SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
Commission File Number: 0-25064
HEALTH FITNESS PHYSICAL THERAPY, INC.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1580506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3500 W. 80th Street, Suite 130, Bloomington, Minnesota, 55431
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (612) 831-6830
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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. Yes [X] No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[X]
State issuer's revenues for its most recent fiscal year: $28,514,000
As of March 24, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the last quoted
price at which such stock was sold on such date as reported by the Nasdaq
SmallCap Market, was $11,695,883.
As of March 24, 1997, there were outstanding 7,666,122 shares of the
issuer's common stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Documents incorporated by reference pursuant to Rule 12b-23: Portions of
the Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders, to be filed within 120 days after the end of the fiscal year
covered by this report, are incorporated by reference into Items 9, 10, 11 and
12 of Part III.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Development
Health Fitness Physical Therapy, Inc. and its wholly-owned direct and
indirect subsidiaries (collectively, the "Company") is engaged in two principal
lines of business (segments): (i) preventative healthcare and (ii)
rehabilitative healthcare. The Company's preventative healthcare business
includes developing, marketing and managing corporate and hospital-based fitness
centers and selling and servicing fitness equipment. The Company's
rehabilitative healthcare business includes owning and operating physical
therapy clinics and providing consulting, group buying, administrative, and
marketing services to independent physical therapy clinics.
The original predecessor business of the Company was founded by Loren S.
Brink in April 1981 as Health Fitness Consultants, Inc., but was sold to its
largest client, Abbott Northwestern Hospital, in November 1983. From 1983
through 1988, the Company was operated as a department of the hospital under Mr.
Brink's management. In April 1988, Mr. Brink and two investors reacquired the
business from Abbott Northwestern Hospital. The Company changed its name to
Health Fitness Corporation in September 1988, and to Health Fitness Physical
Therapy, Inc. in August 1994.
The Company began to expand its fitness center management business beyond
its facilities in Minneapolis, Minnesota in 1990. The Company acquired its first
physical therapy clinic in 1991. The Company continued to grow through managing
new corporate and hospital fitness centers and operating physical therapy
clinics, as well as through acquisitions. By 1994 the Company's revenues
totalled $7,989,569.
In April 1995, the Company acquired the stock of Fitness Systems, a
California-based operator of corporate fitness centers. This acquisition
increased the number of fitness centers managed by the Company from 36 to over
100.
In January 1996, the Company acquired all of the assets and assumed the
liabilities of Minneapolis-based Pro Source Fitness, Inc. ("Pro Source"), a
supplier of fitness equipment and service. Pro Source recently began to also
sell fitness related soft-goods such as shirts, hats and other items, often
customized with client names and/or logos.
In December 1996, the Company acquired the stock of The Preferred
Companies, Inc. ("The Preferred Companies"), an operator of a national network
of independent physical therapy clinics, and entered into employment agreements
with the sellers. The Preferred Companies represents a network of independent
physical therapy practices in connection with marketing to, and negotiating
with, managed care companies, other third-party payors and corporations.
In February 1997, the Company acquired substantially all of the assets of
Isernhagen & Associates, Inc. and Isernhagen Ltd. ("the Isernhagen Companies"),
and entered into employment agreements with the two sellers. The Isernhagen
Companies are engaged in providing comprehensive occupational health, work
injury prevention, and rehabilitation programs and services.
<PAGE>
The Company's executive offices are located at 3500 W. 80th Street, Suite
130, Bloomington, Minnesota 55431 and its telephone number is (612) 831-6830.
Preventative Healthcare Business
Corporate and hospital-based fitness centers are emerging as important
components of the preventative health care industry. Many employers are
undertaking fitness programs in an effort to reduce health care costs, increase
employee productivity and assist employees in managing stress. In addition,
fitness centers have become an important new source of revenue for hospitals by
providing significant inpatient and outpatient services.
The Company provides a full range of development, management and marketing
services for corporate and hospital-owned fitness centers. The Company generally
manages all aspects of fitness center development, including fitness center
design and equipment selection and acquisition. All set-up costs, including
costs related to leasing and improving the site and acquiring the equipment, are
generally borne by the client. The Company also provides consulting services,
for which it receives consulting fees, for design and consulting work with
clients prior to the decision to establish a fitness center. Once a fitness
center is established, the Company generally manages all aspects of fitness
center operation and provides staffing services and exercise programs and
instruction. For its services, the Company receives a management fee which is
normally unrelated to fitness center membership.
The Company's fitness center sales staff markets to corporations and
hospitals primarily through direct mail, telephone follow-ups and on-site
presentations to secure additional consulting and management contracts for the
Company. The Company currently utilizes a corporate and hospital database with
over 15,000 potential leads which meet criteria for being contacted regarding
the development of a center.
The Company currently is under contract to manage 105 corporate and 6
hospital fitness centers located in 26 states, including Arizona, California,
Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Kentucky,
Massachusetts, Maryland, Michigan, Minnesota, Missouri, New Hampshire, New
Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Texas, Virginia, West
Virginia, and Wisconsin. The Company maintains fitness center management
regional offices in Connecticut, Georgia, Illinois, and California.
The Company's Pro Source equipment and soft-goods business is complementary
with the Company's other businesses. The Company's fitness center management and
physical therapy businesses provide potential customers for fitness equipment
sales and service by Pro Source. Pro Source also supplies various
fitness-related soft-goods such as towels, shirts, hats, etc. which can be sold
or given as incentives by clients to fitness center members. The Company hopes
to utilize its contacts with fitness center clients and in the fitness and
physical therapy industries generally to increase sales of products offered by
Pro Source. Pro Source is the exclusive approved fitness equipment supplier to
the International Health and Racquet Sports Association (IHRSA).
<PAGE>
Rehabilitative Healthcare
The Company's rehabilitative healthcare business owns and operates physical
therapy clinics, performs on-site physical therapy services at Company-managed
fitness centers, provides consulting, group buying and marketing services to a
network of independent physical therapy clinics, and provides occupational
health consulting services to employers, insurers and others. Since its
acquisition of the Isernhagen Companies in February 1997, the Company's
rehabilitative healthcare business also authors and sells written materials to
independent physical therapy clinics.
The Company's owned and operated physical therapy clinics provide
facilities, equipment and staff to patients who require treatment for
musculoskeletal (orthopedic) injuries or rehabilitation after surgery. Patients
are generally referred by physicians or third party payors. The Company
currently offers traditional physical therapy services along with "back school"
(i.e. therapy designed to alleviate or reduce back injuries) and "work-hardening
programs" (i.e. therapy designed to prepare an individual with serious or
recurring injuries for a return to work). Physical therapy offered at the
Company's clinics includes a combination of treatments including massage and
exercise therapy and the application of heat, cold, ultrasound and
electrostimulation. The Company employs licensed physical therapists, assisted
by aides and technicians, to provide physical therapy services to individuals
with musculoskeletal (orthopedic) injuries.
Unlike the fitness centers which it manages, the Company owns the equipment
used in its physical therapy clinics. The Company currently leases the space
occupied by its physical therapy clinics. The Company currently owns and manages
11 physical therapy clinics located in California and Minnesota.
The Company's subsidiary, The Preferred Companies, negotiates managed care
and other third-party payor contracts for a nationwide network of over 700
independent physical, occupational and speech therapy clinics throughout the
United States. The Preferred Companies also provides consulting and group
purchasing services to its network members. Network members generally pay a
fixed annual fee.
The Isernhagen Companies, recently acquired by the Company, are
internationally recognized experts in the field of comprehensive occupational
health and rehabilitative programs and services including injury prevention
education, pre-employment screening, ergonomic analysis, risk control
management, and "safe" early return to work programs.
The Company has entered into an agreement with Practice Management
Consultants, Inc. ("PMC") pursuant to which PMC is designing and implementing
certain management procedures, policies, manuals, and operational systems for
the management of the Company's rehabilitation business. The Company reimburses
PMC's expenses on a monthly basis, and issued PMC a warrant to purchase 70,431
shares of the Company's common stock at $4.00 per share, exercisable upon
delivery of certain system deliverables. Thomas H. Coplin, a consultant and
one-half owner of PMC, serves as an executive officer of the Company's
rehabilitative division and President of the Company's Health Fitness Rehab,
Inc. subsidiary.
The Company has also entered into a letter of intent with PMC whereby PMC
will establish criteria for potential physical therapy clinic acquisitions,
conduct due diligence and evaluate potential acquisitions against such criteria,
and negotiate the acquisition agreements for such acquisitions. In addition to
the Company reimbursing PMC's expenses in connection therewith, the letter of
intent provides that PMC or its principals will receive stock options and/or
warrants to purchase Company common stock, the amount and/or value of which will
be linked to the earnings of the Company's rehabilitative business. The Company
is in the process of negotiating one or more definitive agreements reflecting
the terms of such letter of intent. PMC has already commenced performing such
services contemplated by the letter of intent, including in connection with the
Company's recent acquisitions of The Preferred Companies and the Isernhagen
Companies.
<PAGE>
Competition
The preventative healthcare industry is highly competitive. Several
competitors providing fitness center management services have much greater
financial resources, operational experience, marketing abilities, and name
recognition than the Company. The Company also competes on a regional level with
numerous independent operators of one or two corporate fitness centers. At the
present time, management of the Company does not believe that any significant,
formal or organized competition exists for the staffing, managing, and
supervision of hospital fitness center facilities.
The rehabilitative healthcare industry business is also highly competitive
and subject to continual changes in the manner in which services are delivered
and in which providers are selected. Several competitors providing physical
therapy and rehabilitative services (such as NovaCare, Inc., Continental Med,
HealthSouth, Caremark, National Rehab Centers, and Pacific Rehabilitation &
Sports Medicine, Inc.) have much greater financial resources, operational
experience, marketing abilities, and name recognition than the Company. In
addition, independent therapists who operate single clinics throughout the
United States provide significant competition to the Company on a local basis.
The Company believes that its competitive position will benefit from the
Company's management systems, distribution network and relationships with
hospitals. However, there can be no assurance that the Company will be able to
successfully compete with other physical therapy providers.
Proprietary Rights
The Company does not believe that there are any significant proprietary
rights or interests of the Company that would present significant barriers to
entry with respect to competitors in the marketplace or competition for the
business and clients of either the Company's preventative healthcare business or
rehabilitative healthcare business.
GOVERNMENT REGULATION & MARKETPLACE REFORM
General
The health care industry is very regulated, and the federal government and
state governments routinely add, delete or modify the regulations. The
ever-changing nature of the regulation makes it impossible to anticipate exactly
what impact government regulation will have on the Company, but it is quite
likely that government regulation will continue to have a significant role on
the Company's operations.
Certain states in which the Company operates have laws that require
facilities that employ health professionals and provide health related services
to be licensed and, in some cases, to obtain certificates of need. Pursuant to
certificate of need laws, the affected entity is required to prove to a state
regulatory authority the need for and financial feasibility of certain
expenditures related to such activities as the construction of new facilities or
the commencement of new health care services. The Company believes that the
operations of its business, as presently conducted, do not and will not require
certificates of need or other approvals and licenses. There can be no assurance,
however, that existing laws or regulations will not be interpreted or modified
to require the Company to obtain such approvals or licenses and, if so, that
such approvals or licenses could be obtained.
<PAGE>
Statutes and regulations affecting the fitness industry generally have been
enacted or proposed to regulate the industry. Typically, these statutes and
regulations prescribe certain forms and provisions of membership contracts,
including provisions respecting the right of the member to cancel the contract
within, in most cases, three business days after signing, require an escrow of
funds received from pre-opening sales or the posting of a bond, or both, and
establish maximum prices for membership contracts and limitations on the term of
contracts. The Company believes that these statutes and regulations have little,
if any, application to the Company since it does not sell membership contracts.
The Company maintains internal review procedures intended to keep it in
compliance and it believes that its activities are at all times in substantial
compliance with all applicable statutes, rules, and decisions.
Management of the Company believes that there currently is no significant
government regulation which materially limits the Company's ability to provide
management and consulting services to its corporate and hospital-based clients.
With increased state, federal, and local regulation, no assurance can be given
that any governmental statutes or regulations will not be proposed or adopted
that would limit the Company's ability to compete in the marketplace
successfully or at all.
The Commission on Accreditation of Rehabilitation Facilities ("CARF") is an
independent organization that reviews rehabilitation facilities and accredits
facilities that meet its guidelines. CARF accreditation guidelines require
extensive quality assurance and treatment outcome analysis. To date, CARF
accreditation in most states is voluntary and is not required to perform the
rehabilitative services provided by the Company. There can be no assurance that
CARF accreditation will not be required in the future in states in which the
Company does business, and, if required, that the Company will be able to meet
CARF guidelines in such states.
Reimbursement
The health care industry is presently undergoing significant changes in the
delivery of and payment for health care services. Presently, governmental
payors, such as the Medicare and Medicaid programs, as well as private
third-party payors are responding to escalating health care costs by undertaking
efforts to restrict significantly reimbursement rates for health care services,
including physical therapy services. There can be no assurance that
reimbursement for the Company's physical therapy services will remain at current
levels or at levels that render expansion in this area economically attractive.
Many payors place limitations on reimbursement rates by capping or lowering
fees or restricting the number of treatments that will be reimbursed for any
given condition. All of the states in which the Company currently conducts
business have fee schedules that limit the reimbursement rates under workers'
compensation programs.
The Company expects this trend toward governmental and third-party payor
restrictions limiting reimbursement levels for various outpatient services,
including physical therapy services, will continue. There can be no assurance
that reimbursement for the Company's physical therapy services will remain at
current levels or at levels that render expansion economically attractive.
Another approach of governmental and third-party payors has been to
institute capitated programs. Under capitated programs, payors contract with
providers for specific physical therapy services in return for set monthly
prepaid fees per individual enrollee ("capitated" monthly fees). If the provider
has accurately analyzed and negotiated its capitated monthly fees, and the costs
of providing services are less than the demand for treatment, the provider
benefits from positive margins. To the extent that the actuarial analysis
underlying the capitated fees are inaccurate and enrollees require more
treatment than is anticipated, aggregate capitated fees may be insufficient to
cover the costs of providing the enrollees with the services required.
<PAGE>
In order to effectively manage capitated contracts, the Company will need
to acquire additional operational and information systems. While the Company
currently provides physical therapy services under one capitated contract, the
Company does not have any previous experience in managing capitated contracts
and there can be no assurance that the Company can successfully negotiate and
implement other capitated contracts or that such contracts will be profitable.
Although the Company would seek to negotiate stop-loss reinsurance to
contractually shift the risk of financial exposure beyond certain limits to an
insurance carrier in the event it determined to participate in a material
capitated program, there can be no assurance that it will be able to obtain
adequate stop-loss reinsurance. In addition, the Company may be required to
obtain licenses from governmental authorities to be able to offer physical
therapy services on a capitated basis. The Company does not currently have a
license from any government authority to offer such programs, and there can be
no assurance that the Company will be able to obtain such licenses when and if
sought.
Health Care Reform
In response to continuing health care cost increases and the lack of health
care coverage for a significant portion of the American population, the federal
and many state governments have adopted or are considering legislation that is
intended to reform or restructure the health care delivery system significantly.
Because new proposals are introduced quite frequently, the nature and scope of
these reform efforts cannot be accurately predicted at this time. While there
are many different proposals under consideration, many of these reforms
contemplate mandated health care coverage through employer or government
sponsored health care plans that arrange for services with large, vertically
integrated networks of health care providers. Many proposals place prescriptive
limitations on health care spending and the rates that providers may charge.
While state and federal government's consider reform, employers and payors are
also considering new methods for structuring the delivery of health care. Both
the marketplace and the government may change the environment in which the
Company operates. While the Company believes that it can compete successfully by
negotiating to participate in integrated provider networks, no assurance can be
given that the Company will be able to participate in a sufficient number of
these networks or that the rates of reimbursement and other terms of such
participation will be sufficient to be economically attractive. The Company is
not in a position to evaluate whether or what form any reform may take, or
whether or to what extent such reform will cause increased use of integrated
provider networks, nor is it in a position to speculate how such networks will
be run or regulated. It is possible that third parties may impose significant
limits on the Company's operations, such as pricing controls over physical
therapy clinic operations.
Corporate Practice of Medicine
The Company's physical therapy business is also subject to extensive and
changing federal, state, and local regulation governing employment of therapists
and other professionals by business corporations. Several states have adopted
legislation that prohibits, or have interpreted existing legislation to
prohibit, the furnishing of physical therapy services by a business corporation.
Although the Company does not operate in such states, there can be no assurance
that states in which it does operate or may operate will not seek to enact or
enforce this type of restriction or that the Company can adapt its operations to
comply with such restrictions.
<PAGE>
Fraud and Abuse Statutes
Federal and state regulators and third-party payors have reacted negatively
to ownership by physicians of physical therapy clinics to which they refer
patients. Federal legislation prohibits the referral of any Medicare or Medicaid
patient to any separate physical therapy clinic by referring physicians if the
physician or a family member has an ownership or investment interest in, or
financial relationship with, the clinic. This law also regulates every financial
relationship between referring physicians and providers of physical therapy and
imposes substantial penalties for violations of its provisions. Proposed federal
legislation would extend these restrictions to all services provided, regardless
of whether the 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 or operations.
Virtually all states in which the Company operates have enacted laws and
adopted regulations that restrict health care practitioners from referring
patients to health care 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. In addition, there can be no assurance that states in which the
Company operates or will operate will not enact similar or more restrictive
laws.
In addition, the Social Security Act imposes criminal penalties upon
persons who make or receive kickbacks, bribes or rebates in connection with the
Medicare and Medicaid programs. The anti-kickback statute prohibits providers
and others from soliciting, offering, receiving or paying, directly or
indirectly, any remuneration to induce either making a referral for a Medicare
or Medicaid-covered service or item or ordering any covered service or item.
Each violation of these rules may be punished by a fine of up to $25,000 or
imprisonment for up to five years, or both, and may also be treated as
violations of other criminal statutes with more severe penalties. In addition,
the Medicare and Medicaid Patient and Program Protection Act of 1987 imposes
civil sanctions for violation of these prohibitions, punishable by monetary
fines, which can be substantial, and exclusion from the Medicare and Medicaid
programs. Statutes in several states impose similar restrictions on referrals
for medical services, including physical therapy. Because the anti-kickback laws
are broad in scope, and have been expansively interpreted, they limit the manner
in which the Company can pursue acquisitions and market its services to, and
contract for services with, physicians and other health care providers. Some
laws would subject to scrutiny the ownership of debt or equity securities of the
Company by referring physicians, including those from whom the Company has
purchased physical therapy clinics, especially purchases which involve future
consideration based on volume or profits. Further, representatives of the Office
of the Inspector General of the U.S. Department of Social and Health Services,
the agency with civil enforcement responsibility, have indicated that, under
certain circumstances, such agency may regard a payment for goodwill in the
context of a practice sale as contrary to such anti-fraud and abuse rules.
<PAGE>
Certain of the Company's clinics derive a portion (less than 2%) of that
particular clinic's revenues from Medicare or Medicaid programs. As to these
clinics, the parties from whom the clinics were acquired do not refer patients
to the clinics and, therefore, management believes are not referral sources
within the meaning of the law. There can be no assurance, however, that
enforcement authorities will not take a contrary position. Persons found to be
in violation of the law may be subject to the sanctions described above without
regard to the amount of money received from the Medicare or Medicaid programs.
Management considers and seeks to comply with these regulations in planning
acquisitions, marketing activities, and other aspects of its operations but no
assurance can be given regarding compliance in any particular factual situation.
Employees
At December 31, 1996, the Company had 414 full-time and 1,096 part-time
employees. Of the full-time employees, 27 were engaged in general management and
sales, 12 were Regional Managers and 375 were fitness center or physical therapy
clinic staff. The Company's part-time employees are primarily engaged in the
staffing of the fitness centers that the Company operates for its clients. None
of Company's employees are subject to any collective bargaining agreements and
the Company believes that its relations with its employees are good.
Indemnification Obligations
A majority of the Company's management contracts with its fitness center
clients include a provision that obligates the Company to indemnify and hold
harmless its fitness center clients and their employees, officers and directors
from any and all claims, actions and/or suits (including attorneys' fees)
arising directly or indirectly from any act or omission of the Company or its
employees, officers or directors in connection with the operation of the
Company's business. A majority of these management contracts also include a
provision that obligates the clients to indemnify and hold the Company harmless
against all liabilities arising out of the acts or omissions of the clients,
their employees and agents. The Company can make no assurance that any such
claims by its fitness center clients, or their employees, officers or directors,
will not be made in the course of operating the Company's business.
Insurance
The Company maintains professional malpractice liability coverage on its
professional and technical employees in the amount of $1,000,000 per occurrence
and $6,000,000 in the aggregate per therapist, as well as at least $2,000,000 of
general premises liability insurance for each of its fitness centers and its
executive offices. While the Company believes its insurance policies to be
sufficient in amount and coverage for its current operations, there can be no
assurance that coverage will continue to be available in adequate amounts or at
a reasonable cost, and there can be no assurance that the insurance proceeds, if
any, will cover the full extent of loss resulting from any claims.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 6,826 square feet of commercial office
space at 3500 W. 80th Street, Suite 130, Bloomington, Minnesota 55431, under a
lease expiring on July 31, 2001. The Company's monthly base rental expense for
this office is approximately $7,964. Effective June 1, 1997, the Company will
lease an additional 2,003 square feet at the same location for the same term at
an additional monthly base rental of $1,669. The Company's Pro Source division
leases 7,160 square feet of office and retail space located in St. Louis Park,
Minnesota at a monthly base rent of $3,580 under a lease expiring October 1,
1999, and 3,002 square feet of retail space located in Edina, Minnesota at a
monthly base rent of $4,628 under a lease expiring April 30, 1998. The Company
also acquired a lease of approximately 4,927 square feet of commercial office
space at 11620 Wilshire Boulevard, Suite 400, Los Angeles, California 90024,
when it acquired Fitness Systems. The lease expires August 1, 1999 and carries a
monthly base rental of $9,854. The Company has signed a sublease agreement with
Liner & Yankelevitz, LLP on January 9, 1996 which calls for monthly payments of
$5,912 commencing on July 1, 1996. The sublease expires July 31, 1999. All of
the Company's 11 physical therapy clinics are leased for terms of one to five
years with an aggregate monthly base rent of approximately $72,000. The
foregoing monthly base rental amounts exclude taxes, insurance and other related
operating costs. The Company believes that its facilities are adequate for its
foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in various claims and
lawsuits incident to the operation of its business, including claims arising
from accidents or from the negligent provision of physical therapy services.
On 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 on its financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market with
prices quoted on the Nasdaq SmallCap Market under the symbol "HFPT." The
Company's common stock has been traded on the Nasdaq SmallCap Market since
November 14, 1994. Prior to that date, there was no public market for the
Company's common stock. The following table sets forth, for the periods
indicated, the range of low and high bid prices for the Company's common stock
as reported on the Nasdaq SmallCap Market. Quotations in the following table
represent inter-dealer prices; without retail mark-up, markdown or commission,
and do not represent actual transactions.
<PAGE>
Calendar Year 1996: Low High
--- ----
Fourth quarter $2.00 $3.13
Third quarter 2.00 3.13
Second quarter 2.50 3.25
First quarter 2.38 3.75
Calendar Year 1995:
Fourth quarter $2.13 $2.88
Third quarter 2.44 3.50
Second quarter 2.63 3.25
First quarter 2.63 3.25
At March 24, 1997, the published high and low bid prices for the Company's
common stock was $2.50 and $2.50 per share respectively. At March 24, 1997,
there were issued and outstanding 7,666,122 shares of common stock of the
Company held by 221 shareholders of record. Record ownership includes ownership
by nominees who may hold for multiple owners.
The Company has never declared or paid any cash dividends on its common
stock and does not intend to pay cash dividends on its common stock in the
foreseeable future. The Company presently expects to retain any earnings to
finance the development and expansion of its business. The payment by the
Company of dividends, if any, on its common stock in the future is subject to
the discretion of the Board of Directors, will depend on the Company's earnings,
financial condition, capital requirements and other relevant factors. The
Company's bank loan agreement prohibits the payment of dividends.
<PAGE>
During the fiscal year ended December 31, 1996, the Company sold the
following shares of Company Common Stock without registering such sales under
the Securities Act:
<TABLE>
<CAPTION>
Price per Exemption
# of Shares Purchaser(s) Share Relied Upon
- ------------ ------------------ --------- -----------
<S> <C> <C> <C>
120,000 Shares issued to former officer upon exercise of $.589 ss.4(2)
previously issued stock options
84,992 Shares issued to former officer upon exercise of $.589 ss.4(2)
previously issued warrants
40,000 Additional shares issued to previous sellers of * ss.4(2)
business as additional purchase price
234,099 Shares issued to holder of previously issued $2.3375 ss.3(a)(9);ss.4(2)
convertible debenture upon conversion
222,856 Shares issued to holder of previously issued $2.3375 ss.3(a)(9);ss.4(2)
convertible debenture upon conversion
1,600 Shares issued to holder of previously issued $2.1875 ss.4(2)
warrant upon exercise thereof
10,000 Shares issued to software licensor ** ss.4(2)
</TABLE>
- -----------------------------------------------------
* Shares issued as additional consideration in connection with the
Registrant's previous acquisition of business
** Shares issued as partial consideration for software license
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements.
Results of Operations
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
1995 1996
------ -----
<S> <C> <C> <C> <C>
REVENUES:
Preventative healthcare $12,136,000 67.8% $21,790,000 76.4%
Rehabilitative healthcare 5,770,000 32.2 6,724,000 23.6
---------- ---- ---------- ----
Total revenues 17,906,000 100.0 28,514,000 100.0
COST OF REVENUES 13,943,000 77.9 22,813,000 80.0
---------- ---- ---------- ----
GROSS PROFIT 3,963,000 22.1 5,701,000 20.0
OPERATING EXPENSES 3,619,000 20.2 4,429,000 15.6
--------- ---- --------- ----
OPERATING INCOME
(LOSS):
Preventative healthcare 1,612,000 2,482,000
Rehabilitative healthcare 327,000 717,000
Corporate (1,595,000) (1,927,000)
----------- -----------
Total operating income (loss) 344,000 1.9 1,272,000 4.4
OTHER EXPENSES, NET 556,000 3.1 266,000 0.9
------- ---- ------- ----
NET (LOSS) INCOME $(212,000) (1.2)% $1,006,000 3.5%
========== ===== ========== ====
</TABLE>
The Company is engaged in two principal lines of business (segments): (i)
preventative healthcare and (ii) rehabilitative healthcare. Preventative
healthcare includes the development, marketing and management of corporate and
hospital-based fitness centers and the sale of fitness equipment and service.
Rehabilitative healthcare relates to the operation of physical therapy clinics
that provide a full range of rehabilitative services and a network of
independent physical therapy clinics.
The Company's preventative healthcare revenues come from the management and
consulting contracts and agreements and the sales of fitness equipment and
service. The management and consulting contracts and agreements provide for
specific management, consulting, and program fees and contain provisions for
modification, termination, and non-renewal.
<PAGE>
The Company's rehabilitative revenues are comprised of physical therapy
services provided to patients at Company-owned locations and at hospital and
corporate locations, and fees paid by independent therapy clinic network
members. Net revenues from physical therapy services 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.
Years Ended December 31, 1996 and 1995
Revenues. Total revenues increased $10,608,000 or 59.2% to $28,514,000 for
fiscal 1996 from $17,906,000 for fiscal 1995. The increase in preventative
healthcare revenues of $9,654,000 was primarily due to the net addition of five
fitness center management contracts, the increase in consulting revenue, and the
acquisition of a fitness equipment dealer in January 1996. The increase in
rehabilitative healthcare revenues of $954,000 was due to the increase in the
number of patient visits at several clinics and the addition of two new clinics
and four on-site locations.
Operating Income. Operating income increased $928,000 or 269.8% to
$1,272,000 for fiscal 1996 from $344,000 for fiscal 1995. The increase in
operating income was due to an increase of $870,000 in preventative healthcare
and $390,000 in rehabilitative healthcare, partially offset by an increase of
$332,000 in corporate operating costs.
The increase in operating income in preventative healthcare was primarily
due to the acquisition of a fitness equipment dealer on January 11, 1996, the
net addition of five fitness center management contracts and an increase in
consulting revenue. Operating income in preventative healthcare did not increase
commensurate with the increase in revenues for this segment primarily due to the
lower margins associated with the equipment sales added as a result of the
acquisition of a fitness equipment dealer. Operating income, as a percentage of
revenues, in preventative healthcare decreased from 13.3% in fiscal 1995 to
11.4% in fiscal 1996 due to lower margins in equipment sales being partially
offset by increased consulting revenue.
The increase in operating income in the rehabilitative healthcare segment
is due to an increase in the number of patient visits and an increase in the
operating income as a percentage of sales. The increase in operating income as a
percentage of sales is the result of operational efficiencies at the clinics.
The increase in corporate operating costs in fiscal 1996 is directly
related to the acquisitions of an operator of corporate fitness centers in April
1995 and a fitness equipment dealer in January 1996.
Other Expense (Interest Expense/Income). Interest expense, net of interest
income, decreased $290,000 or 52.2% to $266,000 for fiscal 1996 from $556,000
for fiscal 1995. The decrease was due to lower average borrowing in fiscal 1996
when compared to fiscal 1995.
<PAGE>
Net (Loss) Income. The Company's net income increased $1,218,000 to
$1,006,000 or $.14 per share for fiscal 1996 from a loss of $212,000 for fiscal
1995.
Years Ended December 31, 1995 and 1994
Revenues. Revenues increased $9,916,000 or 24.1% to $17,906,000 for fiscal
1995 from $7,990,000 for fiscal 1994. The increase in preventative healthcare
revenue of $8,502,000 is primarily due to the acquisition of Fitness Systems on
April 6, 1995. The increase in rehabilitative healthcare revenue of $1,414,000
is due to the acquisition of 8 physical therapy clinics in the first half of
1994, partially offset by the sale of one clinic in January 1995 and a decline
in the number of patient visits at two clinics on the East Coast due primarily
to poor weather conditions.
Operating Income (Loss). Operating income increased $1,008,000 to $344,000
for fiscal 1995 from a loss of $664,000 for fiscal 1994. The increase in
operating income was due to an increase of $1,326,000 in preventive healthcare
and $76,000 in rehabilitative healthcare, partially offset by an increase of
$394,000 in corporate operating costs.
The increase in operating income in preventive healthcare was primarily due
to the acquisition of Fitness Systems and the increase in rehabilitative
healthcare was due to the acquisition of certain clinics completed from March
through June 1994 and the sale of one underperforming clinic in January 1995.
Other Expense (Interest Expense/Income). Interest expense net of interest
income; decreased $380,000 or 40.6% to $556,000 for fiscal 1995 from $936,000
for fiscal 1994. The decrease was due almost entirely to the effective interest
rate and average borrowings decreasing in 1995 when compared to 1994.
Net Loss. The Company's net loss was $212,000 or $.04 per share for fiscal
1995 from a loss of $1,600,000 or $.52 per share in fiscal 1994.
Liquidity and Capital Resources
The Company had a working capital deficit of $1,396,000 at December 31,
1995, and a working capital deficit of $2,086,000 as of December 31, 1996. The
change is primarily due to the increases in accounts payable and the decrease in
cash and cash equivalents partially offset by the increase in inventories and a
decrease in notes payable.
<PAGE>
In December 1996, the Company entered into an Amended and Restated Term
Loan and Credit Agreement which maintained the maximum amount available under
the Company's revolving line of credit agreement at $1,500,000 bearing interest
at the prime rate plus 2% due May 31, 1997, and also provided for a $600,000
term loan due May 31, 1997 at the prime rate plus 1%. As of December 31, 1996,
the Company had borrowed $1,475,000 on the revolving line of credit and $600,000
on the term loan.
As of December 31, 1996, the Company's principal sources of liquidity
included trade accounts receivable of $4,657,000 and the bank line of credit of
which $1,475,000 was outstanding. The decrease in cash and increase in trade
accounts receivable from December 31, 1995 to December 31, 1996 is primarily due
to the Company's acquisition of Pro Source and the repayment of the assumed
debt.
In February 1997, the Company entered into a second Amended and Restated
Credit and Security Agreement which provides for a line of credit of up to
$1,500,000 at the prime rate plus 2%, and a $2,500,000 term loan at the prime
rate plus 6%. Management believes the $1,500,000 line of credit and cash flow
from operating activities are sufficient to fund operations at current levels,
but that anticipated acquisitions in the Company's rehabilitative business will
require additional financing.
In September 1996, the Company entered into a software license agreement
and a computer consulting agreement with Aspen Information Systems, Inc. The
agreements require the Company to pay $370,000, issue 10,000 shares of Company
common stock, and grant options to purchase 10,000 shares of Company common
stock. The Company paid approximately $57,000 in 1996 pursuant to these
agreements.
In October 1996, the Company entered into a system design and
implementation agreement with Practice Management Consultants, Inc. ("PMC")
pursuant to which PMC will design and implement various management systems for
the management of the Company's rehabilitative healthcare business. The
agreement requires the Company to pay all expenses incurred by PMC in connection
with this agreement through 1997. Costs associated with this agreement,
including purchases for equipment and software, are estimated to be
approximately $1,800,000. The Company paid $637,000 in 1996 pursuant to this
Agreement.
In February 1997, the Company paid $1,000,000 of cash and issued $250,000
of subordinated convertible promissory notes in connection with the Company's
acquisition of the Isernhagen companies. Such cash was provided by the Company's
bank term loan.
<PAGE>
Sources of capital to meet future obligations in 1997 and early 1998 are
anticipated to be cash provided by operations, cash received from customers
prior to performing the related services, and available borrowings under the
Company's line of credit of approximately $150,000 at March 31, 1997.
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.
Outlook
The Company's strategy is to continue to expand its rehabilitative
healthcare operations through acquisitions and to improve profitability of the
physical therapy clinics purchased through the consolidation of the clinics'
operating expenses. The Company intends to focus its acquisitions on physical
therapy clinics located in the Midwest portion of the United States. Management
anticipates that the purchase prices paid for future acquisitions will be
similar to the prices paid to date and payment terms may be a combination of
cash, notes payable, and where appropriate, shares of 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 earn-out criteria. As a
result of government health care regulations, however, the use in the future of
notes payable, earn-out arrangements or common stock may be limited. It is
anticipated that funds required for future acquisitions and the integration of
acquired businesses with the Company will be provided from operating cash flow
and the proceeds from future debt and equity financings. Future equity
financings may result in dilution to holders of Common Stock. However, there can
be no assurance that suitable acquisition candidates will be identified by the
Company in the future, that suitable financing for any such acquisitions can be
obtained by the Company or that any such acquisitions will occur.
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.
Preventative healthcare revenues are expected to increase, on a quarterly
basis in 1997, as a result of adding management contracts and increased sales of
fitness equipment and soft goods.
Rehabilitative healthcare revenues are anticipated to increase, on a
quarterly basis in 1997, as a result of performing physical therapy on-site at
additional corporate fitness centers, increasing the number of physical
therapists at existing clinics, and potential acquisitions of physical therapy
clinics. See "Liquidity and Capital Resources." In January 1997, the Company
sold one physical therapy clinic located in San Diego, California and three
clinics located in Delaware. These clinics accounted for revenues of $1,325,000
in 1996. The Company anticipates that this loss of revenue will be more than
offset by the Company's acquisitions of The Preferred Companies in December 1996
and the Isernhagen Companies in February 1997.
<PAGE>
Preventative healthcare operating income is expected to increase due to the
addition of corporate and hospital based management contracts and increases in
fitness equipment and soft goods sales. Preventative healthcare operating
income, as a percentage of revenues, is expected to remain consistent with that
experienced during the year ended December 31, 1996.
Rehabilitative healthcare operating income 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 the 1996 levels.
The foregoing statements contained in this Outlook section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operation and other forward-looking statements in Part I, "Description of
Business" of this Form 10-KSB for the period ended December 31, 1996, involve a
number of risks and uncertainties. Some of the factors that could cause actual
results to differ materially include but are not limited to the following:
Sufficiency of Working Capital. As of December 31, 1996, the Company had a
negative working capital of $2,086,000 including checks written in excess of
bank balances of $95,000. The Company's ability to fund its working capital
requirements in the future is dependent upon its ability to generate cash flow
from management contracts, equipment and soft goods sales, consulting, and
physical therapy fees. Future acquisitions may adversely affect cash flows from
operating activities due to average daily revenues outstanding on physical
therapy client's account's receivable ranging from 75 to 100 days. Therefore, if
for any reason, the Company's planned operations require more capital than
anticipated, revenues do not increase as planned, or operating income is less
than planned, the Company may need additional financing in order to maintain its
operations. There can be no assurance that the Company would be able to obtain
any required additional financing when needed or that such financing, if
obtained, would be on the terms favorable or acceptable to the Company.
<PAGE>
Reimbursement. The profitability of the Company's rehabilitative healthcare
services are dependent upon obtaining reimbursement for physical therapy
services from government agencies and third-party payors. The healthcare
industry is experiencing, and the Company expects that it will continue to
experience, significant changes in the delivery of and payment of healthcare
services. There is no assurance that reimbursement for the Company's physical
therapy services will remain at current levels or at levels that render
expansion in this service area economically attractive.
Recent and Future Acquisitions. A principal component of the Company's growth
strategy is to acquire physical therapy clinics. The successful execution of
this strategy will depend on the Company's ability to identify and to
appropriate acquisition candidates, to consummate such acquisition on terms
favorable to the Company, to retain and expand the revenues and profitability of
the acquired contracts and clinics, and successfully integrate the acquired
contracts and clinics into the Company's operations. There can be no assurance
that the Company will be successful in executing this strategy.
Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which will be effective for financial statements for fiscal years beginning
after December 15, 1995. The statement requires that such long-lived assets used
by the entity be reviewed for impairment whenever the carrying amount of an
asset may not be recoverable. The Company has determined that the carrying
amounts of its long-lived assets and intangibles at December 31, 1996 are
recoverable through expected cash flows from the use of such assets.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Statement encourages companies to adopt a new accounting
method that accounts for stock compensation awards based on their estimated fair
value at the date they are granted. However, companies are permitted to continue
following current accounting requirements for employee stock-based transactions,
which generally do not result in an expense charge for most options if the
exercise price is at least equal to the fair market value of the stock at the
date of grant. Companies that continue to follow existing standards are required
to disclose in a note to the financial statements the effect on net income
(loss) and net income (loss) per share had the Company recognized expense for
options issued to employees based on SFAS No. 123. The Company has determined
that it will not adopt the fair value method prescribed by SFAS No. 123 for
employee stock-based transactions. The "as if" disclosures are included in Note
7 to the Consolidated Financial Statements.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
Health Fitness Physical Therapy, Inc.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Health Fitness
Physical Therapy, Inc. and Subsidiaries (the Company) as of December 31, 1995
and 1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Health Fitness Physical Therapy,
Inc. and Subsidiaries as of December 31, 1995 and 1996 and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Minneapolis, Minnesota
April 10, 1997
<PAGE>
HEALTH FITNESS PHYSICAL
THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
ASSETS (Note 5)
CURRENT ASSETS:
Cash and cash equivalents $ 506,652
Trade accounts receivable, less allowance for doubtful accounts
of $160,000 and $245,000, respectively 3,926,332 $ 4,656,876
Inventories 454,254
Prepaid expenses and other 457,638 433,413
------------- --------------
Total current assets 4,890,622 5,544,543
PROPERTY, net (Note 4) 807,414 2,185,335
OTHER ASSETS:
Goodwill, less accumulated amortization of $512,400
and $961,424, respectively (Notes 1 and 2) 7,925,834 9,376,367
Noncompete agreements, less accumulated amortization
of $23,027 and $84,874 (Note 3) 363,823 346,976
Trade accounts receivable not expected to be collected within one year,
less allowance for doubtful accounts of $70,000 and $240,000, respectively 210,000 640,000
Other 85,931 85,676
------------- --------------
$ 14,283,624 $ 18,178,897
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Checks written in excess of bank balances $ 94,643
Notes payable (Note 5) $ 2,654,749 2,090,000
Trade accounts payable 322,833 1,662,077
Accrued salaries, wages, and payroll taxes 1,212,640 1,302,770
Other accrued liabilities 745,055 622,182
Current portion of long-term debt (Note 5) 228,556 281,278
Deferred revenue 1,122,666 1,577,186
------------- --------------
Total current liabilities 6,286,499 7,630,136
LONG-TERM DEBT, less current portion (Note 5) 474,078 576,490
DEFERRED LEASE OBLIGATION 124,113 80,183
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Note 7):
Preferred stock, $.01 par value; authorized 5,000,000 shares,
none issued or outstanding
Common stock, $.01 par value; 12,000,000 and 25,000,000 shares authorized;
6,437,429 and 7,173,293 shares issued and outstanding, respectively 64,374 71,733
Additional paid-in capital 10,200,233 11,693,617
Accumulated deficit (2,801,270) (1,795,689)
------------- --------------
7,463,337 9,969,661
Stockholder note and interest receivable (64,403) (77,573)
------------- --------------
7,398,934 9,892,088
------------- --------------
$ 14,283,624 $ 18,178,897
============= ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS PHYSICAL
THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
REVENUES:
Preventative healthcare $ 12,135,659 $ 21,789,983
Rehabilitative healthcare 5,770,546 6,724,361
-------------- ---------------
17,906,205 28,514,344
COSTS OF REVENUES:
Salaries 11,780,400 15,686,183
Equipment 4,414,273
Support 1,221,440 1,386,472
Occupancy 941,621 1,326,961
-------------- ---------------
13,943,461 22,813,889
-------------- ---------------
GROSS PROFIT 3,962,744 5,700,455
OPERATING EXPENSES:
Salaries 1,661,454 1,749,498
Selling, general, and administrative 1,957,772 2,679,227
-------------- ---------------
3,619,226 4,428,725
-------------- ---------------
343,518 1,271,730
INTEREST INCOME 36,927 26,272
INTEREST EXPENSE (592,430) (292,421)
-------------- ---------------
NET (LOSS) INCOME $ (211,985) $ 1,005,581
============== ===============
NET (LOSS) INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ (.04) $ .14
============== ==============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,380,585 7,155,800
=============== ===============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS PHYSICAL
THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholder
Additional Note and Total
Common Stock Paid-in Accumulated Interest Stockholders'
Shares Amount Capital Deficit Receivable Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 4,998,294 $ 49,983 $ 6,659,613 $(2,589,285) $ (38,645) $4,081,666
Exercise of underwriters' overallotment
less issuance costs of $56,010 140,000 1,400 362,590 363,990
Issuance of common stock in
connection with acquisition 160,000 1,600 790,994 792,594
Issuance of common stock purchase
warrants (Note 5) 145,516 145,516
Conversion of convertible notes less
issuance costs of $70,271 1,025,635 10,256 1,987,530 1,997,786
Warrants exercised 113,300 1,133 253,792 254,925
Stock options exercised 200 2 198 200
Advances on notes receivable (69,033) (69,033)
Payments received on notes receivable 43,275 43,275
Net loss (211,985) (211,985)
--------- ---------- ----------- ----------- --------- ----------
BALANCE AT DECEMBER 31, 1995 6,437,429 64,374 10,200,233 (2,801,270) (64,403) 7,398,934
Issuance of common stock in
connection with acquisition 40,000 400 221,914 222,314
Issuance of common stock
purchase warrants (Note 5) 40,000 40,000
Conversion of convertible notes 456,955 4,570 1,049,875 1,054,445
Warrants exercised 86,592 866 52,662 53,528
Stock options exercised 142,317 1,423 102,783 104,206
Issuance of common stock
in connection with a software
license agreement 10,000 100 26,150 26,250
Advances on notes receivable (17,970) (17,970)
Payments received on notes receivable 4,800 4,800
Net income 1,005,581 1,005,581
--------- ---------- ----------- ----------- --------- ----------
BALANCE AT DECEMBER 31, 1996 7,173,293 $ 71,733 $11,693,617 $(1,795,689) $ (77,573) $9,892,088
========= ========== =========== =========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS PHYSICAL
THERAPY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Note 9)
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (211,985) $ 1,005,581
Adjustment to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,027,336 1,073,645
Deferred revenue 8,957 36,200
Change in assets and liabilities, net of acquisitions:
Trade accounts receivable (735,670) (863,950)
Inventories (86,353)
Prepaid expenses and other (51,402) (46,984)
Other assets 25,236 (15,934)
Trade accounts payable (135,212) 534,087
Accrued liabilities and other (90,609) (441,510)
------------- --------------
Net cash (used in) provided by operating activities (163,349) 1,194,782
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property (69,922) (1,183,001)
Payments for acquisitions, net of liabilities assumed
and cash acquired (4,451,437) (537,016)
Payments in connection with earn-out provisions (42,871) (124,924)
Payment in connection with noncompete agreements (199,908) (45,000)
------------- --------------
Net cash used in investing activities (4,764,138) (1,889,941)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in checks written in excess of bank balances 94,643
Borrowings under line of credit 1,370,000 4,700,938
Repayments of line of credit (1,370,000) (3,225,938)
Proceeds from notes payable, net of financing costs 3,818,851 600,000
Repayments of notes payable (500,000) (1,686,942)
Proceeds from long-term debt 113,000
Repayments of long-term debt (379,377) (662,683)
Proceeds from issuance of common stock 564,200 268,659
Proceeds from issuance of warrants to purchase common stock 106,183
Payments of common stock issuance costs (126,281)
Advances on notes receivable (69,033) (17,970)
Payments received on notes receivable 43,275 4,800
------------- --------------
Net cash provided by financing activities 3,457,818 188,507
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,469,669) (506,652)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,976,321 506,652
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 506,652 $ -
============= ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HEALTH FITNESS PHYSICAL
THERAPY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Health Fitness Physical Therapy, Inc. and subsidiaries (the
Company) is engaged in two principal lines of business (segments): (i)
preventative healthcare and (ii) rehabilitative healthcare. Preventative
healthcare includes the development, marketing, and management of corporate
and hospital-based fitness centers and selling of fitness equipment
service and fitness related soft-goods such as shirts, hats, and other
items. Rehabilitative healthcare relates to the operation of physical
therapy clinics that provide a full range of rehabilitation services and
the operation of a national network of independent physical therapy
clinics. The Company provides management and consulting contract services
in 26 states, conducts fitness equipment sales from two locations in
Minnesota, provides physical therapy services from clinics in California
and Minnesota, and conducts the operation, in Arizona, of a network of
independent physical therapy clinics.
Consolidation - The consolidated financial statements include the accounts
of Health Fitness Physical Therapy, Inc. and its subsidiaries, Sports and
Orthopedic Physical Therapy, Inc., Health Fitness Physical Therapy of
Tahoe, Inc., Health Fitness Rehab, Inc., Fitness Centers of America dba
Fitness Systems, and The Preferred Companies, Inc. dba Preferred Therapy
Providers of America. All significant intercompany balances and
transactions have been eliminated.
Cash Equivalents - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
Trade Accounts Receivable - Trade accounts receivable relating to
preventative healthcare represent amounts due from companies and
individuals for services or products shipped. Trade accounts receivable
relating to rehabilitative healthcare represent amounts due from companies,
primarily insurance companies, and individuals. The Company has experienced
that some rehabilitative accounts receivable may not be collected within
one year from the date of service. Therefore, a portion of the trade
accounts receivable balance is classified as noncurrent.
Inventories - Inventories, which consist primarily of fitness equipment,
are stated at the lower of cost (first-in, first-out basis) or market.
Deferred Revenue - Deferred revenue represents billings in advance for the
management of corporate and hospital-based fitness centers and amounts
received in excess of revenues recognized to date on contracting
third-party payor contracts.
Revenue Recognition - All revenues, except for the sale of fitness
equipment and soft-goods and revenues from contracting third-party payor
contracts, are recognized at the time the service is provided. Revenues
relating to the sale of equipment and soft-goods is recognized when the
product is shipped. Revenues from contracting third-party payor contracts
is recognized over the contract period.
<PAGE>
Concentrations of Credit Risks - The Company grants credit to customers in
the ordinary course of business. Concentrations of credit risk with respect
to trade receivables are limited due to the number of customers and their
geographic dispersion.
Property - Property is stated at cost. Depreciation and amortization are
computed using both straight-line and accelerated methods over the useful
lives of the assets or the terms of the capital leases.
Goodwill - Goodwill represents the excess of the purchase price and related
costs over the fair value of the net assets of businesses acquired.
Goodwill relating to rehabilitative healthcare is being amortized on a
straight-line basis over primarily 15 years. Goodwill relating to
preventative healthcare acquisitions is being amortized on a straight-line
basis over 15 or 20 years.
Subsequent payments of earn-out provisions will be accounted for as
adjustments to goodwill and amortized on a straight-line basis over the
remaining life of the goodwill associated with the acquired company.
Recoverability of Long-Lived Assets - The Company reviews long-lived assets
and goodwill related to those assets for impairment whenever events or
changes in circumstances indicate the carrying value of an asset or group
of assets may not be recoverable. The Company considers a history of
operating losses to be its primary indicator of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for
which there are identifiable cash flows, the continued operations of an
entity acquired. The long-lived assets relating to the operations of an
entity acquired is deemed impaired if a forecast of undiscounted future
operating cash flows directly related to the entity, including disposal
value, if any, is less than its carrying amount. If the operations of an
entity acquired is deemed to be impaired, the loss is measured as the
amount by which the carrying amount of the long-lived assets directly
associated with the operations of the acquired entity exceeds its fair
value. Fair value is based on quoted market prices in active markets, if
available. If quoted market prices are not available, an estimate of fair
value is based on the best information available, including prices for
similar assets or the results of valuation techniques such as discounted
estimated future cash flows as if the decision to continue to the
operations of the impaired acquired entity was a new investment decision.
The Company generally measures fair value by discounting estimated future
cash flows. Considerable management judgment is necessary to estimate
discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
Labor - The Company's rehabilitative operations are dependent on attracting
and retaining highly qualified physical therapists. To date, the Company
has not experienced significant difficulty in attracting and retaining
qualified physical therapists, even though the demand for physical
therapists exceeds the available supply. The Company's ability to increase
its fees to cover such additional costs may be restricted by the
cost-containment pressures on health care providers.
Income Taxes - The Company utilizes the asset and liability method of
accounting for income taxes as required by Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred
income tax assets and liabilities are computed annually for differences
between the financial statement and tax basis of assets and liabilities
that will result in taxable or deductible amounts in the future based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities.
<PAGE>
Use of Estimates - The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires
management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Net (Loss) Income Per Common Share - The net (loss) income per common share
is based on the weighted average number of common and common equivalent
shares outstanding during the period using the modified treasury stock
method. Net (loss) income per common share assuming full dilution would be
substantially the same.
The weighted average number of common and common equivalent shares for the
year ended December 31, 1996, includes 292,829 contingent shares assumed to
be issued to the sellers of Fitness Centers of America dba Fitness Systems
(Fitness Systems). The Company is obligated to issue the contingent shares
to the sellers of Fitness Systems so that the aggregate value of the common
stock issued in connection with the acquisition of Fitness Systems equals
$1,200,000 based on the average closing sale price of the Company's common
stock during the fourth quarter of 1996 not reaching at least $6.00 per
share during the same three-month average price calculation. Options and
warrants were not included as common stock equivalents for the year ended
December 31, 1996 due to their antidilutive effect.
The weighted average number of common and common equivalent shares for the
year ended December 31, 1995 does not include contingent shares, options,
and warrants due to their antidilutive effect.
Reclassifications - Certain reclassifications have been made to the
December 31, 1995 financial statements to conform to the presentation
adopted in the December 31, 1996 financial statements. The
reclassifications had no effect on stockholders' equity or net loss as
previously reported.
2. ACQUISITIONS
On April 6, 1995, the Company completed the acquisition of all of the
issued and outstanding stock (the Acquired Stock) of closely held Fitness
Systems, a California-based operator of corporate fitness centers. In
connection with the acquisition of Fitness Systems, assets acquired,
liabilities assumed, notes and common stock issued, and cash consideration
paid were as follows:
<PAGE>
Assets acquired:
Cash $ 6,284
Accounts receivable 1,224,810
Prepaid expenses and other 122,885
Property 102,250
Excess of purchase price over net assets acquired 6,957,095
--------------
8,413,324
Liabilities assumed:
Accounts payable 55,393
Accrued expenses 1,394,074
Deferred revenue 817,311
--------------
2,266,778
Notes issued 896,231
Common stock issued 792,594
--------------
Cash consideration paid $ 4,457,721
==============
The Company paid William L. Horton, Fitness Systems' Chief Executive and
majority shareholder, and certain other shareholder employees of Fitness
Systems (the Sellers) $3,000,000 in cash and executed $1,000,000 of
noninterest-bearing secured promissory notes in favor of the Sellers as
partial consideration for the Acquired Stock. In addition, the Company
issued 160,000 shares of its common stock to the Sellers on April 6, 1995
and issued an additional 40,000 shares of stock to the Sellers on April 6,
1996. The Company contractually agreed with the Sellers that if the average
closing sale price of the Company's publicly traded stock during the fourth
calendar quarter of 1996 does not reach at least $6.00 per share, the
Company would 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. The Company will issue 292,829
shares of common stock in 1997 so the aggregate value of the stock
consideration equals $1,200,000. In addition to the foregoing
consideration, the selling shareholders retained the rights to receive
collections of accounts receivable and certain other assets outstanding as
of March 31, 1995, which approximated $1,270,000, and retained ownership of
certain other assets. The Sellers are also entitled to certain "earn-out"
payments equal to 10% of the gross profits, as defined, of Fitness Systems
for each of the five years ending December 31, 1995 through 1999. For the
years ended December 31, 1995 and 1996, the Company incurred costs of
$126,883 and $178,188, respectively, relating to the earn-out provision.
Finally, William L. Horton was paid $60,000 pursuant to a consulting and
noncompete agreement executed in connection with the transaction. The
$60,000 was expensed during the term of the consulting agreement, April 6,
1995 to October 6, 1995.
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 20 years using the straight-line method. The
consolidated statements of operations include the results of operations of
Fitness Systems since April 1, 1995.
The following unaudited pro forma condensed combined statements of
operations reflect the combined operations of the Company and Fitness
Systems during the year ended December 31, 1995, adjusted for related
financing costs, as if the acquisition and the financing had occurred at
the beginning of 1995. (Pro forma information relating to the 1996
acquisitions discussed below is not included due to the impact of the
acquired companies being insignificant.) The unaudited pro forma condensed
combined statements of operations may not necessarily reflect the actual
operations of the Company which would have resulted had the acquisition and
related financing occurred as of the date presented. The unaudited pro
forma information is not necessarily indicative of future results of
operations for the combined companies.
<PAGE>
Revenues $ 20,514,000
Cost of revenues 16,151,000
-------------
Gross profit 4,363,000
Operating expenses 4,397,000
-------------
Net loss $ (34,000)
=============
Net loss per common and common equivalent share $ (.01)
=============
Weighted average common and common equivalent shares
outstanding 6,657,000
=============
On January 11, 1996, the Company completed the acquisition of all of the
assets and assumed the liabilities of closely held Pro Source Fitness, Inc.
(Pro Source), a Minnesota-based supplier of fitness equipment and services.
For the fiscal year ended December 31, 1995, Pro Source reported revenues
of $4,992,000. In connection with the acquisition, assets purchased,
liabilities assumed, and cash consideration paid were as follows:
Assets acquired:
Cash $ 9,648
Accounts receivable 285,666
Inventories 367,901
Prepaid expenses and other 37,676
Property 237,745
Excess of purchase price over net assets acquired 135,369
--------------
1,074,005
Liabilities assumed:
Accounts payable 497,862
Accrued expenses and other 116,795
Debt 361,752
--------------
976,409
--------------
Cash consideration paid $ 97,596
==============
The purchase agreement requires the Company to make an annual cash payment
(the earn-out provision) of up to 30% of gross profits, as defined, to the
seller for four calendar years starting in 1996. For the year ended
December 31, 1996, the Company incurred costs of $107,875 relating to the
earn-out provision.
The Company entered into employment agreements with certain key employees
of Pro Source for terms of two to four years. These agreements provide for
minimum aggregate annual salaries of approximately $135,000 and also
provide for incentive awards based on performance. The Company also granted
stock options to the former owners of Pro Source to purchase up to 75,000
shares of the Company's common stock at $3.00 per share in connection with
these employment agreements.
This acquisition has been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired is
being amortized over 15 years using the straight-line method. The
consolidated statements of operations include the results of operations of
Pro Source since January 1, 1996.
<PAGE>
On April 1, 1996, the Company acquired the assets of Christopher Breuleux,
a sole proprietor engaged in the business of providing preventative
healthcare development consulting services, for $84,336. The Company also
granted Mr. Breuleux stock options to purchase up to 25,000 shares of the
Company's stock at $3.00 per share in connection with his employment
agreement.
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 seven years using the straight-line method. The
consolidated statements of operations include the results of operations of
the assets acquired since April 1, 1996.
On July 2, 1996, the Company acquired the assets of Physical Therapy of Red
Wing, a general partnership engaged in the operation of an outpatient
physical therapy clinic, for $25,000. The Company also entered into
noncompete agreements with the sellers that called for a lump-sum payment
of $25,000. The noncompete agreements cover a period of two years and
prohibit the sellers from directly or indirectly competing with the Company
within 25 miles of the city of Red Wing, Minnesota.
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 three years using the straight-line method. The
consolidated statements of operations include the results of operations of
Physical Therapy of Red Wing since July 2, 1996.
On December 1, 1996, the Company completed the acquisition of all of the
issued and outstanding stock of closely held The Preferred Companies, Inc.
dba Preferred Therapy Providers of America (Preferred). Preferred, an
Arizona-based company, is an operator of a national network of independent
physical therapy clinics. For the eleven months ended November 30, 1996,
Preferred had revenues of $600,000 (unaudited). 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 of Preferred, assets acquired,
liabilities assumed, notes issued, and cash consideration paid were as
follows:
Assets acquired:
Cash $ 5,121
Accounts receivable 10,928
Prepaid expenses and other 2,040
Property 5,122
Noncompete agreement 20,000
Excess of purchase price over net assets acquired 998,261
-------------
1,041,472
Liabilities assumed:
Notes payable 15,000
Accounts payable 1,295
Accrued expenses 21,458
Deferred revenue 342,041
-------------
379,794
Notes issued 300,000
-------------
Cash consideration paid $ 361,678
=============
<PAGE>
The notes issued are convertible, subordinated promissory notes, bear
interest at 8%, and are due December 1, 1998, unless converted earlier. The
convertible, subordinated promissory notes and accrued interest are
convertible at the option of the holders after May 30, 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 10 days or $4.00
per share.
The purchase agreement requires the Company to make annual payments of up
to 25% of net income from operations, as defined, for each of the five
fiscal years ending December 31, 1997 through 2001. The annual payment, if
any, is due in a combination of 50% in cash and 50% in the Company's common
stock. The number of shares issued in connection with the annual payment is
calculated by dividing the portion of the annual payment payable in common
stock by $4.00.
The purchase agreement also required the Company to enter into employment
agreements with certain key employees of Preferred for a term of 5 years.
These agreements provide for minimum aggregate annual salaries of $270,000.
The Company also granted stock options to purchase up to 87,000 shares of
the Company's common stock at $4.00 per share in connection with the
employment agreements.
This acquisition has been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired is
being amortized over 15 years using the straight-line method. The
consolidated statements of operations include the results of operations of
Preferred since December 1, 1996.
3. NONCOMPETE AGREEMENTS
On September 27, 1995, the Company entered into a noncompete and separation
agreement with a regional vice president. The regional vice president was
the former owner of a corporate fitness center operator acquired by the
Company in 1992. The separation agreement permitted the Company to
terminate its employment and bonus obligations to that regional vice
president. The Company made a lump-sum payment of $199,908 to the former
employee and issued a note in the amount of $186,942. The note was paid in
1996. In addition, the Company granted the employee stock options to
purchase a total of 30,000 shares of the Company's common stock at an
option price of $3.00 per share, which expire on July 31, 2000.
The noncompete agreement covers a period of seven years and prohibits the
former employee from directly or indirectly competing with the Company. The
payments associated with this agreement will be amortized over the
seven-year term of the noncompete agreement.
The Company also entered into noncompete agreements with the former owners
of two companies acquired in 1996 (see Note 2).
<PAGE>
4. PROPERTY
Property at December 31 consists of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Leasehold improvements $ 166,010 $ 370,554
Office equipment 474,512 1,602,473
Preventative and rehabilitative healthcare equipment 731,039 992,345
------------ -------------
1,371,561 2,965,372
Less accumulated depreciation and amortization 564,147 780,037
------------ -------------
$ 807,414 $ 2,185,335
============ =============
</TABLE>
Included in preventative and rehabilitative healthcare equipment is
equipment under capital leases at cost of $159,990 and accumulated
amortization of $123,708 as of December 31, 1995.
5. FINANCING
Notes Payable - Notes payable at December 31 consist of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Revolving line of credit $ 1,475,000
Term loan 600,000
Convertible, unsecured promissory notes $ 1,496,885
Noninterest bearing $1,000,000 note payable; paid in 1996 970,922
Note payable; paid in 1996 186,942
Note payable under unsecured revolving line of credit 15,000
------------- --------------
$ 2,654,749 $ 2,090,000
============= ==============
</TABLE>
At December 31, 1996, the Company had a term loan and credit agreement (the
Agreement) that provided for a $600,000 term loan and a revolving line of
credit which provided for maximum borrowings of $1.5 million. Borrowings
under the Agreement were due May 31, 1997.
On February 4, 1997, the Agreement was amended and restated (the Amended
Agreement). The Amended Agreement increased the $600,000 term note to $2.5
million, subject to certain conditions, and extended the due dates of the
term loan and the revolving line of credit to January 31, 2000. The Company
has borrowings of $2.5 million under the term loan. The term note is due in
eight quarterly installments of $100,000, beginning January 31, 1998, and a
final payment of $1.7 million on January 31, 2000. Interest on outstanding
term loan borrowings is payable monthly and is computed at the prime rate
plus 6%. Revolving line of credit borrowings are limited based on eligible
borrowings, as defined. Interest on outstanding revolving line of credit
borrowings is payable monthly and is computed at the prime rate plus 2%.
Borrowings under the Amended Agreement are secured by substantially all the
Company's assets and personally guaranteed by the Company's president. The
agreement contains various restrictive covenants relating to quarterly
minimum levels of net worth and net income, limitations on additional
indebtedness and capital expenditures, prohibits dividend payments, and
other matters.
<PAGE>
At December 31, 1996, the Company also had an unsecured revolving line of
credit providing up to $50,000 in financing. Interest on outstanding
borrowings under the line of credit was at 2.60% over the prime rate
(10.85% at December 31, 1996).
During 1995, the Company received proceeds of $3.6 million from the
issuance of convertible, unsecured promissory notes (the Convertible Notes)
and warrants to purchase 574,666 shares of the Company's common stock. A
value of $106,183 was assigned to the warrants, based on independent
appraisal, which has been credited to additional paid-in-capital, resulting
in a similar amount of original issue discount. The Convertible Notes with
an aggregate face value of $1.5 million, $1.1 million, and $1.0 million
bear interest at 11%, at the prime rate plus 2%, and at 10.75%,
respectively. The Convertible Notes and accrued interest are convertible at
the option of the holder any time after 120 days from the date of issuance
unless the Company allows the holder to convert earlier into shares of
common stock at a conversion price of the lesser of 85% of the average bid
price per share of the Company's stock over the immediately preceding 10
days or $3.33 per share. During 1995, holders of Convertible Notes
converted their notes with an aggregate face value of $2.1 million and
accrued interest of $77,570 into 1,025,635 shares of the Company's common
stock. The Convertible Notes balance at December 31, 1995 consisted of two
Convertible Notes with face values of $1.0 million due February 1, 1996,
and $500,000 due June 20, 1996. The warrants are exercisable at $4.00 per
share and expire in 1999 and 2000.
On February 1, 1996, the Company entered into an agreement with the holder
of the Convertible Note with a face value of $1.0 million. The agreement
required a principal payment of $500,000 plus accrued interest and the
issuance of a new convertible unsecured promissory note (the New
Convertible Note). The agreement also required the Company to reduce the
exercise price of the warrant to purchase 250,000 shares of the Company's
common stock issued in connection with the Convertible Note from $4.00 to
$3.00 (the New Warrants). A value of $40,000 has been assigned to the New
Warrants, based on independent appraisal, which has been credited to
additional paid-in capital, resulting in a similar amount of original issue
discount. The $500,000 plus accrued interest was paid in 1996.
During 1996, holders of the New Convertible Note and the Convertible Notes
with a face value of $500,000 due June 20, 1996 converted their notes and
accrued interest of $68,135 into 456,955 shares of the Company's common
stock.
The Company incurred costs of $167,465 and issued warrants to purchase
196,667 shares of the Company's common stock relating to the issuance of
the Convertible Notes. A value of $39,333 was assigned to the warrants
based on an independent appraisal. These costs and the original issue
discount were amortized using the interest method from the date of issuance
to conversion.
Long-Term Debt - Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Noninterest bearing notes payable, discounted using discount rates
between 8.75% and 9.25%, due in annual installments of $255,000 with
final payment in 1998 $ 666,133 $ 470,964
Convertible, subordinated promissory notes 300,000
Note payable, secured by inventory, interest at 9.90%,
due in monthly installments of $5,209 through 1988 86,804
Capital lease obligations, paid in 1996 36,501
------------- ---------------
702,634 857,768
Less current portion 228,556 281,278
------------- ---------------
$ 474,078 $ 576,490
============= ===============
</TABLE>
<PAGE>
The convertible, subordinated promissory notes bear interest at 8% and are
due December 1, 1998, unless converted earlier. The convertible,
subordinated notes and accrued interest are convertible at the option of
the holders after May 30, 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.
Maturities of long-term debt at December 31, 1996 are as follows:
Years ending December 31:
1997 $ 281,278
1998 576,490
------------
$ 857,768
============
The fair value of the Company's financing is estimated at its carrying
value based on the rates currently available to the Company.
6. COMMITMENTS AND CONTINGENCIES
Leases - The Company leased certain equipment and vehicles under agreements
which substantially cover the estimated useful lives of the respective
assets. These agreements were capitalized at the present value of the
future minimum lease payments.
The Company also leases office space and equipment under operating leases.
In addition to base rental payments, these leases require the Company to
pay its proportionate share of real estate taxes, special assessments, and
maintenance costs. These leases can be renewed for additional one-year
periods.
Costs incurred under operating leased are recorded as rent expense and
aggregated approximately $972,000 and $1,338,000 for the years ended
December 31, 1995 and 1996, respectively.
The minimum lease payments due under operating leases at December 31, 1996
are as follows:
Years ending December 31:
1997 $ 1,222,308
1998 697,920
1999 496,632
2000 186,156
2001 186,156
------------
$ 2,789,172
============
Employment Agreements - The Company has entered into employment agreements
with certain key employees for terms of two or seven years. The agreements
provide for minimum aggregate annual salaries of approximately $1,310,000
and also provide for incentive awards based on performance.
Development Agreements - During 1996, the Company entered into three
agreements relating to the development of a management information and
control system specifically designed to assist the Company in managing its
operations.
<PAGE>
In September 1996, the Company entered into an agreement with a software
developer for 70 site licenses and limited service and support for a period
of two years from the installment date, as defined. The software will be
used in managing the Company's preventative healthcare operations. The
Company agreed to purchase the original site licenses and limited service
and support for $370,000, issue 10,000 shares of common stock, and grant an
option to purchase 5,000 shares of common stock on each of the first and
second anniversaries of the agreement. Such costs are included in property.
The value of the common stock issued $26,250, was determined based on the
market value of the Company's common stock. The options will have an
exercise price equal to the fair market value of the Company's common stock
on the date of grant. Options to purchase 1,666 shares of common stock vest
on the grant date and options to purchase 1,667 shares of common stock vest
on the first and second anniversaries of the grant date. After the initial
two-year period, the Company may purchase ongoing service and support for
the 70 sites at a rate of $75,000 per year and the issuance of an option to
purchase 5,000 shares of common stock at an exercise price equal to the
fair market value of the Company's common stock. The Company had paid
$57,000 of the original purchase price in 1996 and $253,000 from January 1,
1997 through April 10, 1997. The remaining $60,000 is due in installments
of $40,000 and $20,000 on July 1, 1997 and October 1, 1997, respectively.
In October 1996, the Company entered into an agreement with a consulting
company (one of the owners of the consulting company is also an executive
officer of the Company) for the design and implementation of a management
information and control system and to serve as a broker in the purchase and
sale of physical therapy clinics. The system will be used primarily in
managing the Company's rehabilitative healthcare operations. The projected
cost relating to the contract, including the purchase of equipment and
software, is $1,810,000. As part of the agreement, the Company has also
issued a warrant to purchase 70,431 shares of common stock at an exercise
price of $4.00. The warrant is exercisable at the completion of the
agreement, as defined, and expires in October 2003. The fair market value
of the warrant will also be determined at the completion of the agreement,
as defined. As of December 31, 1996, the Company has paid $637,000 relating
to this agreement.
In December 1996, the Company entered into an agreement with a software
developer and received a paid-up, perpetual, nonexclusive right and license
to use the developer's software in managing the Company's rehabilitative
healthcare operations. At the signing of the agreement, the Company agreed
to purchase 300 site licenses for $150,000. The Company paid $50,000 for
100 site licenses at the signing of the agreement and agreed to purchase
100 site licenses for $50,000 no later than September 15, 1997, and another
100 site licenses no later than May 15, 1998. The Company has also agreed
to purchase service and support at a rate of $500 per site for the first
125 sites. The rate for service and support for additional sites will be
negotiated in the future.
Benefit Plan - The Company has defined contribution plans which conforms to
IRS provisions for 401(k) plans. Employees are eligible to participate in
the plan providing they have attained the age of 21 and have completed one
year of service. Participants may contribute up to 15% of their earnings,
and the Company may make certain matching contributions. The Company made
matching contributions of $40,000 and $67,000 during the years ended
December 31, 1995 and 1996, respectively.
Legal Proceedings - On April 17, 1996, a former employee filed a claim
against the Company, 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 on its financial position or results of operation.
<PAGE>
The Company is also involved in various other claims and lawsuits incident
to the operation 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 or results of operation.
Guarantee - The Company has received minority interests in two limited
liability companies (LLCs) in exchange for $1,782, guaranteeing a $38,724
obligation for one LLC, and entering into an equipment lease with one LLC.
The Company has deferred the profit on the leased equipment and will
recognize the profit ratably over the lease term. One LLC (the operating
LLC) operates a hospital-based fitness center pursuant to a trademark
license from the other LLC. The Company has also entered into a management
contract with the operating LLC to manage the fitness center.
7. EQUITY TRANSACTIONS
Issuance of Common Stock - In January 1995, the Company received net
proceeds of $363,990 when underwriters of the Company's initial public
offering exercised their overallotment option to purchase 140,000 shares of
common stock at $3.00 per share. During September through December 1995,
the Company issued 1,025,635 shares of common stock to holders of
Convertible Notes electing to convert their notes with a face value of $2.1
million and accrued interest of $77,570.
In 1996, the Company issued 456,955 shares of common stock to holders of
the New Convertible Note and a Convertible Note electing to convert their
notes with a face value of $1.0 million and accrued interest of $60,135. In
1996, the Company also issued 10,000 shares of common stock in connection
with a software license agreement. The value of the common stock, $26,250,
was determined based on the market value of the Company's common stock.
Stock Options - Effective February 24, 1992, the Board of Directors and
stockholders of the Company adopted the 1992 Incentive Stock Option Plan
and the 1992 Nonqualified Stock Option Plan (the Plans). On December 31,
1993, the provisions for granting options under the Plan expired. The Plans
provided for the grant of options to purchase shares of common stock to key
employees and advisors of the Company at exercise prices not less than 100%
of the fair market value at the date of grant and 110% for incentive stock
options to individuals owning 10% or more of the Company's common stock.
During 1994, the Company also granted options outside of the Plan to
purchase 52,800 shares of common stock for prices ranging from $1.56 to
$3.16 in connection with three employment agreements. During 1995, the
Board of Directors and shareholders approved a 1995 Stock Option Plan. The
aggregate number of shares of common stock that could be issued under this
Plan is 1,000,000 shares of common stock.
Generally, the options outstanding (1) are granted at prices equal to the
market value of the stock on the date of grant, (2) vest immediately,
ratably over a five year vesting period, or one year prior to expiration,
and, (3) expire over a period of five or ten years from the date of grant.
No previously issued options have been repriced.
<PAGE>
A summary of the status of the Company's stock options are presented below:
<TABLE>
<CAPTION>
1995 1996
-------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 496,800 $ .90 725,212 $ 1.56
Granted 230,012 3.01 359,235 3.24
Exercised (200) 1.56 (135,000) .66
Terminated (1,400) 2.48 (49,748) 1.09
------------ ------------
Outstanding at end of year 725,212 $ 1.56 899,699 $ 2.39
============ ======== ============ ========
Options exercisable at year-end 516,200 $ 1.25 510,835 $ 1.80
============ ======== ============ ========
Options available for future grants 731,588 422,101
============ ============
</TABLE>
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25 and related interpretations. No compensation cost has
been recognized for options issued under the Plans when the exercise price
of the options granted are at least equal to the fair value of the common
stock on the date of grant. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date for
awards in 1995 and 1996, consistent with the provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company's net (loss) income would have changed to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Net (loss) income, as reported $ (211,985) $ 1,005,581
Net (loss) income, pro forma $ (343,130) $ 822,306
Net (loss) income per common share, as reported $ (.04) $ .14
Net (loss) income per common share, pro forma $ (.06) $ .11
</TABLE>
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions and
results for the grants:
1995 1996
Dividend yield None None
Expected volatility 41.18% 53.67%
Expected life of option 5 years 5 or 10 years
Risk-free interest rate 6.06% 6.23%
Fair value of options on grant date $1.23 $1.49
<PAGE>
The following table summarizes information about stock options at December
31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (Years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$.65 - $1.56 270,600 .47 $ .81 266,200 $ .80
2.18 - 2.50 50,400 2.27 2.20 32,400 2.19
3.00 - 3.16 491,699 3.92 3.00 212,235 3.00
4.00 87,000 9.92 4.00 4.00
---------- ----------
899,699 3.37 $2.39 510,835 $ 1.80
========== ==== ===== ========== =======
</TABLE>
Employee Stock Purchase Plan - During 1995, the Board of Directors and
Stockholders adopted an Employee Stock Purchase Plan (the Stock Purchase
Plan). The Stock Purchase Plan allows employees to purchase shares of the
Company's common stock at 90% of the fair market value, as defined. The
aggregate number of shares that could be issued is 200,000 shares of common
stock. During 1996, the Company issued 7,317 shares under the Stock
Purchase Plan.
Warrants - The Company has issued warrants to directors, selling agents,
and consultants in consideration for services performed. The warrants
expire at various dates in fiscal years 1997 to 2003. The Company has also
issued warrants in connection with the issuance of debt. The warrants
issued in connection with the debt expire in 1999 and 2000. Warrant
activity is as follows:
<TABLE>
<CAPTION>
Exercise
Number of Price
Shares Exercisable Per Share
<S> <C> <C> <C>
Balances at December 31, 1994 1,121,992 941,992 $.59 - $3.16
Granted 773,733 328,733 2.25 - 4.00
Exercised (113,300) (113,300) 2.25
Became exercisable 180,000 3.60
Terminated (553,700) (553,700) 2.25
------------ ----------
Balances at December 31, 1995 1,228,725 783,725 .59 - 4.00
Granted 322,831 2.63 - 4.00
Exercised (86,592) (86,592) .59 - 2.19
Became exercisable 446,600 2.63 - 4.00
Terminated (250,000) 4.00
------------ ----------
Balances at December 31, 1996 1,214,964 1,143,733 $1.25 - $4.00
============ ==========
</TABLE>
Warrants to purchase 180,000 shares of common stock at $3.60 per share
contain a net value exercise provision allowing for the issuance of a
lesser number of shares than provided for in the warrant without payment of
the cash exercise price.
Stockholder Note and Interest Receivable - Note and interest receivable are
amounts due from a stockholder and officer of the Company. The amount due
represents receivables relating to transactions with the stockholder and
officer of the Company.
<PAGE>
8. INCOME TAXES
Income tax expense for the year ended December 31, 1996, has been offset by
a reduction in the valuation allowance for deferred taxes. The benefit for
income taxes has been offset by a valuation allowance for the year ended
December 31, 1995, because the Company's net operating losses could not be
carried back and future realization of the net operating loss carryforwards
is uncertain.
A reconciliation between taxes computed at the expected federal income tax
rate and the effective tax rate for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Tax benefit (expense) computed at statutory rates $ 70,000 $ (350,000)
State taxes, net of federal effect 10,000 (50,000)
Nondeductible goodwill amortization (90,000) (120,000)
Other (10,000) (10,000)
Change in valuation allowance 20,000 530,000
----------- -------------
$ - $ -
=========== =============
</TABLE>
At December 31, 1996, the Company had $1,500,000 of federal and state
operating loss carryforwards. The carryforwards expire from 2004 to 2010.
The net operating tax loss is limited to $1,200,000 per year under Internal
Revenue Code Section 382 at December 31, 1996.
The tax effect of the temporary differences, tax carryforwards, and
valuation allowances at December 31 is as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Current:
Accounts receivable $ 290,000
Prepaid expenses (50,000)
Other 40,000
Accrued employee benefits 170,000
Accrual to cash basis adjustment $ (390,000) (700,000)
Tax loss carryforwards 390,000 520,000
Valuation allowance (270,000)
------------ -----------
$ - $ -
============ ===========
Noncurrent:
Difference between tax and book depreciation
and amortization $ (50,000) $ (90,000)
Tax loss carryforwards 850,000 90,000
Valuation allowance (800,000)
------------ -----------
$ - $ -
============ ===========
</TABLE>
<PAGE>
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NONCASH FINANCING
ACTIVITIES
A summary of supplemental cash flow information and noncash financing for
the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Cash paid for interest $ 115,328 $ 225,434
Conversion of notes payable and accrued interest to equity 2,177,570 1,054,445
Issuance of notes payable in connection with acquisitions 896,231 300,000
Issuance of common stock in connection with the acquisition
of Fitness Systems 792,594 222,314
Issuance of common stock in connection with a software license
agreement 26,250
Issuance of note payable in connection with the noncompete
agreement 186,942
Receivable from the issuance of common stock 110,925
</TABLE>
10. SEGMENT INFORMATION
Specific financial information by business segment is included in the
following summary:
1995 1996
Revenues:
Preventative healthcare $ 12,135,659 $ 21,789,983
Rehabilitative healthcare 5,770,546 6,724,361
-------------- ---------------
$ 17,906,205 $ 28,514,344
============== ===============
Operating income (loss):
Preventative healthcare $ 1,612,219 $ 2,482,149
Rehabilitative healthcare 326,765 717,018
Corporate (1,595,466) (1,927,437)
-------------- ---------------
$ 343,518 $ 1,271,730
============== ===============
Identifiable assets:
Preventative healthcare $ 7,334,989 $ 8,967,477
Rehabilitative healthcare 3,632,905 5,313,436
Corporate 3,315,730 3,897,984
-------------- ---------------
$ 14,283,624 $ 18,178,897
============== ===============
Depreciation and amortization:
Preventative healthcare $ 312,629 $ 520,708
Rehabilitative healthcare 415,343 342,132
Corporate 299,364 210,805
-------------- ---------------
$ 1,027,336 $ 1,073,645
============== ===============
Additions to property:
Preventative healthcare $ 3,800 $ 559,817
Rehabilitative healthcare 20,070 234,426
Corporate 148,302 119,574
-------------- ---------------
$ 172,172 $ 913,817
============== ===============
<PAGE>
11. SUBSEQUENT EVENTS
Sale of Physical Therapy Clinics - In January 1997, the Company sold four
underperforming physical therapy clinics. The total sale price of the
clinics exceeded the carrying value of the long-lived assets associated
with the clinics. In 1996, the clinics generated revenues of approximately
$1,325,000.
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 & Associated, 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 1,088,260
--------------
1,339,819
Liabilities assumed:
Accounts payable 26,145
Accrued expenses 45,574
Deferred revenue 18,100
--------------
89,819
Notes issued 250,000
--------------
Cash consideration paid $ 1,000,000
==============
The Company also agreed to issue common stock with a value of $500,000 on
February 7, 1999, provided the former owners of Isernhagen are employed by
the Company on that date.
The notes issued are convertible, subordinated promissory notes, bear
interest at 8%, and are due May 7, 1998, unless converted earlier. The
convertible, subordinated promissory notes and accrued interest are
convertible at the option of the holders after August 6, 1997, at a
conversion price of the lesser of 85% of the average bid price per share of
the Company's common stock over the immediately preceding ten days or $4.00
per share.
The purchase agreement requires the Company to make annual cash payments of
50% of net income from operations in excess of 25% of revenues, as defined,
for each of the five fiscal years ending February 28, 1998 through 2002.
The purchase agreement also required the Company to enter into employment
agreements with certain key employees of Isernhagen for a term of five
years. These agreements provide for minimum aggregate annual salaries of
$195,000. The Company also granted stock options to purchase up to 70,000
shares of the Company's common stock at $4.00 per share in connection with
the employment agreements.
<PAGE>
On April 9, 1997, the Company completed the acquisition of all the issued
and outstanding stock of closely held K.A.M. Physical Therapy Services,
Corp. (K.A.M.), an Iowa-based provider of rehabilitative services. The
purchase agreement contained a noncompete provision which covers a period
of seven years and prohibits one of the former owners from directly or
indirectly competing with the Company. In connection with the acquisition
of K.A.M., the Company issued 78,911 shares of common stock valued at
$200,000 and cash consideration of $200,000.
The purchase agreement requires the Company to make annual payments up to
39% of net income from operations, as defined, for each of the five fiscal
years ending March 31, 1997 through 2001. The annual payment, if any, is
due in a combination of 50% in cash and 50% in the Company's common stock.
The number of shares issued in connection with the annual payment is
calculated by dividing the portion of the annual payment payable in common
stock by $3.50.
The purchase agreement also required the Company to enter into an
employment agreement with a key employee of K.A.M. for a term of five
years. This agreement provides for a minimum annual salary of $100,000. The
Company also granted stock options to purchase up to 5,000 shares of the
Company's common stock at $4.00 per share with this employment agreement.
This acquisition has been accounted for using the purchase method of
accounting, and the excess of purchase price over net assets acquired is
being amortized over 15 years using the straight-line method.
In connection with the K.A.M. acquisition, the Company also entered into a
separate noncompete agreement with a former K.A.M. owner. The noncompete
agreement required the Company to make a lump-sum distribution of $75,000
and prohibits the former owner from directly or indirectly competing with
the Company for a period of five years.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names and ages of the executive officers of the Registrant and
their positions and offices presently held are as follows:
Name Age Position with Company
Loren S. Brink 41 Chairman, President and Chief Executive
Officer
Don Paul Cochran 42 Secretary, Treasurer and Chief Financial
Officer
Charles J. Pappas 47 Fitness Management division President
Thomas H. Coplin 52 Health Fitness Rehab division President
Patrick D. Regan 40 Pro Source Fitness division President
Loren S. Brink has been President, Chief Executive Officer and Chairman of
the Company since its inception in 1981. He holds a Masters Degree in Cardiac
Rehabilitation and Adult Fitness from the University of Wisconsin. He has an
extensive clinical background, has published numerous articles regarding
corporate fitness and speaks frequently at national conferences.
Don Paul Cochran has served as Secretary, Treasurer and Chief Financial
Officer of the Company since January 1997. Prior to joining the Company Mr.
Cochran served as a consultant to Practice Management Consultants, Inc., a
physical therapy consulting business of which Thomas H. Coplin is President and
one-half owner. From 1995 to 1996, Mr. Cochran served as Chief Financial Officer
of Access Management Corp., a document imaging company. From 1989 to 1995, Mr.
Cochran served as Vice President-Tax of E.W. Blanch Co., a reinsurance
brokerage.
Charles J. Pappas has served as President of the Company's Fitness
Management division since March 10, 1997. Prior to joining the Company, from
1995 to 1997 Mr. Pappas was General Manager of Bearpath Golf and Country Club, a
golf course, clubhouse, pool and tennis facility located in Eden Prairie,
Minnesota. From 1995 to 1996, Mr. Pappas was a retail business advisor to the
Shakopee Mdewakanton Dakota Community. From 1994 to 1995, Mr. Pappas was General
Manager of Dakotah! Sport and Fitness, an athletic club operated by the Shakopee
Mdewakanton Dakota Community located near Prior Lake, Minnesota. From 1985 to
1993, Mr. Pappas was Vice President/General Manager of Flagship Athletic Club
located in Eden Prairie, Minnesota.
Thomas H. Coplin has served as President of the Company's Health Fitness
Rehab division since January 1997 and was designated an executive officer of the
Company in March 1997. Since 1995, Mr. Coplin has been President of Practice
Management Consultants, Inc., a physical therapy consulting company. Since 1994,
Mr. Coplin has also served as President of Coplin Quarter Horses. From 1981 to
1993, Mr. Coplin was President of Coplin Physical Therapy Associates, Inc., a
physical therapy practice which was acquired by ReHab Clinics, Inc. in 1993 and
for whom Mr. Coplin served as Area Vice President for a portion of 1993.
<PAGE>
Patrick D. Regan has served as the President of the Company's Pro Source
Fitness division since January 1996 when the Company acquired the assets of such
business. Prior to joining the Company, Mr. Regan was the President of Pro
Source since 1991.
There are no family relationships among any of the Company's directors or
executive officers.
The information required by Item 9 relating to directors and compliance
with Section 16(a) of the Exchange Act is incorporated herein by reference to
the sections labeled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," respectively, which appear in the Company's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated herein reference to the
section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated herein by reference to
the section labeled "Principal Shareholders and Management Shareholdings" which
appears in the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
section labeled "Certain Transactions" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibits are numbered in accordance with Item 601 of Regulation S-B.
See "Exhibit Index" immediately following the signature page of this
Form 10-KSB.
(b) Reports on Form 8-K
On January 7, 1997, the Registrant filed a Form 8-K reporting the
Registrant's acquisition on December 23, 1996 of all of the
outstanding capital stock of The Preferred Companies, Inc., an Arizona
corporation. No other reports on Form 8-K were filed during (or with
respect to events occurring in) the last fiscal quarter of the
Registrant's 1996 fiscal year.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 1997 HEALTH FITNESS PHYSICAL THERAPY, INC.
By /s/ Loren S. Brink
Loren S. Brink
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Don Paul Cochran
Don Paul Cochran
Secretary, Treasurer and Chief Financial Officer
(Principal Financial Officer)
By /s/ Bradley J. Bowman
Bradley J. Bowman
Controller
(Principal Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
above or below constitutes and appoints Loren S. Brink and Don Paul Cochran, or
either of them, his true and lawful attorneys-in-fact, and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
in their respective capacities as directors of the Company.
<PAGE>
Signature Date
/s/ Loren S. Brink
Loren S. Brink Director April 15, 1997
/s/ Charles E. Bidwell
Charles E. Bidwell Director April 15, 1997
/s/ James A. Bernards
James A. Bernards Director April 15, 1997
/s/ George E. Kline
George E. Kline Director April 15, 1997
/s/ William T. Simonet, M.D.
William T. Simonet, M.D. Director April 15, 1997
/s/ Robert K. Spinner
Robert K. Spinner Director April 15, 1997
<PAGE>
EXHIBIT INDEX
HEALTH FITNESS PHYSICAL THERAPY, INC.
FORM 10-KSB
Exhibit No. Description
***3.1 Articles of Incorporation, as amended, of the Company
*3.2 Restated By-Laws of the Company
*4.1 Specimen of Common Stock Certificate
*10.1 Agreement for Purchase and Sale of Assets dated December 17,
1993 between the Company and Northern California Back to Work
Rehabilitation Clinic
*10.2 Agreement for Purchase and Sale of Assets dated December 16,
1993 between the Company and River City Rehab, Inc. and
Eric R. Gram, Henna R. Barker and Michael B. Humphrey
*10.3 Purchase and Sale Agreement dated April 13, 1994 between
the Company and Mark W. Siewert and Sports and Orthopedic
Physical Therapy, Inc.
*10.4 Agreement for Purchase and Sale of Assets dated June 2,
1994 between the Company and START Physical Therapy,
Michael M. Drucker, M.D., Ralph J. Venuto, M.D., Michael
Roy, R.P.T., Roger Rommelfanger, R.P.T. and Michael Weinstein, M.D
*10.5 Agreement for Purchase and Sale of Assets dated June 10, 1994
between Health Fitness Physical Therapy of Tahoe, Inc., a
wholly-owned subsidiary of the Company, and Tahoe Physical
Therapy Clinic, Inc.
*10.6 Warrant dated March 3, 1993 in favor of Jim Bernards/
Brightstone Capital
*10.7 Employment Agreement dated February 24, 1992 between the
Company and Loren S. Brink
10.8 Standard Office Lease Agreement (Net) dated as of June 13, 1995
covering headquarters of Company
**10.9 Health Fitness Physical Therapy, Inc. 1995 Stock Option Plan
**10.10 Stock Purchase Agreement dated March 27, 1995 between the Company,
William Horton and William Horton as Trustee
10.11 Second Amended and Restated Credit and Security Agreement dated
as of February 4, 1997 by and between the Company and Norwest
Bank, N.A., together with Revolving Note and Term Note
attached thereto.
****10.12 Agreement of Purchase and Sale dated December 23, 1996 by and among
The Preferred Companies, Inc., its shareholders, and Health Fitness
Rehab, Inc.
*****10.13 Agreement of Purchase and Sale dated February 7, 1997 by and between
Isernhagen & Associates, Inc. and Health Fitness Rehab, Inc.
*****10.14 Agreement of Purchase and Sale dated February 7, 1997 by and between
Isernhagen Ltd. and Health Fitness Rehab, Inc.
10.15 Systems Design and Implementation Agreement dated October 15, 1996
between Practice Management Consultants, Inc. and the Company.
21.1 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on Signature Page)
<PAGE>
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 No. 33- 83784C.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1995.
*** Incorporated by reference to the Company Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1996.
**** Incorporated by reference to the Company's Current Report on Form 8-K filed
on January 7, 1997.
*****Incorporated by reference to the Company's Current Report Form 8-K filed
on February 21, 1997.
STANDARD OFFICE LEASE AGREEMENT (NET)
THIS LEASE AGREEMENT (hereinafter called the "Lease Agreement") made as of the
13th day of June, 1995, by and between NORTHLAND CENTER LIMITED PARTNERSHIP, a
Minnesota limited partnership, having offices at 3501) West 80th Street,
Bloomington, Minnesota, 55431 (hereinafter called the "Landlord"), and HEALTH
FITNESS PHYSICAL THERAPY, a Minnesota corporation (hereinafter called the
"Tenants").
WITNESSETH
FOR AND IN CONSIDERATION of the sum of One Dollar ($1.00) in hand paid by
each of the parties to the other, and other good and valuable consideration,
receipt and sufficiency of which is hereby acknowledged, Landlord does hereby
lease and let unto Tenant, and Tenant does hereby hire, lease and take from
Landlord, that area outlined on Exhibit A-1 attached hereto, and by this
reference incorporated herein, and described as Suite 110, containing
approximately 6,826 square feet, (hereinafter called the "Premises") at 3500
West 80th Street (hereinafter called the "Building") in the City of Bloomington,
County of Hennepin, State of Minnesota. The term Building as it is used herein
shall consist of the land and building(s) set forth in Exhibit A-2 hereto.
ARTICLE 1 - TERM
To have and to hold said Premises for a term of Five (5) Years, commencing
August 1, 1996, and terminating July 31, 2001, (hereinafter called the "Terms")
upon the rentals and subject to the conditions set forth in this Lease
Agreement, and the Exhibits attached hereto. The commencement and termination
dates are specifically subject to the provisions of Article 5 hereof.
ARTICLE 2 - USE
The Premises shall be used by the Tenant solely for the following purposes:
GENERAL OFFICE USE
<PAGE>
ARTICLE 3 - RENTALS
Tenant agrees to pay to Landlord as minimum rental (hereinafter called
"Minimum Rental") for the Premises, without notice set-off or demand, the sum of
Seven Thousand Nine Hundred Sixty-Four and no/100 dollars ($7,964.00) per month,
said monthly installments shall be due and payable by Tenant in advance on the
first day of each calendar month during the Term of this Lease Agreement, or any
extension or renewal thereof, at the office of Landlord set forth in the
preamble to this Lease Agreement or at such other place as Landlord may
designate. In the event of any fractional calendar month, Tenant shall pay for
each day in such partial month a rental equal to 1130 of the Minimum Rental.
Tenant agrees to pay, as Additional Rent, which shall be collectible to the same
extent as Minimum Rental, all amounts which may become due to Landlord hereunder
and any tax, charge or fee that may be levied, assessed or imposed upon or
measured by the rents reserved hereunder by any governmental authority acting
under any present or future law before any fine, penalty, interest or costs may
be added thereto for non-payment. Pursuant to Article 6 hereof, Landlord's
estimated Operating Expenses for 1996 are $6.05 per square toot and estimated
Real Estate Taxes payable in 1996 are $3.35 per square foot.
ARTICE 4 - CONSTRUCTION
Plans and/or a description for permanent improvements to the Premises are
attached hereto as Exhibit A-3 and by this reference incorporated herein
(hereafter called the "Plans") The Plans have been approved by each of Landlord
and Tenant. The parties acknowledge that the Plans are to modify the Expansion
Space (as hereinafter defined) to accommodate Tenant's intended use. Landlord
shall be responsible for constructing the improvements as shown the Plans
(hereafter called "Tenant Improvements") for and on behalf of Tenant. Landlord
and Tenant have agreed that the costs of such Tenant Improvements shall be paid
by Tenant, although initially advanced by Landlord, with said costs to be
reimbursed to Landlord by Tenant as part of Tenant's payments of Minimum Rental
as set forth in Article 3 above. Any improvements to the Premises. other than as
shown on the Plans, and the furnishing of the Premises, shall be made by Tenant
at the sole cost and expense of Tenant, subject to all other provisions of this
Lease Agreement, including compliance with all applicable governmental laws,
ordinances and regulations. If the Tenant Improvements cannot be substantially
completed prior to the commencement of the Term, then the provisions of Article
5 shall apply.
<PAGE>
ARTICLE 5 - POSSESSION
A. Tenant is currently in possession of a certain "Sublet Area" consisting
of a portion of Suite 110 as depicted on Exhibit A-1 attached hereto pursuant to
a sublease agreement dated March 8, 1994, (the "Sublease") which expires at
midnight on July 31, 1996. The parties agree that the Premises hereunder shall
consist of the Sublet Area plow the adjacent area (the "Expansion Space") as
depicted on Exhibit A-1 attached hereto and which Expansion Space shall be
delivered to Tenant for occupancy on the commencement date of this Lease
Agreement. The parties agree that after the delivery of the Expansion Space to
Tenant as provided for herein, the Premises hereunder shall consist of the
Sublet Area plus the Expansion Space which together contain approximately 6,826
rentable square feet and which shall hereinafter be refereed to as "Suite 110."
B. Except as otherwise provided, Landlord shall deliver possession of the
Expansion Space on or before the date hereinabove specified for commencement of
the Term, but delivery of possession prior to such commencement date shall not
affect the expiration date of this Lease Agreement. Failure of Landlord to
deliver possession of the Expansion Space by the date hereinabove provided, due
to a holding over by a prior tenant, or any other cause beyond Landlord's
control, or time required for construction delays due to material shortages,
strikes, or acts of God, shall automatically postpone the date of commencement
of the Term of this Lease Agreement with respect to the Expansion Space. The
rentals herein reserved with respect to the Expansion Space shall commence on
the first day of the Term, provided, however, in the event of any occupancy by
Tenant prior to the beginning of the Term, such occupancy shall in all respects
be the same as that of a tenant under this Lease Agreement, and the rental shall
commence as of the date that Tenant enters into such occupancy of the Expansion
Space. Provided further, that if Landlord shall be delayed in delivery of the
Expansion Space to Tenant due to Tenant's failure to agree to the Plans or any
delay caused by a party employed by or the agent of Tenant, or by Tenant's
failure to pay for the costs of the Tenant Improvements requested by Tenant
subsequent to approval of the Plans, then in such case the rental shall be
accelerated by the number of days of such delay, and the rentals shall commence
the same as if occupancy had been taken by Tenant. By occupying the Expansion
Space as a Tenant, or to install fixtures, facilities or equipment, or to
perform finishing work, Tenant shall be conclusively deemed to have accepted the
same and to have acknowledged that the Expansion Space are in the condition
required by this Lease Agreement.
ARTICLE 6 - TENANT'S PRO RATA SHARE OF REAL ESTATE TAXES AND OPERATING EXPENSES
A. During each full or partial calendar year during the Term of this Lease
Agreement, Tenant shall pay to Landlord, as Additional Rental, an amount equal
to the Real Estate Taxes and Operating Expenses (both as hereinafter defined)
per square foot of rentable area in the Building multiplied by the number of
square feet of rentable area in the Premises prorated for the period that Tenant
occupied the Premises. Notwithstanding the preceding sentence, Tenant's share of
the following Operating Expenses shall be computed on the basis of the cost of
said expenses per rentable square foot of area within the Building actually
occupied: cleaning, management, and energy expenses.
B. Landlord shall, each year during the Term of this Lease Agreement, give
Tenant an estimate of Operating Expenses and Real Estate Taxes payable per
square foot of rentable area for the coming calendar year. Tenant shall pay, as
Additional Rental, along with its monthly Minimum Rental payments required
hereunder, one-twelfth (1/12) of such estimated Operating Expenses and Real
Estate Taxes and such Additional Rental shall be payable until subsequently
adjusted for the following year pursuant to this Article.
<PAGE>
C. As soon as possible after the expiration of each calendar year, Landlord
shall determine and certify to Tenant the actual Operating Expenses and Real
Estate Taxes for the previous year per square foot of rentable area in the
Building and the amount applicable to the Premises. If such statement shows that
Tenant's share of Operating Expenses and Real Estate Taxes exceeds Tenant's
estimated monthly payments for the previous calendar year, then Tenant shall,
within twenty (20) days after receiving Landlord's certification, pay such
deficiency to Landlord. In the event of an overpayment by Tenant, such
overpayment shall be refunded to Tenant, at the time of certification, in the
form of an adjustment in the Additional Rental next coming due, or if at the end
of the Term by a refund.
D. For the purposes of this Article, the term "Real Estate Taxes" means the
total of all taxes, fees, charges and assessments, general and special, ordinary
and extraordinary, foreseen or unforeseen, which become due or payable upon the
Building. All costs arid expenses incurred by Landlord during negotiations for
or contests of the amoumt of Real Estate Taxes shall be included within the term
"Real Estate Taxes." For purposes of this Article, the term "Operating Expenses"
shall be deemed to mean all costs and expenses directly related to the Building
incurred by Landlord in the repair, operation, management and maintenance of the
Building including interior and exterior and common area maintenance, management
fees, cleaning expenses, energy expenses, insurance premiums, and the
amortization of capital investments made to reduce operating costs or that are
necessary due to governmental requirements, all in accordance with generally
accepted accounting principles.
E. Landlord may at any time designate a fiscal year in lieu of a calendar
year and in such event, at the time of such a change, there may be a billing for
the fiscal year which is less than 12 calendar months.
F. Landlord reserves, and Tenant hereby assigns to Landlord, the sole and
exclusive right to contest, protest, petition for review, or otherwise seek a
reduction in the Real Estate Taxes.
ARTICLE 7 - UTILITIES AND SERVICE
A. Landlord agrees to furnish water, electricity, elevator service, and
janitorial service. In the event Tenant's requirements and/or usage of such
utilities and services is substantially greater than is customarily supplied to
a typical tenant in the Building, Landlord or Tenant may request that the
difference in such requirement and/or usage be determined and that appropriate
adjustments be made in the Minimum Rental provided for in Article 3 of this
Lease Agreement.
B. Landlord agrees to furnish heat during the usual heating season and air
conditioning during the usual air conditioning season, all during normal
business hours as defined in this Lease Agreement.
<PAGE>
C. No temporary interruption or failure of such services incidental to the
making of repairs, alterations or improvements, or due to accidents or strike or
conditions or events not under Landlord's control, shall be deemed as an
eviction of the Tenant or relieve the Tenant from any of the Tenant's
obligations hereunder.
D. For the purposes of this Article 7, normal business hours shall be
deemed to mean the period of time between 8:00 a.m. and 5:00 p.m., Monday
through Friday, and specifically excluding Saturdays, Sundays and legal
holidays.
ARTICLE 8 - NON-LIABILITY OF LANDLORD
Except in the event of negligence of Landlord, its agents, employees or
contractors, Landlord shall not be liable for any loss or damage for failure to
furnish heat, air conditioning, electricity, elevator service, water, sprinkler
system or janitorial service. Landlord shall not be liable for personal injury,
death or any damage from any cause about the Premises or the Building except if
caused by Landlord's gross negligence.
ARTICLE 9 - CARE OF PREMISES
A. Tenant agrees:
1. To keep the Premises in as good condition and repair as they were in at the
time Tenant took possession of same, reasonable wear and tear and damage
from fire and other casualty for which insurance is normally procured
excepted;
2. To keep the Premises in a clean and sanitary condition;
3. Not to commit any nuisance or waste on the Premises, overload the Premises
or the electrical, water and/or plumbing facilities in the Premises or
Building throw foreign substances in plumbing facilities or waste any of
the utilities furnished by Landlord;
4. To abide by such rules and regulations as may from time to time be
reasonably promulgated by Landlord;
5. To preserve and protect all carpeted areas and to provide and use carpet
protector mats in all locations within the Premises where chairs with
castors are used; and
6. To obtain Landlord's prior approval of the interior design of any portion
of the Premises visible from the common areas or from the outside of the
Building. "Interior Design" as used in the preceding sentence shall include
but not be limited to floor and wall coverings, furniture, office design,
artwork and color scheme.
B. If Tenant shall fail to keep and preserve the Premises in the state of
condition required by the provisions of this Article 9, the Landlord may at its
option put or cause the same to be put into the condition and state of repair
agreed upon, and in such case the Tenant, on demand, shall pay the cost thereof.
<PAGE>
ARTICLE 10 - NON-PERMITTED USE
Tenant agrees to use the Premises only for the purposes set forth in
article 2 hereof. Tenant further agrees not to commit or permit any act to be
performed on the Premises or any omission to occur which shall be in violation
of any statute, regulation or ordinance of any governmental body or which will
increase the insurance rates on the Building or which will be in violation of
any insurance policy carried on the Building by the Landlord. Tenant, at its
expense, shall comply with all governmental laws, ordinances, rules and
regulations applicable to the use of the Premises and its occupancy and shall
promptly comply with all governmental orders, rulings and directives for the
correction, prevention and abatement of any violation upon, or in connection
with the Premises or Tenant's use or occupancy of the Premises, including the
making of any alterations or improvements to the Premises, all at Tenant's sole
cost and expense. The Tenant shall not disturb other occupants of the Building
by making any undue or unseemly noise or otherwise and shall not do or permit to
be done in or about the Premises anything which will be dangerous to life or
limb.
ARTICLE 11 - INSPECTION
The Landlord or its employees or agents shall have the right without any
diminution of rent or other charges payable hereunder by Tenant to enter the
Premises at all reasonable times for the purpose of exhibiting the Premises to
prospective tenants or purchasers, inspection, cleaning, repairing, testing,
altering or improving the same or said Building, but nothing contained in this
Article shall be construed so as to impose any obligation on the Landlord to
make any repairs, alterations or improvements.
ARTICLE 12 - ALTERATIONS
Tenant will not make any alterations, repairs, additions or improvements in
or to the Premises or add, disturb or in any way change any plumbing, wiring,
life/safety or mechanical systems, locks, or structural components of the
Building without the prior written consent of the Landlord as to the character
of the alterations, additions or improvements to be made, the manner of doing
the work, and the contractor doing the work. Such consent shall not be
unreasonably withheld or delayed, if such alterations, repairs, additions or
improvements are required of Tenant or are the obligation of Tenant pursuant to
this Lease Agreement. All such work shall comply with all applicable
governmental laws, ordinances, rules and regulations. The Landlord as a
condition to said consent may require a surety performance and/or payment bond
from the Tenant for said actions. Tenant agrees to indemnify and hold Landlord
free and harmless from any liability, loss, cost, damage or expense (including
attorney's fees) by reasons of any said alteration, repairs, additions or
improvements.
<PAGE>
ARTICLE 13 - SIGNS
Tenant agrees that no signs or other advertising materials shall be
erected, attached or affixed to any portion of the interior or exterior of the
Premises or the Building without the express prior written consent of Landlord.
ARTICLE 14 - COMMON AREAS
A. Tenant agrees that the use of all corridors, passageways, elevators,
toilet rooms, parking areas and landscaped area in and around said Building, by
the Tenant or Tenant's employees, visitors or invitees, shall be subject to such
rules and regulations as may from time to time be made by Landlord for the
safety, comfort and convenience of the owners, occupants, tenants and invitees
of said Building. Tenant agrees that no awnings, curtains, drapes or shades
shall be used upon the Premises except as may be approved by Landlord.
B. In addition to the Premises, Tenant shall have the right of
non-exclusive use, in common with others, of (a) all unrestricted automobile
parking areas, driveways and walkways, and (b) loading facilities, freight
elevators and other facilities as may be constructed in the Building, all to be
subject to the terms and conditions of this Lease Agreement and to reasonable
rules and regulations for the use thereof as prescribed from time to time by
Landlord.
C. Landlord shall have the right to make changes or revisions in the site
plan and in the Building so as to provide additional leasing area. Landlord
shall also have the right to construct additional buildings on the land
described on Exhibit A-2 for such purposes as Landlord may deem appropriate.
Landlord also reserves all airspace rights above, below and to all sides of the
Premises, including the right to make changes, alterations or provide additional
leasing areas.
D. Landlord and Tenant agree that Landlord will not be responsible for any
loss, theft or damage to vehicles, or the contents thereof, parked or left in
the parking areas of the Building and Tenant agrees to so advise its employees,
visitors or invitees who may use such parking areas. The parking areas shall
include those areas designated by Landlord, in its sole discretion, as either
restricted or unrestricted parking areas. Any restricted parking areas shall be
leased only by separate license agreement with Landlord. Tenant further agrees
not to use or permit its employees, visitors or invitees to use the parking
areas for overnight storage of vehicles.
<PAGE>
ARTICLE 15 - ASSIGNMENT AND SUBLETTING
A. Tenant agrees not to assign, sublet, license, mortgage or encumber this
Lease Agreement, the Premises, or any part thereof, whether by voluntary act,
operation of law, or otherwise, without the specific prior written consent of
Landlord in each instance. If Tenant is a corporation or a partnership, transfer
of a controlling interest of Tenant shall be considered an assignment of this
Lease Agreement for purposes of this Article. Consent by Landlord in one such
instance shall not be a waiver of Landlord's rights under this Article as to
requiring consent for any subsequent instance. In the event Tenant desires to
sublet a part or all of the Premises, or assign this Lease Agreement, Tenant
shall give written notice to Landlord at least thirty (30) days prior to the
proposed subletting or assignment, which notice shall state the name of the
proposed subtenant or assignee, the terms of any sublease or assignment
documents and copies of financial reports or other relevant financial
information of the proposed subtenant or assignee. At Landlord's option, any and
all payments by the proposed assignee or sublessee with respect to the
assignment of sublease shall be paid directly to Landlord. In any event no
subletting or assignment shall release Tenant of its obligation to pay the rent
and to perform all other obligations to be performed by Tenant hereunder for the
Term of this Lease Agreement. The acceptance of rent by Landlord from any other
person shall not be deemed to be a waiver by Landlord of any provision hereof.
At Landlord's option, Landlord may terminate the Lease Agreement in lieu of
giving its consent to any proposed assignment of this Lease Agreement or
subletting of the Premises (which termination may be contingent upon the
execution of a new lease with the proposed assignee or subtenant).
B. Landlord's right to assign this Lease Agreement is and shall remain
unqualified upon any sale or transfer of the Building and, providing the
purchaser succeeds to the interests of Landlord under this Lease Agreement,
Landlord shall thereupon be entirely freed of all obligations of the Landlord
hereunder and shall not be subject to any liability resulting from any act or
omission or event occurring after such conveyance.
ARTICLE 16- LOSS BY CASUALTY
If the Building is damaged or destroyed by fire or other casualty, the
Landlord shall have the right to terminate this Lease Agreement, provided it
gives written notice thereof to the Tenant within ninety (90) days after such
damage or destruction. If a portion of the Premises is damaged by fire or other
casualty, and Landlord does not elect to terminate this Lease Agreement, the
Landlord shall, at its expense, restore the Premises to as near the condition
which existed immediately prior to such damage or destruction, as reasonably
possible, and the rentals shall abate during such period of time as the Premises
are untenantable, in the proportion that the untenantable portion of the
Premises bears to the entire Premises.
ARTICLE 17 - WAIVER OF SUBROGATION
Landlord and Tenant hereby release the other from any and all liability or
responsibility to the other or anyone claiming through or under them by way of
subrogation or otherwise for any loss or damage to property caused by fire or
any of the extended coverage or supplementary contract casualties, even if such
fire or other casualty shall have been caused by the fault or negligence of the
other party, or anyone for whom such party may be responsible, provided however,
that this release shall be applicable and in force and effect only with respect
to loss or damage occurring during such times as the releasing party's policies
shall contain a clause or endorsement to the effect that any such release would
not adversely affect or impair said policies or prejudice the right of the
releasing party to recover thereunder. Landlord and Tenant agree that they will
request their insurance carriers to include in their policies such a clause or
endorsement. If extra cost shall be charged therefore, each party shall advise
the other of the amount of the extra cost, and the other party, at its election,
may pay the same, but shall not be obligated to do so.
<PAGE>
ARTICLE 18 - EMINENT DOMAIN
If the entire Building is taken by eminent domain, this Lease Agreement
shall automatically terminate as of the date of taking. If a portion of the
Building is taken by eminent domain, the Landlord shall have the right to
terminate this Lease Agreement, provided it gives written notice thereof to the
Tenant within ninety (90) days after the date of taking. If a portion of the
Premises is taken by eminent domain and this Lease Agreement is not terminated
by Landlord, the Landlord shall, at its expense, restore the Premises to as near
the condition which existed immediately prior to the date of taking as
reasonably possible, and the rentals shall abate during such period of time as
the Premises are untenantable, in the proportion that the untenantable portion
of the Premises bears to the entire Premises. All damages awarded for such
taking under the power of eminent domain shall belong to and be the sole
property of Landlord, irrespective of the basis upon which they are awarded,
provided, however, that nothing contained herein shall prevent Tenant from
making a separate claim to the condemning authority for its moving expenses and
trade fixtures. For purposes of this Article, a taking by eminent domain shall
include Landlord's giving of a deed under threat of condemnation.
ARTICLE 19 - SURRENDER
On the last day of the Term of this Lease Agreement or on the sooner
termination thereof in accordance with the terms hereof, Tenant shall peaceably
surrender the Premises in good condition and repair consistent with Tenant's
duty to make repairs as provided in Article 9 hereof. On or before said last
day, Tenant shall at its expense remove all of its equipment from the Premises,
repairing any damage caused thereby, and any property not removed shall be
deemed abandoned. All alterations, additions and fixtures other than Tenant's
trade fixtures, which have been made or installed by either Landlord or Tenant
upon the Premises shall remain as Landlord's property and shall be surrendered
with the Premises as a part thereof, or shall be removed by Tenant, at the
option of Landlord, in which event Tenant shall at its expense repair any damage
caused thereby. It is specifically agreed that any and all telephonic, coaxial,
ethernet, or other computer, wordprocessing, facsimile, or electronic wiring
installed by Tenant within the Premises (hereafter "Wiring") shall be removed at
Tenant's cost at the expiration of the Term, unless Landlord has specifically
requested in writing that said Wiring shall remain, whereupon said Wiring shall
be surrendered with the Premises as Landlord's property. If the Premises are not
surrendered at the end of the Term or the sooner termination thereof, Tenant
shall indemnify Landlord against loss or liability resulting from delay by
Tenant in so surrendering the Premises, including, without limitation, claims
made by any succeeding tenant founded on such delay. Tenant shall promptly
surrender all keys for the Premises to Landlord at the place then fixed for
payment of rental and shall inform Landlord of combinations on any locks and
safes on the Premises.
<PAGE>
ARTICLE 20 - NON-PAYMENT OF RENT, DEFAULTS
If any one or more of the following occurs: (1) a rent payment or any other
payment due from Tenant to Landlord shall be and remain unpaid in whole or in
part for more than ten (10) days after same is due and payable; (2) Tenant shall
violate or default on any of the other covenants, agreements, stipulations or
conditions herein, or in any parking agreement(s) or other agreements between
Landlord and Tenant relating to the Premises, and such violation or default
shall continue for a period of ten (10) days after written notice from Landlord
of such violation or default; (3) if Tenant shall commence or have commenced
against Tenant proceedings under a bankruptcy, receivership, insolvency or
similar type of action; or (4) if Tenant shall vacate any substantial portion of
the Premises for a period of more than 15 days; then it shall be optional for
Landlord, without further notice or demand, to cure such default or to declare
this Lease Agreement forfeited and the said Term ended, or to terminate only
Tenant's right to possession of the Premises, and to re-enter the Premises, with
or without process of law, using such force as may be necessary to remove all
persons or chattels therefrom, and Landlord shall not be liable for damages by
reason of such re-entry or forfeiture; but notwithstanding re-entry by Landlord
or termination only of Tenant's right to possession of the Premises, the
liability of Tenant for the rent and all other sums provided herein shall not be
relinquished or extinguished for the balance of the Term of this Lease Agreement
and Landlord shall be entitled to periodically sue Tenant for all sums due under
this Lease Agreement or which become due prior to judgment, but such suit shall
not bar subsequent suits for any further sums coming due thereafter. Tenant
shall be responsible for, in addition to the rentals and other sums agreed to be
paid hereunder, the cost of any necessary maintenance, repair, restoration,
reletting (including related cost of removal or modification of tenant
improvements) or cure as well as reasonable attorney's fees incurred or awarded
in any suit or action instituted by Landlord to enforce the provisions of this
Lease Agreement, regain possession of the Premises, or the collection of the
rentals due Landlord hereunder. Tenant shall also be liable to Landlord for the
payment of a late charge in the amount of 10% of the rental installment or other
sum due Landlord hereunder if said payment has not been received within ten (10)
days from the date said payment becomes due and payable, or cleared by
Landlord's bank within three (3) business days after deposit. Tenant agrees to
pay interest at the highest permissible rate of interest allowed under the usury
statutes of the State of Minnesota, or in case no such maximum rate of interest
is provided, at the rate of 12% per annum, on all rentals and other sums due
Landlord hereunder not paid within ten (10) days from the date same become due
and payable. Each right or remedy of Landlord provided for in this Lease
Agreement shall be cumulative and shall be in addition to every other right or
remedy provided for in this Lease Agreement now or hereafter existing at law or
in equity or by statute or otherwise.
ARTICLE 21 - LANDLORD'S DEFAULT
Landlord shall not be deemed to be in default under this Lease Agreement
until Tenant has given Landlord written notice specifying the nature of the
default and Landlord does not cure such default within thirty (30) days after
receipt of such notice or within such reasonable time thereafter as may be
necessary to cure such default where such default is of such a character as to
reasonably require more than thirty (30) days to cure.
<PAGE>
ARTICLE 22 - HOLDING OVER
Tenant will, at the expiration of this Lease Agreement, whether by lapse of
time or termination, give up immediate possession to Landlord. If Tenant fails
to give up possession the Landlord may, at its option, serve written notice upon
Tenant that such holdover constitutes any one of (i) renewal of this Lease
Agreement for one year, and from year to year thereafter, or (ii) creation of a
month-to-month tenancy, or (iii) creation of a tenancy at sufferance. If
Landlord does not give said notice, Tenant's holdover shall create a tenancy at
sufferance. In any such event the tenancy shall be upon the terms and conditions
of this Lease Agreement, except that the Minimum Rental shall be double the
Minimum Rental Tenant was obligated to pay Landlord under this Lease Agreement
immediately prior to termination (in the case of tenancy at sufferance such
Minimum Rental shall be prorated on the basis of a 365 day year for each day
Tenant remains in possession); excepting further that in the case of a tenancy
at sufferance, no notices shall be required prior to commencement of any legal
action to gain repossession of the Premises. In the case of a tenancy at
sufferance, Tenant shall also pay to Landlord all damages sustained by Landlord
resulting from retention of possession by Tenant. The provisions of this
paragraph shall not constitute a waiver by Landlord of any right of re-entry
otherwise available to Landlord; nor shall receipt of any rent or any other act
in apparent affirmance of the tenancy operate as a waiver of the right to
terminate this Lease Agreement for a breach by Tenant hereof.
ARTICLE 23 - SUBORDINATION
Tenant agrees that this Lease Agreement shall be subordinate to any
mortgage(s) that may now or hereafter be placed upon the Building or any part
thereof, and to any and all advances to be made thereunder, and to the interest
thereon, and all renewals, replacements, and extensions thereof, provided the
mortgagee named in such mortgage(s) shall agree to recognize this Lease
Agreement or Tenant in the event of foreclosure provided the Tenant is not in
default. In confirmation of such subordination, Tenant shall promptly execute
and deliver any instrument, in recordable form, as required by Landlord's
mortgagee. In the event of any mortgagee electing to have the Lease Agreement a
prior incumbrance to its mortgage, then and in such event upon such mortgagee
notifying Tenant to that effect, this Lease Agreement shall be deemed prior in
incumbrance to the said mortgage, whether this Lease Agreement is dated prior to
or subsequent to the date of said mortgage.
ARTICLE 24 - INDEMNITY, INSURANCE AND SECURITY
A. Tenant will keep in force at its own expense for so long as this Lease
Agreement remains in effect public liability insurance with respect to the
Premises in which Landlord shall be named as an additional insured, in companies
and in form acceptable to Landlord with a minimum combined limit of liability of
Two Million Dollars ($2,000,000.00). This limit shall apply per location. Said
insurance shall also provide for contractual liability coverage by endorsement.
Tenant shall further provide for business interruption insurance to cover a
period of not less than six (6) months. Tenant will further deposit with
Landlord the policy or policies of such insurance or certificates thereof, or
other acceptable evidence that such insurance is in effect, which evidence shall
provide that Landlord shall be notified in writing thirty (30) days prior to
cancellation, material change, or failure to renew the insurance. Tenant further
covenants and agrees to indemnify and hold Landlord and Landlord's manager of
the Building harmless for any claim, loss or damage, including reasonable
attorney's fees, suffered by Landlord, Landlord's manager or Landlord's other
tenants caused by: i) any act or omission by Tenant, Tenant's employees or
anyone claiming through or by Tenant in, at, or around the Premises or the
Building; ii) the conduct or management of any work or thing whatsoever done by
Tenant in or about the Premises; or iii) Tenant's failure to comply with any and
all governmental laws, rules, ordinances or regulations applicable to the use of
the Premises and its occupancy. If Tenant shall not comply with its covenants
made in this Article 24, Landlord may, at its option, cause insurance as
aforesaid to be issued and in such event Tenant agrees to pay the premium for
such insurance promptly upon Landlord's demand.
<PAGE>
B. Tenant shall be responsible for the security and safeguarding of the
Premises and all property kept, stored or maintained in the Premises. Landlord
will make available to Tenant, at Tenant's request, the plans and specifications
for construction of the Building and the Premises. Tenant represents that it is
satisfied that the construction of the Building and the Premises, including the
floors, walls, windows, doors and means of access thereto are suitable for the
particular needs of Tenant's business. Tenant further represents that it is
satisfied with the security of said Building and Premises for the protection of
any property which may be owned, held, stored or otherwise caused or permitted
by Tenant to be present upon the Premises. The placement and sufficiency of all
safes, vaults, cash or security drawers, cabinets or the like placed upon the
Premises by Tenant shall be at the sole responsibility and risk of Tenant.
Tenant shall maintain in force throughout the Term, insurance upon all
contents of the Premises, including that owned by others and Tenant's equipment
and any alterations, additions, fixtures, or improvements in the Premises
acknowledged by Landlord to be the Tenant's.
C. Landlord shall carry and cause to be in full force and effect a fire and
extended coverage insurance policy on the Building, but not contents owned,
leased or otherwise in possession of Tenant. The cost of such insurance shall be
an Operating Expense.
ARTICLE 25 - NOTICES
All notices from Tenant to Landlord required or permitted by any provisions
of this Lease Agreement shall be directed to Landlord postage prepaid, certified
or registered mail, at the address provided for Landlord in the preamble to this
Lease Agreement or at such other address as Tenant shall be advised to use by
Landlord. All notices from Landlord to Tenant required or permitted by any
provision of this Lease Agreement shall be directed to Tenant, postage prepaid,
certified or registered mail, at the Premises and at the address, if any, set
forth on page 6 of this Lease Agreement. Landlord and Tenant shall each have the
right at any time and from time to time to designate one (1) additional party to
whom copies of any notice shall be sent.
<PAGE>
ARTICLE 26 - APPLICABLE LAW
This Lease Agreement shall be construed under the laws of the State of
Minnesota.
ARTICLE 27 - MECHANICS' LIEN
In the event any mechanic's lien shall at any time be filed against the
Premises or any part of the Building by reason of work, labor, services or
materials performed or furnished to Tenant or to anyone holding the Premises
through or under Tenant, Tenant shall forthwith cause the same to be discharged
of record. If Tenant shall fail to cause such lien forthwith to be discharged
within five (5) days after being notified of the filing thereof, then, in
addition to any other right or remedy of Landlord, Landlord may, but shall not
be obligated to, discharge the same by paying the amount claimed to be due, or
by bonding, and the amount so paid by Landlord and all costs and expenses,
including reasonable attorney's fees incurred by Landlord in procuring the
discharge of such lien, shall be due and payable in full by Tenant to Landlord
on demand.
ARTICLE 28 - SECURITY INTEREST
Tenant hereby grants to Landlord a security interest in all goods,
chattels, fixtures and personal property belonging to Tenant, which nor are or
may hereafter be placed in the Premises, to secure all rents due hereunder and
all other covenants and obligations of Tenant hereunder. In the event there
exists any security interest in said property which security interest is
paramount and superior to the security interest herein created, Landlord may
satisfy said paramount security interest and all sums paid in satisfying said
security interest will be considered additional sums owed Landlord by Tenant
hereunder. Tenant hereby acknowledges receipt of a true, full and complete copy
of this Lease Agreement. Landlord, in the event of a default by Tenant of any
covenant or condition herein contained, may exercise, in addition to any rights
and remedies herein granted, all the rights and remedies of a secured party
under the Uniform Commercial Code or any other applicable law. Tenant agrees
upon request of Landlord to execute and deliver to Landlord a financing
statement evidencing such security interest. A copy of this Lease Agreement may
be filed as a financing statement.
ARTICLE 29 - BROKERAGE
Each of the parties represents and warrants that there are no claims for
brokerage commissions or finder's fees in connection with this Lease Agreement,
and agrees to indemnify the other against, and hold it harmless from all
liabilities arising from any such claim, including without limitation, the cost
of attorney's fees in connection therewith.
ARTICLE 30 - SUBSTITUTION
Landlord reserves the right, on thirty (30) days written notice to Tenant,
to substitute other premises within the Building for the Premises hereunder. The
substituted premises shall contain substantially the same square footage as the
Premises, shall contain comparable improvements, and the Minimum Rental shall
not exceed the Minimum Rental specified in Article 3 hereof.
ARTICLE 31- ESTOPPEL CERTIFICATES
Each party hereto agrees that at any time, and from time to time during the
Term of this Lease Agreement (but not more often than twice in each calendar
year), within ten (10) days after request by the other party hereto, it will
execute, acknowledge and deliver to such other party or to any prospective
purchaser, assignee or mortgagee designated by such other party, an estoppel
certificate in a form acceptable to Landlord. Tenant agrees to provide Landlord
(but not more often than twice in any calendar year), within ten (10) days of
request, the then most current financial statements of Tenant and any guarantors
of this Lease Agreement, which shall be certified by Tenant, and if available,
shall be audited and certified by a certified public accountant. Landlord shall
keep such financial statements confidential, except Landlord shall, in
confidence, be entitled to disclose such financial statements to existing or
prospective mortgagees or purchasers of the Building.
<PAGE>
ARTICLE 32 - GENERAL
This Lease Agreement does not create the relationship of principal and
agent or of partnership or of joint venture or of any association between
Landlord and Tenant, the sole relationship between Landlord and Tenant being
that of landlord and tenant. No waiver of any default of Tenant hereunder shall
be implied from any omission by Landlord to take any action on account of such
default if such default persists or is repeated, and no express waiver shall
affect any default other than the default specified in the express waiver and
that only for the time and to the extent therein stated. The covenants of Tenant
to pay the Minimum Rental and the Additional Rental are each independent of any
other covenant, condition, or provision contained in this Lease Agreement. The
marginal or topical headings of the several Articles, paragraphs and clauses are
for convenience only and do not define, limit or construe the contents of such
Articles, paragraphs or clauses. All preliminary negotiations are merged into
and incorporated in this Lease Agreement. This Lease Agreement can only be
modified or amended by an agreement in writing signed by the parties hereto. All
provisions hereof shall be binding upon the heirs, successors and assigns of
each party hereto. If any term or provision of this L ease Agreement shall to
any extent be held invalid or unenforceable, the remainder shall not be affected
thereby, and each other term and provision of this Lease Agreement shall be
valid and be enforced to the fullest extent permitted by law. If Tenant is a
corporation, each individual executing this Lease Agreement on behalf of said
corporation represents and warrants that he is duly authorized to execute and
deliver this Lease Agreement on behalf of said corporation in accordance with a
duly adopted resolution of the Board of Directors of said corporation or in
accordance with the Bylaws of said corporation, and that this Lease Agreement is
binding upon said corporation in accordance with its terms. No receipt or
acceptance by Landlord from Tenant of less than the monthly rent herein
stipulated shall be deemed to be other than a partial payment on account for any
due and unpaid stipulated rent; no endorsement or statement of any check or any
letter or other writing accompanying any check or payment of rent to Landlord
shall be deemed an accord and satisfaction, and Landlord may accept and
negotiate such check or payment without prejudice to Landlord's rights to (i)
recover the remaining balance of such unpaid rent or (ii) pursue any other
remedy provided in this Lease Agreement. (Neither party shall record this Lease
Agreement or any memorandum thereof, and any such recordation shall be a breach
of this Lease Agreement void, and without effect.) Time is of the essence with
respect to the due performance of the terms, covenants and conditions herein
contained. Submission of this instrument for examination does not constitute a
reservation of or option for the Premises, and this Lease Agreement shall become
effective only upon execution and delivery thereof by Landlord and Tenant.
ARTICLE 33 - EXCULPATION
Tenant agrees to look solely to Landlord's interest in the Building for the
recovery of any judgment from Landlord, it being agreed that Landlord and
Landlord's partners, whether general or limited (if Landlord is a partnership)
or its directors, officers or shareholders (if Landlord is a corporation), shall
never be personally liable for any such judgment.
<PAGE>
IN WITNESS WHEREOF, this Lease Agreement has been duly executed by the
parties hereto as of the day and year indicated above.
TENANT: LANDLORD;
HEALTH FITNESS PHYSICAL THERAPY NORTHLAND CENTER LIMITED PARTNERSHIP
a Minnesota corporation a Minnesota limited partnership
By: /s/ Loren Brink By: /s/ Frank J. Dutke
Loren Brink Frank J. Dutke
Chief Executive Officer Assistant Secretary
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SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
BY AND BETWEEN
HEALTH FITNESS PHYSICAL THERAPY, INC.
AND
NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION
Dated as of: February 4, 1997
[GRAPHIC OMITTED]
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<PAGE>
Table of Contents
ARTICLE I DEFINITIONS.........................................................1
Section 1.1 Definitions....................................................1
Section 1.2 Cross References..............................................11
ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY...........................11
Section 2.1 Existing Advances.............................................11
Section 2.2 Revolving Advances............................................12
Section 2.3 Term Advance..................................................13
Section 2.4 Payment of Term Note.........................................13
Section 2.5 Interest; Default Interest; Participations; Usury.............13
Section 2.6 Fees..........................................................14
Section 2.7 Computation of Interest and Fees; When Interest
Due and Payable...............................................14
Section 2.8 Capital Adequacy..............................................14
Section 2.9 Voluntary Prepayment; Termination of Credit
Facility by the Borrower; Permanent Reduction of the
Maximum Line; Prepayment of the Term Note; Waiver of Fees.....15
Section 2.10 Mandatory Prepayment.........................................16
Section 2.11 Payment......................................................16
Section 2.12 Payment on Non-Banking Days..................................16
Section 2.13 Use of Proceeds..............................................16
Section 2.14 Liability Records............................................16
ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF.............................17
Section 3.1 Grant of Security Interest....................................17
Section 3.2 Notification of Account Debtors and Other Obligors............17
Section 3.3 Assignment of Insurance.......................................17
Section 3.4 Occupancy.....................................................17
Section 3.5 License.......................................................18
Section 3.6 Financing Statement...........................................18
Section 3.7 Setoff........................................................19
ARTICLE IV CONDITIONS OF LENDING.............................................19
Section 4.1 Conditions Precedent to the Initial Revolving
and Initial Term Advance......................................19
Section 4.2 Conditions Precedent to All Advances..........................21
Section 4.3 Conditions Precedent to Second Term Advance...................21
Section 4.3 Conditions Precedent to Second Term Advance...................22
<PAGE>
ARTICLE V REPRESENTATIONS AND WARRANTIES.....................................23
Section 5.1 Corporate Existence and Power; Name; Chief
Executive Office; Inventory and Equipment Locations;
Tax Identification Number.....................................23
Section 5.2 Authorization of Borrowing; No Conflict as to Law
or Agreements.................................................23
Section 5.3 Legal Agreements..............................................24
Section 5.4 Subsidiaries..................................................24
Section 5.5 Financial Condition; No Adverse Change........................24
Section 5.6 Litigation....................................................24
Section 5.7 Regulation U..................................................24
Section 5.8 Taxes.........................................................24
Section 5.9 Titles and Liens..............................................25
Section 5.10 Plans........................................................25
Section 5.11 Default......................................................25
Section 5.12 Environmental Matters........................................25
Section 5.13 Submissions to Lender........................................26
Section 5.14 Financing Statements.........................................27
Section 5.15 Rights to Payment............................................27
Section 5.16 Financial Solvency...........................................27
ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS..................................28
Section 6.1 Reporting Requirements........................................28
Section 6.2 Books and Records; Inspection and Examination.................30
Section 6.3 Account Verification..........................................31
Section 6.4 Compliance with Laws..........................................31
Section 6.5 Payment of Taxes and Other Claims.............................31
Section 6.6 Maintenance of Properties.....................................32
Section 6.7 Insurance.....................................................32
Section 6.8 Preservation of Existence.....................................32
Section 6.9 Delivery of Instruments, etc..................................33
Section 6.10 Collateral Account...........................................33
Section 6.11 Lockbox......................................................33
Section 6.12 Performance by the Lender....................................34
Section 6.13 Minimum Book Net Worth.......................................35
Section 6.14 Maximum Debt to Book Net Worth Ratio.........................36
Section 6.15 Net Income...................................................36
Section 6.16 New Covenants................................................36
Section 6.17 Employment of Loren Brink....................................37
Section 6.18 Condition Subsequent to Closing..............................37
<PAGE>
ARTICLE VII NEGATIVE COVENANTS...............................................38
Section 7.1 Liens.........................................................38
Section 7.2 Indebtedness..................................................38
Section 7.3 Guaranties....................................................39
Section 7.4 Investments and Subsidiaries..................................39
Section 7.5 Dividends.....................................................40
Section 7.6 Sale or Transfer of Assets; Suspension of Business
Operations....................................................40
Section 7.7 Consolidation and Merger; Asset Acquisitions..................40
Section 7.8 Sale and Leaseback............................................40
Section 7.9 Restrictions on Nature of Business............................40
Section 7.10 Capital Expenditures.........................................40
Section 7.11 Accounting...................................................40
Section 7.12 Defined Benefit Pension Plans................................41
Section 7.13 Other Defaults...............................................41
Section 7.14 Place of Business; Name......................................41
Section 7.15 Organizational Documents; S Corporation Status...............41
Section 7.16 Salaries.....................................................41
Section 7.17 Change in Ownership..........................................41
ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES..........................42
Section 8.1 Events of Default.............................................42
Section 8.2 Rights and Remedies...........................................44
Section 8.3 Certain Notices...............................................45
ARTICLE IX MISCELLANEOUS.....................................................45
Section 9.1 Restatement of Old Credit Documents...........................45
Section 9.2 Release.......................................................45
Section 9.3 No Waiver; Cumulative Remedies................................45
Section 9.4 Amendments, Etc...............................................45
Section 9.5 Addresses for Notices, Etc....................................46
Section 9.6 Further Documents.............................................46
Section 9.7 Collateral....................................................47
Section 9.8 Costs and Expenses............................................47
Section 9.9 Indemnity.....................................................47
Section 9.10 Participants.................................................48
Section 9.11 Execution in Counterparts....................................48
Section 9.12 Binding Effect; Assignment; Complete Agreement;
Exchanging Information.......................................48
Section 9.13 Severability of Provisions...................................48
Section 9.14 Headings.....................................................49
Section 9.15 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial.....49
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT
Dated as of February 4, 1997
HEALTH FITNESS PHYSICAL THERAPY, INC., a Minnesota corporation (the
"Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a National
Banking Association (the "Lender"), hereby agree as follows:
ARTICLE I
Definitions
Section 1. 1 Definitions. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
( a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
( b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Accounts" means all accounts of the Borrower and each Subsidiary, as
such term is defined in the UCC, including without limitation the aggregate
unpaid obligations of customers and other account debtors to the Borrower
or such Affiliate arising out of the sale or lease of goods or rendition of
services by the Borrower or such Affiliate on an open account or deferred
payment basis.
"Advance" means a Revolving Advance or a Term Advance.
"Advances" means the Term Advances and Revolving Advances.
"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, and
any other Person Controlled by, Controlling or under common Control with
the Borrower, including (without limitation) any Subsidiary of the
Borrower.
"Agreement" means this Second Amended and Restated Credit and Security
Agreement, as amended, supplemented or restated from time to time.
<PAGE>
"Availability" means the difference of ( i) the Borrowing Base and (
ii) the outstanding principal balance of the Revolving Note.
"Banking Day" means a day other than a Saturday, Sunday or other day
on which banks are generally not open for business in Minneapolis,
Minnesota.
"Base Rate" means the rate of interest publicly announced from time to
time by the Lender as its "base rate" or, if the Lender ceases to announce
a rate so designated, any similar successor rate designated by the Lender.
"Book Net Worth" means the aggregate of the common and preferred
stockholders' equity in the Borrower, determined in accordance with GAAP.
"Borrowing Base" means, at any time the lesser of:
( a) the Maximum Line; or
( b) subject to change from time to time in the Lender's sole
discretion, (provided, however, that the Lender shall not, without the
Borrower's consent, change the following percentages until the one
year anniversary of the date hereof), the sum of:
( i) 40% of Eligible New Fitness Center Accounts, plus
( ii) 80% of Eligible Aged Fitness Center Accounts, plus
( iii) 65% of Eligible Physical Therapy Accounts, plus
( iv) 75% of Eligible Pro Source Accounts.
"Capital Expenditures" for a period means any expenditure of money for
the lease, purchase or other acquisition of any capital asset, or for the
lease of any other asset whether payable currently or in the future.
"Collateral" means all of the Borrower's Equipment, General
Intangibles, Inventory, Receivables, all sums on deposit in any Collateral
Account, and any items in any Lockbox; together with ( i) all substitutions
and replacements for and products of any of the foregoing; ( ii) proceeds
of any and all of the foregoing; ( iii) in the case of all tangible goods,
all accessions; ( iv) all accessories, attachments, parts, equipment and
repairs now or hereafter attached or affixed to or used in connection with
any tangible goods; and ( v) all warehouse receipts, bills of lading and
other documents of title now or hereafter covering such goods.
"Collateral Account" has the meaning given in Section 6.10.
"Commitment" means the Lender's commitment to make Advances to or for
the Borrower's account pursuant to Article II.
<PAGE>
"Control," when used with respect to any specified Person, means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract
or otherwise.
"Corporate Guarantors" means Sports & Orthopedic Physical Therapy,
Inc., Health Fitness Physical Therapy of Tahoe, Inc., Fitness Centers of
America, Preferred Companies and Health Fitness Rehab, Inc., and after the
conditions set forth in Section 4.3 are completed, HFRI.
"Corporate Guarantor Security Agreement" means each Security Agreement
of even date herewith, executed by each Corporate Guarantor and delivered
to the Lender.
"Credit Facility" means the credit facility being made available to
the Borrower by the Lender pursuant to Article II.
"Debt" of any Person means all items of indebtedness or liability
which in accordance with GAAP would be included in determining total
liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes of
determining a Person's aggregate Debt at any time, "Debt" shall also
include the aggregate payments required to be made by such Person at any
time under any lease that is considered a capitalized lease under GAAP.
"Debt to Book Net Worth Ratio" as of a given date means the ratio of
the Borrower's Debt to the Borrower's Book Net Worth.
"Default" means an event that, with giving of notice or passage of
time or both, would constitute an Event of Default.
"Default Period" means any period of time beginning on the first day
of any month during which a Default or Event of Default has occurred and
ending on the date the Lender notifies the Borrower in writing that such
Default or Event of Default has been cured or waived.
"Default Rate" means, with respect to the Revolving Advances, an
annual rate equal to two percent (2.00 %) over the Revolving Floating Rate,
which rate shall change when and as the Revolving Floating Rate changes and
with respect to the Term Advances, an annual rate equal to the Term
Floating Rate.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Aged Fitness Center Accounts" means all unpaid Accounts, net
of any credits, arising from the Borrower's or any Guarantor's fitness
center operations which are 31 days or more past the invoice date, except
the following shall not in any event be deemed Eligible Aged Fitness Center
Accounts:
<PAGE>
(i) That portion of Accounts over 90 days past invoice date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
(iii) Accounts owed by any unit of government, whether foreign or
domestic;
(iv) Accounts owed by an account debtor located outside the
United States;
(v) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vi) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(vii) Accounts not subject to a duly perfected security interest
in the Lender's favor or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender
including without limitation any payment or performance bond;
(viii) That portion of Accounts that has been restructured,
extended, amended or modified;
(ix) That portion of Accounts that constitutes advertising,
finance charges or service charges;
(x) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii) or
(viii) above; and
(xi) Accounts, or portions thereof, otherwise deemed ineligible
by the Lender in its reasonable discretion.
"Eligible New Fitness Center Accounts" means all unpaid Accounts, net
of any credits, arising from the Borrower's or any Guarantor's fitness
center operations which are less than 31 days past the invoice date, except
the following shall not in any event be deemed Eligible New Fitness Center
Accounts:
(i) That portion of Accounts over 90 days past invoice date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
(iii) Accounts owed by any unit of government, whether foreign or
domestic;
(iv) Accounts owed by an account debtor located outside the
United States;
<PAGE>
(v) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vi) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(vii) Accounts not subject to a duly perfected security interest
in the Lender's favor or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender
including without limitation any payment or performance bond;
(viii) That portion of Accounts that has been restructured,
extended, amended or modified;
(ix) That portion of Accounts that constitutes advertising,
finance charges or service charges;
(x) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii) or
(viii) above; and
(xi) Accounts, or portions thereof, otherwise deemed ineligible
by the Lender in its reasonable discretion.
"Eligible Physical Therapy Accounts" means all unpaid Accounts, net of
any credits, arising from the Borrower's or any Guarantor's physical
therapy operations, except the following shall not in any event be deemed
Eligible Physical Therapy Accounts:
(i) That portion of Accounts over 90 days past invoice date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
(iii) Accounts owed by any unit of government, whether foreign or
domestic, including, without limitation all Accounts of the Veteran's
Administration;
(iv) Accounts owed by an account debtor located outside the
United States;
(v) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vi) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(vii) Accounts not subject to a duly perfected security interest
in the Lender's favor or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender
including without limitation any payment or performance bond;
<PAGE>
(viii) That portion of Accounts that has been restructured,
extended, amended or modified;
(ix) That portion of Accounts that constitutes advertising,
finance charges or service charges;
(x) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii) or
(viii) above; and
(xi) Accounts, or portions thereof, otherwise deemed ineligible
by the Lender in its reasonable discretion;
provided, however, that $20,000 of Accounts shall be deemed ineligible
under subparagraph (x) above, subject to change from time to time in the
Lender's reasonable discretion.
"Eligible Pro Source Accounts" means all unpaid Accounts, net of any
credits, arising from the sale of the Borrower's or any Guarantor's
inventory constituting fitness equipment, except the following shall not in
any event be deemed Eligible Pro Source Accounts:
(i) That portion of Accounts over 90 days past invoice date;
(ii) That portion of Accounts that is disputed or subject to a
claim of offset or a contra account;
(iii) Accounts owed by any unit of government, whether foreign or
domestic;
(iv) Accounts owed by an account debtor located outside the
United States;
(v) Accounts owed by an account debtor that is insolvent, the
subject of bankruptcy proceedings or has gone out of business;
(vi) Accounts owed by a shareholder, Subsidiary, Affiliate,
officer or employee of the Borrower;
(vii) Accounts not subject to a duly perfected security interest
in the Lender's favor or which are subject to any lien, security
interest or claim in favor of any Person other than the Lender
including without limitation any payment or performance bond;
(viii) That portion of Accounts that has been restructured,
extended, amended or modified;
(ix) That portion of Accounts that constitutes advertising,
finance charges or service charges;
<PAGE>
(x) Accounts owed by an account debtor, regardless of whether
otherwise eligible, if 10% or more of the total amount due under
Accounts from such debtor is ineligible under clauses (i), (ii) or
(viii) above; and
(xi) Accounts, or portions thereof, otherwise deemed ineligible
by the Lender in its reasonable discretion.
"Environmental Laws" has the meaning specified in Section 5.12.
"Equipment" means all of the Borrower's equipment, as such term is
defined in the UCC, whether now owned or hereafter acquired, including but
not limited to all present and future machinery, vehicles, furniture,
fixtures, manufacturing equipment, shop equipment, office and recordkeeping
equipment, parts, tools, supplies, and including specifically (without
limitation) the goods described in any equipment schedule or list herewith
or hereafter furnished to the Lender by the Borrower.
"Event of Default" has the meaning specified in Section 8.1.
"Existing Revolving Advances" has the meaning specified in Section
2.1.
"Existing Term Advances" has the meaning specified in Section 2.1.
"Funding Date" has the meaning given in Section 2.2 .
"GAAP" means generally accepted accounting principles, applied on a
basis consistent with the accounting practices applied in the financial
statements described in Section 5.5.
"General Intangibles" means all of the Borrower's general intangibles,
as such term is defined in the UCC, whether now owned or hereafter
acquired, including (without limitation) all present and future patents,
patent applications, copyrights, trademarks, trade names, trade secrets,
customer or supplier lists and contracts, manuals, operating instructions,
permits, franchises, the right to use the Borrower's name, and the goodwill
of the Borrower's business.
"Guarantors" means the Individual Guarantor and the Corporate
Guarantors.
"Hazardous Substance" has the meaning given in Section 5.12.
"HFRI" means Health Fitness Rehab of Iowa, Inc., an Iowa corporation.
"Individual Guarantor" means Loren Scott Brink.
"Inventory" means all of the Borrower's inventory, as such term is
defined in the UCC, whether now owned or hereafter acquired, whether
consisting of whole goods, spare parts or components, supplies or
materials, whether acquired, held or furnished for sale, for lease or under
service contracts or for manufacture or processing, and wherever located.
<PAGE>
"Isernhagen" means Isernhagen Ltd., a Minnesota corporation and
Isernhagen & Associates, Inc., a Minnesota Corporation.
"K.A.M." means K.A.M. Physical Therapy Services, P.C., an Iowa
professional corporation.
"Loan Documents" means this Agreement, the Notes and the Security
Documents.
"Lockbox" has the meaning given in Section 6.11.
"Maturity Date" means January 31, 2000.
"Maximum Line" means $1,500,000, unless said amount is reduced
pursuant to Section 2.9, in which event it means the amount to which said
amount is reduced.
"Net Income" means fiscal year-to-date after-tax net income, decreased
by the sum of any extraordinary, non-operating or non-cash income recorded
by the Borrower and increased by any extraordinary, non-cash or
non-operating expense or loss recorded by the Borrower, as determined in
accordance with GAAP.
"Note" means the Revolving Note or the Term Note, and "Notes" means
the Revolving Note and the Term Note.
"Obligations" means the Notes and each and every other debt, liability
and obligation of every type and description which the Borrower may now or
at any time hereafter owe to the Lender, whether such debt, liability or
obligation now exists or is hereafter created or incurred, whether it
arises in a transaction involving the Lender alone or in a transaction
involving other creditors of the Borrower, and whether it is direct or
indirect, due or to become due, absolute or contingent, primary or
secondary, liquidated or unliquidated, or sole, joint, several or joint and
several, and including specifically, but not limited to, all indebtedness
of the Borrower arising under this Agreement, the Notes or any other loan
or credit agreement or guaranty between the Borrower and the Lender,
whether now in effect or hereafter entered into.
"Old Credit Documents" means that certain Restated Term Loan and
Credit Agreement dated as of December 16, 1996, as amended.
"Old Revolving Note" means the Borrower's revolving note dated as of
December 16, 1996, payable to the order of the Lender in the original
principal amount of $1,500,000.
<PAGE>
"Old Security Documents" means the Borrower's Security Agreement in
favor of the Lender dated as of February 5, 1996.
"Old Term Note" means the Borrower's term note dated as of December
16, 1996, payable to the order of the Lender in the original principal
amount of $600,000.
"Permitted Lien" has the meaning given in Section 7.1.
"Person" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Plan" means an employee benefit plan or other plan maintained for the
Borrower's employees and covered by Title IV of ERISA.
"Preferred Companies" means The Preferred Companies, Inc., an Arizona
corporation.
"Premises" means all premises where the Borrower or any Subsidiary
conducts its business and has any rights of possession, including (without
limitation) the premises described in Exhibit D attached hereto.
"Receivables" means each and every right of the Borrower to the
payment of money, whether such right to payment now exists or hereafter
arises, whether such right to payment arises out of a sale, lease or other
disposition of goods or other property, out of a rendering of services, out
of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to
payment is created, generated or earned by the Borrower or by some other
person who subsequently transfers such person's interest to the Borrower,
whether such right to payment is or is not already earned by performance,
and howsoever such right to payment may be evidenced, together with all
other rights and interests (including all liens and security interests)
which the Borrower may at any time have by law or agreement against any
account debtor or other obligor obligated to make any such payment or
against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans
and obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
"Related Persons" means any Person and (i) all relatives (including
step or adoptive) within the third degree of such Person, (ii) all Persons
Controlled by, Controlling or under common Control with such Person, and
(iii) all Persons who are owners, directors or officers of such Person.
"Reportable Event" shall have the meaning assigned to that term in
Title IV of ERISA.
<PAGE>
"Revolving Advance" has the meaning given in Section 2.2 .
"Revolving Floating Rate" means an annual rate equal to the sum of the
Base Rate plus two percent (2.00%), which annual rate shall change when and
as the Base Rate changes.
"Revolving Note" means the Borrower's revolving promissory note,
payable to the order of the Lender in substantially the form of Exhibit A
hereto and any note or notes issued in substitution therefor, as the same
may hereafter be amended, supplemented or restated from time to time.
"Security Documents" means this Agreement, the Corporate Guarantor
Security Agreements and any other document delivered to the Lender from
time to time to secure the Obligations, as the same may hereafter be
amended, supplemented or restated from time to time.
"Security Interest" has the meaning given in Section 3.1.
"Subordination Agreement" means the Debt Subordination Agreement, to
be executed by START Physical Therapy in the Lender's favor and
acknowledged by the Borrower, and any other subordination agreement
accepted by the Lender from time to time, as the same may hereafter be
amended, supplemented or restated from time to time.
"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., and
Preferred Companies, 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.
"Subsidiary Inventory" means, for each Subsidiary, all of such
Subsidiary's inventory, as such term is defined in the UCC, whether now
owned or hereafter acquired, whether consisting of whole goods, spare parts
or components, supplies or materials, whether acquired, held or furnished
for sale, for lease or under service contracts or for manufacture or
processing, and wherever located.
"Subsidiary Receivables" means each and every right of each Subsidiary
to the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises out of a sale, lease
or other disposition of goods or other property, out of a rendering of
services, out of a loan, out of the overpayment of taxes or other
liabilities, or otherwise arises under any contract or agreement, whether
such right to payment is created, generated or earned by such Subsidiary or
by some other person who subsequently transfers such person's interest to
such Subsidiary, whether such right to payment is or is not already earned
by performance, and howsoever such right to payment may be evidenced,
together with all other rights and interests (including all liens and
security interests) which such Subsidiary may at any time have by law or
agreement against any account debtor or other obligor obligated to make any
such payment or against any property of such account debtor or other
obligor; all including but not limited to all present and future accounts,
contract rights, loans and obligations receivable, chattel papers, bonds,
notes and other debt instruments, tax refunds and rights to payment in the
nature of general intangibles.
<PAGE>
"Term Advances" has the meaning specified in Section 2.3.
"Term Floating Rate" means an annual rate equal to the sum of the Base
Rate plus six percent (6.00%), which annual rate shall change when and as
the Base Rate changes.
"Term Note" means the Borrower's promissory note, payable to the order
of the Lender in substantially the form of Exhibit B hereto 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.
"Termination Date" means the earliest of (i) the Maturity Date, (ii)
the date the Borrower terminates the Credit Facility, or (iii) the date the
Lender demands payment of the Obligations pursuant to Section 8.2.
"UCC" means the Uniform Commercial Code as in effect from time to time
in the state designated in Section 9.15 as the state whose laws shall
govern this Agreement, or in any other state whose laws are held to govern
this Agreement or any portion hereof.
Section 1. 2 Cross References. All references in this Agreement to
Articles, Sections and subsections, shall be to Articles, Sections and
subsections of this Agreement unless otherwise explicitly specified.
ARTICLE II
Amount and Terms of the Credit Facility
Section 2. 1 Existing Advances.
( a) Revolving Advances. The Lender has made various revolving
advances to the Borrower (the "Existing Revolving Advances") as evidenced
by the Old Credit Documents. As of February 1, 1997 the outstanding
principal balance of the Existing Revolving Advances was $1,500,000. Upon
execution and delivery of this Agreement, the Existing Revolving Advances
shall be deemed to be Revolving Advances made pursuant to Section 2.2 and
repayable in accordance with the Revolving Note. To the extent the
Revolving Note evidences the Existing Revolving Advances, the Revolving
Note shall be issued in substitution for and replacement of but not in
payment of the Old Credit Documents.
<PAGE>
( b) Term Advances. The Lender has made various term advances to the
Borrower (the "Existing Term Advances") as evidenced by the Old Credit
Documents. As of February 1, 1997 the outstanding principal balance of the
Existing Term Advances was $600,000. Upon execution and delivery of this
Agreement, the Existing Term Advances shall be deemed to be $600,000 of the
Initial Term Advance made pursuant to Section 2.3 and repayable in
accordance with the Term Note. To the extent the Term Note evidences the
Existing Term Advances, the Term Note shall be issued in substitution for
and replacement of but not in payment of the Old Credit Documents.
Section 2. 2 Revolving Advances. The Lender agrees, on the terms and
subject to the conditions herein set forth, to make advances to the Borrower
from time to time from the date all of the conditions set forth in Section 4.1
are satisfied (the "Funding Date") to the Termination Date, on the terms and
subject to the conditions herein set forth (the "Revolving Advances"). The
Lender shall have no obligation to make a Revolving Advance if, after giving
effect to such requested Revolving Advance, the sum of the outstanding and
unpaid Revolving Advances would exceed the Borrowing Base. The Borrower's
obligation to pay the Revolving Advances shall be evidenced by the Revolving
Note and shall be secured by the Collateral as provided in Article III. Within
the limits set forth in this Section 2.2 , the Borrower may borrow, prepay
pursuant to Section 2.9 and reborrow. The Borrower agrees to comply with the
following procedures in requesting Revolving Advances under this Section 2.2 :
( a) The Borrower shall make each request for a Revolving Advance to
the Lender before 2:00 p.m. (Minneapolis time) of the day of the requested
Revolving Advance. Requests may be made in writing or by telephone,
specifying the date of the requested Revolving Advance and the amount
thereof. Each request shall be by ( i) any officer of the Borrower; or (
ii) any person designated as the Borrower's agent by any officer of the
Borrower in a writing delivered to the Lender; or ( iii) any person whom
the Lender reasonably believes to be an officer of the Borrower or such a
designated agent.
( b) Upon fulfillment of the applicable conditions set forth in
Article IV, the Lender shall disburse the proceeds of the requested
Revolving Advance by crediting the same to the Borrower's demand deposit
account maintained with the Lender unless the Lender and the Borrower shall
agree in writing to another manner of disbursement. Upon the Lender's
request, the Borrower shall promptly confirm each telephonic request for an
Advance by executing and delivering an appropriate confirmation certificate
to the Lender. The Borrower shall repay all Advances even if the Lender
does not receive such confirmation and even if the person requesting an
Advance was not in fact authorized to do so. Any request for an Advance,
whether written or telephonic, shall be deemed to be a representation by
the Borrower that the conditions set forth in Section 4.2 have been
satisfied as of the time of the request.
<PAGE>
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"), and (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
together with the Initial Term Advance and the Second 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. 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.
Section 2. 4 Payment of Term Note. The outstanding principal balance of the
Term Note shall be due and payable (a) in eight quarterly installments of
$100,000 each, beginning on January 31, 1998 and continuing on April 30, July
31, October 31 and January 31 of each calendar year thereafter, through and
including October 31, 1999, and (b) in one final installment on the Termination
Date, when the entire unpaid principal balance of the Term Note, and all unpaid
interest accrued thereon, shall be due and payable in full.
Section 2. 5 Interest; Default Interest; Participations; Usury. Interest
accruing on the Notes shall be due and payable in arrears on the first day of
each month.
( a) Revolving Note. Except as set forth in Sections 2.5(c) and
2.5(e), the outstanding principal balance of the Revolving Note shall bear
interest at the Revolving Floating Rate.
( b) Term Note. Except as set forth in Sections 2.5(c) and 2.5(e), the
outstanding principal balance of the Term Note shall bear interest at the
Term Floating Rate.
( c) Default Interest Rate. At any time during any Default Period, in
the Lender's sole discretion and without waiving any of its other rights
and remedies, the principal of the Advances outstanding from time to time
shall bear interest at the Default Rate, effective for any periods
designated by the Lender from time to time during that Default Period.
<PAGE>
( d) Participations. If any Person shall acquire a participation in
the Advances under this Agreement, the Borrower shall be obligated to the
Lender to pay the full amount of all interest calculated under, along with
all other fees, charges and other amounts due under this Agreement,
regardless if such Person elects to accept interest with respect to its
participation at a lower rate than the Revolving Floating Rate or the Term
Floating Rate, or otherwise elects to accept less than its pro rata share
of such fees, charges and other amounts due under this Agreement.
( e) Usury. In any event no rate change shall be put into effect which
would result in a rate greater than the highest rate permitted by law.
Section 2. 6 Fees.
( a) Term Advances Fee. The Borrower hereby agrees to pay the Lender a
fully earned and non-refundable term advances fee of $12,500, due and
payable upon the execution of this Agreement.
( b) Audit Fees. The Borrower hereby agrees to pay the Lender, on
demand, audit fees in connection with any audits or inspections conducted
by the Lender of any Collateral or the Borrower's operations or business at
the rates established from time to time by the Lender as its audit fees
(provided, however, that such audit fees shall not exceed $500 per day per
auditor) together with all actual out-of-pocket costs and expenses incurred
in conducting any such audit or inspection. The Borrower shall not be
required to pay the Lender for more than two audits for each calendar year
unless an Event of Default occurs during such calendar year.
Section 2. 7 Computation of Interest and Fees; When Interest Due and
Payable. Interest accruing on the outstanding principal balance of the Advances
and fees hereunder outstanding from time to time shall be computed on the basis
of actual number of days elapsed in a year of 360 days. Interest shall be
payable in arrears on the first day of each month and on the Termination Date.
Section 2. 8 Capital Adequacy. If any Related Lender determines at any time
that its Return has been reduced as a result of any Rule Change, such Related
Lender may require the Borrower to pay it the amount necessary to restore its
Return to what it would have been had there been no Rule Change. For purposes of
this Section 2.8:
( a) "Capital Adequacy Rule" means any law, rule, regulation,
guideline, directive, requirement or request regarding capital adequacy, or
the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not
having the force of law, that applies to any Related Lender. Such rules
include rules requiring financial institutions to maintain total capital in
amounts based upon percentages of outstanding loans, binding loan
commitments and letters of credit.
<PAGE>
( b) "Return", for any period, means the return as reasonably
determined by such Related Lender on the Advances based upon its total
capital requirements and a reasonable attribution formula that takes
account of the Capital Adequacy Rules then in effect. Return may be
calculated for each calendar quarter and for the shorter period between the
end of a calendar quarter and the date of termination in whole of this
Agreement.
( c) "Rule Change" means any change in any Capital Adequacy Rule
occurring after the date of this Agreement, but the term does not include
any changes in applicable requirements that at the Closing Date are
scheduled to take place under the existing Capital Adequacy Rules or any
increases in the capital that any Related Lender is required to maintain to
the extent that the increases are required due to a regulatory authority's
assessment of the financial condition of such Related Lender.
( d) "Related Lender" includes (but is not limited to) the Lender, any
parent corporation of the Lender and any assignee of any interest of the
Lender hereunder and any participant in the loans made hereunder.
Certificates of any Related Lender sent to the Borrower from time to time
claiming compensation under this Section 2.8, stating the reason therefor and
setting forth in reasonable detail the calculation of the additional amount or
amounts to be paid to the Related Lender hereunder to restore its Return shall
be conclusive absent manifest error. In determining such amounts, the Related
Lender may use any reasonable averaging and attribution methods.
Section 2. 9 Voluntary Prepayment; Termination of Credit Facility by the
Borrower; Permanent Reduction of the Maximum Line; Prepayment of the Term Note;
Waiver of Fees. Except as otherwise provided herein, the Borrower may terminate
the Credit Facility or prepay the Advances in whole at any time or from time to
time in part, and, subject to payment and performance of all Obligations and
termination of the Credit Facility, the Lender shall release or terminate the
Security Interest and the Security Documents to which the Borrower is entitled
by law.
( a) Termination by Borrower. The Borrower may terminate the Credit
Facility at any time in accordance with in accordance with subsections (b)
and (c).
( b) Permanent Reduction of Maximum Line. The Borrower may at any time
and from time to time, upon at least 30 days' prior written notice to the
Lender, permanently reduce in part or completely the Maximum Line or
terminate the Credit Facility in accordance with the following provisions:
( i) The Borrower may not reduce the Maximum Line to an amount
less than the then-aggregate outstanding balance of the Revolving
Advances.
( ii) Any reduction in the Maximum Line must be in an amount not
less than $100,000 or an integral multiple thereof.
<PAGE>
( iii) If the Borrower reduces the Maximum Line to zero, all
Obligations shall be immediately due and payable.
( c) Prepayment of the Term Note. The Borrower may at any time and
from time to time, upon at least 1 business day's prior written notice to
the Lender, prepay in part or in whole the outstanding principal balance of
the Term Note, so long as immediately following any partial prepayment of
the Term Note the Borrower's Availability is not less than $500,000. Any
partial prepayments of the Term Note shall be applied to principal payments
due and owing in inverse order of their maturities and must be in a minimum
amount of $10,000 and in integral multiples of $10,000.
Section 2. 10 Mandatory Prepayment. Without notice or demand, if the
outstanding principal balance of the Revolving Advances shall at any time exceed
the Borrowing Base, the Borrower shall immediately prepay the Revolving Advances
to the extent necessary to eliminate such excess. Any payment received by the
Lender under this Section 2.10 or under Section 2.9 may be applied to the
Obligations, in such order and in such amounts as the Lender, in its discretion,
may from time to time determine; provided that any prepayment under Section
2.9(c) which the Borrower designates as a partial prepayment of the Term Note
shall be applied to principal installments of the Term Note in inverse order of
maturity.
Section 2. 11 Payment. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations upon receipt
by the Lender. The Lender may hold all payments not constituting immediately
available funds for three (3) days before applying them to the Obligations.
Notwithstanding anything in Section 2.2 , the Borrower hereby authorizes the
Lender to charge against the Borrower's account with the Lender or, in its
discretion at any time or from time to time without the Borrower's request and
even if the conditions set forth in Section 4.2 would not be satisfied, to make
a Revolving Advance in an amount equal to the portion of the Obligations from
time to time due and payable.
Section 2. 12 Payment on Non-Banking Days. Whenever any payment to be made
hereunder shall be stated to be due on a day which is not a Banking Day, such
payment may be made on the next succeeding Banking Day, and such extension of
time shall in such case be included in the computation of interest on the
Advances or the fees hereunder, as the case may be.
Section 2. 13 Use of Proceeds. The Borrower shall use the proceeds of
Advances in accordance with Schedule 2.13.
Section 2. 14 Liability Records. The Lender may maintain from time to time,
at its discretion, liability records as to the Obligations. All entries made on
any such record shall be presumed correct until the Borrower establishes the
contrary. Upon the Lender's demand, the Borrower will admit and certify in
writing the exact principal balance of the Obligations that the Borrower then
asserts to be outstanding. Any billing statement or accounting rendered by the
Lender shall be conclusive and fully binding on the Borrower unless the Borrower
gives the Lender specific written notice of exception within 30 days after
receipt.
<PAGE>
ARTICLE III
Security Interest; Occupancy; Setoff
Section 3. 1 Grant of Security Interest. The Borrower hereby pledges,
assigns and grants to the Lender a security interest (collectively referred to
as the "Security Interest") in the Collateral, as security for the payment and
performance of the Obligations.
Section 3. 2 Notification of Account Debtors and Other Obligors. Upon the
occurrence and during the continuance of any Event of Default, the Lender may
notify any account debtor or other person obligated to pay the amount due that
such right to payment has been assigned or transferred to the Lender for
security and shall be paid directly to the Lender. The Borrower will join in
giving such notice if the Lender so requests. At any time after the Borrower or
the Lender gives such notice to an account debtor or other obligor, the Lender
may, but need not, in the Lender's name or in the Borrower's name, (a) demand,
sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such right to payment, or grant any
extension to, make any compromise or settlement with or otherwise agree to
waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as the
Borrower's agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of the Borrower's mail to any address
designated by the Lender, otherwise intercept the Borrower's mail, and receive,
open and dispose of the Borrower's mail, applying all Collateral as permitted
under this Agreement and holding all other mail for the Borrower's account or
forwarding such mail to the Borrower's last known address.
Section 3. 3 Assignment of Insurance. As additional security for the
payment and performance of the Obligations, the Borrower hereby assigns to the
Lender any and all monies (including, without limitation, proceeds of insurance
and refunds of unearned premiums) due or to become due under, and all other
rights of the Borrower with respect to, any and all policies of insurance now or
at any time hereafter covering the Collateral or any evidence thereof or any
business records or valuable papers pertaining thereto, and the Borrower hereby
directs the issuer of any such policy to pay all such monies directly to the
Lender. Upon the occurrence and during the continuance of any Event of Default,
the Lender may (but need not), in the Lender's name or in the Borrower's name,
execute and deliver proof of claim, receive all such monies, endorse checks and
other instruments representing payment of such monies, and adjust, litigate,
compromise or release any claim against the issuer of any such policy.
Section 3. 4 Occupancy.
( a) The Borrower hereby irrevocably grants to the Lender the right,
subject to the rights of any landlord of such Premises, to take possession
of the Premises at any time during a Default Period.
<PAGE>
( b) The Lender may use the Premises only to hold, process,
manufacture, sell, use, store, liquidate, realize upon or otherwise dispose
of goods that are Collateral and for other purposes that the Lender may in
good faith deem to be related or incidental purposes.
( c) The Lender's right to hold the Premises shall cease and terminate
upon the earlier of ( i) payment in full and discharge of all Obligations
and termination of the Commitment, and ( ii) final sale or disposition of
all goods constituting Collateral and delivery of all such goods to
purchasers.
( d) The Lender shall not be obligated to pay or account for any rent
or other compensation for the possession, occupancy or use of any of the
Premises unless required by the landlord or landlords of such Premises;
provided, however, that if the Lender does pay or account for any rent or
other compensation for the possession, occupancy or use of any of the
Premises, the Borrower shall reimburse the Lender promptly for the full
amount thereof. In addition, the Borrower will pay, or reimburse the Lender
for, all taxes, fees, duties, imposts, charges and expenses at any time
incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this
Agreement or the provisions of this Section 3.4.
Section 3. 5 License. The Borrower hereby grants to the Lender a
non-exclusive, worldwide and royalty-free license to use or otherwise exploit
all trademarks, franchises, trade names, copyrights and patents of the Borrower
for the purpose of selling, leasing or otherwise disposing of any or all
Collateral during any Default Period.
Section 3. 6 Financing Statement. A carbon, photographic or other
reproduction of this Agreement or of any financing statements signed by the
Borrower is sufficient as a financing statement and may be filed as a financing
statement in any state to perfect the security interests granted hereby. For
this purpose, the following information is set forth:
Name and address of Debtor:
Health Fitness Physical Therapy, Inc.
3500 West 80th Street
Suite 130
Bloomington, Minnesota 55431
Federal Tax Identification No. 41-1580506
<PAGE>
Name and address of Secured Party:
Norwest Bank Minnesota, National Association
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
Federal Tax Identification No. 41-1592157
Section 3. 7 Setoff. Upon the occurrence and during the continuance of any
Event of Default, the Borrower agrees that the Lender may at any time or from
time to time, at its sole discretion and without demand and without notice to
anyone, setoff any liability owed to the Borrower by the Lender, whether or not
due, against any Obligation, whether or not due. In addition, upon the
occurrence and during the continuance of any Event of Default, each other Person
holding a participating interest in any Obligations shall have the right to
appropriate or setoff any deposit or other liability then owed by such Person to
the Borrower, whether or not due, and apply the same to the payment of said
participating interest, as fully as if such Person had lent directly to the
Borrower the amount of such participating interest.
ARTICLE IV
Conditions of Lending
Section 4. 1 Conditions Precedent to the Initial Revolving and Initial Term
Advance. The Lender's obligation to make the initial Revolving Advance and the
Initial Term Advance hereunder shall be subject to the condition precedent that
the Lender shall have received all of the following, each in form and substance
satisfactory to the Lender:
( a) This Agreement, properly executed by the Borrower.
( b) The Notes, properly executed by the Borrower.
( c) A true and correct copy of the leases pursuant to which the
Borrower or its Subsidiaries are leasing the Premises in St. Louis Park,
Minnesota, Edina, Minnesota and Bloomington, Minnesota, together with a
landlord's disclaimer and consent with respect to each such lease.
( d) Current searches of appropriate filing offices showing that ( i)
no state or federal tax liens have been filed and remain in effect against
the Borrower, ( ii) no financing statements have been filed and remain in
effect against the Borrower except those financing statements relating to
Permitted Liens or to liens held by Persons who have agreed in writing that
upon receipt of proceeds of the Advances, they will deliver UCC releases
and/or terminations satisfactory to the Lender, and ( iii) the Lender has
duly filed all financing statements necessary to perfect the Security
Interest, to the extent the Security Interest is capable of being perfected
by filing.
<PAGE>
( e) A certificate of the Borrower's Secretary or Assistant Secretary
certifying as to ( i) the resolutions of the Borrower's directors and, if
required, shareholders, authorizing the execution, delivery and performance
of the Loan Documents, ( ii) the Borrower's articles of incorporation and
bylaws, and ( iii) the signatures of the Borrower's officers or agents
authorized to execute and deliver the Loan Documents and other instruments,
agreements and certificates, including Advance requests, on the Borrower's
behalf.
( f) A current certificate issued by the Secretary of State of
Minnesota, certifying that the Borrower is in compliance with all
applicable organizational requirements of the State of Minnesota.
( g) Evidence that the Borrower and each Subsidiary is duly licensed
or qualified to transact business in all jurisdictions where the failure to
do so would materially adversely affect the Lender's, Borrower's or any
Subsidiary's rights or the Lender's security in the Collateral, provided,
however, that the Borrower need not evidence qualification to transact
business in California as of the date hereof.
( h) An opinion of counsel to the Borrower, addressed to the Lender.
( i) Certificates of the insurance required hereunder, with all hazard
insurance containing a lender's loss payable endorsement in the Lender's
favor and with all liability insurance naming the Lender as an additional
insured.
( j) A separate guaranty, properly executed by each Guarantor,
pursuant to which each Guarantor unconditionally guarantees the full and
prompt payment of all Obligations.
( k) A certificate of the Secretary or Assistant Secretary of each
Corporate Guarantor certifying as to ( i) the resolutions of the directors
and, if required, shareholders, of that Corporate Guarantor authorizing the
execution, delivery and performance of the guaranty executed and delivered
to the Lender by that Corporate Guarantor; ( ii) articles of incorporation
and bylaws; and ( iii) the signatures of the officers or agents authorized
to execute and deliver such guaranty on behalf of such company.
( l) Current searches of appropriate filing offices showing that ( i)
no state or federal tax or judgment liens have been filed and remain in
effect against the Corporate Guarantors, ( ii) no financing statements have
been filed and remain in effect against the Corporate Guarantors 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 the Corporate Guarantors,
to the extent such security interests are capable of being perfected by
filing.
<PAGE>
( m) Separate Corporate Guarantor Security Agreements, duly executed
by each Corporate Guarantor.
( n) An opinion of counsel to each Guarantor, addressed to the Lender.
( o) Payment of the fees and commissions due through the date of the
initial Advance under Section 2.6 and expenses incurred by the Lender
through such date and required to be paid by the Borrower under Section
9.8, including all legal expenses incurred through the date of this
Agreement.
( p) Such other documents as the Lender may reasonably require.
Section 4. 2 Conditions Precedent to All Advances. The Lender's obligation
to make each Advance shall be subject to the further conditions precedent that
on such date:
( a) the representations and warranties contained in Article V are
correct on and as of the date of such Advance as though made on and as of
such date, except to the extent that such representations and warranties
relate solely to an earlier date; and
( b) no event has occurred and is continuing, or would result from
such Advance which constitutes a Default or an Event of Default.
Section 4. 3 Conditions Precedent to Second Term Advance. The Lender's
obligation to make the Second Term Advance shall be subject to the condition
precedent that the Lender shall have received all of the following, each in form
and substance satisfactory to the Lender:
( a) The Agreement and Plan of Reorganization by and among K.A.M.
Physical Therapy Services Corp., The Shareholders of K.A.M. Physical
Therapy Services Corp. and HFRI, pursuant to which HFRI acquires all of the
assets of K.A.M., and such other documents and evidence of a successful
purchase as the Lender may reasonably require.
( b) Evidence that the Borrower owns 100% of the common and preferred
stock of HFRI.
( c) A separate guaranty, substantially in the form of the guaranties
executed by the other Corporate Guarantors, properly executed by HFRI,
pursuant to which HFRI unconditionally guarantees the full and prompt
payment of all Obligations.
( d) A certificate of the Secretary or Assistant Secretary of HFRI
certifying as to ( i) the resolutions of the directors and, if required,
shareholders, of HFRI authorizing the execution, delivery and performance
of the guaranty executed and delivered to the Lender by HFRI; ( ii)
articles of incorporation and bylaws; and ( iii) the signatures of the
officers or agents authorized to execute and deliver such guaranty on
behalf of HFRI.
<PAGE>
( e) 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 K.A.M. or HFRI, ( ii) no financing statements have been
filed and remain in effect against K.A.M. 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.
( f) A separate Corporate Guarantor Security Agreement, duly executed
by HFRI.
( g) An opinion of counsel to HFRI, addressed to the Lender.
( h) Such other documents as the Lender may reasonably require.
Section 4. 4 Conditions Precedent to Third Term Advance. The Lender's
obligation to make the Third Term Advance shall be subject to the condition
precedent that the Lender shall have received all of the following, each in form
and substance satisfactory to the Lender:
( a) The Asset Purchase Agreements by and between Health Fitness
Rehab, Inc. and Isernhagen, bills of sale, and such other evidence of a
successful purchase as the Lender may reasonably require.
( b) An Opinion of Counsel to Isernhagen, addressed to Borrower,
opining as to the purchase of Isernhagen's assets pursuant to the Asset
Purchase Agreement by and between Health Fitness Rehab, Inc. and
Isernhagen.
( c) 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 Isernhagen, ( ii) no financing statements have been filed
and remain in effect against Isernhagen 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 Health Fitness Rehab, Inc., to the extent such
security interests are capable of being perfected by filing.
( d) An opinion of counsel to Health Fitness Rehab, Inc., addressed to
the Lender.
( e) Such other documents as the Lender may reasonably require.
<PAGE>
ARTICLE V
Representations and Warranties
The Borrower represents and warrants to the Lender as follows:
Section 5. 1 Corporate Existence and Power; Name; Chief Executive Office;
Inventory and Equipment Locations; Tax Identification Number. The Borrower and
each of the Subsidiaries is a corporation, duly organized, validly existing and
in good standing under the laws of the State of its incorporation and is duly
licensed or qualified to transact business in all jurisdictions where the
failure to do so would materially adversely effect the Lender's, Borrower's or
any Subsidiary's rights or the Lender's security in the Collateral, provided,
however, that, as of the date hereof, (i) the Borrower is not duly licensed or
qualified to transact business in California, Massachusetts, Texas, Iowa, North
Dakota, West Virginia, Illinois, Ohio, Kentucky or Oklahoma and (ii) Fitness
Centers of America is not duly licensed or qualified to transact business in
Colorado, Maryland, Wisconsin, North Carolina, Illinois, Ohio, Kentucky and
Oregon. The Borrower and each of the Subsidiaries has all requisite power and
authority, corporate or otherwise, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under, the Loan Documents, the Guarantors' guaranties and the Corporate Guaranty
Security Agreements. During their existence, the Borrower and each Subsidiary
has done business solely under the names set forth in Schedule 5.1 hereto. The
Borrower's and each of the Subsidiaries' chief executive office and principal
place of business are located at the respective addresses set forth in Schedule
5.1 hereto, and all of the Borrower's and Subsidiaries' records relating to
their business or the Collateral are kept at those locations. All Inventory,
Subsidiary Inventory and Equipment are located at those locations or at one of
the other locations set forth in Schedule 5.1 hereto. The Borrower's tax
identification number is correctly set forth in Section 3.6 hereto.
Section 5. 2 Authorization of Borrowing; No Conflict as to Law or
Agreements. The execution, delivery and performance by the Borrower of the Loan
Documents and the borrowings from time to time hereunder have been duly
authorized by all necessary corporate action and do not and will not ( i)
require any consent or approval of the Borrower's stockholders; ( ii) require
any authorization, consent or approval by, or registration, declaration or
filing with, or notice to, any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any third party,
except such authorization, consent, approval, registration, declaration, filing
or notice as has been obtained, accomplished or given prior to the date hereof;
( iii) violate any provision of any law, rule or regulation (including, without
limitation, Regulation X of the Board of Governors of the Federal Reserve
System) or of any order, writ, injunction or decree presently in effect having
applicability to the Borrower or of the Borrower's articles of incorporation or
bylaws; ( iv) result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other material agreement, lease or instrument
to which the Borrower is a party or by which it or its properties may be bound
or affected provided, however, that the Borrower is or will be in default under
its security agreement with START Physical Therapy as a result of the Security
Interest and Obligations hereunder; or ( v) result in, or require, the creation
or imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature (other than the Security Interest)
upon or with respect to any of the properties now owned or hereafter acquired by
the Borrower.
<PAGE>
Section 5. 3 Legal Agreements.
( a)The Old Credit Documents constitute the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance
with their respective terms (subject to laws generally affecting the
enforcement of creditors' rights). The Borrower has no claim, defense or
offset to enforcement of the Old Credit Documents.
( b) This Agreement constitutes and, upon due execution by the
Borrower, the other Loan Documents will constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower in
accordance with their respective terms (subject to laws generally affecting
the enforcement of creditors' rights).
Section 5. 4 Subsidiaries. Except as set forth in Schedule 5.4 hereto, the
Borrower has no Subsidiaries.
Section 5. 5 Financial Condition; No Adverse Change. The Borrower has
heretofore furnished to the Lender audited financial statements for itself and
its Subsidiaries for their fiscal year ended December 31, 1995 and unaudited
financial statements for itself and its Subsidiaries for the fiscal year-to-date
period ended November 30, 1996 and those statements fairly present the
Borrower's and Subsidiaries' financial conditions on the dates thereof and the
results of their operations and cash flows for the periods then ended and were
prepared in accordance with generally accepted accounting principles. Since the
date of the most recent financial statements, there has been no material adverse
change in the Borrower's or any Subsidiary's business, properties or condition
(financial or otherwise).
Section 5. 6 Litigation. There are no actions, suits or proceedings pending
or, to the Borrower's knowledge, threatened against or affecting the Borrower or
any Subsidiary or the properties of the Borrower or any Subsidiary before any
court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, which, if determined adversely to the
Borrower or such Subsidiary, would have a material adverse effect on the
financial condition, properties or operations of the Borrower or such
Subsidiary.
Section 5. 7 Regulation U. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U of the Board of Governors of the Federal Reserve
System), and no part of the proceeds of any Advance will be used to purchase or
carry any margin stock or to extend credit to others for the purpose of
purchasing or carrying any margin stock.
Section 5. 8 Taxes. The Borrower and the Affiliates have paid or caused to
be paid to the proper authorities when due all federal, state and local taxes
required to be withheld by each of them. The Borrower and the Affiliates have
filed all federal, state and local tax returns which to the knowledge of the
officers of the Borrower or any Affiliate, as the case may be, are required to
be filed, and the Borrower and the Affiliates have paid or caused to be paid to
the respective taxing authorities all taxes as shown on said returns or on any
assessment received by any of them to the extent such taxes have become due.
<PAGE>
Section 5. 9 Titles and Liens. The Borrower has good and absolute title to
all Collateral described in the collateral reports provided to the Lender and
all other Collateral, properties and assets reflected in the latest financial
statements referred to in Section 5.5 and all proceeds thereof, free and clear
of all mortgages, security interests, liens and encumbrances, except for
Permitted Liens. No financing statement naming the Borrower as debtor is on file
in any office except to perfect only Permitted Liens.
Section 5. 10 Plans. Except as disclosed to the Lender in writing prior to
the date hereof, neither the Borrower nor any Affiliate maintains or has
maintained any Plan. Neither the Borrower nor any Affiliate has received any
notice or has any knowledge to the effect that it is not in full compliance with
any of the requirements of ERISA. No Reportable Event or other fact or
circumstance which may have an adverse effect on the Plan's tax qualified status
exists in connection with any Plan. Neither the Borrower nor any Affiliate has:
( a) Any accumulated funding deficiency within the meaning of ERISA;
or
( b) Any liability or knows of any fact or circumstances which could
result in any liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service, the Department of Labor or any participant in
connection with any Plan (other than accrued benefits which or which may
become payable to participants or beneficiaries of any such Plan).
Section 5. 11 Default. The Borrower is in compliance with all material
provisions of all agreements, instruments, decrees and orders to which it is a
party or by which it or its property is bound or affected, the breach or default
of which could have a material adverse effect on the Borrower's financial
condition, properties or operations.
Section 5. 12 Environmental Matters.
( a) Definitions. As used in this Agreement, the following terms shall
have the following meanings:
( i) "Environmental Law" means any federal, state, local or other
governmental statute, regulation, law or ordinance dealing with the
protection of human health and the environment.
( ii) "Hazardous Substances" means pollutants, contaminants,
hazardous substances, hazardous wastes, petroleum and fractions
thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
<PAGE>
( b) To the Borrower's knowledge, there are not present in, on or
under the Premises any Hazardous Substances in such form or quantity as to
create any liability or obligation for the Borrower, any Subsidiary or the
Lender under common law of any jurisdiction or under any Environmental Law,
and no Hazardous Substances have ever been stored, buried, spilled, leaked,
discharged, emitted or released in, on or under the Premises in such a way
as to create any such liability.
( c) To the Borrower's knowledge, neither the Borrower nor any
Subsidiary has disposed of Hazardous Substances in such a manner as to
create any liability under any Environmental Law.
( d) There are not and there never have been any requests, claims,
notices, investigations, demands, administrative proceedings, hearings or
litigation, relating in any way to the Borrower's or any Subsidiary's use
of Premises, the Borrower or any Subsidiary, alleging liability under,
violation of, or noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto. To the Borrower's
knowledge, no such matter is threatened or impending.
( e) To the Borrower's knowledge, the Borrower's and its Subsidiaries'
businesses are and have in the past always been conducted in accordance
with all Environmental Laws and all licenses, permits and other
authorizations required pursuant to any Environmental Law and necessary for
the lawful and efficient operation of such businesses are in the Borrower's
or a Subsidiaries' possession and are in full force and effect. No permit
required under any Environmental Law is scheduled to expire within 12
months and there is no threat that any such permit will be withdrawn,
terminated, limited or materially changed.
( f) To the Borrower's knowledge, the Premises are not and never have
been listed on the National Priorities List, the Comprehensive
Environmental Response, Compensation and Liability Information System or
any similar federal, state or local list, schedule, log, inventory or
database.
( g) The Borrower has delivered to Lender all environmental
assessments, audits, reports, permits, licenses and other documents which
have been or are in the possession of the Borrower or any Subsidiary and
which describe or relate in any way to the Premises, the Borrower's
businesses or any Subsidiary's businesses.
Section 5. 13 Submissions to Lender. All financial and other information
provided to the Lender by or on behalf of the Borrower in connection with the
Borrower's request for the credit facilities contemplated hereby is true and
correct in all material respects and, as to projections, valuations or proforma
financial statements, present a good faith opinion as to such projections,
valuations and proforma condition and results.
<PAGE>
Section 5. 14 Financing Statements. The Borrower has provided to the Lender
signed financing statements sufficient when filed to perfect the Security
Interest and the other security interests created by the Security Documents.
When such financing statements are filed in the offices noted therein, the
Lender will have a valid and perfected security interest in all Collateral and
all other collateral described in the Security Documents which is capable of
being perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on real
estate, unless a sufficient fixture filing is in effect with respect thereto.
Section 5. 15 Rights to Payment. Each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral or other collateral covered by the Security Documents is (or, in the
case of all future Collateral or such other collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim (other than those arising in the ordinary course
of business), of the account debtor or other obligor named therein or in the
Borrower's or any Subsidiary's records pertaining thereto as being obligated to
pay such obligation.
Section 5. 16 Financial Solvency. Both before and after giving effect to
the acquisitions of K.A.M., HFRI, Preferred Companies Isernhagen, and all of the
other transactions contemplated in the Loan Documents, neither the Borrower nor
any Affiliate:
( a) was or will be insolvent, as that term is used and defined in
Section 101(32) of the United States Bankruptcy Code and Section 2 of the
Uniform Fraudulent Transfer Act;
( b) has unreasonably small capital or is engaged or about to engage
in a business or a transaction for which any remaining assets of the
Borrower or such Affiliate are unreasonably small;
( c) by executing, delivering or performing its obligations under the
Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to, nor believes that it will, incur
debts beyond its ability to pay them as they mature;
( d) by executing, delivering or performing its obligations under the
Loan Documents or other documents to which it is a party or by taking any
action with respect thereto, intends to hinder, delay or defraud either its
present or future creditors; and
( e) at this time contemplates filing a petition in bankruptcy or for
an arrangement or reorganization or similar proceeding under any law any
jurisdiction, nor, to the best knowledge of the Borrower, is the subject of
any actual, pending or threatened bankruptcy, insolvency or similar
proceedings under any law of any jurisdiction.
<PAGE>
ARTICLE VI
Borrower's Affirmative Covenants
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower will comply with the following
requirements, unless the Lender shall otherwise consent in writing:
Section 6. 1 Reporting Requirements. The Borrower will deliver, or cause to
be delivered, to the Lender each of the following, which shall be in form and
detail reasonably acceptable to the Lender:
( a) as soon as available, and in any event within 120 days after the
end of each fiscal year of the Borrower, the Borrower's audited financial
statements with the unqualified opinion of independent certified public
accountants selected by the Borrower and acceptable to the Lender, which
annual financial statements shall include the Borrower's balance sheet as
at the end of such fiscal year and the related statements of the Borrower's
income, retained earnings and cash flows for the fiscal year then ended,
prepared, if the Lender so requests, on a consolidating and consolidated
basis to include any Affiliates, all in reasonable detail and prepared in
accordance with GAAP, together with ( i) copies of all management letters
prepared by such accountants; ( ii) a report signed by such accountants
stating that in making the investigations necessary for said opinion they
obtained no knowledge, except as specifically stated, of any Default or
Event of Default hereunder and all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not the Borrower is in
compliance with the requirements set forth in Sections 6.13, 6.14, 6.15 and
7.10; and ( iii) a certificate of the Borrower's chief financial officer
stating that such financial statements have been prepared in accordance
with GAAP and whether or not such officer has knowledge of the occurrence
of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
( b) as soon as available and in any event within 30 days of the end
of each month, an unaudited/internal balance sheet and statements of income
and retained earnings of the Borrower as at the end of such period and for
the year to date period then ended, prepared, if the Lender so requests, on
a consolidating and consolidated basis to include any Affiliates, in
reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end audit adjustments; and
accompanied by a certificate of the Borrower's chief financial officer,
substantially in the form of Exhibit C hereto stating ( i) that such
financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, ( ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating in reasonable detail
the facts with respect thereto, and ( iii) all relevant facts in reasonable
detail to evidence, and the computations as to, whether or not the Borrower
is in compliance with the requirements set forth in Sections 6.13, 6.14,
6.15 and 7.10;
<PAGE>
( c) on the 15th and last day of each month or, upon the occurrence
and during the continuance of an Event of Default more frequently if the
Lender so requires, agings of the Borrower's and each Subsidiary's accounts
receivable and a calculation of the Borrower's and Subsidiaries' Accounts,
Eligible Aged Fitness Center Accounts, Eligible New Fitness Center
Accounts, Eligible Physical Therapy Accounts and Eligible Pro Source
Accounts as at the end of such period;
( d) within 30 days after the end of each month, a report outlining
the Borrower's allowances for discounts, certified as correct by an officer
of the Borrower and the agings of the Borrower's and Subsidiaries' accounts
payable;
( e) at least 30 days before the beginning of each fiscal year of the
Borrower, the projected balance sheets and income statements for each month
of such year, each in reasonable detail, representing the Borrower's good
faith projections and certified by the Borrower's chief financial officer
as being the most accurate projections available and identical to the
projections used by the Borrower for internal planning purposes, together
with such supporting schedules and information as the Lender may in its
discretion require;
( f) immediately after the commencement thereof, notice in writing of
all litigation and of all proceedings before any governmental or regulatory
agency affecting the Borrower of the type described in Section 5.12 or
which seek a monetary recovery against the Borrower in excess of $50,000;
( g) as promptly as practicable (but in any event not later than five
business days) after an officer of the Borrower obtains knowledge of the
occurrence of any breach, default or event of default under any Security
Document or any event which constitutes a Default or Event of Default
hereunder, notice of such occurrence, together with a detailed statement by
a responsible officer of the Borrower of the steps being taken by the
Borrower to cure the effect of such breach, default or event;
( h) as soon as possible and in any event within 30 days after the
Borrower knows or has reason to know that any Reportable Event with respect
to any Plan has occurred, the statement of the Borrower's chief financial
officer setting forth details as to such Reportable Event and the action
which the Borrower proposes to take with respect thereto, together with a
copy of the notice of such Reportable Event to the Pension Benefit Guaranty
Corporation;
<PAGE>
( i) as soon as possible, and in any event within 10 days after the
Borrower fails to make any quarterly contribution required with respect to
any Plan under Section 412(m) of the Internal Revenue Code of 1986, as
amended, the statement of the Borrower's chief financial officer setting
forth details as to such failure and the action which the Borrower proposes
to take with respect thereto, together with a copy of any notice of such
failure required to be provided to the Pension Benefit Guaranty
Corporation;
( j) promptly upon knowledge thereof, notice of ( i) any disputes or
claims by the Borrower's customers exceeding $10,000 individually or
$50,000 in the aggregate during any fiscal year; ( ii) credit memos
exceeding $10,000 individually or $50,000 in the aggregate; ( iii) any
goods returned to or recovered by the Borrower exceeding $10,000
individually or $50,000 in the aggregate; and ( iv) any change in the
persons constituting the Borrower's officers and directors;
( k) promptly upon knowledge thereof, notice of any loss of or
material damage to any Collateral or other collateral covered by the
Security Documents or of any substantial adverse change in any Collateral
or such other collateral or the prospect of payment thereof;
( l) promptly upon their distribution, copies of all financial
statements, reports and proxy statements which the Borrower shall have sent
to its stockholders;
( m) promptly after the sending or filing thereof, copies of all
regular and periodic reports which the Borrower shall file with the
Securities and Exchange Commission or any national securities exchange;
( n) as soon as possible, and in any event by not later than April
30th of each year, an updated personal financial statement of the
Individual Guarantor;
( o) promptly upon knowledge thereof, notice of the Borrower's
violation of any law, rule or regulation, the non-compliance with which
could materially and adversely affect the Borrower's business or its
financial condition; and
( p) from time to time, with reasonable promptness, any and all
receivables schedules, collection reports, deposit records, equipment
schedules, copies of invoices to account debtors, shipment documents and
delivery receipts for goods sold, and such other material, reports, records
or information as the Lender may reasonably request.
Section 6. 2 Books and Records; Inspection and Examination. The Borrower
will keep accurate books of record and account for itself and the Subsidiaries
pertaining to the Collateral and pertaining to the Borrower's and Subsidiaries'
businesses and financial conditions and such other matters as the Lender may
from time to time request in which true and complete entries will be made in
accordance with GAAP and, upon the Lender's request, will permit any officer,
employee, attorney or accountant for the Lender to audit, review, make extracts
from or copy any and all corporate and financial books and records of the
Borrower and its Subsidiaries at all times during ordinary business hours, to
send and discuss with account debtors and other obligors requests for
verification of amounts owed to the Borrower or any Subsidiary, and to discuss
the Borrower's or any Subsidiary's affairs with any of its directors, officers,
employees or agents. The Borrower will permit the Lender, or its employees,
accountants, attorneys or agents, to examine and inspect any Collateral, other
collateral covered by the Security Documents or any other property of the
Borrower or any Subsidiary at any time during ordinary business hours.
<PAGE>
Section 6. 3 Account Verification. The Lender may at any time and from time
to time send or require the Borrower or any Subsidiary to send requests for
verification of accounts or notices of assignment to account debtors and other
obligors. The Lender may also at any time and from time to time telephone
account debtors and other obligors to verify accounts.
Section 6. 4 Compliance with Laws.
( a) The Borrower will and will require its Subsidiaries to ( i)
comply with the requirements of applicable laws and regulations, the
non-compliance with which would materially and adversely affect its or a
Subsidiary's business or financial condition and ( ii) use and keep the
Collateral, and require that others use and keep the Collateral, only for
lawful purposes, without violation of any federal, state or local law,
statute or ordinance.
( b) Without limiting the foregoing undertakings, the Borrower
specifically agrees that it will comply with and agrees that it will
require each Subsidiary to comply with all applicable Environmental Laws
and obtain and comply with all permits, licenses and similar approvals
required by any Environmental Laws, and will not generate, use, transport,
treat, store or dispose of any Hazardous Substances in such a manner as to
create any liability or obligation under the common law of any jurisdiction
or any Environmental Law.
Section 6. 5 Payment of Taxes and Other Claims. The Borrower will pay or
discharge, and will require each Subsidiary to pay or discharge, when due, (a)
all taxes, assessments and governmental charges levied or imposed upon it or
such Subsidiary or upon its or such Subsidiary's income or profits, upon any
properties belonging to it or such Subsidiary (including, without limitation,
the Collateral) or upon or against the creation, perfection or continuance of
the Security Interest and the security interests granted pursuant to the
Corporate Guarantor Security Agreements, prior to the date on which penalties
attach thereto, (b) all federal, state and local taxes required to be withheld
by it or such Subsidiary, and (c) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien or charge upon any
properties of the Borrower or such Subsidiary; provided, that the Borrower and
the Subsidiaries shall not be required to pay any such tax, assessment, charge
or claim whose amount, applicability or validity is being contested in good
faith by appropriate proceedings and for which proper reserves have been made.
Section 6. 6 Maintenance of Properties.
( a) The Borrower will keep and maintain, and will require each
Subsidiary to keep and maintain, the Collateral, the other collateral
covered by the Security Documents and all of the other properties necessary
or useful in its business in good condition, repair and working order
(normal wear and tear excepted) and will from time to time replace or
repair any worn, defective or broken parts; provided, however, that nothing
in this Section 6.6 shall prevent the Borrower or any Subsidiary from
discontinuing the operation and maintenance of any of its properties if
such discontinuance is, in the Lender's judgment, desirable in the conduct
of the Borrower's or such Subsidiary's business and not disadvantageous in
any material respect to the Lender.
( b) The Borrower will defend the Collateral against all claims or
demands of all Persons (other than the Lender and those Persons with
Permitted Liens) claiming the Collateral or any interest therein.
( c) The Borrower will keep, and will require each Subsidiary to keep
all Collateral and other collateral covered by the Security Documents free
and clear of all security interests, liens and encumbrances except
Permitted Liens.
Section 6. 7 Insurance. The Borrower will obtain and at all times maintain,
and will require each Subsidiary to obtain and at all times maintain, insurance
with insurers believed by the Borrower to be responsible and reputable, in such
amounts and against such risks as may from time to time be reasonably required
by the Lender, but in all events in such amounts and against such risks as is
usually carried by companies engaged in similar business and owning similar
properties in the same general areas in which the Borrower and the Subsidiaries
operate. Without limiting the generality of the foregoing, the Borrower will at
all times keep all tangible Collateral insured against risks of fire (including
so-called extended coverage), theft, collision (for Collateral consisting of
motor vehicles) and such other risks and in such amounts as the Lender may
reasonably request, with any loss payable to the Lender to the extent of its
interest, and all policies of such insurance shall contain a lender's loss
payable endorsement for the Lender's benefit acceptable to the Lender. All
policies of liability insurance required hereunder shall name the Lender as an
additional insured.
Section 6. 8 Preservation of Existence. The Borrower will preserve and
maintain its existence and all of its rights, privileges and franchises
necessary or desirable in the normal conduct of its business and shall conduct
its business in an orderly, efficient and regular manner. The Borrower will
require each Subsidiary to preserve and maintain its existence and all of their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of its business and shall require each Subsidiary to conduct its
business in an orderly, efficient and regular manner.
<PAGE>
Section 6. 9 Delivery of Instruments, etc. Upon request by the Lender, the
Borrower will promptly deliver to the Lender in pledge all instruments,
documents and chattel papers constituting Collateral, duly endorsed or assigned
by the Borrower.
Section 6. 10 Collateral Account.
( a) Upon the occurrence and during the continuance of an Event of
Default, the Lender may establish a collateral account (the "Collateral
Account") for the deposit of payments on Receivables and Subsidiary
Receivables.
( b) If the Collateral Account is so established, the Borrower shall
promptly deposit, and shall require each Subsidiary to promptly deposit,
all payments on Receivables, Subsidiary Receivables and other cash proceeds
of the Collateral received by it or any Subsidiary into the Collateral
Account. Until so deposited or paid to the Lender, the Borrower and
Subsidiaries shall hold all payments on Receivables and Subsidiary
Receivables in trust for and as the property of the Lender and shall not
commingle such payments with any of its other funds or property.
( c) Amounts deposited in the Collateral Account shall not bear
interest and shall not be subject to withdrawal by the Borrower or any
Subsidiary, except after full payment and discharge of all Obligations.
( d) All deposits in the Collateral Account shall constitute proceeds
of Collateral and shall not constitute payment of the Obligations. The
Lender shall, after allowing 2 Banking Days, apply deposited funds in the
Collateral Account to the payment of the Obligations, in any order or
manner of application satisfactory to the Lender, by transferring such
funds to the Lender's general account.
( e) All items deposited in the Collateral Account shall be subject to
final payment. If any such item is returned uncollected, the Borrower or
its Subsidiaries will immediately pay the Lender the amount of that item,
or the Lender at its discretion may charge any uncollected item to the
Borrower's commercial account or other account. The Borrower shall be
liable as an endorser on all items deposited in the Collateral Account,
whether or not in fact endorsed by the Borrower.
Section 6. 11 Lockbox. Upon the occurrence and during the continuance of an
Event of Default, the Lender may request and upon such request the Borrower will
irrevocably direct and will require each Subsidiary to irrevocably direct all
present and future account debtors and other Persons obligated to make payments
on Receivables or Subsidiary Receivables to make such payments directly to a
special lockbox (the "Lockbox") to be under the Lender's control.
( a) After such request, all of the Borrower's and each Subsidiary's
invoices, account statements and other written or oral communications
directing, instructing, demanding or requesting payment of any Receivable,
Subsidiary Receivable or any other amount constituting Collateral shall
conspicuously direct that all payments be made to the Lockbox and shall
include the Lockbox address. All payments received in the Lockbox shall be
processed to the Collateral Account.
<PAGE>
( b) The Borrower agrees to deposit and will require each Subsidiary
to deposit in the Collateral Account or, at the Lender's option, to deliver
to the Lender all collections on Receivables, Subsidiary Receivables and
all other proceeds of Collateral, which the Borrower or any Subsidiary may
receive directly notwithstanding its direction to account debtors and other
obligors to make payments to the Lockbox, immediately upon receipt thereof,
in the form received, except for the Borrower's or Subsidiary's endorsement
when deemed necessary. Until delivered to the Lender or deposited in the
Collateral Account, the Borrower and Subsidiaries shall hold all proceeds
or collections of Collateral in trust for and as the property of the Lender
and shall not commingle them with any other funds or property of the
Borrower or any Subsidiary. All such collections shall constitute proceeds
of Collateral and shall not constitute payment of any Obligation.
Section 6. 12 Performance by the Lender. If the Borrower at any time fails
to perform or observe any of the foregoing covenants contained in this Article
VI or elsewhere herein, and if such failure shall continue for a period of ten
calendar days after the Lender gives the Borrower written notice thereof (or in
the case of the agreements contained in Sections 6.5, 6.7, 6.10 and 6.11
immediately upon the occurrence of such failure, without notice or lapse of
time), the Lender may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of the Borrower (or, at the Lender's option, in
the Lender's name) and may, but need not, take any and all other actions which
the Lender may reasonably deem necessary to cure or correct such failure
(including, without limitation, the payment of taxes, the satisfaction of
security interests, liens or encumbrances, the performance of obligations owed
to account debtors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments); and the Borrower shall
thereupon pay to the Lender on demand the amount of all monies expended and all
costs and expenses (including reasonable attorneys' fees and legal expenses)
incurred by the Lender in connection with or as a result of the performance or
observance of such agreements or the taking of such action by the Lender,
together with interest thereon from the date expended or incurred at the
Revolving Floating Rate. To facilitate the Lender's performance or observance of
such covenants of the Borrower, the Borrower hereby irrevocably appoints the
Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in
fact (which appointment is coupled with an interest) with the right (but not the
duty) from time to time to create, prepare, complete, execute, deliver, endorse
or file in the name and on behalf of the Borrower any and all instruments,
documents, assignments, security agreements, financing statements, applications
for insurance and other agreements and writings required to be obtained,
executed, delivered or endorsed by the Borrower under this Section 6.12.
<PAGE>
Section 6. 13 Minimum Book Net Worth. The Borrower will maintain, during
each period described below, its Book Net Worth, determined as at the end of
each month, at an amount not less than:
( a) from December 31, 1996 through March 30, 1997, $9,800,000; and
( b) for each period set forth below, the sum of (i) the Borrower's
actual Book Net Worth as of December 31, 1996, plus (ii) the increase in
the Borrower's Book Net Worth resulting from the issuance of its common and
preferred stock during the period from December 31, 1996 through the
Termination Date, plus (iii) the amount set forth opposite such period
below:
<PAGE>
Period Minimum Book Net Worth
- -------------------------------------------------- --------------------------
From March 31, 1997 through
June 29, 1997 $150,000
- -------------------------------------------------- --------------------------
From June 30, 1997 through
September 29, 1997 $400,000
- -------------------------------------------------- --------------------------
From September 30, 1997 through
December 30, 1997 $650,000
- -------------------------------------------------- --------------------------
From December 31, 1997 through
March 31, 1998 $1,000,000
- -------------------------------------------------- --------------------------
Section 6. 14 Maximum Debt to Book Net Worth Ratio. The Borrower will
maintain the ratio of its Debt to its Book Net Worth, determined as at the end
of each month, at a ratio not greater than 1.00 to 1.00.
Section 6. 15 Net Income. The Borrower will achieve during each period
described below, Net Income of not less than the amount set forth opposite such
period:
Period Minimum Net Income
- ------------------------------------------------ -----------------------
January 1, 1996 through
December 31, 1996 $900,000
- ------------------------------------------------ -----------------------
January 1, 1997 through
March 30, 1997 $150,000
- ------------------------------------------------ -----------------------
From January 1, 1997 through
June 29, 1997 $400,000
- ------------------------------------------------ -----------------------
From January 1, 1997 through
September 29, 1997 $650,000
- ------------------------------------------------ -----------------------
From January 1, 1997 through
December 31, 1997 $1,000,000
- ------------------------------------------------ -----------------------
From January 1, 1998 through
March 30, 1998 $150,000
- ------------------------------------------------ -----------------------
Section 6. 16 New Covenants. On or before March 30, 1998, the Lender shall
establish acceptable covenant levels for application at the end of each calendar
quarter under Sections 6.13, 6.14, 6.15 and 7.10, based upon the Borrower's
projections for such periods. The Lender shall negotiate in good faith with the
Borrower to establish such covenant levels, provided that (i) in no event shall
such covenant levels be less stringent than the present levels and (ii) if for
any reason the Borrower and the Lender do not enter into legally binding
documentation establishing such covenants at levels acceptable to the Lender in
its sole discretion on or prior to March 30, 1998 such failure shall constitute
an Event of Default hereunder.
<PAGE>
Section 6. 17 Employment of Loren Brink. The Borrower shall employ Loren
Scott Brink to fulfill the duties and obligations of the Borrower's chief
executive officer.
Section 6. 18 Condition Subsequent to Closing.
( a) On or before February 18, 1997, the Borrower shall deliver to the
Lender evidence, in form and substance acceptable to the Lender, that the
following UCC financing statements have been terminated: (i) Minnesota
Secretary of State filing no. 1897685 listing the Borrower as debtor and
Textron Financial Corporation as secured party; (ii) Minnesota Secretary of
State filing no. 1561298 listing Sports & Orthopedic Physical Therapy, Inc.
as debtor and TCF as secured party; (iii) Illinois Secretary of State
filing no. 3384410 listing the Borrower as debtor and Horton Community
Property Trust as secured party; (iv) Connecticut Secretary of State filing
no. 1613175 listing the Borrower as debtor and Horton Community Property
Trust as secured party; (v) Minnesota Secretary of State filing no. 1512206
listing Health Fitness Corporation as debtor and Robert J. Fink as secured
party; (vi) Minnesota Secretary of State filing no. 1556989 listing the
Health Fitness Corporation as debtor and Lumex Inc. as secured party, and
(vii) Minnesota Secretary of State filing no. 1706969 listing Health
Fitness Corporation as debtor and Southern Pacific Thrift and Loan as
secured party.
( b) On or before March 7, 1997, the Borrower shall deliver to the
Lender evidence that (i) the Borrower is duly licensed or qualified to
transact business in California, Massachusetts, Texas, Iowa, North Dakota,
West Virginia, Illinois, Ohio, Kentucky and Oklahoma, and (ii) Fitness
Centers of America is duly licensed or qualified to transact business in
Colorado, Maryland, Wisconsin, North Carolina, Illinois, Ohio, Kentucky and
Oregon.
( c) On or before March 7, 1997, the Borrower shall deliver to the
Lender a Landlord's Disclaimer and Consents, in form and substance
acceptable to the Lender, properly executed by the landlords of the
Premises leased in Bloomington, Minnesota and Edina, Minnesota.
( d) On or before April 4, 1997, the Borrower shall deliver to the
Lender a Subordination Agreement in form and substance acceptable to the
Lender, properly executed by START Physical Therapy and acknowledged by the
Borrower.
<PAGE>
ARTICLE VII
Negative Covenants
So long as the Obligations shall remain unpaid, or the Credit Facility
shall remain outstanding, the Borrower agrees that, without the Lender's prior
written consent:
Section 7. 1 Liens. The Borrower will not create, incur or suffer to exist,
and will not permit any Subsidiary to create, incur or suffer to exist, any
mortgage, deed of trust, pledge, lien, security interest, assignment or transfer
upon or of any of its assets, now owned or hereafter acquired, to secure any
indebtedness; excluding, however, from the operation of the foregoing, the
following (collectively, "Permitted Liens"):
( a) in the case of any of the Borrower's or any Subsidiary's property
which is not Collateral or other collateral described in the Security
Documents, covenants, restrictions, rights, easements and minor
irregularities in title which do not materially interfere with the
Borrower's or such Subsidiary's business or operations as presently
conducted;
( b) mortgages, deeds of trust, pledges, liens, security interests and
assignments in existence on the date hereof and listed in Schedule 7.1
hereto, securing indebtedness for borrowed money permitted under Section
7.2;
( c) the Security Interest and liens and security interests created by
the Security Documents; and
( d) purchase money security interests relating to the acquisition of
machinery and equipment (including capitalized leases) of the Borrower or
an Subsidiary not exceeding the lesser of cost or fair market value thereof
, not exceeding $100,000 in the aggregate during any fiscal year and so
long as no Default Period is then in existence and none would exist
immediately after such acquisition.
Section 7. 2 Indebtedness. The Borrower will not incur, create, assume or
permit to exist, and will not allow any Subsidiary to incur, create, assume or
permit to exist, any indebtedness or liability on account of deposits or
advances or any indebtedness for borrowed money or letters of credit issued on
the Borrower's or a Subsidiary's behalf, or any other indebtedness or liability
evidenced by notes, bonds, debentures or similar obligations, except:
( a) indebtedness arising hereunder;
( b) indebtedness of the Borrower or a Subsidiary in existence on the
date hereof and listed in Schedule 7.2 hereto; and
( c) indebtedness relating to liens permitted in accordance with
Section 7.1.
<PAGE>
Section 7. 3 Guaranties. The Borrower will not assume, guarantee, endorse
or otherwise become directly or contingently liable, and will not permit any
Subsidiary to assume, guarantee, endorse or otherwise become directly or
contingently liable, in connection with any obligations of any other Person,
except:
( a) the endorsement of negotiable instruments by the Borrower or a
Subsidiary for deposit or collection or similar transactions in the
ordinary course of business; and
( b) guaranties, endorsements and other direct or contingent
liabilities in connection with the obligations of other Persons, in
existence on the date hereof and listed in Schedule 7.2 hereto.
Section 7. 4 Investments and Subsidiaries.
( a) The Borrower will not purchase or hold beneficially, and will not
permit any Subsidiary to purchase or hold beneficially, any stock or other
securities or evidences of indebtedness of, make or permit to exist any
loans or advances to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without
limitation any partnership or joint venture, except:
( i) investments in direct obligations of the United States of
America or any agency or instrumentality thereof whose obligations
constitute full faith and credit obligations of the United States of
America having a maturity of one year or less, commercial paper issued
by U.S. corporations rated "A-1" or "A-2" by Standard & Poors
Corporation or "P-1" or "P-2" by Moody's Investors Service or
certificates of deposit or bankers' acceptances having a maturity of
one year or less issued by members of the Federal Reserve System
having deposits in excess of $100,000,000 (which certificates of
deposit or bankers' acceptances are fully insured by the Federal
Deposit Insurance Corporation);
( ii) travel advances or loans to the Borrower's or any
Subsidiary's officers and employees not exceeding at any one time an
aggregate of $5,000 other than the loan to Loren Scott Brink as set
for in subsection (iii) below;
( iii) the Borrower's loan to Loren Scott Brink in the principal
amount of $66,061.93 so long as such loan matures within five years of
the date hereof and Loren Scott Brink makes the scheduled payments of
principal and interest at least twice each month; and
( iv) advances in the form of progress payments, prepaid rent not
exceeding three months or security deposits.
( b) Neither the Borrower nor any Subsidiary will create or permit to
exist any Subsidiary, other than the Subsidiaries in existence on the date
hereof and listed in Schedule 5.4.
<PAGE>
Section 7. 5 Dividends. The Borrower will not declare or pay any dividends
(other than dividends payable solely in stock of the Borrower) on any class of
stock or make any payment on account of the purchase, redemption or other
retirement of any shares of such stock or make any distribution in respect
thereof, either directly or indirectly.
Section 7. 6 Sale or Transfer of Assets; Suspension of Business
Operations. The Borrower will not sell, lease, assign, transfer or otherwise
dispose of and will not permit any Subsidiary to sell, lease, assign, transfer
or otherwise dispose of ( i) the stock of any Subsidiary, ( ii) all or a
substantial part of the Borrower's or any Subsidiary's assets, or ( iii) any
Collateral or any collateral of any Subsidiary or any interest therein (whether
in one transaction or in a series of transactions) to any other Person other
than the sale of Inventory or Subsidiary Inventory in the ordinary course of
business and will not liquidate, dissolve or suspend business operations
provided, however, that the Borrower and Subsidiaries may sell, lease, assign,
transfer or otherwise dispose of assets up to an aggregate amount of $100,000
during any fiscal year of the Borrower. Neither the Borrower nor any Subsidiary
will in any manner transfer any property without prior or present receipt of
full and adequate consideration.
Section 7. 7 Consolidation and Merger; Asset Acquisitions. The Borrower
will not consolidate with or merge into, and will not permit any Subsidiary to
consolidate with or merge into any Person, or permit any other Person to merge
into it, or acquire (in a transaction analogous in purpose or effect to a
consolidation or merger) all or substantially all the assets of any other Person
provided, however, that (i) the Borrower may acquire 100% of all common and
preferred stock of HFRI which shall own all or substantially all of the assets
of K.A.M. and (ii) the Borrower may acquire all or substantially all of the
assets of any Person up to an aggregate amount of $200,000 during any fiscal
year of the Borrower.
Section 7. 8 Sale and Leaseback. The Borrower will not enter, and will not
permit any Subsidiary to enter, into any arrangement, directly or indirectly,
with any other Person whereby the Borrower or such Subsidiary shall sell or
transfer any real or personal property, whether now owned or hereafter acquired,
and then or thereafter rent or lease as lessee such property or any part thereof
or any other property which the Borrower or such Subsidiary intends to use for
substantially the same purpose or purposes as the property being sold or
transferred.
Section 7. 9 Restrictions on Nature of Business. The Borrower will not
engage, and will not permit any Subsidiary to engage, in any line of business
materially different from that presently engaged in by the Borrower or such
Subsidiary and will not purchase, lease or otherwise acquire assets not related
to its business.
Section 7. 10 Capital Expenditures. The Borrower will not incur or contract
to incur, and will not permit any Subsidiary to incur or contract to incur,
Capital Expenditures of more than $765,000 in the aggregate during any fiscal
year.
Section 7. 11 Accounting. The Borrower will not adopt, and will not permit
any Subsidiary to adopt, any material change in accounting principles other than
as required by GAAP. The Borrower will not adopt, permit or consent and will not
permit any Subsidiary to adopt, permit or consent to any change in the
Borrower's or such Subsidiary's fiscal year.
<PAGE>
Section 7. 12 Defined Benefit Pension Plans. The Borrower will not adopt,
create, assume or become a party to any defined benefit pension plan, unless
disclosed to the Lender pursuant to Section 5.10. The Borrower will not permit
any Subsidiary to adopt, create, assume or become a party to any defined benefit
pension plan, unless disclosed to the Lender pursuant to Section 5.10.
Section 7. 13 Other Defaults. The Borrower will not permit, and will not
allow any Subsidiary to permit, any (a) material breach or default or (b) any
event of default to occur under any note, loan agreement, indenture, lease,
mortgage, contract for deed, security agreement or other contractual obligation
binding upon the Borrower such Subsidiary.
Section 7. 14 Place of Business; Name. The Borrower will not transfer, and
will not permit any Subsidiary to transfer, its chief executive office or
principal place of business, or move, relocate, close or sell any business
location. The Borrower will not permit any tangible Collateral or any records
pertaining to the Collateral to be located in any state or area in which, in the
event of such location, a financing statement covering such Collateral would be
required to be, but has not in fact been, filed in order to perfect the Security
Interest. The Borrower will not change its name and will not permit any
Subsidiary to change their name.
Section 7. 15 Organizational Documents; S Corporation Status. The Borrower
will not amend its certificate of incorporation, articles of incorporation or
bylaws. The Borrower will not become an S Corporation within the meaning of the
Internal Revenue Code of 1986, as amended.
Section 7. 16 Salaries. The Borrower will not pay, and will not permit any
Subsidiary to pay, excessive or unreasonable salaries, bonuses, commissions,
consultant fees or other compensation.
Section 7. 17 Change in Ownership. The Borrower will not sell, and will not
permit any Subsidiary to issue or sell, any stock of a Subsidiary so as to
change the percentage of voting and non-voting stock owned by each of the
Subsidiary's shareholders. The Borrower will not permit and will not allow any
Subsidiary to permit or suffer to occur the sale, transfer, assignment, pledge
or other disposition of any or all of the issued and outstanding shares of stock
of any Subsidiary. The Borrower will not permit any Related Persons to own or
control more than 50% of the issued and outstanding shares of the Borrower.
<PAGE>
ARTICLE VIII
Events of Default, Rights and Remedies
Section 8. 1 Events of Default. "Event of Default", wherever used herein,
means any one of the following events:
( a) Default in the payment of the Obligations when they become due
and payable;
( b) Default in the payment of any fees, commissions, costs or
expenses required to be paid by the Borrower under this Agreement;
( c) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in Sections 6.4, 6.6, 6.8 and 7.13 of
this Agreement if not cured within 10 days of the occurrence thereof.
( d) Default in the performance, or breach, of any covenant or
agreement of the Borrower contained in this Agreement other than those
covenants and agreements described in subsection (c) above;
( e) The Borrower or any Guarantor shall be or become insolvent, or
admit in writing its or his inability to pay its or his debts as they
mature, or make an assignment for the benefit of creditors; or the Borrower
or any Guarantor shall apply for or consent to the appointment of any
receiver, trustee, or similar officer for it or him or for all or any
substantial part of its or his property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of
the Borrower or such Guarantor, as the case may be; or the Borrower or any
Guarantor shall institute (by petition, application, answer, consent or
otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding
relating to it or him under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application or otherwise)
against the Borrower or any such Guarantor; or any judgment, writ, warrant
of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Borrower or any
Guarantor;
( f) A petition shall be filed by or against the Borrower or any
Guarantor under the United States Bankruptcy Code naming the Borrower or
such Guarantor as debtor;
( g) Any representation or warranty made by the Borrower in this
Agreement, by any Guarantor in any guaranty delivered to the Lender, or by
the Borrower (or any of its officers) or any Guarantor in any agreement,
certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any such guaranty shall prove to have been incorrect in any
material respect when deemed to be effective;
<PAGE>
( h) Any litigation or governmental proceeding against the Borrower or
any Subsidiary seeking an amount in excess of $100,000 which is not insured
or subject to indemnity by a solvent third Person and which either ( i)
results in a final judgment, decree or order for the payment of money in
excess of $100,000 and such final judgment, decree or order remains
unsatisfied and in effect for any period of 30 consecutive days, or ( ii)
remains unresolved or unsatisfied for 360 consecutive days.
( i) A default under any bond, debenture, note or other evidence of
indebtedness of the Borrower or any Subsidiary owed to any Person other
than the Lender, or under any indenture or other instrument under which any
such evidence of indebtedness has been issued or by which it is governed,
or under any lease of any of the Premises, and the expiration of the
applicable period of grace, if any, specified in such evidence of
indebtedness, indenture, other instrument or lease;
( j) Any Reportable Event, which the Lender determines in good faith
might constitute grounds for the termination of any Plan or for the
appointment by the appropriate United States District Court of a trustee to
administer any Plan, shall have occurred and be continuing 30 days after
written notice to such effect shall have been given to the Borrower by the
Lender; or a trustee shall have been appointed by an appropriate United
States District Court to administer any Plan; or the Pension Benefit
Guaranty Corporation shall have instituted proceedings to terminate any
Plan or to appoint a trustee to administer any Plan; or the Borrower shall
have filed for a distress termination of any Plan under Title IV of ERISA;
or the Borrower shall have failed to make any quarterly contribution
required with respect to any Plan under Section 412(m) of the Internal
Revenue Code of 1986, as amended, which the Lender determines in good faith
may by itself, or in combination with any such failures that the Lender may
determine are likely to occur in the future, result in the imposition of a
lien on the Borrower's assets in favor of the Plan;
( k) An event of default shall occur under any Security Document or
under any other security agreement, mortgage, deed of trust, assignment or
other instrument or agreement securing any obligations of the Borrower
hereunder or under any note evidencing the Obligations;
( l) The Borrower or any Subsidiary shall liquidate, dissolve,
terminate or suspend its business operations or otherwise fail to operate
its business in the ordinary course, or sell all or substantially all of
its assets, without the Lender's prior written consent;
( m) The Borrower or any Subsidiary shall fail to pay, withhold,
collect or remit any tax or tax deficiency when assessed or due (other than
any tax deficiency which is being contested in good faith and by proper
proceedings and for which it shall have set aside on its books adequate
reserves therefor) or notice of any state or federal tax liens shall be
filed or issued;
<PAGE>
( n) Default in the payment of any amount owed by the Borrower to the
Lender other than any indebtedness arising hereunder;
( o) Any Guarantor shall repudiate, purport to revoke or fail to
perform any such Guarantor's obligations under such Guarantor's guaranty in
favor of the Lender, any individual Guarantor shall die and the estate of
such Guarantor fails to acknowledge and assume the Guarantor's obligations
to the Lender or any other Guarantor shall cease to exist;
( p) The Borrower shall take or participate in any action which would
be prohibited under the provisions of any Subordination Agreement or make
any payment on the Subordinated Indebtedness (as defined in the
Subordination Agreement) that any Person was not entitled to receive under
the provisions of the Subordination Agreement; or
( q) Any breach, default or event of default by or attributable to any
Affiliate under any agreement between such Affiliate and the Lender.
Section 8. 2 Rights and Remedies. During any Default Period, the Lender may
exercise any or all of the following rights and remedies:
( a) the Lender may, by notice to the Borrower, declare the Commitment
to be terminated, whereupon the same shall forthwith terminate;
( b) the Lender may, by notice to the Borrower, declare the
Obligations to be forthwith due and payable, whereupon all Obligations
shall become and be forthwith due and payable, without presentment, notice
of dishonor, protest or further notice of any kind, all of which the
Borrower hereby expressly waives;
( c) the Lender may, without notice to the Borrower and without
further action, apply any and all money owing by the Lender to the
Borrower, including without limitation any funds on deposit with the
Lender, whether or not matured, to the payment of the Obligations;
( d) the Lender may exercise and enforce any and all rights and
remedies available upon default to a secured party under the UCC,
including, without limitation, the right to take possession of Collateral,
or any evidence thereof, proceeding without judicial process or by judicial
process (without a prior hearing or notice thereof, which the Borrower
hereby expressly waives) and the right to sell, lease or otherwise dispose
of any or all of the Collateral, and, in connection therewith, the Borrower
will on demand assemble the Collateral and make it available to the Lender
at a place to be designated by the Lender which is reasonably convenient to
both parties;
( e) the Lender may exercise and enforce its rights and remedies under
the Guaranties and/or the Loan Documents; and
<PAGE>
( f) the Lender may exercise any other rights and remedies available
to it by law or agreement.
Notwithstanding the foregoing, upon the occurrence of an Event of Default
described in subsections (e) or (f) of Section 8.1, the Obligations shall be
immediately due and payable automatically without presentment, demand, protest
or notice of any kind.
Section 8. 3 Certain Notices. If notice to the Borrower of any intended
disposition of Collateral or any other intended action is required by law in a
particular instance, such notice shall be deemed commercially reasonable if
given (in the manner specified in Section 9.5) at least ten calendar days before
the date of intended disposition or other action.
ARTICLE IX
Miscellaneous
Section 9. 1 Restatement of Old Credit Documents. This Agreement is
executed for the purpose of amending and restating the Old Credit Documents.
From and after the date hereof, the Old Credit Documents shall have no force or
effect.
Section 9. 2 Release. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lender, the Participants and any and all
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 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 Agreement, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
Section 9. 3 No Waiver; Cumulative Remedies. No failure or delay by the
Lender in exercising any right, power or remedy under the Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise of any
such right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy under the Loan Documents. The
remedies provided in the Loan Documents are cumulative and not exclusive of any
remedies provided by law.
Section 9. 4 Amendments, Etc. No amendment, modification, termination or
waiver of any provision of any Loan Document or consent to any departure by the
Borrower therefrom or any release of a Security Interest shall be effective
unless the same shall be in writing and signed by the Lender, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. No notice to or demand on the Borrower in any
case shall entitle the Borrower to any other or further notice or demand in
similar or other circumstances.
<PAGE>
Section 9. 5 Addresses for Notices, Etc. Except as otherwise expressly
provided herein, all notices, requests, demands and other communications
provided for under the Loan Documents shall be in writing and shall be (a)
personally delivered, (b) sent by first class United States mail, (c) sent by
overnight courier of national reputation, or (d) transmitted by telecopy, in
each case addressed or telecopied to the party to whom notice is being given at
its address or telecopier number as set forth below:
If to the Borrower:
Health Fitness Physical Therapy, Inc.
3500 West 80th Street
Suite 130
Bloomington, Minnesota 55431
Telecopier: 612/831-7264
Attention: Chief Financial Officer
If to the Lender:
Norwest Bank Minnesota, National Association
7900 Xerxes Avenue South
Bloomington, Minnesota 55431
Telecopier: 612/830-8924
Attention: Douglas Van Metre
or, as to each party, at such other address or telecopier number as may
hereafter be designated by such party in a written notice to the other party
complying as to delivery with the terms of this Section. All such notices,
requests, demands and other communications shall be deemed to have been given on
(a) the date received if personally delivered, (b) when deposited in the mail if
delivered by mail, (c) the date sent if sent by overnight courier, or (d) the
date of transmission if delivered by telecopy, except that notices or requests
to the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9. 6 Further Documents. The Borrower will from time to time execute
and deliver or endorse any and all instruments, documents, conveyances,
assignments, security agreements, financing statements and other agreements and
writings that the Lender may reasonably request in order to secure, protect,
perfect or enforce the Security Interest or the Lender's rights under the Loan
Documents (but any failure to request or assure that the Borrower executes,
delivers or endorses any such item shall not affect or impair the validity,
sufficiency or enforceability of the Loan Documents and the Security Interest,
regardless of whether any such item was or was not executed, delivered or
endorsed in a similar context or on a prior occasion).
<PAGE>
Section 9. 7 Collateral. This Agreement does not contemplate a sale of
accounts, contract rights or chattel paper, and, as provided by law, the
Borrower is entitled to any surplus and shall remain liable for any deficiency.
The Lender's duty of care with respect to Collateral in its possession (as
imposed by law) shall be deemed fulfilled if it exercises reasonable care in
physically keeping such Collateral, or in the case of Collateral in the custody
or possession of a bailee or other third person, exercises reasonable care in
the selection of the bailee or other third person, and the Lender need not
otherwise preserve, protect, insure or care for any Collateral. The Lender shall
not be obligated to preserve any rights the Borrower may have against prior
parties, to realize on the Collateral at all or in any particular manner or
order or to apply any cash proceeds of the Collateral in any particular order of
application.
Section 9. 8 Costs and Expenses. The Borrower agrees to pay on demand all
costs and expenses, including (without limitation) attorneys' fees, incurred by
the Lender in connection with the Obligations, this Agreement, the Loan
Documents, and any other document or agreement related hereto or thereto, and
the transactions contemplated hereby, including without limitation all such
costs, expenses and fees incurred in connection with the negotiation,
preparation, execution, amendment, administration, performance, collection and
enforcement of the Obligations and all such documents and agreements and the
creation, perfection, protection, satisfaction, foreclosure or enforcement of
the Security Interest.
Section 9. 9 Indemnity. In addition to the payment of expenses pursuant to
Section 9.8, the Borrower agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the foregoing
(the "Indemnitees") from and against any of the following (collectively,
"Indemnified Liabilities"):
( a) any and all transfer taxes, documentary taxes, assessments or
charges made by any governmental authority by reason of the execution and
delivery of the Loan Documents or the making of the Advances;
( b) any claims, loss or damage to which any Indemnitee may be
subjected if any representation or warranty contained in Section 5.12
proves to be incorrect in any respect or as a result of any violation of
the covenant contained in Section 6.4(b); and
( c) any and all other liabilities, losses, damages, penalties,
judgments, suits, claims, costs and expenses of any kind or nature
whatsoever (including, without limitation, the reasonable fees and
disbursements of counsel) in connection with the foregoing and any other
investigative, administrative or judicial proceedings, whether or not such
Indemnitee shall be designated a party thereto, which may be imposed on,
incurred by or asserted against any such Indemnitee, in any manner related
to or arising out of or in connection with the making of the Advances and
the Loan Documents or the use or intended use of the proceeds of the
Advances.
<PAGE>
provided, however, that this Section 9.9 shall not apply to any cost or expense
arising from the Lender's gross negligence or willful misconduct.
If any investigative, judicial or administrative proceeding arising from any of
the foregoing is brought against any Indemnitee, upon such Indemnitee's request,
the Borrower, or counsel designated by the Borrower and satisfactory to the
Indemnitee, will resist and defend such action, suit or proceeding to the extent
and in the manner directed by the Indemnitee, at the Borrower's sole costs and
expense. Each Indemnitee will use its best efforts to cooperate in the defense
of any such action, suit or proceeding. If the foregoing undertaking to
indemnify, defend and hold harmless may be held to be unenforceable because it
violates any law or public policy, the Borrower shall nevertheless make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The Borrower's obligation
under this Section 9.9 shall survive the termination of this Agreement and the
discharge of the Borrower's other obligations hereunder.
Section 9. 10 Participants. The Lender and its participants, if any, are
not partners or joint venturers, and the Lender shall not have any liability or
responsibility for any obligation, act or omission of any of its participants.
All rights and powers specifically conferred upon the Lender may be transferred
or delegated to any of the Lender's participants, successors or assigns.
Section 9. 11 Execution in Counterparts. This Agreement and other Loan
Documents may be executed in any number of counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same instrument.
Section 9. 12 Binding Effect; Assignment; Complete Agreement; Exchanging
Information. The Loan Documents shall be binding upon and inure to the benefit
of the Borrower and the Lender and their respective successors and assigns,
except that the Borrower shall not have the right to assign its rights
thereunder or any interest therein without the Lender's prior written consent.
This Agreement, together with the Loan Documents, comprises the complete and
integrated agreement of the parties on the subject matter hereof and supersedes
all prior agreements, written or oral, on the subject matter hereof. Without
limiting the Lender's right to share information regarding the Borrower and its
Affiliates with the Lender's participants, accountants, lawyers and other
advisors, the Lender, Norwest Corporation, and all direct and indirect
subsidiaries of Norwest Corporation, may exchange any and all information they
may have in their possession regarding the Borrower and its Affiliates, and the
Borrower waives any right of confidentiality it may have with respect to such
exchange of such information.
Section 9. 13 Severability of Provisions. Any provision of this Agreement
which is prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof.
<PAGE>
Section 9. 14 Headings. Article and Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.
Section 9. 15 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The
Loan Documents shall be governed by and construed in accordance with the
substantive laws (other than conflict laws) of the State of Minnesota. This
Agreement shall be governed by and construed in accordance with the substantive
laws (other than conflict laws) of the State of Minnesota. The parties hereto
hereby ( i) consents to the personal jurisdiction of the state and federal
courts located in the State of Minnesota in connection with any controversy
related to this Agreement; ( ii) waives any argument that venue in any such
forum is not convenient, ( iii) agrees that any litigation initiated by the
Lender or the Borrower in connection with this Agreement or the other Loan
Documents shall be venued in either the District Court of Hennepin County,
Minnesota, or the United States District Court, District of Minnesota, Fourth
Division; and ( iv) agrees that a final judgment in any such suit, action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
BASED ON OR PERTAINING TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
NORWEST BANK MINNESOTA, HEALTH FITNESS PHYSICAL THERAPY, INC.
NATIONAL ASSOCIATION
By /s/ D.L. Van Metre By /s/ Don Paul Cochran
Douglas L. Van Metre Don Paul Cochran
Its Vice President Its Treasurer
<PAGE>
Table of Exhibits and Schedules
Exhibit A Form of Revolving Note
Exhibit B Form of Term Note
Exhibit C Compliance Certificate
Exhibit D Premises
-------------------
Schedule 2.14 Sources and Uses of Funds
Schedule 5.1 Trade Names, Chief Executive Office,
Principal Place of Business, and
Locations of Collateral
Schedule 5.4 Subsidiaries
Schedule 7.1 Permitted Liens
Schedule 7.2 Permitted Indebtedness and Guaranties
<PAGE>
Exhibit A to Second Amended and Restated
Credit and Security Agreement
REVOLVING NOTE
$1,500,000 Bloomington, Minnesota
February 4, 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 One
Million Five Hundred Thousand Dollars ($1,500,000) or, if less, the aggregate
unpaid principal amount of all Revolving 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
Revolving Note referred to in the Credit Agreement. To the extent this Note
evidences the Borrower's Obligation to pay Existing Revolving Advances, this
Note is issued in substitution for and replacement of but not in payment of the
Borrower's revolving promissory note dated as of December 16, 1996, payable to
the order of the Lender in the original principal amount of $1,500,000. 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
<PAGE>
Exhibit B to Second Amended and Restated
Credit and Security Agreement
TERM NOTE
$2,500,000 Bloomington, Minnesota
February 4, 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 Five Hundred Thousand Dollars ($2,500,000) 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 Existing Term Advances, this Note is issued
in substitution for and replacement of but not in payment of the Borrower's
promissory note dated as of December 16, 1996, payable to the order of the
Lender in the original principal amount of $600,000. 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
SYSTEM DESIGN AND IMPLEMENTATION AGREEMENT
THIS SYSTEM DESIGN AND IMPLEMENTATION AGREEMENT dated as of the 15 day of
October, 1996, by and among HEALTH FITNESS PHYSICAL THERAPY, INC., a Minnesota
corporation ("HFPT"), PRACTICE MANAGEMENT CONSULTANTS, INC., a Minnesota
corporation ("PMC"), and THOMAS COPLIN, an individual residing in Texas, and
THOM BERKOWITZ, an individual residing in Minnesota (each individually a
"Shareholder"; collectively the "Shareholders").
WITNESSETH
WHEREAS, PMC is engaged in the business of consulting to physical therapy
clinics and designing and implementing management systems for physical therapy
clinics, as well as serving as broker in the purchase and sale of physical
therapy clinics;
WHEREAS, HFPT has determined to expand its physical therapy business such
that HFPT's Rehabilitation Division becomes a leader in the rehabilitation
therapy industry and the predominant part of HFPT's combined business; and
WHEREAS, to achieve its goals of expanding its Rehabilitation Division,
HFPT has determined that it needs to design and implement state-of-the-art
management information and control systems; and
WHEREAS, HFPT has completed the conceptual framework and project definition
for such management information and control systems as set forth in Exhibit A
hereto (the "System"); and
WHEREAS, HFPT desires to retain PMC to design and implement the System for
use in managing HFPT's physical therapy business.
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and subject to the terms and conditions set
forth herein, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Specific Definitions. As used in this Agreement, the following terms
shall have the meanings set forth or as referenced below:
"Affiliate" of a specified person (natural or juridical) means a person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. "Control"
shall mean ownership of more than 50% of the shares of stock entitled to vote
for the election of directors in the case of a corporation, and more than 50% of
the voting power in the case of a business entity other than a corporation.
1
<PAGE>
"Confidential Information" means Technology and other proprietary or
nonpublic information which derives economic value from not being generally
known to the public. Confidential Information shall include, but shall not be
limited to, all information in writing which is labeled "Proprietary,"
"Confidential" or with words of similar import and all oral statements
accompanied by a statement indicating that the information is proprietary or
confidential.
"Design and Implementation Costs" means as defined in Section 2.2(a).
"Design and Implementation Efforts" means as defined in Section 2.1.
"HFPT's PT Business" means that portion of HFPT's business engaged in the
acquisition, development and operation of physical therapy clinics on an
out-patient basis (including on-site physical therapy).
"Intellectual Property Rights" means all right, title and interest in and
to: (i) all United States and foreign letters patent and applications for
letters patent, industrial models, designs, utility models, certificates of
inventions, and any other indicia of invention ownership or rights thereto, any
such rights granted under any reissue, division, continuation or
continuation-in-part applications now or hereafter filed; (ii) all trade secret
rights arising under any laws; (iii) all copyright rights and all other literary
property and author rights, whether or not copyrightable, and all copyrights and
copyrighted interests and renewals thereof; (iv) all know-how whether or not
protectable by patent, copyright, or trade secret right; (v) all United States
and foreign trademarks, trade names, service marks, logos, and any applications
therefor, together with all goodwill associated therewith; (vi) all licenses to
use any of the foregoing; and (vii) all amendments, modifications or
improvements to any of the foregoing.
"Technology" means any invention, discovery, know-how, trade secret, data,
information, technology, process or concept, whether or not patented or
patentable, and whether or not memorialized in writing.
1.2 Definitional Provisions.
(a) The words "hereof," "herein," and "hereunder" and words of similar
import, when used in this Agreement, shall refer to this Agreement as a whole
and not to any particular provisions of this Agreement.
(b) Terms defined in the singular shall have a comparable meaning when used
in the plural, and vice-versa.
(c) References to an "Exhibit" or to a "Schedule" are, unless otherwise
specified, to one of the Exhibits or Schedules attached to or referenced in this
Agreement, and references to an "Article" or a "Section" are, unless otherwise
specified, to one of the Articles or Sections of this Agreement.
2
<PAGE>
(d) The term "person" includes any individual, partnership, joint venture,
corporation, trust, unincorporated organization or government or any department
or agency thereof.
ARTICLE 2
DESIGN AND IMPLEMENTATION PROJECT
2.1 Design and Implementation of System. PMC shall use its best efforts,
upon the terms and conditions set forth herein, to design and implement the
System. The deliverables for such design and implementation shall be actual
systems, as well as operating and training manuals, forms, handbooks, guidelines
and other materials necessary for the management and employees of the
Rehabilitation Division of HFPT to fully implement and operate the System (all
such efforts referred to as the "Design and Implementation Efforts"). The
parties acknowledge that such Design and Implementation Efforts commenced
approximately January 26, 1996.
2.2 Costs of Design and Implementation.
(a) HFPT shall pay or reimburse PMC for expenses set forth in the Forecasts
(as defined below) which are reasonably and necessarily incurred in connection
with PMC's Design and Implementation Efforts ("Design and Implementation
Costs"); provided that, unless specifically approved in writing by HFPT prior to
incurrence, HFPT shall not be obligated to pay or reimburse PMC for Design and
Implementation Costs not reflected in the Forecasts or in excess of the amounts
therein.
(b) At least 30 days prior to the beginning of each calendar month, PMC
shall deliver to HFPT a forecast of expenditures to be incurred by PMC (or to
which PMC will irrevocably commit) in such month in connection with PMC's Design
and Implementation Efforts, in such detail as required by HFPT's normal
expenditure approval procedures or as HFPT may reasonably request (a
"Forecast"). Each Forecast shall be consistent with the Budget attached hereto
as Exhibit B (the "Budget"). During such 30-day period, the parties will discuss
and use their good faith best efforts to resolve any concerns HFPT may have
regarding such Forecast and to modify the Forecast accordingly. Within five (5)
business days of the beginning of each calendar month, HFPT shall advance to
PMC, in a single lump sum, the amount reflected in the Forecast for such
upcoming month, minus any funds advanced in previous months which have not been
spent and documented as required in the next sentence. Within five (5) business
days following the end of each month, PMC shall submit to HFPT proper
substantiating documentation evidencing all expenses and the purposes for which
the same were incurred.
2.3 Issuance of Warrant. As consideration for PMC's Design and
Implementation Efforts and for HFPT's ownership of all Inventions and
Intellectual Property Rights resulting therefrom, within 30 days after the date
hereof, HFPT shall issue to PMC a warrant in the form of Exhibit C hereto. The
number of Warrant Shares purchasable upon exercise of this Warrant and the
Exercise Price thereof shall be determined by HFPT so that the product of (i)
$25.00 (adjusted for any stock splits, reverse stock splits or stock dividends
declared after the date hereof) minus the Exercise Price, multiplied by (ii) the
number of Warrant Shares, equals $1,479,051; provided that the per share
Exercise Price shall not be less than $4.00 nor more than $6.00 (adjusted for
any stock splits, reverse stock splits or stock dividends declared after the
date hereof).
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<PAGE>
2.4 Subsequent Design and Implementation. The parties contemplate that they
will, within 30 days after the date hereof, enter into a binding letter of
intent with respect to three additional phases of expansion of HFPT's PT
Business, the terms of which shall be set forth in, and subject to execution of,
one or more definitive agreements with respect thereto.
2.5 Exclusivity. During the term of this Agreement and thereafter so long
as HFPT is pursuing with PMC the subsequent phases contemplated by Section 2.4
or as otherwise provided in Section 5.3(b), neither the Shareholders, PMC nor
any of PMC's employees or representatives will, except on behalf of HFPT,
conduct any discussions, solicitations, inquiries, or negotiations with, or
engage (either directly or indirectly through ownership, consulting relationship
or other means) in, any physical therapy businesses except as described in
Schedule 2.5.
ARTICLE 3
INTELLECTUAL PROPERTY
3.1 Confidentiality. PMC acknowledges that it will enjoy access to and use
of Confidential Information of HFPT during the term of this Agreement and
thereafter. PMC agrees that neither it nor any of its employees or
representatives will disclose or use any HFPT Confidential Information without
the prior written consent of HFPT. Upon termination of this Agreement, PMC, its
employees and the Shareholders shall (i) deliver to HFPT all records, files,
data and similar materials containing HFPT Confidential Information or any
summaries, analyses or compilations thereof, and (ii) not disclose or use,
without HFPT's written consent, any Confidential Information of HFPT.
3.2 Ownership of Technology. All components of the System acquired from
third parties shall be purchased or licensed in the name of HFPT, and PMC shall
not have any ownership rights therein. All Technology designed or implemented by
PMC, either solely or jointly with employees of HFPT, in connection with or as a
result of the Design and Implementation Efforts shall be owned by HFPT and
constitute Confidential Information of HFPT. PMC acknowledges that all
copyrightable works resulting from the Design and Implementation Efforts are
"works for hire" owned by HFPT. PMC hereby agrees to execute appropriate papers
or documents and otherwise provide proper assistance to enable the HFPT (i) to
perfect its full legal right, title and interest in and to such Technology and
(ii) to secure, maintain, enforce and defend its Intellectual Property Rights
available for such Technology in any and all countries.
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<PAGE>
3.3 Protection of Technology. HFPT shall be entitled to protect the
Technology resulting from the Design and Implementation Efforts by obtaining and
maintaining appropriate patent, copyright, or other registrations. All patents
and copyright registrations shall be applied for in the names of the actual
inventors or authors and shall be assigned to HFPT; PMC shall execute and
deliver such forms of assignment, power of attorney and other documents which
are necessary to give effect to the provisions hereof.
3.4 PMC Employees and Consultants. PMC shall ensure that all employees,
consultants and third parties who perform any portion of PMC's Design and
Implementation Efforts under this Agreement have entered into written agreements
with PMC whereby such employee, consultant or third party (i) agrees to maintain
the confidentiality of HFPT Confidential Information, and (ii) either assigns to
PMC all ownership rights, or grants PMC an exclusive worldwide fully-paid
license (with the right to sublicense), in any inventions or discoveries made or
developed by such employee, consultant or third party in the course of such
Design and Implementation Efforts. PMC shall provide copies of such agreements
to HFPT upon HFPT's request.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 Representations of PMC. PMC and the Shareholders, jointly and
severally, represent, warrant and covenant to HFPT that:
(a) PMC is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Minnesota and has full corporate power
to conduct the business in which it is presently engaged and to enter into and
perform its obligations under this Agreement.
(b) PMC has taken all necessary corporate action under the laws of the
state of its incorporation and its articles of incorporation and by-laws to
authorize the execution and consummation of this Agreement. This Agreement
constitutes the valid and legally binding agreement of PMC enforceable against
PMC in accordance with the terms hereof, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
(c) Neither the execution and delivery of this Agreement nor the
performance of the Design and Implementation Efforts will violate any provision
of the certificate of incorporation or bylaws of PMC or any law, rule,
regulation, writ, judgment, injunction, decree, determination, award or other
order of any court or governmental agency or instrumentality, domestic or
foreign, or conflict with or result in any breach of any of the terms of or
constitute a default under or result in termination of or the creation or
imposition of any mortgage, deed of trust, pledge, lien, security interest or
other charge or encumbrance of any nature pursuant to the terms of any contract
or agreement to which PMC or any Shareholder is a party or by which PMC, any
Shareholder or any of their assets is bound.
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<PAGE>
(d) Neither PMC nor any Shareholder is restricted, by confidentiality or
noncompetition obligations or otherwise, from carrying out the Design and
Implementation Efforts except as described in Schedule 4.1(d). HFPT's use of the
System will not infringe, misappropriate, misuse or conflict with the rights of
third parties.
(e) Except as described in Schedule 4.1(d), there are no actions, suits,
claims, disputes or proceedings or governmental investigations pending or
threatened against PMC or any of its Affiliates, either at law or in equity,
before any court or administrative agency or before any governmental department,
commission, board, bureau, agency or instrumentality, or before any arbitration
board or panel whether located in the United States or a foreign country. To
PMC's knowledge, PMC has not failed to comply with any law, rule, regulation,
writ, judgment, injunction, decree, determination, award or other order of any
court or other-governmental agency or instrumentality, domestic or foreign,
which failure in any case would in any material respect impair any rights of
HFPT under this Agreement.
4.2 Representations of HFPT. HFPT represents, warrants and covenants to PMC
that:
(a) HFPT is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Minnesota and has full corporate power
to conduct the business in which it is presently engaged and to enter into and
perform its obligations under this Agreement.
(b) HFPT has taken all necessary corporate action under the laws of the
state of its incorporation and its articles of incorporation and bylaws to
authorize the execution and consummation of this Agreement. This Agreement
constitutes the valid and legally binding agreement of HFPT enforceable against
HFPT in accordance with the terms hereof, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated herein will violate any provision
of the articles and bylaws of HFPT or any law, rule, regulation, writ, judgment,
injunction, decree, determination, award or other order of any court or
governmental agency or instrumentality, domestic or foreign, or conflict with or
result in any breach of any of the terms of or constitute a default under or
result in termination of or the creation or imposition of any mortgage, deed of
trust, pledge, lien, security interest or other charge or encumbrance of any
nature pursuant to the terms of any contract or agreement to which HFPT is a
party or by which HFPT or any of its assets is bound.
(d) HFPT agrees to reimburse PMC and any Shareholder for fifty percent
(50%) of any costs incurred with respect to the matter described in Schedule
4.1(d) as a result of carrying out the Design and Implementation Efforts.
6
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ARTICLE 5
TERMINATION
5.1 Term. Subject to the parties rights under Section 5.2, this Agreement
shall remain in force and effect until completion of the Design and
Implementation Efforts.
5.2 Termination.
(a) HFPT may, by specific written notice to PMC, terminate this Agreement,
including the Design and Implementation Efforts, if HFPT reasonably determines
that a lack of adequate financial resources makes it impracticable for HFPT to
complete the Design and Implementation Efforts.
(b) If either party breaches any of the material terms, conditions or
agreements of this Agreement, then the other party may terminate this Agreement,
at its option and without prejudice to any of its other legal and equitable
rights and remedies, by giving the breaching party ninety (90) days notice in
writing, particularly specifying the breach. Such notice of termination shall
not be effective if the other party cures the specified breach within such
ninety (90) day period, or, in the case of breaches not reasonably curable
within such ninety (90) days, if such party commences the cure thereof within
such ninety (90) days and diligently thereafter prosecutes such cure.
(c) Either party may, by written notice to the other party (which notice
shall be effective upon dispatch), terminate this Agreement in the event that
such other party becomes insolvent, makes an assignment for the benefit of
creditors, goes into liquidation or receivership or otherwise loses legal
control of its business.
5.3 Effect of Termination.
(a) If HFPT terminates the Design and Implementation Efforts, (i) HFPT
shall be obligated to reimburse PMC only for Design and Implementation Costs
incurred by PMC prior to the effective date of such termination (including
expenses to which PMC irrevocably committed), in no event more than the approved
amount through such month of the Design and Implementation Efforts, and (ii) PMC
shall promptly reimburse HFPT for any amounts advanced which are in excess of
Design and Implementation Costs incurred by PMC prior to the effective date of
such termination (including expenses to which PMC irrevocably committed).
(b) The rights and obligations of the parties under Section 2.5 and Article
3 shall survive any termination of this Agreement. If this Agreement is
terminated by HFPT by reason of any willful and material misconduct by PMC or a
Shareholder, then for a period of two (2) years after such termination neither
the Shareholders, PMC nor any of PMC's employees or representatives will,
directly or indirectly, perform any services related to the design or
implementation of systems similar to or performing the same function as the
systems described on Exhibit A, or sell or license any product or system similar
to or performing the same function as the systems described on Exhibit A, to any
physical therapy business, except as described in Schedule 2.5.
7
<PAGE>
(c) Upon termination of this Agreement, each party will within thirty (30)
days return to the other all tangible Confidential Information of the other
party (except one copy which may be retained by legal counsel solely for
evidentiary purposes in the event of a dispute).
ARTICLE 6
MISCELLANEOUS
6.1 Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and the successors or assigns of the parties
hereto; provided, that (i) the rights and obligations of PMC or the Shareholders
herein may not be assigned without the prior written consent of HFPT, and (ii)
the rights and obligations of HFPT herein may not be assigned except to any
person who succeeds to all or a substantial portion of HFPT's PT Business. Any
attempted assignment of this Agreement in violation of this Section 6.1 shall be
null and void.
6.2 Entire Agreement. This Agreement and the agreements contemplated herein
and therein constitute the entire agreements of the parties with respect to the
subject matter of such agreements and supersede all previous proposals or
agreements, oral or written, and all negotiations, conversations or discussions
heretofore had between the parties related to the subject matter of such
agreements.
6.3 Governing Law, Consent to Jurisdiction and Choice of Forum. The
construction and performance of this Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota (without regard
to the choice of law provisions thereof). By execution of this Agreement, HFPT
and PMC hereby consent to the jurisdiction of the courts and other tribunals of
the State of Minnesota for the limited purpose of the determination of any and
all disputes arising out of the construction, interpretation and performance of
this agreement, provided that the specific dispute resolution procedures set
forth in this Agreement shall govern the subject matter described therein.
6.4 Tax Consequences. Each party represents and warrants that it has made
an independent evaluation of the tax consequences resulting to such party as a
result of the terms and effect of this Agreement. No party shall have any
recourse against any other party to this Agreement nor shall this Agreement be
affected in any way by reason of the fact that the consummation of this
Agreement or the transactions contemplated hereby do not have the tax
consequences currently anticipated by such party.
6.5 Survival. All of the representations, warranties, and indemnifications
made in this Agreement, and all terms and provisions hereof intended to be
observed and performed by the parties after the termination hereof (to the
extent specified herein), shall survive such termination and continue thereafter
in full force and effect, subject to applicable statutes of limitations.
8
<PAGE>
6.6 Amendment, Waiver, Discharge, etc. This Agreement may not be amended,
released, discharged, abandoned, changed or modified in any manner, except by an
instrument in writing signed on behalf of each of the parties to this Agreement
by their duly authorized representatives. The failure of either party to enforce
at any time any of the provisions of this Agreement shall in no way be construed
to be a waiver of any such provision, nor in any way to affect the validity of
this Agreement or any part of it or the right of either party after any such
failure to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to be a waiver of any other or subsequent breach.
6.7 Execution in Counterparts. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become a binding agreement when one or more counterparts have been
signed by each party and delivered to the other party.
6.8 Titles and headings; Construction. The titles and headings to Sections
and Articles herein are inserted for the convenience of reference only and are
not intended to be a part of or to affect the meaning or interpretation of this
Agreement. This Agreement shall be construed without regard to any presumption
or other rule requiring construction hereof against the party causing this
Agreement to be drafted.
6.9 Benefit. Nothing in this Agreement, expressed or implied, is intended
to confer on any person other than the parties to this Agreement or their
respective successors or permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
6.10 Notices. All notices or other communications to a party required or
permitted hereunder shall be in writing and shall be delivered personally or by
telecopy (receipt confirmed) to such party (or, in the case of an entity, to an
executive officer of such party) or shall be sent by a reputable express
delivery service or by certified mail, postage prepaid with return receipt
requested, addressed as follows:
if to HFPT to:
Health Fitness Physical Therapy, Inc.
3500 West 80th Street, Suite 130
Minneapolis, Minnesota 55431
Attention: Loren Brink, President
FAX (612) 831-7264
and a copy (which will not constitute notice) to:
Fredrikson & Byron
1100 International Centre
900 Second Avenue
Minneapolis, MN 55402-3397
Attention: John F. Wurm
FAX (612) 347-7077
9
<PAGE>
if to PMC to:
Practice Management Consultants, Inc.
Route 2, Box 722
Decatur, Texas 76234
FAX (817) 627-0201
and a copy (which will not constitute notice) to:
Kovalchuk and Cutshall, P.A.
412 Union Plaza
333 Washington Avenue North
Minneapolis, Minnesota 55401
Attention: Thomas C. Cutshall, Esq.
FAX (612) 373-9821
PMC or HFPT may change their respective above-specified recipient and/or mailing
address by notice to the other party given in the manner herein prescribed. All
notices shall be deemed given on the day when actually delivered as provided
above (if delivered personally or by telecopy) or on the day shown on the return
receipt (if delivered by express delivery service or by mail).
6.11 Severability. If any provision of this Agreement is held invalid by a
court of competent jurisdiction, such provision shall be enforced to the maximum
extent permissible and the remaining provisions shall nonetheless be enforceable
according to their terms.
6.12 Execution of Further Documents. Each party agrees to execute and
deliver without further consideration any further applications, licenses,
assignments or other documents, and to perform such other lawful acts as the
other party may reasonably request to fully secure and/or evidence the rights or
interests herein.
6.13 Relationship. The relationship of HFPT and PMC with respect to the
Design and Implementation Efforts will be that of independent contractors.
Except as otherwise provided in this Agreement, neither party has, and will not,
represent that it has any power, right or authority to bind or to incur any
charges or expenses on behalf of the other party or in the other party's name
without the written consent of the other party. Nothing stated in this Agreement
will be construed as constituting HFPT and PMC, or their affiliates, as partners
or as creating the relationships of employer/employee, franchisor/franchisee, or
principal/agent between them. Neither party nor its affiliates nor its or their
employees or agents are, or will act, as employees of the other party within the
meaning or application of any unemployment insurance laws, social security laws,
workers' compensation or industrial accident laws, social security laws,
workers' compensation or industrial accident laws, or under any other laws or
regulations which may impute any obligations or liability to the other by reason
of an employment relationship. The parties will indemnify and reimburse each
other for and hold the other harmless from any liabilities or obligations
imposed or attempted to be imposed upon a party by virtue of any such law in
performance by a party of this Agreement.
10
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6.14 Compliance with Laws. The parties, and any permitted sublicensees of
the parties, will comply with all applicable international, national, state,
regional and local laws and regulations in exercising their rights or performing
their duties under this Agreement.
6.15 Arbitration. Any dispute arising out of or relating to this Agreement
or any breach hereof shall be settled by binding arbitration in accordance with
commercial arbitration rules of the American Arbitration Association ("AAA").
The arbitrator shall be a retired state or federal judge, as mutually-agreed
upon by HFPT and PMC or, if the parties cannot agree, as selected by the AAA.
The results of such arbitration proceedings shall be binding upon the parties
hereto, and judgment may entered upon the arbitration award in any court having
jurisdiction thereof. Notwithstanding the foregoing, either party may seek
interim injunctive relief from any court of competent jurisdiction.
IN WITNESS WHEREOF, each of the parties has caused this System Design and
Implementation Agreement to be executed in the manner appropriate to each.
PRACTICE MANAGEMENT CONSULTANTS, INC.
By: /s/ Thomas H. Coplin
Its: President
/s/ Thomas Coplin
Thomas Coplin
/s/ Thom Berkowitz
Thom Berkowitz
HEALTH FITNESS PHYSICAL THERAPY, INC.
By: /s/ Loren Brink
Its: CEO
Exhibits:
A - Description of Design and Implementation Efforts
B - Summary of Expenses
C - Form of Warrant
11
<PAGE>
EXHIBIT A
DESCRIPTION OF THE SYSTEM DESIGN AND IMPLEMENTATION EFFORTS
OF REHABILITATION DIVISION OF HEALTH FITNESS PHYSICAL THERAPY
The System will be one or more management information and control systems to
manage and operate the Company's Rehabilitation Division, as such division
currently exists and as it is greatly expanded to become a leader in the
rehabilitation therapy industry and the predominant part of HFPT's combined
business. The System will include software (including packages), operating
manuals, policies and procedures for the following areas of physical therapy
operations:
o Billing and collections
o Therapist staffing management
o Patient scheduling
o Outcomes measurement
o Record keeping
The System will include interfaces and modifications to existing systems,
primarily the general ledger system.
As a test of the implementation of the System, PMC will begin preliminary
application of the MIS portion of the System to HFPT's existing Rehabilitation
Business. PMC will have direct access to all HFPT administration and operational
System and staff for the purposes of System design and implementation. Tom
Coplin will be a liaison to HFPT's Chief Executive Officer.
The Design and Implementation Efforts regarding the System shall include but not
be limited to the following:
o Billing and Collections system
- Provide outline of policy and procedure manual by October
15, 1996.
- Provide draft of policy and procedure manual by December 31,
1996.
- Provide draft of forms, training manual and other necessary
materials by December 31, 1996.
- Provide final completed policy and procedure manual and
forms, training manual and other necessary materials by
February 28, 1997.
o Therapist Staffing Management system
- Provide outline of policy and procedure manual by October
31, 1996.
- Provide draft of policy and procedure manual by December 31,
1996.
- Provide draft of forms, training manual and other necessary
materials by February 28, 1997.
- Provide final completed policy and procedure manual and
forms, training manual and other necessary materials by
March 31, 1997.
A-1
<PAGE>
o Patient Scheduling system
- Provide outline of policy and procedure manual by October
31, 1996.
- Provide draft policy and procedure manual by November 30,
1996.
- Provide draft forms, training manual and other necessary
materials by December 31, 1996.
- Programming to begin as soon as practicable after completion
of preceding step.
- Provide final completed policy and procedures manual, forms,
training manual and other necessary materials as soon as
practicable after completion of programming.
o Outcome Measurement system
- Provide outline of policy and procedure manual by October
31, 1996.
- Provide draft policy and procedure manual by November 30,
1996.
- Provide draft forms, training manual and other necessary
materials by December 31, 1996.
- Programming to begin as soon as practicable after completion
of preceding step.
- Provide final completed forms, training manual and other
necessary materials as soon as practicable after
completion of programming.
o Record Keeping system
- Provide outline of policy and procedure manual by October
31, 1996.
- Provide draft policy and procedure manual by November 30,
1996.
- Provide draft forms, training manual and other necessary
materials by December 31, 1996.
- Programming to begin as soon as practicable after completion
of preceding step.
- Provide final completed policy and procedures manual, forms,
training manual and other necessary materials by as soon as
practicable after completion of programming.
A-2
<PAGE>
EXHIBIT B
Projected Cost of Rehabilitation Division Management Information Systems
Design & Implementation
($000's)
<TABLE>
<CAPTION>
Jan-Jun Jul-Dec Jan-Jun Jul-Dec
1996 1996 1997 1997 Total
---------------- -------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Application Software
Design & Implementation
Billed Hourly Charges $200 $325 $325 $175 $1,025
Expenses
Travel, Phones, Other $75 $100 $100 $50 $325
---------------- -------------- ---------------- --------------- -------------
Total Application Software
Design & Implementation $275 $425 $425 $225 $1,350
Equipment/Operating Software
Headquarters $0 $75 $25 $25 $125
Existing Physical Therapy
Sites $10 $200 $125 $0 $335
---------------- -------------- ---------------- --------------- -------------
Total Equipment/Operating
Software $10 $275 $150 $25 $460
================ ============== ================ =============== =============
TOTAL PROJECT COST $285 $700 $575 $250 $1,810
</TABLE>
<PAGE>
Schedule 2.5
Exceptions to Exclusivity
Physical Therapy Rehabilitation Center, Inc & Jim Latourelle
South Austin Therapy Group
Isernhagen Clinics, Inc.
Spooner Physical Therapy, Inc., The Body Firm & Kevin Spooner
Midlands Physical Therapy, Inc. Brett Smith & Tom Stootsberry
Bornstein-Weiss Physical Therapy
<PAGE>
Schedule 4.1(d)
Tom Coplin, one of PMC's officers, is subject to certain noncompetition
obligations set forth in the following portions of the following agreements:
1) Agreement dated November 26, 1993 by and among RehabClinics, Inc.,
Coplin Physical Therapy Associates, Inc., West Suburban Health Partners, Inc.
and Thomas H. Coplin.
2) Section XI of Agreement of Purchase and Sale dated October 1, 1991 by
and among Coplin Physical Therapy Associates, Inc., Thomas H. Coplin, Kent W.
Malcomson, and RehabClinics, Inc.
3) Section 8 of Employment Agreement dated November 8, 1991 between Coplin
Physical Therapy Associates, Inc. and Thomas H. Coplin.
4) Section XI of Agreement of Purchase and Sale dated January 1, 1992 by
and among West Suburban Health Partners, Inc., certain shareholders thereof
(including Thomas H. Coplin), and RehabClinics, Inc.
Subsidiaries (as of 12/31/96)
1. Health Fitness Physical Therapy of Tahoe, Inc., a Minnesota corporation
2. Sports and Orthopaedic Physical Therapy, Inc., a Minnesota corporation
3. Fitness Centers of America, Inc. d/b/a Fitness Systems, a California
corporation
4. The Preferred Companies, Inc. d/b/a Preferred Therapy Providers of America,
an Arizona corporation
5. Health Fitness Rehab. Inc., a Minnesota corporation
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the Registration
Statements of Health Fitness Physical Therapy, Inc. on Form S-8 relating to the
1995 Employee Stock Purchase Plan, 1995 Employee Stock Option Plan, 1992
Nonqualified Employee Stock Option Plan and the 1992 Incentive Employer Stock
Option Plan of our report dated April 10, 1997, appearing in the Annual Report
on Form 10-KSB of Health Fitness Physical Therapy, Inc. and Subsidiaries for the
year ended December 31, 1996.
Deloitte & Touche LLP
Minneapolis, Minnesota
April 10, 1997
