in connection with future physical therapy
acquisitions will not have a materially dilutive effect on existing Company
shareholders, nor that sales of shares issued in such acquisitions will not
materially adversely affect the price of the Company's common stock.
<PAGE>
Risk of litigation and insufficiency of liability insurance.
Although the Company has had no history of material legal claims, the
Company may be subject to claims and lawsuits from time to time arising from the
operation of its business, including claims arising from accidents or from the
negligent provision of physical therapy services. Damages resulting from and the
costs of defending any such actions could be substantial. In the opinion of
management, the Company is adequately insured against personal injury claims,
professional liability claims and other business-related claims including, but
not limited to, claims related to the negligent provision of physical therapy
services. Nevertheless, there can be no assurance the Company will be able to
maintain such coverage, or that it will be adequate.
Restrictions and affirmative and negative covenants imposed by senior
credit facility.
Certain of the affirmative and negative covenants imposed upon the Company
by its senior secured lender, and senior secured lending facility, restrict the
Company's ability to incur additional senior and subordinated debt. Furthermore,
upon certain events of default, such senior secured lender is entitled to demand
immediate repayment of their outstanding loans. In such circumstances, the
Company may not be able to access other sources of capital, on a timely basis,
or on terms and conditions favorable to the Company, or at all, with sufficient
speed or sufficient size to avoid the Company's senior secured lender from
taking material adverse action against the Company and its collateral.
Lack of proprietary protection; lack of barriers to entry.
Although the Company holds certain trademarks, tradenames and intellectual
property associated with its operations, the Company is primarily a healthcare
service business where patents or other intellectual property are not
applicable, or if applicable, do not provide material barriers to entry for
third parties or competitors to enter the Company's existing preventive and
rehabilitative lines of business and compete with the Company. Therefore, no
assurance can be given that other existing competitors, or healthcare companies
seeking to gain access to the Company's market or limit the Company's market
share, may not devote resources to effectively compete with the Company in the
future. No assurance can be given that if such competition occurs in the future
that the Company's financial position, results of operations or cash flows will
not be materially adversely affected.
Potential depressive effect on price of common stock arising from exercise
and sale of existing convertible securities.
At September 30, 1997, the Company had outstanding 8,096,603 shares of
common stock. Upon the exercise of all outstanding Company stock options and
stock purchase warrants (not including the shares issuable under any contingent
grants, earnout agreements or any future acquisition), there would then be
outstanding 10,619,266 shares of Company common stock outstanding. The exercise
and sale of such outstanding stock options and stock purchase warrants and sale
of stock acquired thereby may have a material adverse effect on the price of the
Company's common stock. In addition, the exercise and sale of such Company's
common stock could occur at a time when the Company would otherwise be able to
obtain additional equity capital on terms and conditions more favorable to the
Company.
<PAGE>
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, results of operation or cash flows.
Item 2. Changes in Securities
During the quarter ended September 30, 1997, the Company sold the following
shares of Common Stock without registration under the Securities Act:
<TABLE>
<CAPTION>
Exemption Relied
Date Amount Purchasers Price Per Share Upon
---- ------ ---------- --------------- ----------------
<S> <C> <C> <C> <C>
7/1/97 28,000 Business broker-payment of commissions $2.50 Section 4(2)
7/10/97 13,120 Warrant holder-stock issued upon exercise $1.50 Sections 3(a)(a);4(2)
7/28/97 25,000 Sellers of acquired business N/A Section 4(2)
7/29/97 13,120 Warrant holder-stock issued upon exercise $1.50 Section 4(2)
8/7/97 8,400 Warrant holders-stock issued upon exercise $1.50 Sections 3(a)(a);4(2)
8/13/97 42,960 Warrant holder-stock issued upon exercise $1.50 Sections 3(a)(a);4(2)
8/22/97 5,040 Warrant holder-stock issued upon exercise $1.50 Sections 3(a)(a);4(2)
9/30/97 39,094 Convertible note holder-stock issued $2.73 Section 4(2)
upon conversion
</TABLE>
During the quarter ended September 30, 1997, the Company issued the
following options, warrants, or other equity securities in consideration of
services rendered or to be rendered or loans made to the Company, without
registration under the Securities Act:
<TABLE>
<CAPTION>
Exercise Exemption
Date Amount Type Purchasers Price Per Share Relied Upon
---- ------ ---- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C>
7/31/97 16,668 Option Employee $4.00 Section 4(2)
7/31/97 4,166 Option Employee $4.00 Section 4(2)
7/31/97 4,166 Option Employee $4.00 Section 4(2)
8/26/97 20,000 Warrant Bridge Lender $3.00 Section 4(2)
</TABLE>
<PAGE>
Item 3. Defaults Upon Senior Securities
At September 30, 1997, the Company was not in compliance with the
minimum net worth, maximum debt to net worth ratio, and minimum net
income covenants of its Second Amended and Restated Credit and
Security Agreement with Norwest Bank Minnesota, National Association.
The Company has discussed these defaults with the bank and expects
that such defaults as of September 30, 1997 will be waived.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
**3.1 Articles of Incorporation, as amended, of the Company
*3.2 Restated Bylaws of the Company
*4.1 Specimen of Common Stock Certificate
10.1 Bridge Loan Agreement dated August 26, 1997 between the Company
and Brightbridge Fund I, L.P.
10.2 Subordinated Unsecured Promissory Note dated August 26, 1997 by
the Company to Brightbridge Fund I, L.P.
10.3 Warrant dated August 26, 1997 issued by the Company to
Brightbridge Fund I, L.P.
10.4 Second Amendment to Second Amended and Restated Credit and
Security Agreement dated August 6, 1997 by and between the
Company and Norwest Bank Minnesota, National Association
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 Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997.
(b) Reports on Form 8-K
No Forms 8-K were filed by the Company during the quarter ended
September 30, 1997.
<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 CORPORATION
Dated: November 14, 1997 By: /s/ Loren S. Brink
Loren S. Brink
Chairman, President and Chief
Executive Officer
Dated: November 14, 1997 By: /s/ Charles E. Bidwell
Charles E. Bidwell
Treasurer and Chief Financial Officer
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBIT INDEX TO FORM 10-Q
Commission File No.: 0-25064
For the quarter ended
September 30, 1997
HEALTH FITNESS CORPORATION
Exhibit
Number Description
**3.1 Articles of Incorporation, as amended, of the Company
*3.2 Restated Bylaws of the Company
*4.1 Specimen of Common Stock Certificate
10.1 Bridge Loan Agreement dated August 26, 1997 between the Company
and Brightbridge Fund I, L.P.
10.2 Subordinated Unsecured Promissory Note dated August 26, 1997 by
the Company to Brightbridge Fund I, L.P.
10.3 Warrant dated August 26, 1997 issued by the Company to
Brightbridge Fund I, L.P.
10.4 Second Amendment to Second Amended and Restated Credit and
Security Agreement dated August 6, 1997 by and between the
Company and Norwest Bank Minnesota, National Association
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 Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1997.
BRIDGE LOAN AGREEMENT
THIS BRIDGE LOAN AGREEMENT (this "Agreement") is dated as of August 26,
1997, by and between Health Fitness Corporation, a Minnesota corporation (the
"Company"), and Brightbridge Fund I, L.P. a Minnesota limited partnership
("Investor").
RECITALS:
Whereas, the Company needs cash to fund its operations until such time as
it can complete a proposed private offering of senior subordinated debentures
(the "Offering") as contemplated by that certain Confidential Private Placement
Memorandum dated July 7, 1997 (as amended or supplemented, the "Offering
Memorandum"); and
Whereas, Investor desires to lend funds to the Company on the terms and
conditions set forth in this Agreement.
AGREEMENT:
Accordingly, in consideration of the foregoing, the mutual promises set
forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Loan/Promissory Note. Investor agrees to lend to the Company Five
Hundred Thousand Dollars ($500,000) and the Company agrees to deliver to the
Investor a subordinated unsecured promissory note, in the form attached hereto
as Exhibit A (the "Note"), in a like amount. The delivery of the Note shall be
made concurrently with delivery of funds to the Company in the amount set forth
above.
2. Warrants.
(a) In consideration of the loan, the Company shall issue to Investor,
concurrently with delivery of the Note, stock purchase warrants, in the
form attached hereto as Exhibit B (the "Original Warrant"), to purchase
Twenty Thousand (20,000) shares of Company Common Stock at an exercise
price of $3.00 per share. If the Note is not paid when due, the number of
shares purchasable under the Original Warrant shall increase by 2,500, and
further increase by an additional 2,500 shares for each 60-day period
thereafter that the Note remains unpaid.
(b) The parties intend that the terms of Original Warrant shall be at
least as favorable to the Investor (on a proportional basis) as the
warrants to be issued to purchasers of the Company's unsecured subordinated
debt in the Offering. Therefore, notwithstanding subsection (a) above, if
the Offering is completed (for purposes of which, the Offering shall be
deemed completed upon one or more closings resulting in cumulative
aggregate proceeds to the Company of at least $4,000,000), Investor shall
have the option, exercisable in its sole discretion at anytime within 30
days after completion of the Offering, of receiving, in lieu of the
<PAGE>
Original Warrant, stock purchase warrants, in form identical to the
warrants received by the purchaser(s) of unsecured subordinated debt in the
Offering and at the same exercise price per share, entitling Investor to
purchase a pro rata number of shares of Company Common Stock (equal to a
fraction of the total number of warrants issued to such purchaser(s) of
unsecured subordinated debt, the numerator of which equals $500,000 and the
denominator of which equals the total amount of subordinated debt related
to such warrants) (the "Replacement Warrant"). For purposes of
clarification, if a purchaser in the Offering purchases both secured and
unsecured debt, the warrants associated with such unsecured portion,
without giving effect to any "blended" provisions, shall be the form of
warrants which Investor may elect to receive pursuant to this Section.
The Original Warrant and/or the Replacement Warrant are referred to
herein as the "Warrant", and the shares of Company Common Stock issuable
upon exercise of the Warrant are referred to hereinafter as the "Warrant
Shares."
3. Repayment. All outstanding principal and accrued interest on the Note
shall be due and payable 90 days after the date hereof; provided, however, that
notwithstanding the foregoing, the Note shall be payable in full within three
business days after the closing of any private or public offering(s) of
unsecured subordinated debt or equity securities of the Company resulting in
cumulative aggregate proceeds to the Company of at least $4,000,000. The Note
may be prepaid at any time without penalty.
4. Subordination. The Note shall be subordinate to all senior debt of the
Company as set forth in Section 5 of the Note.
5. Restrictions on Transfer. The Note, the Warrant, and the Warrant Shares
shall be subject to certain restrictions on transfer identified in the Note and
the Warrant.
6. Representations and Warranties of the Company. The Company represents
and warrants as follows:
(a) This Agreement has been duly authorized by all necessary corporate
action on behalf of the Company, has been duly executed and delivered by an
authorized officer of the Company, and is a valid and binding agreement on
the part of the Company.
(b) All corporate action necessary to the authorization, issuance, and
delivery of the Note, the Warrant, and the Warrant Shares has been taken on
or prior to the date hereof.
(c) As of the date hereof, this Agreement, the Note, the Warrant and
the Offering Memorandum (together with all exhibits thereto and documents
delivered therewith), taken as a whole, do not contain an untrue statement
of a material fact or omit to state a material fact required in light of
the circumstances under which such statements were made to be stated in
such documents to make the statements in such documents, taken as a whole,
not misleading.
<PAGE>
7. Investor represents and warrants to the Company as follows:
(a) This Agreement has been duly authorized by all necessary corporate
or partnership action on behalf of Investor, has been duly executed and
delivered by an authorized officer of Investor, and is a valid and binding
agreement on the part of Investor.
(b) Investor is an "accredited investor" as defined in Rule 501(a) of
Regulation D of the Securities Act, and was not formed for the purpose of
making this investment. Investor is a bona fide resident of, and received
the offer and made the decision to invest in the Note in, the State of
Minnesota. The Note and the Warrant are being purchased by Investor in
Investor's name solely for Investor's own beneficial interest and not as
nominee for, or on behalf of, or for the beneficial interest of, or with
the intention to transfer to, any other person, trust or organization.
(c) Investor has such knowledge and experience in financial and
business matters that Investor is capable of evaluating the merits and
risks of the prospective investment in the Note and Warrants and has the
net worth to undertake such risks. Investor is in a financial position to
hold the Note, the Warrant and the Warrant Shares for an indefinite period
of time and is able to bear the economic risk and withstand a complete loss
of Investor's investment therein. Investor believes that the investment in
the Note and Warrants is suitable for the Investor based upon Investor's
investment objectives and financial needs.
(d) Investor realizes that (i) the purchase of the Note and the
Warrant is a long-term investment, (ii) Investor must bear the economic
risk of investment for an indefinite period of time because the Note, the
Warrant, and the Warrant Shares have not been registered under the
Securities Act or under the securities laws of any state and, therefore,
none of such securities can be sold unless they are subsequently registered
under said laws or exemptions from such registrations are available; (iii)
Investor may not be able to liquidate Investor's investment in the event of
an emergency or pledge any of such securities as collateral for loans; and
(iv) the transferability of such securities is restricted and legends will
be placed on the Note and the Warrant and on any certificates representing
the Warrant Shares referring to the applicable restrictions on
transferability.
(e) Investor has been given access to full and complete information
regarding the Company and has utilized such access to Investor's
satisfaction for the purpose of obtaining information concerning the
Company and to obtain any additional information, to the extent reasonably
available, necessary to verify the accuracy of information provided to
Investor.
<PAGE>
(f) Investor is not subject to the backup withholding provisions of
Section 3406(a)(i)(C) of the Internal Revenue Code of 1986, as amended
(Note: You are subject to backup withholding if (i) you fail to furnish
your Social Security number or taxpayer identification number herein; (ii)
the Internal Revenue Service notifies the Company that You furnished an
incorrect Social Security number or taxpayer identification number; (iii)
you are notified that you are subject to backup withholding; or (iv) you
fail to certify that you are not subject to backup withholding or you fail
to certify your Social Security number or taxpayer identification number).
(g) Investor does not own voting securities of any brokerage firm. No
director, officer, partner or 5% owner of Investor is also a director,
officer, partner, branch manager, registered representative, employee,
shareholder of, or similarly related to or employed by, a brokerage firm.
8. Registration Rights.
(a) Each time the Company shall determine to proceed with the actual
preparation and filing of a registration statement under the Securities Act
in connection with the proposed offer and sale for money of any of its
securities by it, the Company will give written notice of its determination
to Investor. Upon the written request of Investor given within 30 days
after the date of mailing of any such notice from the Company, the Company
will, except as herein provided, cause all the Warrant Shares issued and to
be issued upon exercise of the Warrants requested by Investor to be
registered, to be included in such registration statement, all to the
extent requisite to permit the sale or other disposition by Investor of the
Warrant Shares to be so registered; provided, however, that nothing herein
shall prevent the Company from, at any time, abandoning or delaying any
such registration initiated by it. If any such registration shall be
underwritten in whole or in part, the Company may require that the shares
requested for inclusion by Investor pursuant to this paragraph (a) be
included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters. If in the good
faith judgment of the managing underwriter of such public offering the
inclusion of all of the shares originally covered by a request for
registration made by Investor would reduce the number of shares to be
offered by the Company or interfere with the successful marketing of the
shares of stock offered by the Company, the number of shares owned by
Investor and otherwise to be included in the underwritten public offering
may be reduced; provided, however, that any such required reduction shall
be pro rata among all persons (other than the Company) who are
participating in such offering. Those shares which are thus excluded from
such underwritten public offering shall be withheld from the market by
Investor for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten public offering.
(b) With respect to each inclusion of securities in a registration
statement pursuant to this Section 8, the Company shall bear the following
fees, costs and expenses: all registration, filing and NASD fees, printing
expenses, fees and disbursements of counsel and accountants for the
Company, fees and disbursements of counsel for the underwriter or
<PAGE>
underwriters of such securities (if the Company is required to bear such
fees and disbursements), all internal expenses, the premiums and other
costs of policies of insurance against liability arising out of the public
offering, and legal fees and disbursements and other expenses of complying
with state securities laws of any jurisdictions in which the securities to
be offered are to be registered or qualified. Fees and disbursements of
special counsel and accountants for the selling holders, underwriting
discounts and commissions, and transfer taxes for selling holders and any
other expenses relating to the sale of securities by the selling holders
not expressly included above shall be borne by the selling holders.
(c) The Company shall indemnify Investor, its officers and directors
and each person, if any, who controls Investor within the meaning of
Section 15 of the Securities Act against all losses, claims, damages, and
liabilities caused by any untrue statement or alleged untrue statement of a
material fact contained in the registration statement or prospectus (and as
amended or supplemented) relating to such registration, or caused by any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances under which they are made, unless such statement or
omission was made in reliance upon and in conformity with information
furnished in writing to the Company expressly for use therein by Investor.
(d) Investor shall indemnify the Company, its officers and directors
and each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act against all losses, claims, damages, and
liabilities caused by any untrue statement or alleged untrue statement of a
material fact contained in the registration statement or prospectus (and as
amended or supplemented) relating to such registration, or caused by any
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light
of the circumstances under which they are made, provided that this
paragraph (e) shall apply only to statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
expressly for use therein by the Investor.
9. Other.
(a) This Agreement and the rights and obligations of the parties
hereunder shall not be assignable, in whole or in part, by any party
without the prior written consent of the other party, and neither this
Agreement nor any provision hereof may be amended, modified, waived or
discharged without the written consent of the party against whom
enforcement of such amendment, modification, waiver, or discharge is
sought.
<PAGE>
(b) This Agreement, including the exhibits attached hereto,
constitutes the entire agreement of the parties relative to the subject
matter hereof and supersedes any and all other agreements and
understandings, whether written or oral, relative to the matters discussed
herein.
(c) This Agreement shall be construed and enforced in accordance with
the laws of the State of Minnesota, except for its rules relating to
conflicts of law.
(d) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
(e) The Company agrees to reimburse Investor for up to $2,000 of fees
or expenses incurred by Investor in connection with this Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the date set forth above.
HEALTH FITNESS CORPORATION
By: /s/ Charles E. Bidwell
Its:
BRIGHTBRIDGE FUND I, L.P.
By: Brightstone Capital Limited LLC,
General Partner
By: /s/ Illegible
Its: Partner
Address: Brightbridge Fund I, L.P
c/o Brightstone Capital Limited
7200 Metro Blvd, Suite 200
Edina Minnesota 55439
Tax I.D. No.: 41-1839255
EXHIBIT A
This Note has not been registered under the Securities Act of 1933 or any
state securities laws and may not be sold, transferred, assigned, offered,
pledged or otherwise distributed for value unless there is an effective
registration statement under such act or laws covering such security or the
Company receives an opinion of counsel for the holder of this security
(concurred to by counsel for the Company) stating that such sale, transfer,
assignment, pledge or distribution is exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 and all
applicable state securities laws.
SUBORDINATED UNSECURED PROMISSORY NOTE
$500,000 Minneapolis, Minnesota
August 26,1997
FOR VALUE RECEIVED, the undersigned, Health Fitness Corporation, a Minnesota
corporation (the "Company"), promises to pay to the order of Brightbridge Fund
I, L.P., or its permitted successors and assigns ("Holder"), at Holder's address
set forth in the Loan Agreement (as defined below), or such other place as
Holder may designate in writing from time to time, the principal sum of Five
Hundred Thousand Dollars ($500,000), in lawful money of the United States,
together with simple interest from the date hereof on the unpaid principal
balance outstanding from time to time at the rate of twelve percent (12%) per
year (calculated on the basis of the actual number of days elapsed and a 360-day
year), subject to adjustment as described below. The entire unpaid principal
balance on this Note and accrued interest thereon shall be due and payable on
the earlier of (i) November 24, 1997 (90 days after the date hereof), or (ii)
three business after the closing of any private or public offering(s) of
unsecured subordinated debt or equity securities of the Company resulting in
cumulative aggregate proceeds to the Company of at least $4,000,000.
1. Bridge Loan Agreement. This Note has been issued pursuant to and is
subject to the terms and provisions of the Bridge Loan Agreement (the "Loan
Agreement"), dated as of August 26, 1997, between the Company and Holder, and
this Note and Holder are entitled to all the benefits provided for in the Loan
Agreement. The provisions of the Loan Agreement are incorporated herein by
reference with the same force and effect as if fully set forth herein.
2. Prepayment. This Note may be prepaid at any time without penalty.
3. Unsecured Note. This Note is unsecured and the Company and Holder agree
that this Note shall not be secured at any time in the future by a grant of a
security interest in any assets of the Company, whether or not those assets are
owned by the Company at this time or acquired by the Company on a date
subsequent to the date hereof. The provisions of this Section 3 are designed for
the benefit of the third party senior creditors as well as the Company and
Holder.
<PAGE>
4. Notification of Offering. The Company shall notify Holder of the
anticipated closing of any private or public offering of unsecured subordinated
debt or equity securities of the Company resulting in proceeds to the Company of
at least $4,000,000 at least three (3) business days prior to the date thereof.
5. Subordination. The indebtedness evidenced by this Note is and shall
remain subordinate in right of payment to all Senior Debt to the extent and in
the manner hereinafter set forth. "Senior Debt" shall mean the principal and
interest on indebtedness of the Company to financial institutions for borrowed
money (other than the indebtedness evidenced by this Note), and for purchase
money loans secured by real estate or personal property used in connection with
the business of the Company, whether created, incurred or assumed before or
after the date hereof, except such as by its terms is expressly not superior in
right of payment of this Note, and renewals, extensions and refundings of any
such indebtedness. The subordination provisions contained in this Section 5 are
expressly and only for the benefit of third party senior creditors of the
Company and shall in no way limit the rights or remedies of Holder against the
Company; provided, however, that Holder agrees that it will not commence any
action or proceeding against the Company to recover all or any part of the
indebtedness owed to Holder by the Company as evidenced by this Note, nor shall
Holder join any other creditor in bringing any such action or proceeding against
the Company, unless and until the Senior Debt has been paid in full.
No payment of principal or interest on this Note shall be made if the
Company is in default or breach, or such payment would result in a default or
breach, with respect to any Senior Debt. For purposes of this paragraph, default
or breach with respect to any Senior Debt shall refer to a failure of the
Company (i) to pay in full when due the principal of or interest or premium on
any such Senior Debt, or any portion thereof, according to its terms, or (ii) to
be in compliance with any covenant in any loan agreement, security agreement or
related agreement between the Company and the holder of such Senior Debt. Upon
any distribution of assets of the Company, upon dissolution, winding up,
liquidation or reorganization of the Company, whether in bankruptcy, insolvency
or receivership proceedings, or upon an assignment for the benefit of the
Company, or otherwise, Senior Debt shall first be paid in full, or provision
made for such payment in cash, before any payment is made on account of the
principal of or interest on this Note. In such events, upon payment in full of
all Senior Debt, Holder shall be subrogated ratably to all rights of such Senior
Debtors to receive payments or distributions of the assets of the Company
applicable to such Senior Debt until the principal of and interest on this Note
shall be paid in full.
If Holder receives any payment on the indebtedness owed to it by the
Company as evidenced by this Note that Holder is not entitled to receive under
the provisions of this Note, Holder will hold the amount so received in trust
for the third party senior creditors and will turn over such payment to the
third party senior creditors in the form received (except for the endorsement of
Holder where necessary) for application to the then-existing Senior Debt,
whether or not due. If Holder exercises any right of setoff which Holder is not
permitted to exercise under the provisions of this Note, Holder will promptly
pay over to the third party senior creditors, in immediately available funds, an
amount equal to the amount of the claims or obligations offset.
<PAGE>
Notwithstanding the foregoing, payment of principal and interest on this
Note shall not be subordinated to the prior payment of such Senior Debt as to
all amounts which actually are paid by the Company under this Note if the
Company is not in default or breach with respect to any Senior Debt at the time
or times such payment or payments are made.
6. Default. "Default" means any event which is, or after notice or passage
of time, or both, would be, an Event of Default. An "Event of Default" occurs
if:
(a) the Company fails to make any payment on this Note when the same
becomes due and payable, and such default continues for a period of 30
days;
(b) the Company defaults in the payment of interest or principal on
any Senior Debt and such Senior Debt shall, as a result thereof, have been
accelerated (or comparable event shall have occurred) so that the same
shall have become due and payable prior to the date on which the same would
otherwise have become due and payable and such acceleration has been in
effect without rescission or annulment for a period of 30 days; provided,
however, that if such default in the payment of interest or principal on
any Senior Debt shall be remedied or cured by the Company or waived by the
holders of such Senior Debt, or if such acceleration shall have been
rescinded or annulled by the holders of such Senior Debt, then, unless this
Note shall have been accelerated as provided in this Note, the Event of
Default hereunder by reason thereof shall be deemed likewise to have been
thereupon remedied, cured or waived without further action upon the part of
the Holder.
If an Event of Default occurs and is continuing, the principal of and
interest on this Note shall become and be immediately due and payable without
any declaration or other act on the part of Holder.
Holder may waive an existing Default or Event of Default and its
consequences. When a Default or Event of Default is waived, it is cured and
ceases.
7. Expenses of Enforcement. The Company agrees to reimburse Holder upon
demand for all reasonable out-of-pocket expenses, including reasonable
attorneys' fees, in connection with Holder's enforcement of the Company's
obligations hereunder.
8. Investment Intent. Holder, by acceptance hereof, agrees to give written
notice to the Company before transferring this Note of Holder's intention to do
so, describing briefly the manner of any proposed transfer of this Note.
Promptly upon receiving such written notice, the Company shall present copies
thereof to counsel for the Company. If, in the opinion of such counsel, the
proposed transfer of this Note may be effected without registration or
qualification (under any federal or state law) of this Note, the Company, as
promptly as practicable, shall notify Holder of such opinion, whereupon Holder
shall be entitled to transfer this Note, all in accordance with the terms of the
notice delivered by Holder to the Company, provided that an appropriate legend
in substantially the form set forth at the end of this Note respecting the
foregoing restrictions on transfer and disposition may be endorsed on this Note.
<PAGE>
9. Notices. All demands and notices to be given hereunder shall be
delivered or sent by certified mail, return receipt requested; in the case of
the Company, addressed to its corporate headquarters, 3500 West 80th Street,
Suite 130, Bloomington, Minnesota 55431-4432, and in the case of Holder,
addressed to the address written above, in either case, until a new address
shall have been substituted by like notice.
10. Amendment. Neither this Note nor any term hereof may be changed,
waived, discharged or terminated orally but only by an instrument in writing
signed by the party against which enforcement of the change, waiver, discharge
or termination is sought.
IN WITNESS WHEREOF, Company has caused this Note to be executed on its
behalf by its duly authorized officer on the day and year first above written.
HEALTH FITNESS CORPORATION
By: /s/ Charles E. Bidwell
Its: Chief Financial Officer
EXHIBIT B
This Warrant has not been registered under the Securities Act of 1933 or
any state securities laws and may not be sold, transferred, assigned, offered,
pledged or otherwise distributed for value unless there is an effective
registration statement under such act or laws covering such security or the
Company receives an opinion of counsel for the holder of this security
(concurred to by counsel for the Company) stating that such sale, transfer,
assignment, pledge or distribution is exempt from the registration and
prospectus delivery requirements of the Securities Act of 1933 and all
applicable state securities laws.
WARRANT
FOR
SHARES OF COMMON STOCK
OF
HEALTH FITNESS CORPORATION
FOR VALUE RECEIVED, Brightbridge Fund I, L.P. or its successors or assigns
("Holder"), is hereby entitled to subscribe for and purchase from Health Fitness
Corporation, a Minnesota corporation (the "Company"), up to Twenty Thousand
(20,000) fully paid and nonassessable shares (the "Warrant Shares") of the
Company's Common Stock, par value $.01 per share (the "Common Stock") at an
exercise price per share equal to $3.00 per share (the "Warrant Exercise
Price").
This warrant may be exercised by Investor at any time prior to five year
anniversary of the date hereof.
This warrant is subject to the following provisions, terms and conditions:
1. (a) The rights represented by this warrant may be exercised by Holder,
in whole or in part, by written notice of exercise substantially in the form
attached hereto delivered to the Company at least twenty (20) days prior to the
intended date of exercise and by the surrender of this warrant (properly
endorsed if required) at the principal office of the Company and upon Holder's
payment to the Company by cash, certified check or bank draft of the purchase
price for such shares or by exercise of the Conversion Right as provided in (b)
below. The Warrant Shares so purchased shall be deemed to be issued as of the
close of business on the date on which this warrant has been exercised by
payment to the Company of the Warrant Exercise Price, unless the Conversion
Right has been exercised. Certificates for the shares of stock so purchased,
bearing the restrictive legend set forth at the end of this warrant, shall be
delivered to Holder within fifteen (15) days after the rights represented by
this warrant shall have been so exercised, and, unless this warrant has expired,
a new warrant representing the number of Warrant Shares, if any, with respect to
which this warrant has not been exercised shall also be delivered to Holder
hereof within such time. No fractional shares shall be issued upon the exercise
of this warrant.
<PAGE>
(b) In lieu of payment, the rights represented by this warrant may also be
exercised by a written notice of exercise specifying that Holder wishes to
convert all of this warrant (the "Conversion Right") into that number of shares
of Common Stock equal to the quotient obtained by dividing (x) the value of the
shares subject to the warrant (determined by subtracting the aggregate warrant
exercise price in effect immediately prior to the exercise of the Conversion
Right from the aggregate fair market value of the shares of Common Stock
issuable upon exercise of this warrant immediately prior to the exercise of the
Conversion Right) by (y) the fair market value of one share of Common Stock
immediately prior to the exercise of the Conversion Right. For purposes of this
section 1(b), the fair market value of a share of Common Stock as of a
particular date (the "Determination Date") shall mean:
(i) If the Company's Common Stock is traded on an exchange or is
quoted on the Nasdaq Stock Market, then the closing or last sale price,
respectively, reported for the business day immediately preceding the
Determination Date.
(ii) If the Company's Common Stock is not traded on an exchange or on
the Nasdaq Stock Market, then the mean of the closing high bid and low
asked prices reported for the business day immediately preceding the
Determination Date.
2. The Company covenants and agrees that all Warrant Shares that may be
issued upon the exercise of the rights represented by this warrant shall, upon
issuance, be duly authorized and issued, fully paid and nonassessable shares.
The Company further covenants and agrees that during the period within which the
rights represented by this warrant may be exercised, the Company will at all
times have authorized, and reserved for the purpose of issue or transfer upon
exercise of the subscription rights evidenced by this warrant, a sufficient
number of shares of its Common Stock to provide for the exercise of the rights
represented by this warrant.
3. The Warrant Exercise Price and the number of Warrant Shares shall be
subject to adjustment from time to time as provided in this Section 3.
(a) If the Company at any time divides the outstanding shares of its Common
Stock into a greater number of shares (whether pursuant to a stock split, stock
dividend or otherwise), and conversely, if the outstanding shares of its Common
Stock are combined into a smaller number of shares, the Warrant Exercise Price
in effect immediately prior to such division or combination shall be
proportionately adjusted to reflect the reduction or increase in the value of
each such share.
(b) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected in such a way that holders of the Company's Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for such shares, then, as a condition of such reorganization,
<PAGE>
reclassification, consolidation, merger or sale, Holder shall have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, other securities or assets as
would have been issued or delivered to Holder if it had exercised this warrant
and had received such shares of Common Stock prior to such reorganization,
reclassification, consolidation, merger or sale. The Company shall not effect
any such consolidation, merger or sale, unless prior to the consummation thereof
the successor corporation (if other than the Company) resulting from such
consolidation or merger or the corporation purchasing such assets shall assume
by written instrument executed and mailed to Holder at the last address of
Holder appearing on the books of the Company, the obligation to deliver to
Holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, Holder may be entitled to purchase.
(c) Upon each adjustment of the Warrant Exercise Price, Holder shall
thereafter be entitled to purchase, at the Warrant Exercise Price resulting from
such adjustment, the number of shares obtained by multiplying the Warrant
Exercise Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Exercise Price resulting from such
adjustment.
(d) Upon any adjustment of the Warrant Exercise Price, the Company shall
give written notice thereof, by first class mail, postage prepaid, addressed to
the registered holder of this warrant at the address of such holder as shown on
the books of the Company, which notice shall state the Warrant Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(e) This Warrant is issued in connection with a certain Bridge Loan
Agreement between the Company and Holder and a Subordinated Promissory Note made
by the Company in favor of Holder, each dated as of the date hereof. In addition
to the foregoing adjustments, if the Company fails to pay such Subordinated
Unsecured Promissory Note when due, the number of shares of Common Stock which
Holder shall be entitled to purchase under this Warrant shall be increased by
2,500, and further increase by an additional 2,500 shares for each 60-day period
thereafter that such Subordinated Unsecured Promissory Note remains unpaid. Any
adjustment pursuant to this subsection (e) shall not affect the Warrant Exercise
Price.
4. This Warrant shall not entitle Holder to any voting rights or other
rights as a shareholder of the Company.
<PAGE>
5. Holder, by acceptance hereof, agrees to give written notice to the
Company before transferring this warrant or transferring any Warrant Shares of
Holder's intention to do so, describing briefly the manner of any proposed
transfer of this warrant or such Warrant Shares. Promptly upon receiving such
written notice, the Company shall present copies thereof to counsel for the
Company. If, in the opinion of such counsel, the proposed transfer of this
warrant or disposition of Warrant Shares may be effected without registration or
qualification (under any federal or state law) of this warrant or the Warrant
Shares, the Company, as promptly as practicable, shall notify Holder of such
opinion, whereupon Holder shall be entitled to transfer this warrant or such
Warrant Shares, all in accordance with the terms of the notice delivered by
Holder to the Company, provided that an appropriate legend in substantially the
form set forth at the end of this warrant respecting the foregoing restrictions
on transfer and disposition may be endorsed on this warrant or the certificates
for such Warrant Shares.
6. Subject to the provisions of Section 5, this warrant and all rights
hereunder are transferable, in whole or in part, at the principal office of the
Company by Holder in person or by duly authorized attorney, upon surrender of
this warrant properly endorsed to any person or entity who represents in writing
that he/it is acquiring the warrant for investment and without any view to the
sale or other distribution thereof. Holder, by taking or holding this warrant,
consents and agrees that the bearer of this warrant, when endorsed, may be
treated by the Company and all other persons dealing with this warrant as the
absolute owner hereof for any purpose and as the person entitled to exercise the
rights represented by this warrant, or to the transfer hereof on the books of
the Company, any notice to the contrary notwithstanding; but until such transfer
on such books, the Company may treat the registered owner hereof as the owner
for all purposes.
7. Neither this warrant nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought.
8. Section 8 of the Bridge Loan Agreement, dated as of the date hereof,
between the Company and Holder contains certain registration rights applicable
to the Warrant Shares.
IN WITNESS WHEREOF, the Company has caused this warrant to be signed and
delivered by a duly authorized officer as of the 26th day of August, 1997.
HEALTH FITNESS CORPORATION
By: /s/ Charles E. Bidwell
Its: Chief Financial Officer
<PAGE>
NOTICE OF EXERCISE OF WARRANT -- To be Executed by the Registered Holder
in Order to Exercise the Warrant
The undersigned hereby irrevocably elects to exercise the attached Warrant
to purchase, for cash pursuant to Section 1(a) thereof, __________________
shares of Common Stock of Health Fitness Corporation issuable upon the exercise
of such Warrant. The undersigned requests that certificates for such shares be
issued in the name of _______________________. If this Warrant is not fully
exercised, the undersigned requests that a new Warrant to purchase the balance
of shares remaining purchasable hereunder be issued in the name of
_________________________.
Date: _____________________ ______________________________________
[name of registered Holder]
______________________________________
[signature]
______________________________________
[street address]
______________________________________
[city, state, zip]
______________________________________
[tax identification number]
<PAGE>
NOTICE OF EXERCISE OF WARRANT -- To be Executed by the Registered Holder
in Order to Convert the Warrant on a
Cashless Basis
The undersigned hereby irrevocably elects to convert, on a cashless basis,
a total of _____________ shares of Common Stock of Health Fitness Corporation
otherwise purchasable upon exercise of the attached Warrant into such lesser
number of shares of Common Stock as determined by Section 1(b) of the Warrant.
The undersigned requests that certificates for such shares be issued in the name
of _________________________. If this Warrant is not fully converted, the
undersigned requests that a new Warrant to purchase the balance of shares
remaining purchasable hereunder be issued in the name of
______________________________.
Date: _____________________ _____________________________________
[name of registered Holder]
_____________________________________
[signature]
_____________________________________
[street address]
_____________________________________
[city, state, zip]
_____________________________________
[tax identification number]
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
This Second Amendment, dated as of August 6, 1997, is made by and between
HEALTH FITNESS CORPORATION f/k/a Health Fitness Physical Therapy, Inc., a
Minnesota corporation (the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, a National Banking Association (the "Lender").
Recitals
The Borrower and the Lender have entered into a Second Amended and Restated
Credit and Security Agreement dated as of February 4, 1997, as amended by First
Amendment to Second Amended and Restated Credit and Security Agreement dated as
of May 16, 1997 (as amended, the "Credit Agreement").
Due to the proposed stock acquisition of Medlink Services, Inc., an Iowa
corporation formerly known as Medlink Management Services, Inc. ("Medlink
Services") and Medlink Corporation, an Iowa corporation ("Medlink") by Health
Fitness Rehab of Iowa, Inc., an Iowa corporation ("HFRI"), a subsidiary of the
Borrower, the Borrower has requested that certain amendments be made to the
Credit Agreement. The Lender is willing to make such amendments pursuant to the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Second Amendment shall
have the same meanings given them in the Credit Agreement, unless otherwise
defined herein. In addition, Section 1.1 of the Credit Agreement is amended by
adding or amending, as the case may be, the following definitions:
"`Affiliate' or `Affiliates' means Sports & Orthopedic Physical
Therapy, Inc., Health Fitness Physical Therapy of Tahoe, Inc., Fitness
Centers of America, Health Fitness Rehab, Inc., Preferred Companies, HFRI,
Duffy, Medlink Services, Medlink and any other Person Controlled by,
Controlling or under common Control with the Borrower, including (without
limitation) any Subsidiary of the Borrower."
"`Corporate Guarantors' means Sports & Orthopedic Physical Therapy,
Inc., Health Fitness Physical Therapy of Tahoe, Inc., Fitness Centers of
America, Preferred Companies, Health Fitness Rehab, Inc., HFRI, Duffy,
Medlink Services, and Medlink."
"`Medlink' means Medlink Corporation, an Iowa corporation."
"`Medlink Services' means Medlink Services, Inc., an Iowa corporation
formerly known as Medlink Management Services, Inc."
<PAGE>
"`Medlink Shareholders' means Jerry Anderson, Ted Roush, Doris Davis,
A.Y. Al-Shash and Clifford Makohoniuk."
"`Second Amendment' means that certain Second Amendment to Second
Amended and Restated Credit and Security Agreement, dated as of August 6,
1997, by and between the Borrower and the Lender."
"`Second Amendment Funding Date' means the date on which the Second
Amendment becomes effective."
"`Subsidiary' means any corporation, including without limitation,
Sports & Orthopedic Physical Therapy, Inc., Health Fitness Physical Therapy
of Tahoe, Inc., Fitness Centers of America, Health Fitness Rehab, Inc.,
Preferred Companies, HFRI, Duffy (a subsidiary of HFRI), Medlink Services
(a subsidiary of HFRI), and Medlink (a subsidiary of HFRI), of which more
than 50% of the outstanding shares of capital stock having general voting
power under ordinary circumstances to elect a majority of the board of
directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes shall have or might have voting power
by reason of the happening of any contingency, is at the time directly or
indirectly owned by the Borrower, by the Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries."
"`Term Note' means the Borrower's second replacement term note dated
as of August 6, 1997, payable to the order of the Lender, substantially in
the form of Exhibit A to the Second Amendment, and any note or notes issued
in substitution or replacement therefor, as the same may hereafter be
amended, supplemented or restated from time to time."
2. Term Advances. Section 2.3 of the Credit Agreement is amended in its
entirety and replaced with the following new section:
"Section 2.3 Term Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make (a) an initial advance
to the Borrower on the Funding Date in the amount of $1,250,000 less the
amount of Existing Term Advances then outstanding (the "Initial Term
Advance"), (b) a second advance to the Borrower in the amount of $250,000
upon the satisfaction of all conditions set forth in Section 4.3 hereof
(the "Second Term Advance"), (c) a third advance to the Borrower in the
amount of $1,000,000 upon the satisfaction of all conditions set forth in
Section 4.4 hereof (the "Third Term Advance"), (d) a fourth advance to the
Borrower in the amount of $350,000 on the First Amendment Date (the "Fourth
Term Advance"), and (e) a fifth advance to the Borrower in the amount of
$425,000 on the Second Amendment Funding Date (the "Fifth Term Advance",
and together with the Initial Term Advance, the Second Term Advance, the
Third Term Advance and the Fourth Term Advance, the "Term Advances"). If
the Second Term Advance is not made on or before March 31, 1997, the
Lender's obligation to make the Second Term Advance shall be terminated,
and no Second Term Advance shall be made. If the Third Term Advance is not
made on or before March 31, 1997, the Lender's obligation to make the Third
Term Advance shall be terminated, and no Third Term Advance shall be made.
If the Fourth Term Advance is not made on or before May 31, 1997, the
Lender's obligation to make the Fourth Term Advance shall be terminated,
and no Fourth Term Advance shall be made. If the Fifth Term Advance is not
made on or before August 30, 1997, the Lender's obligation to make the
Fifth Term Advance shall be terminated, and no Fifth Term Advance shall be
made. The Borrower's obligation to pay the Term Advances shall be evidenced
by the Term Note and shall be secured by the Collateral as provided in
Article III."
<PAGE>
3. New Trade Names, Chief Executive Office, Principal Place of Business and
Locations of Collateral. Schedule 5.1 is hereby amended by deleting paragraphs
1, 3, 5 and 7 therein and inserting the following:
1. Borrower (Health Fitness Corporation)
A. Trade Names and Division Names of Borrower
Rivercity Rehab
Pro Source Fitness (formerly The Fitness Center Store)
Health Fitness Physical Therapy, Inc. (Former name of Borrower)
Indian Ventures, Inc. (Former name of Borrower)
Health Fitness Consultants, Inc. (Former name of Borrower)
B. Chief Executive Office/Principal Place of Business of Borrower
Health Fitness Physical Therapy, Inc.
3500 West 80th Street
Suite 130
Bloomington, Minnesota 55431
C. Other Inventory and Equipment Locations
5614 36th Street West
St. Louis Park, Minnesota 55416
7441 France Avenue South
Edina, Minnesota 55431
3600 West 80th Street
Suite 95
Bloomington, Minnesota 55431
133 Hedin Avenue
Red Wing, Minnesota 55066
<PAGE>
12432 Lolly Court
Saratoga, California 95070
1723 Village Court
Crystal Lake, Illinois 60014
7 Happ Road
Northfield, Illinois 60093
1001 Cherry Blossom Way
Georgetown, Kentucky 40324
634 Harwood Drive
Fargo, North Dakota 58104
13 Pendry Avenue
Cincinnati, Ohio 45215
3. Health Fitness Physical Therapy of Tahoe, Inc.
A. Trade Names and Division Names of Borrower
None
B. Chief Executive Office/Principal Place of Business of Borrower
Health Fitness Physical Therapy of Tahoe, Inc.
3500 West 80th Street
Suite 130
Bloomington, Minnesota 55431
C. Other Inventory and Equipment Locations
None.
5. Health Fitness Rehab, Inc.
A. Trade Names and Division Names of Borrower
Health Fitness Rehab
Isernhagen & Associates
Isernhagen Ltd.
<PAGE>
B. Chief Executive Office/Principal Place of Business of Borrower
Health Fitness Rehab, Inc.
3500 West 80th Street
Suite 130
Bloomington, Minnesota 55431
C. Other Inventory and Equipment Locations
Isernhagen & Associates
2202 Water Street
Duluth, Minnesota 55812
7. Health Fitness Rehab of Iowa, Inc.
A. Trade Names and Division Names
K.A.M. Physical Therapy Services
Duffy & Associates Physical Therapy
Iowa Hand Rehabilitation Center
Medlink Services, Inc.
Medlink Management Services, Inc.
Medlink Corporation
R.G. Anderson Center for Work Injury Rehabilitation
Travel Dent
B. Chief Executive Office/Principal Place of Business
Health Fitness Rehab of Iowa, Inc.
3500 West 80th Street
Suite 130
Bloomington, Minnesota 55431
C. Other Inventory and Equipment Locations
K.A.M. locations:
Mercy Hospital of Franciscan Sisters
201 8th Avenue S.E.
Oelwein, Iowa
West Union Good Samaritan Center
201 Hall Street
West Union, Iowa
<PAGE>
Peoples Memorial Hospital
Highway 20, East
Independence, Iowa
Central Community Hospital
Elkader, Iowa
Duffy & Associates Physical Therapy locations:
925 East First Street
Suites I, J., K & L
Schneider's Square
Ankeny, Iowa 50021
7116, 7120 & 7124 University Avenue
Des Moines, Iowa 50311
Medlink Services, Inc. and Medlink Corporation locations:
10052 Justin Drive
Urbandale, Iowa 50322
210 E. Franklin
Bloomfield, Iowa 52537
4. Subsidiaries. Schedule 5.4 of the Credit Agreement is hereby
amended by adding the following:
"Medlink Services, Inc.
Medlink Corporation"
5. Permitted Liens. Schedule 7.1 of the Credit Agreement is hereby
amended by adding the following to the end of the Permitted Liens list:
<TABLE>
<CAPTION>
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
Debtor Creditor Collateral Jurisdiction Filing Date Filing No.
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Medlink Services First Trust N.A. Specified Leased Iowa Secretary of 09/29/94 K577659
Equipment State 10/19/94 K585843
02/28/95 K629959
03/08/95 K632773
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
Medlink Services Norwest Bank Specified Leased Iowa Secretary of 01/22/96 K705456
Iowa, N.A. Equipment State
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
Medlink Services Norwest Bank Specified Leased Iowa Secretary of 12/14/95 K695907
Iowa, N.A. Equipment State
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
</TABLE>
<PAGE>
6. Permitted Indebtedness. Schedule 7.2 of the Credit Agreement is hereby
amended by adding the following to the end of the Permitted Indebtedness list:
<TABLE>
<CAPTION>
- ------------------------- ---------------- ------------------------- -------------- ---------------------------------
Creditor Principal Maturity Date Monthly Collateral
Amount Payment
- ------------------------- ---------------- ------------------------- -------------- ---------------------------------
<S> <C> <C> <C> <C>
First Trust, N.A. $6,167.60 October __, 1999 $262.50 Specified leased ARCON equipment
- ------------------------- ---------------- ------------------------- -------------- ---------------------------------
Norwest Bank Iowa, N.A. $810.00 December __, 1997 $154.12 Specified leased CI5000 slide
maker equipment
- ------------------------- ---------------- ------------------------- -------------- ---------------------------------
Norwest Bank Iowa, N.A. $251.00 November __, 1997 $67.03 Specified Rich Mar Model X
ultrasound equipment
- ------------------------- ---------------- ------------------------- -------------- ---------------------------------
</TABLE>
7. No Other Changes. Except as explicitly amended by this Second Amendment,
all of the terms and conditions of the Credit Agreement shall remain in full
force and effect and shall apply to any advance or letter of credit thereunder.
8. Consent to Acquisition of Medlink Services and Medlink. Section 7.7 of
the Credit Agreement prohibits the Borrower and its Subsidiaries from acquiring,
consolidating with or merging into any Person, provided that the Borrower is
permitted to acquire 100% of all common and preferred stock of HFRI and HFRI is
permitted to acquire 100% of K.A.M. The Borrower and HFRI have requested that
the Lender consent to HFRI's acquisition of Medlink Services and Medlink, and
waive any Default arising as a result of such acquisition under Section 7.7 of
the Credit Agreement. Effective as of July 31, 1997, and provided that the
contemplated acquisition occurs within 10 days thereafter, the Lender hereby
consents to such acquisition and waives any default arising under Section 7.7 as
a result of such acquisition.
9. Amendment Fee. The Borrower shall pay the Lender as of the date hereof a
fully earned, non-refundable fee in the amount of $2,125 in consideration of the
Lender's execution of this Second Amendment.
10. Conditions Precedent. This Second Amendment shall be effective when the
Lender shall have received an executed original hereof, together with each of
the following, each in substance and form acceptable to the Lender in its sole
discretion:
(a) The second replacement term note, substantially in the form of
Exhibit A hereto, duly executed on behalf of the Borrower (the "Second
Replacement Note").
<PAGE>
(b) The Acknowledgment and Agreement of Guarantors set forth at the
end of this Second Amendment, duly executed by each Guarantor.
(c) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Second Amendment and the Second Replacement
Note, ( ii) the fact that the Articles of Incorporation and Bylaws of the
Borrower, which were certified and delivered to the Lender pursuant to the
Certificate of Authority of the Borrower's Secretary dated as of February
4, 1997 in connection with the execution and delivery of the Credit
Agreement continue in full force and effect and have not been amended or
otherwise modified except as set forth in the Certificate to be delivered,
and ( iii) certifying that the officers and agents of the Borrower who have
been certified to the Lender, pursuant to the Certificate of Authority of
the Borrower's Secretary dated as of February 4, 1997, as being authorized
to sign and to act on behalf of the Borrower continue to be so authorized
or setting forth the sample signatures of each of the officers and agents
of the Borrower authorized to execute and deliver this Second Amendment,
the Second Replacement Note, and all other documents, agreements and
certificates on behalf of the Borrower.
(d) An opinion of the Borrower's counsel as to the matters set forth
in paragraphs 11(a) and 11(b) hereof and as to such other matters as the
Lender shall require.
(e) The Agreement of Purchase and Sale by and among Medlink Services,
Medlink, the Medlink Shareholders, Health Fitness Corporation and HFRI,
pursuant to which HFRI acquires and controls 100% of the common and
preferred stock of Medlink Services and Medlink, and such other documents
and evidence of a successful purchase as the Lender may reasonably require.
(f) An opinion of counsel to Medlink Services and Medlink, addressed
to HFRI and the Borrower, opining as to the acquisition of Medlink Services
and Medlink by HFRI.
(g) Evidence that the Borrower owns and controls 100% of the capital
stock of HFRI and that HFRI owns and controls 100% of the capital stock of
Medlink Services and Medlink.
(h) Separate guaranties, substantially in the form of the guaranties
executed by the other Corporate Guarantors, properly executed by Medlink
Services and Medlink pursuant to which Medlink Services and Medlink
unconditionally guaranty the full and prompt payment of all Obligations.
(i) Separate Corporate Guarantor Security Agreements, substantially
in the form of the security agreements executed by the other Corporate
Guarantors, duly executed by Medlink Services and Medlink.
<PAGE>
(j) A certificate of the Secretary or Assistant Secretary of Medlink
Services certifying as to (i) the resolutions of the directors and, if
required, shareholders, of Medlink Services authorizing the execution,
delivery and performance of the guaranty executed and delivered to the
Lender by Medlink Services; (ii) Medlink Services' articles of
incorporation and bylaws; and (iii) the signatures of the officers or
agents authorized to execute and deliver such guaranty on behalf of Medlink
Services.
(k) A certificate of the Secretary or Assistant Secretary of Medlink
certifying as to (i) the resolutions of the directors and, if required,
shareholders, of Medlink authorizing the execution, delivery and
performance of the guaranty executed and delivered to the Lender by
Medlink; (ii) Medlink's articles of incorporation and bylaws; and (iii) the
signatures of the officers or agents authorized to execute and deliver such
guaranty on behalf of Medlink.
(l) Current searches of appropriate filing offices showing that ( i)
no state or federal tax or judgment liens have been filed and remain in
effect against the Medlink Shareholders, Medlink Services, Medlink or HFRI,
( ii) no financing statements have been filed and remain in effect against
the Medlink Shareholders, Medlink Services, Medlink or HFRI except
financing statements acceptable to the Lender in its sole discretion, and (
iii) the Lender has duly filed all financing statements necessary to
perfect its security interests in the property of HFRI, to the extent such
security interests are capable of being perfected by filing.
(m) An opinion of counsel to the Borrower, Medlink Services and
Medlink, addressed to the Lender.
(n) Payment of the fee described in Paragraph 9.
(o) Such other matters as the Lender may reasonably require.
11. Representations and Warranties. The Borrower hereby represents and
warrants to the Lender as follows:
(a) The Borrower has all requisite power and authority to execute this
Second Amendment and the Second Replacement Note and to perform all of its
obligations hereunder, and this Second Amendment and the Second Replacement
Note have been duly executed and delivered by the Borrower and constitute
the legal, valid and binding obligation of the Borrower, enforceable in
accordance with its terms (subject to laws generally affecting the
enforcement of creditors' rights).
(b) The execution, delivery and performance by the Borrower of this
Second Amendment and the Second Replacement Note have been duly authorized
by all necessary corporate action and do not ( i) require any
authorization, consent or approval by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
( ii) violate any provision of any law, rule or regulation or of any order,
writ, injunction or decree presently in effect, having applicability to the
Borrower, or the articles of incorporation or by-laws of the Borrower, or (
iii) result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument to
which the Borrower is a party or by which it or its properties may be bound
or affected.
<PAGE>
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
12. References. All references in the Credit Agreement to "this Agreement"
shall be deemed to refer to the Credit Agreement as amended hereby; and any and
all references in the Security Documents to the Credit Agreement shall be deemed
to refer to the Credit Agreement as amended hereby. Upon the satisfaction of
each of the conditions set forth in paragraph 10 hereof, the definition of "Term
Note" and all references thereto in the Credit Agreement shall be deemed amended
to describe the Second Replacement Note, which Second Replacement Note shall be
issued by the Borrower to the Lender in replacement, renewal and amendment, but
not in repayment, of the Replacement Note in the principal amount of $2,850,000.
13. No Waiver. The execution of this Second Amendment and acceptance of the
Second Replacement Note and any documents related hereto shall not be deemed to
be a waiver of any Default or Event of Default under the Credit Agreement or
breach, default or event of default under any Security Document or other
document held by the Lender, whether or not known to the Lender and whether or
not existing on the date of this Second Amendment.
14. Release. The Borrower, and each Guarantor by signing the Acknowledgment
and Agreement of Guarantors set forth below, each hereby absolutely and
unconditionally releases and forever discharges the Lender, and any and all
participants, parent corporations, subsidiary corporations, affiliated
corporations, insurers, indemnitors, successors and assigns thereof, together
with all of the present and former directors, officers, agents and employees of
any of the foregoing, from any and all claims, demands or causes of action of
any kind, nature or description, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which the
Borrower or such Guarantor has had, now has or has made claim to have against
any such person for or by reason of any act, omission, matter, cause or thing
whatsoever arising from the beginning of time to and including the date of this
Second Amendment, whether such claims, demands and causes of action are matured
or unmatured or known or unknown.
<PAGE>
15. Costs and Expenses. The Borrower hereby reaffirms its agreement under
the Credit Agreement to pay or reimburse the Lender on demand for all costs and
expenses incurred by the Lender in connection with the Credit Agreement, the
Security Documents and all other documents contemplated thereby, including
without limitation all reasonable fees and disbursements of legal counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Lender for the
services performed by such counsel in connection with the preparation of this
Second Amendment, the Second Replacement Note, Medlink Services' Guaranty,
Medlink Services' Security Agreement, Medlink's Guaranty, Medlink's Security
Agreement and all other documents and instruments incidental hereto and thereto.
The Borrower hereby agrees that the Lender may, at any time or from time to time
in its sole discretion and without further authorization by the Borrower, make a
loan to the Borrower under the Credit Agreement, or apply the proceeds of any
loan, for the purpose of paying any such fees, disbursements, costs and expenses
and the fee required under paragraph 9 hereof.
16. Miscellaneous. This Second Amendment and the Acknowledgment and
Agreement of Guarantors may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and all of
which counterparts, taken together, shall constitute one and the same
instrument.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to
be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, HEALTH FITNESS CORPORATION
NATIONAL ASSOCIATION f/k/a Health Fitness Physical
Therapy, Inc.
By: /s/ Ronald Leaf By: /s/ Charles E. Bidwell
Its: Vice President Charles E. Bidwell
Its: Chief Financial Officer
and Treasurer
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of Health Fitness
Corporation f/k/a/ Health Fitness Physical Therapy, Inc. (the "Borrower") to
Norwest Bank Minnesota, National Association (the "Lender") pursuant to separate
Guaranties each dated as of February 4, 1997 (each, a "Guaranty"), hereby (i)
acknowledges receipt of the foregoing Second Amendment; (ii) consents to the
terms (including without limitation the release set forth in paragraph 14 of the
Second Amendment) and execution thereof; (iii) reaffirms his or its obligations
to the Lender pursuant to the terms of his or its Guaranty; and (iv)
acknowledges that the Lender may amend, restate, extend, renew or otherwise
modify the Credit Agreement and any indebtedness or agreement of the Borrower,
or enter into any agreement or extend additional or other credit accommodations,
without notifying or obtaining the consent of the undersigned and without
impairing the liability of the undersigned under his or its Guaranty for all of
the Borrower's present and future indebtedness to the Lender.
SPORTS & ORTHOPEDIC PHYSICAL
THERAPY, INC.
/s/ Loren S. Brink By /s/ Charles E. Bidwell
Loren Scott Brink Charles E. Bidwell
Its Chief Financial Officer
HEALTH FITNESS PHYSICAL THERAPY FITNESS CENTERS OF AMERICA
OF TAHOE, INC.
By /s/ Charles E. Bidwell By /s/ Charles E. Bidwell
Charles E. Bidwell Charles E. Bidwell
Its Chief Financial Officer Its Chief Financial Officer
HEALTH FITNESS REHAB, INC. THE PREFERRED COMPANIES, INC.
By /s/ Charles E. Bidwell By /s/ Charles E. Bidwell
Charles E. Bidwell Charles E. Bidwell
Its Chief Financial Officer Its Chief Financial Officer
DUFFY & ASSOCIATES PHYSICAL HEALTH FITNESS REHAB OF IOWA, INC.
THERAPY CORP.
By /s/ Charles E. Bidwell By /s/ Charles E. Bidwell
Charles E. Bidwell Charles E. Bidwell
Its Chief Financial Officer Its Chief Financial Officer
<PAGE>
Exhibit A to
Second Amendment
to Second Amended
& Restated Credit and
Security Agreement
SECOND REPLACEMENT TERM NOTE
$3,275,000 Bloomington, Minnesota
August __, 1997
For value received, the undersigned, HEALTH FITNESS CORPORATION f/k/a
Health Fitness Physical Therapy, Inc., a Minnesota corporation (the "Borrower"),
hereby promises to pay on the Termination Date under the Credit Agreement
(defined below), to the order of NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a
national banking association (the "Lender"), at its office in Bloomington,
Minnesota, or at any other place designated at any time by the holder hereof, in
lawful money of the United States of America and in immediately available funds,
the principal sum of Three Million Two Hundred Seventy-Five Thousand Dollars
($3,275,000) or, if less, the unpaid principal amount of the Term Advances made
by the Lender to the Borrower under the Credit Agreement (defined below),
together with interest on the principal amount hereunder remaining unpaid from
time to time, computed on the basis of the actual number of days elapsed and a
360-day year, from the date hereof until this Note is fully paid at the rate
from time to time in effect under the Second Amended and Restated Credit and
Security Agreement of even date herewith (as the same may hereafter be amended,
supplemented or restated from time to time, the "Credit Agreement") by and
between the Lender and the Borrower. The principal hereof and interest accruing
thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement,
which provides, among other things, for acceleration hereof. This Note is the
Term Note referred to in the Credit Agreement. To the extent this Note evidences
the Borrower's obligation to pay the Term Advances prior to the Second Amendment
Funding Date, this Note is issued in substitution for and replacement of but not
in payment of the Borrower's promissory note dated as of May 16, 1997, payable
to the order of the Lender in the original principal amount of $2,850,000.
This Note is secured, among other things, pursuant to the Credit Agreement
and the Security Documents as therein defined, and may now or hereafter be
secured by one or more other security agreements, mortgages, deeds of trust,
assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including
attorneys' fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are
expressly waived.
HEALTH FITNESS CORPORATION f/k/a/ Health Fitness
Physical Therapy, Inc.
By ________________________________________
Charles E. Bidwell
Its Chief Financial Officer and Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED 9/30/97 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 6,095,802
<ALLOWANCES> 810,000
<INVENTORY> 580,863
<CURRENT-ASSETS> 6,159,101
<PP&E> 4,106,507
<DEPRECIATION> 717,048
<TOTAL-ASSETS> 21,828,816
<CURRENT-LIABILITIES> 7,580,810
<BONDS> 3,325,742
0
0
<COMMON> 80,966
<OTHER-SE> 10,793,411
<TOTAL-LIABILITY-AND-EQUITY> 21,828,816
<SALES> 4,920,119
<TOTAL-REVENUES> 24,366,209
<CGS> 3,530,774
<TOTAL-COSTS> 19,503,819
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 761,872
<INTEREST-EXPENSE> 508,948
<INCOME-PRETAX> (164,242)
<INCOME-TAX> 25,911
<INCOME-CONTINUING> (190,154)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190,154)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
