UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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)
Health Fitness Physical Therapy, Inc.
(former name)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
The number of shares outstanding of each of the registrant's classes of
capital stock, as of August 11, 1997 was:
Common Stock, $.01 par value, 7,969,203 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
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Accounts and notes receivable, less allowance for doubtful accounts
of $245,000 and $381,000, respectively $ 4,656,876 $ 5,268,539
Inventories 454,254 616,114
Prepaid expenses and other 433,413 330,089
----------- -----------
Total current assets 5,544,543 6,214,742
PROPERTY (net) 2,185,335 2,830,424
OTHER ASSETS:
Goodwill, less accumulated amortization of $961,424
and $1,089,659, respectively 9,376,367 9,963,230
Noncompete agreements, less accumulated amortization
of $84,874 and $130,757, respectively 346,976 576,093
Trade accounts and notes receivable not expected to be collected within one
year, less allowance for doubtful accounts of $240,000
and $150,000, respectively 640,000 890,072
Other 85,676 500,361
----------- -----------
$18,178,897 $20,974,922
=========== ===========
LIABILITIES AND STOCK HOLDERS' EQUITY
- -------------------------------------
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 94,643 $ 101,235
Notes payable 2,090,000 1,500,000
Trade accounts payable 1,662,077 560,848
Accrued salaries, wages and payroll taxes 1,302,770 1,688,850
Other accrued liabilities 622,182 799,181
Current portion of long-term debt 281,278 680,828
Deferred revenue 1,577,186 1,551,517
---------- ----------
Total current liabilities 7,630,136 6,882,459
LONG-TERM DEBT, less current portion 576,490 2,903,242
DEFERRED LEASE OBLIGATION 80,183 58,819
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 7,909,563 shares issued and outstanding, respectively 71,733 79,096
Additional paid-in capital 11,693,617 12,449,824
Accumulated deficit (1,795,689) (1,320,714)
----------- -----------
9,969,661 11,208,206
Stockholder note and interest receivable (77,573) (77,804)
------------ ------------
9,892,088 11,130,402
----------- ----------
$18,178,897 $20,974,922
========== ==========
</TABLE>
See notes to consolidated financial statements
<PAGE>
HEALTH FITNESS CORPORATION AND SUBSIDIARIES
(Formerly Health Fitness Physical Therapy, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1996 1997 1996 1997
-------- -------- ------- ------
<S> <C> <C> <C> <C>
REVENUES:
Preventive healthcare $5,137,779 $5,771,228 $10,545,404 $12,055,588
Rehabilitative healthcare 1,759,942 2,111,717 3,327,249 4,060,790
--------- ---------- ----------- -----------
6,897,721 7,882,945 13,872,653 16,116,378
COST OF REVENUES:
Salaries 3,860,036 4,728,898 7,753,320 9,158,991
Equipment 854,896 898,997 1,961,923 2,332,273
Occupancy 429,714 372,920 744,522 683,190
Support 181,381 439,860 461,171 841,246
--------- ---------- ---------- ----------
5,326,027 6,440,675 10,920,936 13,015,700
--------- ---------- ---------- ----------
GROSS PROFIT 1,571,694 1,442,270 2,951,717 3,100,678
OPERATING EXPENSES:
Salaries 624,740 530,659 1,123,728 1,018,356
Selling, general, and administrative 578,774 876,805 1,125,804 1,603,551
--------- --------- ---------- ----------
1,203,514 1,407,464 2,249,532 2,621,907
--------- --------- ---------- ----------
OPERATING INCOME 368,180 34,806 702,185 478,771
OTHER (EXPENSE) INCOME:
Interest expense (89,214) (170,911) (196,853) (299,772)
Other income 4,023 407,554 6,876 474,381
--------- ---------- ---------- ----------
(85,191) 236,643 (189,977) 174,609
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 282,989 271,449 512,208 653,380
INCOME TAXES - 63,345 - 178,405
---------- ---------- ---------- ----------
NET INCOME $ 282,989 $ 208,104 $ 512,208 $ 474,975
=========== ========== =========== ==========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE $ .04 $ .03 $ .07 $ .06
========== ========== =========== ==========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,935,726 8,015,288 6,847,896 7,833,393
========== ========== =========== ==========
</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>
Six Months Ended
June 30,
-----------------------
1996 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 512,208 $ 474,975
Adjustment to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 542,667 617,031
Deferred revenue (7,642) (43,769)
Gain on sale of physical therapy clinics - (496,461)
Change in assets and liabilities, net of acquisitions:
Trade accounts and notes receivable (272,872) (516,443)
Inventories (24,257) (148,368)
Prepaid expenses and other 232,971 233,642
Other assets (290,915) (51,659)
Trade accounts payable (272,630) (1,329,870)
Accrued liabilities 347,237 186,625
-------- ----------
Net cash provided (used in) by operating activities 766,767 (1,074,297)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (130,059) (912,019)
Payments for acquisitions, net of liabilities assumed (130,784) (1,221,825)
Payments in connection with earnout provisions - (178,966)
Payment in connection with noncompete agreements - (275,000)
Proceeds from sale of physical therapy clinics - 1,220,600
-------- ----------
Net cash used in investing activities (260,843) (1,367,210)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances - 6,592
Borrowings under line of credit 2,065,000 972,500
Repayment of line of credit (1,110,000) (962,500)
Repayment of notes payable (1,854,986) -
Borrowings of long-term debt 113,000 2,519,269
Repayment of long-term debt (262,730) (246,663)
Proceeds from issuance of common stock 95,305 152,540
Advances on notes receivable (12,569) (4,281)
Payments received on notes receivable - 4,050
--------- ----------
Net cash (used in) provided by financing activities (966,980) 2,441,507
--------- ----------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (461,056) -
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 506,652 -
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 45,596 $ -
========== ===========
</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 six months ended
June 30, 1997 are not necessarily indicative of the operating results for the
year ending December 31, 1997.
NOTE 2. ACQUISITIONS
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 1,164,260
---------
1,415,811
Liabilities assumed:
Accounts payable 72,792
Accrued expenses 74,919
Deferred revenue 18,100
---------
165,811
Notes issued 250,000
---------
Cash consideration paid $1,000,000
=========
The Company also agreed to issue common stock with a value of $500,000 on
February 7, 1999, provided the former owners of Isernhagen are employed by the
Company on that date.
The notes issued are convertible, subordinated promissory notes, bear
interest at 8%, and are due May 7, 1998, unless converted earlier. The
convertible, subordinated promissory notes and accrued interest are convertible
at the option of the holders after August 6, 1997, at a conversion price of the
lesser of 85% of the average bid price per share of the Company's common stock
over the immediately preceding ten days or $4.00 per share.
The purchase agreement requires the Company to make annual cash payments of
50% of net income from operations in excess of 25% of revenues, as defined, for
each of the five fiscal years ending February 28, 1998 through 2002.
The purchase agreement also required the Company to enter into employment
agreements with 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.
<PAGE>
This acquisition has been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired is being
amortized over 15 years using the straight-line method. The consolidated
statements of income include the results of operations of Isernhagen since
February 1, 1997.
The following unaudited pro forma condensed combined statements of income
reflect the combined operations of the Company and Isernhagen for the six months
ended June 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>
Six Months Ended
June 30
-----------------------------
1996 1997
---- ----
<S> <C> <C>
Revenues $14,611,000 $16,328,000
Cost of revenues 11,583,000 13,127,000
---------- ----------
Gross profit 3,028,000 3,201,000
Other expenses 2,512,000 2,695,000
---------- ----------
Net income $ 516,000 $ 506,000
========== ==========
Net income per common and common equivalent share $ .07 $ .06
========== ==========
Weighted average common and common equivalent shares outstanding 7,038,000 7,900,000
========== ==========
</TABLE>
On April 9, 1997, the Company acquired of all the issued and outstanding
stock of closely held K.A.M. Physical Therapy Services Corp. (K.A.M.), an
Iowa-based provider of rehabilitative services. The purchase agreement contained
a noncompete provision which covers a period of seven years and prohibits one of
the former owners from directly or indirectly competing with the Company. In
connection with the acquisition of K.A.M., the Company issued 78,911 shares of
common stock valued at $200,000 and cash consideration of $200,000. 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 334,573
--------
517,822
Liabilities assumed:
Accounts payable 65,857
Accrued expenses 51,965
117,822
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.
<PAGE>
This acquisition will be accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired will be
amortized over 15 years using the straight-line method.
In connection with the K.A.M. acquisition, the Company also entered into a
separate noncompete agreement with a former K.A.M. owner. The noncompete
agreement required the Company to make a lump-sum 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 248,212
-------
660,420
Liabilities assumed:
Accounts payable 70,000
Notes payable 83,396
Accrued expenses 63,274
-------
216,670
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 will be accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired will be
amortized over 15 years using the straight-line method.
In August, 1997 the Company completed the acquisition, effective as of July
31, 1997, of all the issued and outstanding stock of Medlink 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 approximately
$94,125 (subject to adjustment).
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.
<PAGE>
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 will be accounted for using the purchase method of
accounting and the excess of purchase price over net assets acquired will be
amortized over 15 years using the straight-line method.
Sales 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. The Company recorded a gain on the
sales of approximately $496,000. At closing, the Company received $1,222,500 and
notes rceivable totaling $445,000. The notes receivable have interest rates of
6% to 7% and require annual or quarterly principal payments. The notes
receivable 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 payments of $330,000.
NOTE 3. DEBT
In February 1997, the Company's term loan and credit agreement was amended
and restated (the Amended Agreement). 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. At June
30, 1997, the Company has borrowings of $2.85 million under the term loan. In
August 1997, the term note was further increased to $3.275 million. 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.
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 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 June 4, 1997, the holders of two convertible, subordinated promissory
notes with a face value of $200,000 due December 1, 1998 converted their notes
and accrued interest of $8,000 into 91,264 shares of the Company's common stock.
NOTE 4. 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.
On June 26, 1997 the Company issued 2,000 shares of common stock in return
for services provided. The fair value of the common stock issued, $5,000, was
based on the market value of the Company's common stock.
<PAGE>
During the six months ended June 30, 1997, the Company received proceeds of
$152,540 when the holders of stock options or warrants exercised their right to
purchase a total of 217,160 shares of common stock at prices ranging from $.65
to $2.28 per share. The Company also issued 4,106 shares of common stock in
connection with the Company's employee stock purchase plan.
NOTE 5. LEGAL PROCEEDINGS
On April 17, 1996, a former employee filed a cliam entitled Julian 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 the foregoing claim will not have
a material adverse effect on the Company's financial condition, results of
operations 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 or 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 oeprations or cash flows.
NOTE 6. INCOME TAXES
The provision for income taxes for the six months ended June 30, 1996 has
been offset by a reduction in the valuation allowance for deferred taxes. The
provision for income taxes for the six months ended June 30, 1997 has been
partially offset by a reduction in the valuation allowance.
NOTE 7. NET INCOME PER SHARE
Income per share of common and common equivalent was computed by dividing
net income by the weighted average number of shares of common and common
equivalent shares outstanding during each period.
For the three and six months ended June 30, 1997, this amount includes
190,476 and 207,265 contingent shares, respectively, assumed to be issued to the
Sellers of Fitness Systems and to the Sellers of Isernhagen. Options and
warrants were not included as common stock equivalents for the three and six
months ended June 30, 1997 due to their antidilutive effect.
For the three and six months ended June 30, 1996, this amount includes
200,000 and 221,319 contingent shares, respectively, 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 six months ended
June 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 June 30,
-----------------------------------------------------------------
1996 1997
---- ----
<S> <C> <C> <C> <C>
REVENUES:
Preventive healthcare $5,138,000 74.5% $5,771,000 73.2%
Rehabilitative healthcare 1,760,000 25.5 2,112,000 26.8
---------- ------ --------- ------
Total revenues 6,898,000 100.0 7,883,000 100.0
COST OF REVENUES 5,326,000 77.2 6,441,000 81.7
---------- ------ --------- ------
GROSS PROFIT 1,572,000 22.8 1,442,000 18.3
OPERATING EXPENSES 1,204,000 17.5 1,407,000 17.9
---------- ------ ---------- ------
OPERATING INCOME (LOSS):
Preventive healthcare 911,000 679,000
Rehabilitative healthcare 358,000 ( 1,000)
Corporate (901,000) (643,000)
---------- ----------
Total operating income 368,000 5.3 35,000 .4
OTHER (EXPENSES) INCOME, NET (85,000) (1.2) 236,000 3.0
---------- ------ ---------- -----
283,000 4.1 271,000 3.4
INCOME TAXES - - 63,000 .8
---------- ------ ---------- -----
NET INCOME $ 283,000 4.1% $ 208,000 2.6%
========== ====== ========== =====
For The Six Months
Ended June 30,
1996 1997
---- ----
REVENUES:
Preventive healthcare $10,546,000 76.0% $12,056,000 74.8%
Rehabilitative healthcare 3,327,000 24.0 4,061,000 25.2
---------- ------ --------- ------
Total revenues 13,873,000 100.0 16,117,000 100.0
COST OF REVENUES 10,921,000 78.7 13,016,000 80.8
---------- ------ ---------- ------
GROSS PROFIT 2,952,000 21.3 3,101,000 19.2
OPERATING EXPENSES 2,250,000 16.2 2,622,000 16.3
---------- ------ ---------- ------
OPERATING INCOME (LOSS):
Preventive healthcare 1,409,000 1,412,000
Rehabilitative healthcare 575,000 106,000
Corporate (1,282,000) (1,039,000)
---------- ----------
Total operating income 702,000 5.1 479,000 2.9
OTHER (EXPENSES) INCOME, NET (190,000) (1.4) 174,000 1.1
---------- ----- ---------- ------
512,000 3.7 653,000 4.0
INCOME TAXES - - 178,000 1.1
---------- ----- ---------- ------
NET INCOME $ 512,000 3.7% $ 475,000 2.9%
========== ===== ========== ======
</TABLE>
General. The Company is engaged in two principal lines of business: (i)
preventive healthcare; and (ii) rehabilitative healthcare. Preventive health-
care 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.
<PAGE>
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.
Revenues. Revenues increased $985,000 or 14.3% to $7,883,000 for the three
months ended June 30, 1997 from $6,898,000 for the same period ended June 30,
1996. Revenues increased $2,244,000 or 16.2% to $16,117,000 for the six months
ended June 30, 1997 from $13,873,000 for the same period ended June 30, 1996.
Preventive healthcare revenues increased $633,000 and $1,510,000 for the
three and six month periods ended June 30, 1997 compared to the same periods in
1996. The increases were primarily due to the annualized effect of adding
several hospital and corporate fitness center management contracts and the
increase in sales of fitness equipment and service of $114,000 and $606,000 for
the three and six month periods ended June 30, 1997, partially offset by the net
loss of four management contracts for the three months ended June 30, 1997.
Rehabilitative healthcare revenues increased by $352,000 and $734,000 for
the three and six month periods ended June 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 and Duffy & Associates in May 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 $439,000 and $1,236,000 for
the three and six month periods ended June 30, 1997, and revenues of $1,009,000
and $1,950,000 for the three and six months ended June 30 1996. The newly
acquired clinics and clinic networks accounted for revenues of $416,000 and
$1,214,000 for the three and six month periods ended June 30, 1997.
Operating Income. Operating income decreased $333,000 or 90.8% to $35,000
for the three months ended June 30, 1997 from $368,000 when compared to the same
period in 1996. Operating income decreased by $223,000 or 31.8% to $479,000 for
the six months ended June 30, 1997 from $702,000 when compared to the same
period in 1996. The decrease in operating income for the three months ended June
30, 1997 was due to a decrease in operating income for preventive healthcare of
$232,000 and a decrease in operating income for rehabilitative healthcare of
$359,000, partially offset by a reduction in corporate costs of $258,000. The
decrease in operating income for the six months ended June 30, 1997 was due to a
decrease in operating income for rehabilitative health care of $469,000,
partially offset by and increase in operating income for preventive healthcare
of $3,000 and a reduction in coporate costs of $243,000.
The decrease in operating income for the three and six month periods ended
June 30, 1997 is due to an increase in clinic and regional salaries and support
for rehabilitative health care and an increase in regional support for
preventive healthcare, partially offset by a decrease 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 $82,000 to $171,000 for the three months
ended June 30, 1997 from $89,000 for the same period in 1996, and increased
$103,000 to $300,000 for the six months ended June 30, 1997 from $197,000 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. Other
income increased $404,000 to $408,000 for the three months ended June 30, 1997
from $4,000 for the same period in 1996, and increased $467,000 to $474,000 for
the six months ended June 30, 1997 from $7,000 for the same period in 1996. The
increase is primarily due to the gain on the sale of the four underperforming
clinics in January 1997 and the sale of the seven under performing clinics in
May 1997.
Income Taxes. Income taxes were calculated based on management's estimate
of the Company's effective tax rate. The provision for income taxes for the
three and six months ended June 30, 1996 was offset by a reduction in the
valuation allowance for deferred taxes. The provision for income taxes for the
three months ended June 30, 1997 was partially offset by a reduction in the
valuation allowance for deferred taxes.
Net Income. The Company's net income decreased $75,000 to $208,000 or $.03
per share for the three months ended June 30, 1997 from $283,000 or $.04 per
share for the same period in 1996. For the six months ended June 30, 1997 the
Company's net income decreased $37,000 to $475,000 or $.06 per share from
$512,000 or $.07 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 $668,000 as of June 30, 1997. The change
was primarily due to the decreases 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 and accrued
salaries, wages and payroll taxes. Notes payable at June 30, 1997 consisted of
$1,500,000 on its existing line of credit. The Company's principal sources of
liquidity included trade accounts and notes receivable of $5,269,000.
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 payments 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 acquisiiton 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.
In August 1997, the Company paid approximately $94,125 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.
Sources of capital to meet future obligations in 1997 and the first half of
1998 are anticipated to be cash provided by operations and additional debt
and/or equity financing. 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.
<PAGE>
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 health
care 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 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.
As a publicly-owned corporation, the Company has and will incur additional
expenses due to being a public company. The Company's growth strategy will
require expanded patient services and support, increased personnel throughout
the Company, expanded operational and financial systems and implementation of
new control procedures. These factors will affect future results and liquidity.
Preventive healthcare operating income, as a percentage of revenues, is
expected to remain consistent with that experienced for the year ended December
31, 1996.
Rehabilitative healthcare revenues are anticipated 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 anticipates that this loss of revenue will 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 second half of 1997.
Rehabilitative health care operating income from existing clinics is
expected to increase on a quarterly basis as a result of increasing revenues and
streamlining the billing and marketing functions of the companies acquired to
date. Corporate expenses, as a percentage of revenues, are anticipated to be
consistent with 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:
<PAGE>
Sufficiency of working capital
At June 30, 1997, the Company had a negative working capital position of
$688,000. 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 can and 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.
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 June 30, 1997, the Company has grown from owning and
operating one physical therapy clinic to owning and operating 11 free-standing
clinics and 12 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 may 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
could 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.
<PAGE>
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 health care
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.
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.
<PAGE>
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.
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 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.
<PAGE>
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.
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 health care 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.
<PAGE>
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 June 30, 1997, three of the companies eleven
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 November 1996, the Board of Governors of the Nasdaq Stock Market, Inc.,
approved and submitted for approval to the Securities and Exchange Commission
("SEC") enhanced listing and maintenance requirements for companies listing
their securities on the SmallCap Market and the Nasdaq National Market(R).
Although not yet approved by the SEC, the enhanced maintenance requirements for
listing the companies' securities on the SmallCap Market would include, as
proposed, net tangible assets of at least $2 million, $500,000 of net income in
two of the last three years or the Company having a market capitalization of at
least $35 million. At the present time, the Company does not have net tangible
assets of $2 million, nor does the Company meet the net income or market
capitalization tests summarized above. Although the Company is currently taking
steps to meet such proposed Nasdaq maintenance requirements, no assurance can be
given by the Company that it will meet such enhanced maintenance requirements
if, and when, adopted by the SEC. If such enhanced maintenance requirements are
adopted by the SEC, and the Company then fails to meet such requirements in any
possible phase-in time permitted, 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.
If the Company's common stock were de-listed from the SmallCap Market, the
Company's common stock could become subject to Rule 15g-9 under the Exchange
Act, which imposes additional sales practice requirements on broker-dealers that
sell such securities. Such rule may adversely affect the ability of
broker-dealers to sell the Company's common stock and may adversely affect the
ability of the Company's shareholders to sell any of the Company's common stock
in any secondary market.
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, as listed
and traded on the Nasdaq SmallCap Market.
<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, may 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 June 30, 1997, the Company had outstanding 7,909,563 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 10,429,746 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.
<PAGE>
Item 2. Changes in Securities
During the quarter ended June 30, 1997, the Company sold the following
shares of Common Stock without registration under the Securities Act:
<TABLE>
<CAPTION>
Exemption
Date Amount Purchasers Price Per Share Relied Upon
---- ------ ---------- --------------- -----------
<S> <C> <C> <C> <C>
4/7/97 78,911 Seller of acquired business $2.19 Section 4(2)
4/14/97 1,600 Warrant holder-stock issued upon exercise $2.19 Sections 3(a)(9); 4(2)
4/25/97 292,829 Former shareholders of Fitness Centers of N/A Section 4(2)
America, Inc.- additional shares issued
pursuant to March 24, 1995 merger
5/16/97 50,000 Seller of acquired business N/A Section 4(2)
6/4/97 3,360 Warrant holder-stock issued upon exercise $1.50 Sections 3(a)(9);4(2)
6/4/97 91,264 Two convertible note holders-stock issued $2.28 Sections 3(a)(9);4(2)
upon conversion
6/4/97 800 Warrant holder-stock issued upon exercise $2.19 Sections 3(a)(9);4(2)
6/30/97 2,000 Law firm-stock for services $2.50 Section 4(2)
</TABLE>
During the quarter ended June 30, 1997, the Company issued the following
options, warrants, or other equity securities in consideration of services
rendered or to be rendered 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>
4/9/97 5,000 Option Employee $4.00 Section 4(2)
5/16/97 15,000 Option Employee $3.50 Section 4(2)
5/31/97 20,000 Option Employee $3.00 Section 4(2)
</TABLE>
Item 3 Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting on June 4, 1997. Proxies for the Annual
Meeting were solicited pursuant to Regulation 14 under the Securities Exchange
Act of 1934. There was no solicitation in opposition to management. The
following actions were taken at the annual meeting:
(a) The following nominees were elected to the Company's Board of
Directors, with the following number of shares voted for and withheld
authority: from the above-named nominees:
Shares Voted For Withholding Authority
Loren S. Brink 5,851,494 449,641
James A. Bernards 6,283,643 17,492
Charles E. Bidwell 6,283,643 17,492
George E. Kline 6,280,843 20,292
William T. Simonet, M.D. 6,283,643 17,492
Robert K. Spinner 6,280,543 20,592
<PAGE>
(b) The proposed amendment of the Company's Articles of Incorporation to
change the Company's name to "Health Fitness Corporation" was approved by a
vote of 6,272,328 shares in favor, 22,461 shares against and 6,346 shares
abstained.
(c) The proposed increase in the number of shares reserved for issuance
under the Company's 1995 Stock Plan from 1,000,000 to 2,000,000 was
approved by a vote of 3,448,623 shares in favor, 643,788 shares against,
and 62,253 shares abstained, which totals excluded 2,146,471 broker
non-votes.
(d) The appointment of Deloitte and Touche LLP as the Company's independent
auditors for the fiscal year ending December 31, 1997 was approved by a
vote of 6,201,388 shares in favor, 74,461 shares against, and 20,286 shares
abstained, which vote excluded 5,000 broker non-votes.
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 First Amendment to Second Amended and Restated Credit Agreement
dated May 16, 1997 between the Company and Norwest Bank, N.A.
10.2 Executive Employment Agreement dated May 22, 1997 between the
Company and Loren S. Brink
27 Financial Data Schedule (in electronic version only)
- ---------
*Incorporated by reference to the Company's Registration Statement on
Form SB-2, No. 33-83784C.
(b) Reports on Form 8-K
On April 23, 1997, the Registrant filed a Form 8-K/A, amending the
Registrant's Form 8-K filed on February 21, 1997. No other
Forms 8-K were filed during the quarter ended June 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: August 13, 1997 By:/s/ Loren S. Brink
---------------------
Loren S. Brink
Chairman, President and Chief
Executive Officer
Dated: August 13, 1997 By:/s/ Charles E. Bidwell
-------------------------
Charles E. Bidwell
Treasurer and Chief Financial Officer
ARTICLES OF INCORPORATION
OF
HEALTH FITNESS CORPORATION
AS AMENDED THROUGH JUNE 4, 1997
I.
The name of this corporation shall be: Health Fitness Corporation.
II.
The location and post office address of the registered office of this
corporation in the State of Minnesota shall be 3500 West 80th Street, Suite 130,
Bloomington, Minnesota 55431.
III.
The aggregate number of shares of capital stock which this corporation is
authorized to issue is 30,000,000, of which 25,000,000 shares shall be common
shares with a par value of $.01 per share, and of which 5,000,000 shall be
preferred shares of $.01 par value. Authority is hereby expressly vested in the
Board of Directors of the corporation, subject to the provisions of this Article
III and to the limitations prescribed by law, to authorize the issue from time
to time of one or more series of preferred shares and, with respect to each such
series, to determine or fix by resolution or resolutions adopted by the
affirmative vote of a majority of the whole Board of Directors providing for the
issue of such series the voting powers, full or limited, if any, of the shares
of such series and the designations, preferences and relative, participating,
optional or other special rights and the qualifications, limitations or
restrictions thereof, including, without limitation, the determination or fixing
of the rates of and terms and conditions upon which any dividends shall be
payable on such series, any terms under or conditions on which the shares of
such series may be redeemed, any provision made for the conversion or exchange
of the shares of such series for shares of any other class or classes or of any
other series of the same or any other class or classes of the corporation's
capital stock, and any rights of the holders of the shares of such series upon
the voluntary or involuntary liquidation, dissolution or winding up of the
corporation.
IV.
No holder of shares of any class of capital stock of the corporation shall
be entitled to any cumulative voting rights.
V.
No holder of any class of capital stock of the corporation shall have any
preemptive rights to subscribe for, purchase or acquire any part of any new
stock of any class of such capital stock of the corporation.
3
<PAGE>
VI.
No director of the corporation shall be personally liable to the
corporation or its shareholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article VII
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 302A.559 of the Minnesota Business
Corporation Act or Section 80A.23 of the Minnesota Securities Law, or (iv) for
any transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this Article VII shall apply to or have any effect on
the liability or alleged liability of any director of the corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
VII.
An action required or permitted to be taken at a meeting of the Board of
Directors of the corporation may be taken by a written action signed in the
aggregate by all of the directors unless the action need not be approved by the
shareholders of the corporation, in which case the actions may be taken by a
written action signed, or counterparts of a written action signed in the
aggregate, by the number of directors that would be required to take the same
action at a meeting of the Board of Directors of the corporation at which all of
the directors were present.
FIRST AMENDMENT TO
SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of May 16, 1997, is made by and between 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 (the "Credit
Agreement").
Due to the proposed stock acquisition of Duffy & Associates Physical
Therapy, P.C., an Iowa corporation ("Duffy") 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 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 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, and Duffy."
"`Duffy' means Duffy & Associates Physical Therapy Corp., an Iowa
corporation."
"`First Amendment' means that certain First Amendment to Second
Amended and Restated Credit and Security Agreement, dated as of May
16, 1997, by and between the Borrower and the Lender."
<PAGE>
"`First Amendment Date' means the date on which the First
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, and Duffy (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 first replacement term note
dated as of May 16, 1997, payable to the order of the Lender,
substantially in the form of Exhibit A to the First 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"), and (d) a fourth advance to the Borrower in the
amount of $350,000 on the First Amendment Date (the "Fourth Term
Advance", and together with the Initial Term Advance, the Second Term
Advance and the Third 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. 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."
3. New Trade Names, Chief Executive Office, Principal Place of Business and
Locations of Collateral. Schedule 5.1 is hereby amended by deleting paragraph 7.
therein and inserting the following:
<PAGE>
"7. Health Fitness Rehab of Iowa, Inc.
A. Trade Names and Division Names
K.A.M. Physical Therapy Services
Duffy & Associates Physical Therapy
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
Peoples Memorial Hospital
Hiway 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"
<PAGE>
4. Subsidiaries. Schedule 5.4 of the Credit Agreement is hereby amended by
deleting the parenthetical "(after the acquisition of K.A.M. is completed)" and
adding the following:
"Duffy & Associates Physical Therapy Corp."
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>
Duffy Bankers Leasing Specific Leased Iowa Secretary of January 23, K619708
Company Equipment State 1995
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
Duffy Bankers Leasing Specific Leased Iowa Secretary of September 12, K675167
Company Equipment State 1995
- --------------------- ------------------ ----------------------- -------------------- ---------------- --------------
</TABLE>
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 Payment Collateral
Amount
- ------------------------- ---------------- ---------------------- ------------------- -------------------------------
<S> <C> <C> <C> <C>
Bankers Leasing Company $50,000.00 March 20, 1997 $2,304.75 Lease of Specific Equipment
- ------------------------- ---------------- ---------------------- ------------------- -------------------------------
Bankers Leasing Company $3,995.00 August 20, 1998 $138.43 Minolta 1081 Copier, Document
Feeder & Bin Sorter
- ------------------------- ---------------- ---------------------- ------------------- -------------------------------
</TABLE>
7. No Other Changes. Except as explicitly amended by this 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 Duffy & Associates Physical Therapy. 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 Duffy, and waive any
Default arising as a result of such acquisition under Section 7.7 of the Credit
Agreement. Effective as of the First Amendment Date, and provided that the
contemplated merger 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.
<PAGE>
9. Amendment Fee. The Borrower shall pay the Lender as of the date hereof a
fully earned, non-refundable fee in the amount of $1,750 in consideration of the
Lender's execution of this Amendment.
10. Conditions Precedent. This First 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 first replacement term note, substantially in the form of
Exhibit A hereto, duly executed on behalf of the Borrower (the "Replacement
Note").
( b) The Acknowledgment and Agreement of Guarantors set forth at the
end of this 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 Amendment and the 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 Amendment, the
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 9(a) and 9(b) hereof and as to such other matters as the
Lender shall require.
( e) The Agreement of Purchase and Sale by and among Duffy, Pamela A.
Duffy, the sole shareholder of Duffy, the Borrower and HFRI, pursuant to
which HFRI acquires and controls 100% of the common and preferred stock of
Duffy, and such other documents and evidence of a successful purchase as
the Lender may reasonably require.
( f) An opinion of counsel to Duffy, addressed to HFRI and the
Borrower, opining as to the acquisition of Duffy by HFRI.
<PAGE>
( 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
Duffy.
( h) Evidence that the legal name of Duffy has been changed to Duffy &
Associates Physical Therapy Corp.
( i) A separate guaranty, substantially in the form of the guaranties
executed by the other Corporate Guarantors, properly executed by Duffy
pursuant to which Duffy unconditionally guaranties the full and prompt
payment of all Obligations.
( j) A separate Corporate Guarantor Security Agreement, substantially
in the form of the security agreements executed by the other Corporate
Guarantors, duly executed by Duffy.
( k) A certificate of the Secretary or Assistant Secretary of Duffy
certifying as to (i) the resolutions of the directors and, if required,
shareholders, of Duffy authorizing the execution, delivery and performance
of the guaranty executed and delivered to the Lender by Duffy; (ii) Duffy'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 Duffy.
( 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 Pamela A. Duffy, Duffy or HFRI, ( ii) no financing
statements have been filed and remain in effect against Pamela A. Duffy,
Duffy 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 and Duffy, 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
Amendment and the Replacement Note and to perform all of its obligations
hereunder, and this Amendment and the 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).
<PAGE>
(b) The execution, delivery and performance by the Borrower of this
Amendment and the 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.
(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 9 hereof, the definition of "Term
Note" and all references thereto in the Credit Agreement shall be deemed amended
to describe the Replacement Note, which Replacement Note shall be issued by the
Borrower to the Lender in replacement, renewal and amendment, but not in
repayment, of the original Note in the principal amount of $250,000.
13. No Waiver. The execution of this Amendment and acceptance of the
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 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
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
Amendment, the Replacement Note, Duffy's Guaranty, Duffy'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 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.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, HEALTH FITNESS PHYSICAL THERAPY,
NATIONAL ASSOCIATION INC.
By /s/ Douglas L. Van Metre By /s/ Don Paul Cochran
Douglas L. Van Metre Don Paul Cochran
Its Vice President Its Treasurer
<PAGE>
ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS
The undersigned, each a guarantor of the indebtedness of 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 First Amendment; (ii) consents to the terms (including without
limitation the release set forth in paragraph 14 of the 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/ Don Paul Cochran
Loren Scott Brink Don Paul Cochran
Its Treasurer and Chief Financial Officer
HEALTH FITNESS PHYSICAL THERAPY FITNESS CENTERS OF AMERICA
OF TAHOE, INC.
By /s/ Don Paul Cochran By /s/ Don Paul Cochran
Don Paul Cochran Don Paul Cochran
Its Treasurer and Chief Its Treasurer and Chief Financial Officer
Financial Officer
HEALTH FITNESS REHAB, INC. THE PREFERRED COMPANIES, INC.
By /s/ Don Paul Cochran By /s/ Don Paul Cochran
Don Paul Cochran Don Paul Cochran
Its Treasurer and Chief Its Treasurer and Chief Financial Officer
Financial Officer
HEALTH FITNESS REHAB OF IOWA, INC.
By /s/ Don Paul Cochran
Don Paul Cochran
Its Treasurer and Chief Financial Officer
<PAGE>
Exhibit A to
First Amendment
to Second Amended
& Restated Credit and
Security Agreement
FIRST REPLACEMENT TERM NOTE
$2,850,000 Bloomington, Minnesota
May 16, 1997
For value received, the undersigned, 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 Two
Million Eight Hundred Fifty Thousand Dollars ($2,850,000) 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 First Amendment
Date, this Note is issued in substitution for and replacement of but not in
payment of the Borrower's promissory note dated as of February 4, 1997, payable
to the order of the Lender in the original principal amount of $2,500,000.
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 PHYSICAL THERAPY, INC.
By /s/ Don Paul Cochran
Don Paul Cochran
Its Treasurer
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into this 22nd day of May, 1997, to be effective as of January 1, 1997 between
Health Fitness Physical Therapy, Inc. (the "Company"), located at 3500 West 80th
Street, Suite 130, Bloomington, Minnesota 55431 and Loren S. Brink (the
"Executive"), residing at 9635 Bennett Place, Eden Prairie, Minnesota 55347.
RECITALS:
WHEREAS, the Company wishes to provide for the continued employment of
Executive as its President and Chief Executive Officer for the term, and on the
conditions, set forth herein; and
WHEREAS, Executive desires to be assured of certain minimum compensation
from Company for Executive's services during the term hereof and to be
protected, and compensated, in the event of any change in the control affecting
the Company; and,
WHEREAS, Company desires reasonable protection of Company's confidential
business and technical information which has been developed by the Company in
recent years at substantial expense.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the Company and Executive each intend to be legally bound, covenant and agree as
follows:
1. Employment. Upon the terms and conditions set forth in this Agreement,
Company hereby employs Executive as its President and Chief Executive Officer,
and Executive accepts such employment. Except as expressly provided herein, the
termination of this Agreement by either party shall also terminate Executive's
employment by Company.
2. Duties. Executive shall devote his full-time and best efforts to the Company
and shall fulfill the duties of his position which shall include such duties as
may, from time to time, be assigned to him by the Board of Directors of the
Company, provided such duties are reasonably consistent with Executive's
education, experience and background.
3. Term. Subject to the provisions of Sections 6 and 11 hereof, Executive's
employment shall commence on the effective date hereof ("Employment Date") and
continue through December 31, 1999, but shall be automatically extended, unless
otherwise terminated in accordance herewith, for an additional three (3) year
term commencing on January 1, 2000 through December 31, 2002, and thereafter,
shall be automatically extended for additional consecutive three (3) year terms
on each January 1, thereafter, unless either party gives written notice to the
other of termination in accordance herewith. In any event, the Agreement shall
automatically terminate, without notice, when Executive reaches 70 years of age.
If employment is continued after the age of 70 by mutual agreement, it shall be
terminable at will by either party.
<PAGE>
4. Compensation.
(a) 1997-1999 Annual Base Salary. For services rendered under this
Agreement during the first year (calendar 1997) of this Agreement, Company
shall retroactively pay Executive a minimum Base Salary ("Base Salary")
(Base Salary shall mean regular cash compensation paid on a periodic basis
exclusive of any and all benefits, bonuses or other incentive payments made
or obligated by Company to Executive hereunder) at an annual rate of
$160,000, payable in accordance with existing payroll practices of the
Company. On January 1, 1998, Executive's Base Salary shall be increased to
an annual rate of $170,000, and on January 1, 1999, Executive's Base Salary
shall be increased to an annual rate of $180,000. In subsequent years,
based upon extensions of this Agreement, Executive's Base Salary shall be
adjusted annually based upon a performance and compensation review
conducted by the Compensation Committee of the Company's Board of
Directors, and negotiated and mutually agreed to, in good faith, between
Executive and the Company's Board of Directors. Such review will be based
upon both individual and Company performance and shall be completed by
April 1 of each subsequent year, provided that, any and all adjustments to
Executive's Base Salary shall be effective, retroactively, to January 1 of
each of such subsequent years. The foregoing 1997- 1999 minimum Base Salary
for Executive shall not prohibit Company's Board of Directors (or the
Compensation Committee of Company's Board of Directors), to set Executive's
Base Salary during such initial three (3) year term at an annual rate
greater than that prescribed above; however, in no instance shall
Executive's Base Salary be less than that set forth above. Commencing
January 1, 2000, Executive's minimum Base Salary hereunder shall be no less
than $200,000 annually.
(b) Annual Year-End Cash Bonus. Executive shall also be eligible to earn an
annual year- end cash bonus in accordance herewith.
(i) Annual Year-End Cash Bonuses. For 1997, and each year thereafter
under this Agreement, Executive's cash bonus shall be determined by a
comparison of the Company's actual pre-tax, pre-bonus profits ("PTP")
with the Company's pre-tax, pre-bonus profits ("BPTP"), as set forth
in the Company's annual budget, as approved by the Company's Board of
Directors. Such bonus shall be paid in accordance with the following
formula:
o If Company's PTP = 80% of BPTP, then bonus = 25% of existing
Base Salary;
o If Company's PTP = 100% of BPTP, then bonus = 50% of existing
Base Salary; and
o If Company's PTP = 120% of BPTP, then bonus = 75% of existing
Base Salary.
In addition, for each additional 1% increase in PTP as a percentage of
BPTP in the foregoing table, Executive shall be entitled to receive an
additional 1.25% of Base Salary as a cash bonus, provided that, the
maximum cash bonus paid hereunder shall not exceed 75% of Executive's
then existing Base Salary.
(ii) Payment of Bonus. All calculations above shall be based upon the
amounts as reported in the Company's audited financial statements for
the full year. The payment of the foregoing cash bonuses shall be made
within fifteen (15) business days after completion of the Company's
audit and acceptance by the Company, but in no instance, later than
March 31.
(c) 1997 Incentive Stock Option Grant. Upon execution of this Agreement,
Company shall grant to Executive an Incentive Stock Option pursuant to the
Company's 1995 Stock Option Plan to acquire up to 100,000 shares of the
Company's Common Stock, in substantially the form set forth on the Stock
Option Exhibit A attached hereto and acceptable to Executive and his
counsel. Such Incentive Stock Option shall have an exercise price of $3.00,
which represents at least 110% of the Fair Market Value of the Company's
Common Stock on the date of grant. Such option shall bear a five (5) year
term, but shall be exercisable only in accordance with the following
vesting schedule:
<PAGE>
Number of
Vesting Date Shares Exercisable
January 1, 1997.......................................25,000
January 1, 1998.......................................50,000
January 1, 1999.......................................75,000
January 1, 2000......................................100,000
Executive's stock options shall be governed by the terms of this Agreement,
the Company's existing Stock Option Plan and the Company's Stock Option
Agreement with Executive attached hereto and incorporated herein by
reference. Executive shall be entitled, at Executive's sole option, to
exercise any and all Options pursuant to such Incentive Stock Option (in
whole or in part) pursuant to a cashless exercise procedure established for
Executive and certain other Company employees, as hereinafter established
and then in effect. In addition, except as set forth herein, in the event
of termination of this Agreement by the Company (except termination of
Executive's employment for "cause", as set forth in Section 6(a)(i) or
termination by Executive pursuant to Section 6(a)(ii)), all of the above
options, and all other existing options in favor of Executive, shall
immediately vest and be exercisable by Executive for the remainder of the
term of such options in accordance with their specific terms.
(d) Fringe Benefits. In addition to the compensation and incentive payments
payable to Executive as provided in Sections 4(a)-(d) above:
(i) Automobile. Executive shall be entitled to an automobile allowance
of $750 per month throughout the term of this Agreement, as renewed
and/or extended hereunder, plus all reasonable costs associated with
maintaining one (1) automobile, including, but not limited to,
licensing, maintenance, fuel and automobile insurance.
(ii) Vacation. Executive shall be entitled to four (4) weeks paid
vacation each calendar year. All such paid vacation shall accumulate,
so that if Executive's full vacation is not taken in a particular
calendar year, any unused portion shall be carried into subsequent
years; however, such accumulation shall not exceed an aggregate of
four (4) calendar weeks.
(iii) Executive Medical Exam. Executive shall receive an annual
executive medical examination up to $1,000 at a location chosen by
Executive, at the Company's cost.
(iv) Life Insurance. The Company shall maintain a term life insurance
policy on Executive's life (so long as such insurance is available at
commercially standard rates) in a principal amount equal to at least
three (3) times Executive's then existing annual Base Salary. The
Company shall pay all premiums on said policy during the term of this
Agreement and Executive shall have the right to designate and change
beneficiaries in Executive's sole discretion.
<PAGE>
(v) Long-Term Disability. The Company shall also maintain (so long as
such insurance is available at commerically standard rates) long-term
disability policy on Executive providing for the payment to age 65 of
benefit equivalent to seventy percent (70%) of Executive's annual Base
Salary in the event Executive becomes permanently disabled as defined
in Section 6(b)(ii).
(vi) Other Benefits. The Executive shall be entitled to participate in
all other benefit programs offered by the Company to its full-time
executive employees, including, but not limited to, health, medical,
dental and eye care; first class travel benefits; retirement benefits
through the Company's pension and/or profit sharing plans; sick leave
benefits; and accidental death and dismemberment coverages.
(vii) Financial, Legal and Tax Planning Counsel. Executive shall be
entitled to personal assistance and professional advice from
financial, legal and tax professionals of his choosing up to $2,500
per year from the Company.
(viii) County Club Membership. Executive shall be entitled to maintain
a country club membership, at a location determined by Executive, for
use primarily in entertaining customers, employees and vendors of the
Company. The Company shall be responsible for the payment of all dues
and applicable taxes relating to such membership, as well as all
customary business expenses related to use of such membership.
Executive agrees to maintain records in appropriate form and detail
may be requested by the Company in order to comply with all applicable
tax laws and regulations relating to the deductibility of any such
allowances.
5. Business Expenses. The Company shall, in accordance with, and to the extent
of, its policies in effect from time to time, bear all customary business
expenses (including the advancement of certain expenses) incurred by the
Executive in performing his duties as an executive of the Company, provided that
Executive accounts promptly such expenses to Company in the manner prescribed
from time to time by the Company.
6. Termination. Subject to the respective continuing obligations of the parties
pursuant to Sections 7, 8, 9, 10, 11, 12 and 13, this Agreement may be
terminated prior to the expiration of its then remaining applicable term only as
follows:
(a) By the Company. The Company may terminate this Agreement under the
following circumstances:
(i) For "Cause". Company may terminate this Agreement on sixty (60)
days written notice to Executive for "cause", including, fraud,
misrepresentation, theft or embezzlement of Company assets, material
intentional violations of law or Company policies, or a material
breach of the provisions of this Agreement, including specifically the
repeated failure to perform his duties as required by Section 2 hereof
after written notice of such failure from Company; however, in the
event of termination related to Executive's performance, Executive's
termination shall only be effective upon the expiration of a sixty
(60) day cure period following a lack of corrective action having been
undertaken by Executive during said cure period.
(ii) Without "Cause". The Company may terminate this Agreement upon
twelve (12) months written notice without "cause." Executive may also
terminate this Agreement upon twelve (12) months written notice to
Company. The Base Salary compensation due and owing by the Company to
Executive following either of such early terminations of this
Agreement shall be paid as set forth at Section 7(a) hereof.
<PAGE>
(b) Death and Disability.
(i) Death. If Executive should die during the term of this Agreement,
this Agreement shall thereupon terminate; provided, however, that the
Company shall pay to the Executive's beneficiary or estate the
compensation provided in Section 7 below.
(ii) Permanent Disability. In the event the Executive should become
permanently disabled during the term of this Agreement, this Agreement
shall also terminate. For the purposes hereof, a permanent disability
shall mean that disability resulting from injury, disease or other
cause, whether mental or physical, which incapacitates the Executive
from performing his normal duties as an employee, appears to be
permanent in nature and contemplates the continuous, necessary and
substantially complete loss of all management and professional
activities for a continuous period of six (6) months.
(iii) Partial Disability. If the Executive should become partially
disabled, he shall be entitled to his salary as provided herein for a
period of nine (9) months. At the end of said period of time, if such
Executive remains partially disabled, the disabled Executive's salary
shall be reduced according to the amount of time the disabled
Executive is able to devote to the Company's business.
(iv) Temporary Disability. In the event the Executive should become
disabled, but such disability is not permanent, as defined above, such
disabled Executive shall be entitled to his salary for a period of
nine (9) months. If such temporary disability continues longer than
said period of time, then the disabled Executive shall be deemed to
have become permanently disabled for the purposes of this Agreement at
the end of said nine (9) month period.
7. Compensation Payable Following Early Termination.
(a) In the event of any termination pursuant to Section 6, Executive's Base
Salary shall be paid as follows:
(i) In the event of termination pursuant to Section 6(a)(i) (for
"cause"), Executive's Base Salary shall continue to be paid on a
semi-monthly basis for sixty (60) days from the effective date of such
termination and Executive shall also be entitled to continue to
participate in those benefit programs provided by subsections
4(e)(iv-viii) (inclusive), for eighteen (18) months following such
termination, at Executive's expense;
(ii) In the event of termination of this Agreement by reason of
Executive's death, Executive's Base Salary shall terminate as of the
end of the eighteenth (18th) month following the Executive's death;
(iii) In the event of termination of this Agreement by reason of
disability, Executive's Base Salary shall be terminated as of the end
the eighteenth (18th) month period following Executive's inability to
perform his duties occurs; and
<PAGE>
(iv) In the event of any termination by the Company pursuant to
Section 6(a)(ii) (without "cause"), Executive's Base Salary shall be
continued to be paid on a semi-monthly basis, but shall terminate at
the end of the twenty-fourth (24th) month period following such
written notice of termination by the Company. In the event of any
termination by Executive pursuant to Section 6(a)(ii), (without
"cause") Executive's Base Salary shall be continued to be paid on a
semi-monthly basis for a period up to, but not to exceed, 120 days. In
lieu of such continued semi-monthly Base Salary, the Company and
Executive may agree to a lump-sum distribution to Executive pursuant
to such termination in a form, substance and manner mutually
acceptable to Company and Executive, pursuant to a written Severance
Agreement then mutually negotiated between the Company and Executive
in connection with such termination.
(b) In the event of termination by reason of Executive's death, disability,
termination without cause, or any Change in Control, as defined at Section
11:
(i) Executive shall receive a pro rata portion (prorated through the
last day Base Salary is payable pursuant to clauses (a)(ii), (a)(iii)
and (a)(iv), respectively) of any bonus or incentive payment (for the
year in which death, disability or termination occurred), to which he
would have been entitled had he remained continuously employed for the
full fiscal year in which death, disability or termination occurred
and continued to perform his duties in the same manner as they were
performed immediately prior to the death, disability or termination;
(ii) The right to exercise any unexpired and non-vested stock options
previously granted Executive shall immediately vest and accelerate;
and
(iii) Any and all payments owing to Executive arising from a
termination of this Agreement resulting from a permanent or partial
disability of Executive shall first be provided and paid pursuant to
the Company's existing disability policy, as then in effect, but shall
be further supplemented to the extent provided by this Agreement but
all such payments due and owing to Executive arising from such
permanent or partial disability shall not be cumulative or aggregated.
8. Confidential Information.
(a) For purposes of this Section 8, the term "Confidential Information"
means information which is not generally known and which is proprietary to
Company, including: (i) trade secret information about Company and its
services; and (ii) information relating to the business of Company as
conducted at any time within the previous two (2) years or anticipated to
be conducted by Company, and to any of its past, current or anticipated
products, including, without limitation, information about Company's
research, development, services, purchasing, accounting, engineering,
marketing, selling, leasing or servicing. All information which Executive
has a reasonable basis to consider Confidential Information or which is
treated by Company as being Confidential Information shall be presumed to
be Confidential Information, whether originated by Executive, or by others,
and without regard to the manner in which Executive obtains access to such
information.
(b) Executive will not during the term of this Agreement and following
expiration or termination of this Agreement, use or disclose any
Confidential Information to any person not employed by Company without the
prior authorization of Company and will use reasonably prudent care to
safeguard, protect and to prevent the unauthorized disclosure of, all of
such Confidential Information.
<PAGE>
9. Inventions.
(a) For purposes of this Section 9, the term "Inventions" means
discoveries, improvements and ideas (whether or not in writing or reduced
to practice) and works of authorship, whether or not patentable or
copyrightable: (1) which relate directly to the business of Company, or to
Company's actual or demonstrably anticipated research or development; (2)
which result from any work performed by Executive for Company; (3) for
which equipment, supplies, facilities or trade secret information of
Company is utilized; or (4) which were conceived or developed during the
time Executive was obligated to perform the duties described in Section 2.
However, the term "Inventions" shall not include Patent No. 4788983 issued
in favor of Executive.
(b) Executive agrees that all Inventions made, authored or conceived by
Executive, either solely or jointly with others, during Executive's
employment with Company (except as otherwise provided above), shall be the
sole and exclusive property of Company. Upon termination of this Agreement,
Executive shall turn over to a designated representative of Company all
property in Executive's possession and custody belonging to Company.
Executive shall not retain any copies or reproductions of correspondence,
memoranda, reports, notebooks, drawings, photographs or other documents
relating in any way to the affairs of Company which came into Executive's
possession at any time during the term of this Agreement.
(c) Executive will promptly upon request by Company fully disclose to
Company in writing any Inventions. Executive will assign (and by this
Agreement, hereby assigns) to Company all of Executive's rights to
Inventions, and to applications for patents or copyrights in all countries
and to patents and copyrights granted in all countries. Upon the request of
Company, Executive will apply for such United States or foreign patents or
copyrights as Company may deem desirable, and Executive will do any and all
acts necessary in connection with such applications for patents or
copyrights, or assignments, in order to establish in Company the entire
right, title and interest in and to such patents or copyrights. If
Executive renders assistance to Company under this Section 9(c) after
termination of this Agreement, Company shall pay a reasonable fee as
determined by Company for Executive's time and expenses.
Notice: Pursuant to Minn. Stat. ss. 181.78, Executive is hereby notified that
this Agreement does not apply to any invention for which no equipment, supplies,
facility, or trade secret information of Company was used and which was
developed initially on the Executive's own time and: (1) which does not relate:
(a) directly to the business of Company; or (b) to Company's actual or
demonstrably anticipated research or development; or (2) which does not result
from any work performed by Executive for the Company.
10. Non-Competition. Executive agrees that for a period of twelve (12) months
following termination of this Agreement for any reason (except in the case of
termination of this Agreement pursuant to Section 11 because of a Change in
Control or any Business Combination or any termination of this Agreement without
cause), he will not directly or indirectly, alone or as a partner, officer,
director, or shareholder of any other firm or entity, engage in any commercial
activity in the United States in competition with any part of Company's
business: (a) that was under the Executive's management or supervision during
the last year of employment by Company; or (b) with respect to which Executive
has Confidential Information as defined in Section 8 of this Agreement.
<PAGE>
11. Business Combination or "Change In Control".
(a) Change in Control. For purposes of this Section 11, a "Business
Combination" or "Change in Control" with respect to, or concerning, the
Company shall mean the following:
(i) the sale, lease, exchange or other transfer, directly or
indirectly of all or substantially all of the assets of the Company
(in one transaction or in a series of related transactions) to a
person or entity that is not controlled by the Company;
(ii) the approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company;
(iii) a merger or consolidation to which the Company is a party if the
shareholders of the Company immediately prior to effective date of
such merger or consolidation have "beneficial ownership" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), immediately following the effective date of
such merger or consolidation, of securities of the surviving
corporation representing: (A) more than 50%, but not more than 80%, of
the combined voting power of the surviving corporation's then
outstanding securities ordinarily having the right to vote at
elections of directors, unless such merger or consolidation has been
approved in advance by the Incumbent Directors; or (B) 50% or less of
the combined voting power of the surviving corporation's then
outstanding securities ordinarily having the right to vote at
elections of directors (regardless of any approval by the Incumbent
Directors);
(iv) any person becomes after the effective date of this Agreement the
"beneficial owner" (as defined in Rule 13d-3 of the Exchange Act),
directly or indirectly, of: (A) 20% or more, but not 50% or more, of
the combined voting power of the Company's outstanding securities
ordinarily having the right to vote at elections of directors, unless
the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors; or (B) 50% or more of the combined
voting power of the Company's outstanding securities ordinarily having
the right to vote at elections of directors (regardless of any
approval by the Incumbent Directors);
(v) the Incumbent Directors cease, for any reason, to constitute at
least a majority of the Company's Board; or
(vi) a change in control of the Company of a nature that would be
required to be reported pursuant to Section 13 or 15(d) of the
Exchange Act, whether or not the Company is then subject to such
reporting requirements.
(b) Incumbent Directors. For purposes of this Section 11, the term
"Incumbent Directors" shall mean any individual who is a member of the
Board of the Company on the effective date of this Agreement, as well as
any individual who subsequently becomes a member of the Board whose
election, or nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the then Incumbent Directors
(either by specific vote or by approval of the Proxy Statement of the
Company in which such individual is named as a nominee for director without
objection to such nomination).
<PAGE>
(c) Executive's Option to Terminate This Agreement. It is expressly
recognized by the parties that a Business Combination would necessarily
result in material alteration or diminishment of Executive's position and
responsibilities. Therefore, if, during the term of this Agreement, there
shall occur, with or without the consent of Company, any Business
Combination or Change in Control, Executive shall have an exclusive option
to terminate this Agreement on twenty (20) calendar days' notice to the
Company.
(d) Compensation Payable to Executive Upon Termination Following a Change
in Control. It is expressly recognized that Executive's position with
Company and agreement to be bound by the terms of this Agreement represent
a commitment in terms of Executive's personal and professional career which
cannot be reduced to monetary terms, and thus, necessarily constitutes a
forbearance of options now and in the future open to Executive in Company's
areas of endeavor. Accordingly, in the event Executive elects to terminate
this Agreement in connection with any Business Combination or Change in
Control under this Section 11:
(i) Executive shall be under no obligation whatever to seek other
employment opportunities during any period between termination of this
Agreement under this Section 11 and the expiration of Executive's then
unexpired three (3) year term of this Agreement as it existed at the
time of termination, or twenty-four (24) months, whichever is longer,
and Executive shall not be obligated to accept any other employment
opportunity which may be offered to Executive during such period;
(ii) During such unexpired term of this Agreement, or for twenty-four
(24) months thereafter, whichever is longer, Executive shall continue
to receive on a semi-monthly basis, Executive's Base Salary then in
effect upon the date of such notice to the Company hereunder;
(iii) In lieu of the continued cash compensation provided in Section
11(d)(ii) above, Executive may elect, in writing, to receive from the
Company a lump sum cash settlement in an amount equal to 299% of
Executive's then existing Base Salary (at the rate in effect
immediately prior to such Business Combination); provided, however,
Executive's election to receive a lump sum cash settlement from the
Company, in lieu of the semi-monthly payments specified above, shall
occur and be paid within 90 days of the termination of this Agreement
arising from any such Business Combination or any Change in Control.
(iv) Executive's termination of this Agreement by reason of a Change
in Control described in this Section 11 and the receipt by Executive
of any amounts pursuant to subsection 11(d), shall not preclude
Executive' continued employment with Company, or the surviving entity
in any Business Combination, on such terms as shall then be mutually
negotiated between Company (or any such surviving entity) and
Executive following such termination;
(v) The right to exercise all unexpired and non-vested stock options
in favor of Executive shall immediately vest and accelerate;
(vi) Executive shall be entitled to continue to participate in those
benefit programs and perquisites provided by subsection 4(e) hereof,
for twenty-four (24) months following termination, at the Company's
expense; and
<PAGE>
(vii) Notwithstanding any other provisions of this Agreement, or any
other agreement, contract or understanding heretofore, or hereafter,
entered into between the Company and Executive, if any "payments"
(including without limitation, any benefits or transfers of property
or the acceleration of the vesting of any benefits) and the nature of
compensation under any arrangement that is considered contingent on a
change in control for purpose of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), together with any other
payments that Executive has the right to receive from the Company, or
any corporation that is a member of an "affiliated group" (as defined
in Section 1504A of the Code without regard to Section 1504B of the
Code), of which the Company is a member, would constitute a "parachute
payment" (as defined in Section 280G of the Code), the aggregate
amount of such payments shall be reduced to equal the largest amount
as would result in no portion of such payments being subject to the
excise tax imposed by Section 4999 of the Code; provided however,
Executive shall be entitled to designate and select among such
payments that will be reduced, and/or eliminated, in order to comply
with the forgoing provision of the Code.
12. No Adequate Remedy. The parties declare that is impossible to measure in
money the damages which will accrue to either party by reason of a failure to
perform any of the obligations under this Agreement. Therefore, if either party
shall institute any action or proceeding to enforce the provisions hereof, such
person against whom such action or proceeding is brought hereby waives the claim
or defense that such party has an adequate remedy at law, and such person shall
not urge in any such action or proceeding the claim or defense that such party
has an adequate remedy at law.
13. Miscellaneous.
(a) Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of all successors and assigns of the Company, whether by way
of merger, consolidation, operation of law, assignment, purchase or other
acquisition of substantially all of the assets or business of Company and
shall only be assignable under the foregoing circumstances and shall be
deemed to be materially breached by Company if any such successor or assign
does not absolutely and unconditionally assume all of Company's obligations
to Executive hereunder. Any such successor or assign shall be included in
the term "Company" as used in this Agreement.
(b) Notices. All notices, requests and demands given to, or made, pursuant
hereto shall, except as otherwise specified herein, be in writing and be
delivered or mailed to any such party at its address which:
(i) In the case of Company shall be:
HEALTH FITNESS PHYSICAL THERAPY, INC.
3500 West 80th Street, Suite 130
Minneapolis, Minnesota 55431
With a copy to:
MR. DONALD COCHRAN, CHIEF FINANCIAL OFFICER
HEALTH FITNESS PHYSICAL THERAPY, INC.
3500 West 80th Street, Suite 130
Minneapolis, Minnesota 55431
<PAGE>
(ii) In the case of the Executive shall be:
MR. LOREN S. BRINK
9635 Bennett Place
Eden Prairie, Minnesota 55437
With a copy to:
THOMAS J. PUFF, ESQ.
Messerli & Kramer, P.A.
Suite 1800
150 South Fifth Street
Minneapolis, Minnesota 55402
Either party may, by notice hereunder, designate a change of address.
Any notice, if mailed properly addressed, postage prepaid, registered
or certified mail, shall be deemed dispatched on the registered date or
that stamped on the certified mail receipt, and shall be deemed
received within the fifth business day thereafter, or when it is
actually received, whichever is sooner.
(c) Captions. The various headings or captions in this Agreement are for
convenience only and shall not affect the meaning or interpretation of this
Agreement.
(d) Governing Law. The validity, construction and performance of this
Agreement shall be governed by the laws of the State of Minnesota and any
legal proceeding arising out of or in connection with this Agreement shall
be brought in the appropriate courts of the State of Minnesota, with each
of the parties hereto consenting to the exclusive jurisdiction of said
courts for this purpose.
(e) Construction. Wherever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the
remainder of such provision or the remaining provisions of this Agreement.
(f) Waivers. No failure on the part of either party to exercise, and no
delay in exercising, any right or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right or
remedy hereunder preclude any other or further exercise thereof or the
exercise of any right or remedy granted hereby or by any related document
or by law.
(g) Modification. This Agreement may not be, and shall not be, modified or
amended except by a written instrument signed by both parties hereto.
(h) No Conflicting Business. Executive agrees that he will not, during the
term of this Agreement, transact business with the Company personally, or
as an agent, owner, partner, shareholder of any other entity; provided,
however, Executive may enter into any business transaction that is, in the
opinion of the Company's Board of Directors, reasonable, prudent or
beneficial to the Company, so long as any such business transaction is at
arms-length as though between independent and prudent individuals and is
ratified and approved by the designated members of the Company's Board of
Directors.
<PAGE>
(i) Entire Agreement. This Agreement constitutes the entire Agreement and
understanding between the parties hereto in reference to all the matters
herein agreed upon; provided, however, that this Agreement shall not
deprive Executive of any other rights Executive may have now, or in the
future, pursuant to law or the provisions of Company benefit plans.
(j) Counterparts. This Agreement shall be executed in at least two
counterparts, each of which shall constitute an original, but both of
which, when taken together, will constitute one in the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered the day and year first above written.
HEALTH FITNESS PHYSICAL THERAPY, INC.
By: /s/ James A. Bernards
Its: Director
/s/ Loren S. Brink
Loren S. Brink
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS CONTAINED IN REGISTRANT'S FORM 10-QSB FOR QUARTER
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 5,649,539
<ALLOWANCES> 381,000
<INVENTORY> 616,114
<CURRENT-ASSETS> 6,214,742
<PP&E> 3,451,988
<DEPRECIATION> 621,564
<TOTAL-ASSETS> 20,974,922
<CURRENT-LIABILITIES> 6,882,459
<BONDS> 2,903,242
0
0
<COMMON> 79,096
<OTHER-SE> 11,051,306
<TOTAL-LIABILITY-AND-EQUITY> 20,974,922
<SALES> 3,326,426
<TOTAL-REVENUES> 16,116,378
<CGS> 2,332,273
<TOTAL-COSTS> 13,015,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 61,173
<INTEREST-EXPENSE> 299,772
<INCOME-PRETAX> 653,380
<INCOME-TAX> 178,405
<INCOME-CONTINUING> 474,975
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 474,975
<EPS-PRIMARY> $.06
<EPS-DILUTED> $.06
</TABLE>
